<PAGE>
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

(X)      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
         ACT OF 1934

For the quarterly period ended December 31, 1998
                               -----------------

( )      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
         ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number 0-12214
                       -------

                          DALECO RESOURCES CORPORATION
              ----------------------------------------------------
              Name of small business issue as specified in Charter


Delaware                                     23-2860739
--------                                     ----------
(State or other jurisdiction                (IRS Employer Identification Number)
of incorporation or organization)

435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087                    (610) 254-4199
-------------------------                    --------------
(Address of Principal Executive Offices)     (Issuer's telephone number)


                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

Check whether the  registrant  filed all  documents  and reports  required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after  distribution under a
plan confirmed by court.
                                                                 Yes ___ No ___


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.

3,102,574 shares of common stock as of February 1, 1999


                                       1
<PAGE>
                                      INDEX


                                                                           PAGE
PART I   FINANCIAL INFORMATION

   ITEM 1         FINANCIAL STATEMENTS (Unaudited).........................  3
                  Consolidated Balance Sheets..............................  3
                  Consolidated Statement Of Income.........................  4
                  Consolidated Statement Of Deficit........................  5
                  Consolidated Statement Of Cash Flow......................  6
                  Notes to Consolidated Financial Statements...............  7

ITEM 2   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS......................

PART II  OTHER INFORMATION

ITEM 6   Exhibits and Reports on Form 8-K

SIGNATURES




                                       2

<PAGE>


DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)   
================================================================================
<TABLE>
<CAPTION>
                                                                                       1998                      1997
<S>                                                                               <C>                       <C>   
ASSETS
Current Assets
         Cash and cash equivalents                                                $    289,316              $    560,551
         Accounts receivable                                                           253,781                   261,889
         Other                                                                          11,474                    11,474
                                                                                  ------------              ------------
                           Total Current Assets                                        554,571                   833,914
Oil and gas properties and equipment (note 3)                                        8,989,930                 7,018,296
Property and equipment                                                                  32,632                    57,632
Timber rights (note 4)                                                                 828,342                 1,028,342
Mineral properties (note 5)                                                               --                      23,973
Goodwill (note 15)                                                                     137,693                   709,191
Debt Issue Costs                                                                       322,815                   559,815
                                                                                  ------------              ------------
                           Total Assets                                           $ 10,865,983              $ 10,231,163
                                                                                  ============              ============
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities                                          $  2,316,035              $  1,113,933
Current portion of long-term debt                                                      200,000                   200,000
Drilling deposits                                                                         --                     613,408
Due to related parties (note 7)                                                        433,829                   349,590
                                                                                  ------------              ------------
                           Total Current Liabilities                              $  2,949,864              $  2,276,931
Long-term debt (note 9)                                                              6,285,054                 2,888,646
Debentures (note 8)                                                                       --                      60,000
                                                                                  ------------              ------------
                           Total Liabilities                                         9,234,918                 5,225,577
                                                                                  ------------              ------------
Commitments and Contingencies (note 15 and 16)
Shareholders' Equity
         3,078,548 Common shares,
         (2,776,788-1997) par value $0.01 per share                                     30,785                    27,768
         160,000 Preferred Shares, par value $0.01 per share (note 6)                      160                       160
         Additional Paid in Capital                                                 14,389,998                14,103,912
         Accumulated deficit                                                       (12,789,878)               (9,126,256)
                                                                                  ------------              ------------
                           Total Shareholders' Equity                                1,631,065                 5,005,586
                                                                                  ------------              ------------
                           Total Liabilities and Shareholders' Equity             $ 10,865,983              $ 10,231,163
                                                                                  ============              ============
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                       3


<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
                                                                       1998                 1997

<S>                                                                <C>                    <C>      
Gross Operating Revenue                                            $ 436,819              $ 568,782
Less:    Lease operating expense                                     277,981                109,440
         Severance taxes                                               6,125                  8,639
         Depletion, depreciation and amortization                     65,000                 75,000
         Net profits interest and related expenses                   235,206                284,891
                                                                   ---------              ---------
         Net income (loss) from oil and gas operations              (147,493)                90,812
                                                                   ---------              ---------
Timber sales                                                          27,573                   --
Timber operating costs                                                33,114                 85,433
                                                                   ---------              ---------
Net loss from timber operations                                       (5,541)               (85,433)
                                                                   ---------              ---------
Administrative expense                                               180,818                221,361
Amortization of debenture issue costs                                 50,000                  9,250
Interest expense                                                     165,778                 61,024
Amortization of goodwill                                             100,000                104,166
                                                                   ---------              ---------
                                                                     496,596                395,801

Other Income
Management and administrative fees                                   122,445                 86,129
                                                                   ---------              ---------
Net Loss for the Period                                            $(527,185)             $(304,293)
                                                                   =========              =========
Basic and Fully Diluted Net Loss per Common Share                  $   (0.18)             $   (0.10)
                                                                   =========              =========
</TABLE>





                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                       4
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                                               1998                   1997

Deficit - Beginning of Period             $(12,242,693)          $ (8,801,963)
Net loss for the period                       (527,185)              (304,293)
Dividends on Preferred Stock                   (20,000)               (20,000)
                                          ------------           ------------
Deficit - End of Period                   $(12,789,878)          $ (9,126,256)
                                          ============           ============





















                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                       5
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
                                                                    1998                    1997
<S>                                                            <C>                      <C>         
Operating Activities
Net loss for the period                                        $  (527,185)             $  (304,293)
Items not affecting working capital
         Depletion, depreciation, and amortization                 165,000                  179,166
         Amortization of debt issue costs                          100,000                    9,250
                                                               -----------              -----------
                                                                  (262,185)                (115,877)
Decrease in accounts receivable                                     85,236                   46,694
(Decrease) increase in accounts payable                            275,923                  (18,502)
Increase in advances received on well costs                             --                  345,408
Cash provided (used) for operating activities                       98,974                  257,723
                                                               -----------              -----------
Investing Activities
Drilling and lease acquisition costs incurred                           --               (1,502,763)
                                                               -----------              -----------
Cash used for investing activities                                      --               (1,502,763)
                                                               -----------              -----------
Financing Activities
Increase in amounts due to related parties                          18,000                       --
Dividends Paid                                                     (20,000)                 (20,000)
Proceeds from long-term debt                                            --                1,298,831
                                                               -----------              -----------
Cash provided (used) for financing activities                       (2,000)               1,278,831
                                                               -----------              -----------
Increase in Cash and Cash Equivalents                               96,974                   33,791
Cash and Cash Equivalents - Beginning of Period                    192,342                  526,760
                                                               -----------              -----------
Cash and Cash Equivalents - End of Period                      $   289,316              $   560,551
                                                               ===========              ===========
</TABLE>







                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                       6
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

1.       CONTINUED OPERATIONS

                   The financial statements have been prepared on the basis of a
                   going concern, which contemplates that the Company will be
                   able to realize assets and discharge liabilities in the
                   normal course of business. Accordingly, they do not give
                   effect to adjustments that would be necessary should the
                   Company be required to liquidate it assets. As of December
                   31, 1998 the Company has reported a loss of $527,185 and had
                   negative working capital of $2,395,293. The ability of the
                   Company to meet these liabilities and total liabilities of
                   $9.3 Million and to continue as a going concern is dependent
                   upon the availability of future funding, the successful
                   completion of its drilling projects (see Note 5), and
                   achieving profitable timber operations (see Note 4).

                   As of the date of this report, certain of the Company's
                   subsidiaries are in default relative to certain debt
                   obligations.

 2.      Summary of Significant Accounting Policies

         a.       Use of estimates

                           The preparation of financial statements in conformity
                           with generally accepted accounting principles
                           requires management to make estimates and assumptions
                           that affect the reported amounts of assets and
                           liabilities and disclosure of contingent assets and
                           liabilities at the date of the financial statements
                           and the reported amounts of revenues and expenses
                           during the reporting period. Actual results could
                           differ from those estimates.

         b.       Basis of consolidation

                           The consolidated financial statements of Daleco
                           Resources Corporation (the "Company") have been
                           prepared in accordance with generally accepted
                           accounting principles and include the accounts of the
                           Company and its wholly-owned subsidiaries Westlands
                           Resources Corporation ("Westlands", Sustainable
                           Forest Industries Inc. ("Sustainable"), Deven
                           Resources, Inc. ("Deven"), Tri-Coastal Energy, Inc.,
                           and Haly Corp. The Company's investments in oil and
                           gas leases are accounted for using proportionate
                           consolidation whereby the Company's prorata share of
                           each of the assets, liabilities, revenues and
                           expenses of the investments are aggregated with those
                           of the Company in its financial statements.

         c.       Oil and gas properties and equipment

                           The Company follows the successful efforts method of
                           accounting for the costs of exploration and
                           development activities. Direct acquisition costs of
                           developed and undeveloped leases are capitalized.
                           Costs of undeveloped leases on which proved reserves
                           are found are transferred to proven oil and gas
                           properties. Each undeveloped lease with significant
                           acquisition cost is reviewed periodically and a
                           valuation allowance provided for any estimated
                           decline in value. Capitalized costs of proved
                           developed leases are charged to income on the units
                           of production basis based upon total proved reserves.
                           The capitalized costs of these proved developed
                           leases are written down to their projected net
                           recoverable amount.

                                       7
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                           Costs of exploratory wells found to be dry during the
                           year or before the issuance of these financial
                           statements are charged against earnings in that year.
                           Costs of successful exploration wells and development
                           wells are capitalized. All costs of development wells
                           and successful exploration wells are charged to
                           earnings on a unit-of-production basis based upon
                           proved developed reserves. Where the costs of
                           developed wells and successful exploration wells
                           exceed projected net recoverable amounts, such wells
                           are written down to their projected net recoverable
                           amount. Net recoverable amount is the aggregate of
                           estimated un-discounted future net revenues from
                           proven reserves less operating and production
                           expenses.

                           Effective in the first quarter of 1997, the Company
                           began assessing the impairment of capitalized costs
                           of proved oil and gas properties and other long-lived
                           assets in accordance with Statement of Financial
                           Accounting Standards No. 121 (SFAS 121), Accounting
                           for the Impairment of Long-Lived Assets and for
                           Long-Lived Assets to be Disposed of. Under this
                           method, the Company generally assesses its oil and
                           gas properties on a field-by-field basis utilizing
                           its current estimate of future revenues and operating
                           expenses. In the event net undiscounted cash flow is
                           less than the carrying value, an impairment loss is
                           recorded based on estimated fair value, which would
                           consider discounted future net cash flows. SFAS 121
                           did not have any impact on the Company's change in
                           method of assessing impairment of oil and gas
                           properties and other long-lived assets.

         d.       Site restoration, dismantlement and abandonment costs

                           The salvage value of producing wells is expected to
                           exceed the cost of site restoration and abandonment.
                           As a result, no such costs are accrued in these
                           financial statements.

         e.       Property and Equipment

                           Property and equipment are recorded at cost and
                           depreciated over the straight-line method over a
                           period of five years.

         f.       Timber Rights

                           The Company has recorded the acquisition of timber
                           rights at cost. These costs are deferred until
                           commercial production commences. Where the costs
                           exceed projected net recoverable amounts, the timber
                           rights are written down to the projected net
                           recoverable amount. Net recoverable amount is the
                           aggregate of estimated un-discounted future net
                           revenues from the sale of timber less operating and
                           production expenses.

         g.       Debt Issue Costs

                           Debt issue costs as of December 31, 1998 and 1997,
                           represent those associated with the Heller Financial,
                           Inc. loan (see Note 9) and will be amortized over a
                           period of five years.

                                       8
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED) 
================================================================================

         h.       Cash and Cash Equivalents

                           Cash and cash equivalents include cash and
                           investments with original maturities of three months
                           or less.

         I.       Goodwill

                           Goodwill associated with the acquisition of Deven
                           Resources, Inc. is being amortized over a three (3)
                           year period.

         j.       Fair Value of Financial Instruments

                           Cash and cash equivalents, receivables, and all
                           liabilities have fair values approximating carrying
                           amounts, except for the Heller Financial, Inc., and
                           Sonata Investment Company, LTD., loans for which it
                           is not practicable to estimate fair values. The loans
                           are to be repaid out of net cash flows. Additional
                           interest or profit participation is payable after the
                           payment of principal.

         k.       Reverse Stock Split

                           Effective February 24, 1998, the majority of
                           stockholders of the Company approved a reverse
                           ten-for-one stock split. The effect of the reverse
                           stock split has been retroactively reflected in these
                           financial statements. All reference to the number of
                           common and preferred shares, stock options, warrants,
                           and per share amounts elsewhere in these financial
                           statements and related footnotes have been restated
                           as appropriate to reflect the effect of the reverse
                           split for all periods presented.



                                       9
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED) 
================================================================================

 3.      Oil and Gas and Equipment
<TABLE>
<CAPTION>
                                                                     1998            1997
                                                                     ----            ----
<S>                                                              <C>             <C>        
Proven lease acreage costs                                       $ 6,071,637     $ 5,259,400

Proven undeveloped lease acreage costs                             1,906,220       1,906,220

Well costs                                                         4,795,605       2,501,208
                                                                 -----------     -----------
                                                                 $12,773,462     $ 9,666,828
Accumulated depletion, depreciation and amortization               3,783,532       2,648,532
                                                                 -----------     -----------
                                                                 $ 8,989,930     $ 7,018,296
                                                                 ===========     ===========
</TABLE>

4.       Timber Rights Acquisition

         Effective September 29, 1995, the Company entered into an agreement
         ("Acquisition Agreement") to purchase 100% of the issued and
         outstanding shares of the common stock of Sustainable Forest Industries
         Inc. ("Sustainable"), a privately held Delaware Company, in exchange
         for 150,000 shares of common stock of the Company.

         Prior to this, Sustainable entered into a Timber Acquisition Agreement
         on September 27, 1995 with Oreu Timber and Trading Co., Ltd. ("Oreu"),
         a Guyana Corporation which is an affiliate of May Joy Agricultural
         Cooperative Society Ltd. ("May Joy"). Under the terms of the agreement,
         Sustainable has been assigned the exclusive harvesting and cutting
         rights for the timber concession issue by Permit No. 1367. This permit
         was originally granted to May Joy who subsequently assigned harvesting
         rights to Oreu as per an agreement dated January 3,1995,1

         In exchange for the timber rights, Oreu received a 10% ownership of
         Sustainable. This ownership was subsequently converted to equivalent
         shares of the Company as a result of the acquisition of Sustainable.

         The acquisition has been accounted for by the purchase method. The
         purchase price of $962,500 was determined based on the fair value of
         the 150,000 common shares of Daleco given up to acquire Sustainable.
         The fair value of the net liabilities of Sustainable acquired was
         $65,842 resulting in consideration of approximately $1,028,500 which
         has been recorded as timber rights.

5.       Mineral Properties

         In February 1995, the Company acquired 109 mining claims from
         shareholders of the Company for $15,673 representing their cost to
         acquire the claims. Additional costs of $8,300 were incurred during
         fiscal 1997 to maintain these claims. The claims were not renewed and
         written-off during Fiscal 1998.


                                       10
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED) 
================================================================================

6.       Notes Payable

         During the year ended September 30, 1995, the Company received
         $1,100,000 in return for two notes payable, with the producing wells of
         the Company used as collateral. Interest of 10% per annum was due
         monthly.

         During fiscal 1996, the Company repaid $300,000 of the outstanding
         balance. During fiscal 1997, the remaining $800,000 was converted into
         16,000 shares of 10% cumulative preferred stock, at $50.00 per share.

         During fiscal 1998, the Company borrowed $145,000 from four (4)
         persons. The debt was evidenced by Notes which matured on November 21,
         1998. The Notes earned interest at 2% over the prime rate charged by
         the Huntingdon National Bank of Columbus, Ohio, through the maturity
         date, and 18% thereafter. The Noteholders were also given warrants.
         (See Note 10(b)--Warrants).

7.       Due to (from) Related Parties
<TABLE>
<CAPTION>
                                                                    1998              1997
<S>                                                                <C>                <C>   
                  Net due (from) to Amir and Erlich
                           Bearing interest at prime +3%           $91,062            91,062
                           Bearing interest at 7%                  342,767           258,528
                                                                   -------           -------
                                                                  $433,829          $349,590
                                                                  ========          ========
</TABLE>
         The amounts due to Haly Corporation were eliminated through the
         acquisition of Haly as of September 30, 1997 (see Note 18). Amir and
         Erlich are officers and shareholders of the Company. These amounts have
         no fixed repayment terms.

8.       Debentures
                                                         1998          1997
                                                         ----          ----
                        8% Convertible                 $40,000       $60,000
                                                       -------       -------
                        Debentures

         a.       7% Convertible Debentures

                           On May 31, 1996 the Company issued $1,000,000 of 7%
                           convertible debentures with interest payable in cash
                           or stock on a semi-annual basis, and a term of three
                           years. The placement agent's fees were 10% of the
                           gross proceeds and 10,000 warrants at $10.00, with an
                           expiration date of May 30, 2001 (see Note 12). The
                           debentures could be converted after a holding period
                           of: (a) as to 50% of the principal amount, 40 days
                           (July 10, 1996), and (b) the remaining 50%, 60 days
                           (July 30, 1996). The debentures are convertible into
                           the Company's common stock at the lessor of (1) a 35%
                           discount on the previous five day average closing bid
                           price at conversion, or; (2) the previous day average
                           closing bid price at closing (May 31, 1996). As of
                           September 30, 1996, $600,000 of the 7% debentures had
                           been converted into 107,712 common shares. The
                           remaining balance was converted into 80,579 common
                           shares during 1997.

         b.       8% Convertible Debentures


                                       11
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                           On September 11, 1996, the Company issued $1,310,000
                           worth of 8% convertible debentures with interest
                           payable in stock only and accruing until conversion
                           or redemptions after the term of two years. The
                           placement agent's fees were 10% of the gross proceeds
                           and 12,111 warrants at $10.07 expiring November 16,
                           2001. The debentures may be converted after a holding
                           period of 45 days after closing at the lessor of: (1)
                           the fixed conversion price ($1 0.171875), or (2) 75%
                           of the average closing bid price for the five trading
                           days immediately preceding the date of conversion. As
                           of December 31, 1998, $1,270,000 of the 8% debentures
                           had been converted into 843,081 common shares.
9.       Debt
         Long-term debt of the Company consists of the following:

         a.       Heller Financial, Inc.

                           During the forth quarter of fiscal 1997, the Company
                           entered into an arrangement with Heller Financial,
                           Inc. ("Heller") whereby Heller has agreed to provide
                           the Company with up to $15,000,000 to rework existing
                           horizontal wells, re-complete its vertical wells as
                           horizontal wells, and develop additional acreage.
                           Under the terms of the agreement, all of the
                           properties of Westlands were transferred to a newly
                           formed Limited Partnership, Tri-Coastal Energy, L.P.,
                           the general partner of which is Tri-Coastal Energy,
                           Inc., (Tri-Coastal) and the sole limited partner of
                           which is Westlands. Westlands is also the sole
                           shareholder of Tri-Coastal. The amount outstanding
                           under this arrangement as of December 31, 1998, was
                           $5,835,054. Interest on the borrowings is at prime
                           plus 2%. Principal is paid out of 85% of the net cash
                           flow from the properties. Additional interest is
                           payable from 50% of the net cash flow from these
                           properties after the payment of principal.

         b.       Sonata Investment Company, LTD.

                           During the third quarter of fiscal 1997, Sustainable
                           entered into a loan agreement with Sonata Investment
                           Company, LTD. for $250,000, which remains outstanding
                           as of September 30, 1997. Sustainable has the right
                           to request an additional $250,000 prior to December
                           31, 1999. The Company and Westlands are guarantors of
                           the loan with Westlands (now Tri-Coastal Energy,
                           L.P.) wells being pledged as collateral, subordinated
                           to the Heller Financing. The loan is to be repaid out
                           of 25% of Sustainable's net cash flow with any
                           remaining balance due by December 31, 1999. Interest
                           is at 12%. In addition, Sonata will receive a profits
                           participation of 25% of the net profits of
                           Sustainable while the loan is outstanding and 20%
                           after the loan is repaid (after payout). Should
                           Sustainable request the additional $250,000 from
                           Sonata and should Sonata elect not to make said
                           advance, then the after payout rate reduces from 20%
                           to 15%.

                                       12
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

         c.       PNC Bank Loan

                           During the fourth quarter of fiscal 1998, Deven
                           Resources, Inc. obtained a term loan of $300,000 with
                           interest at prime plus 12%. Principal is due at
                           $25,000 per quarter. The loan is secured by specific
                           properties owned by Deven.

         The Company is in default under these debt obligations currently.

         d.       First Regional Bank

                           As of December 31, 1998, the Company assumed a
                           $100,000 loan with First Regional Bank when it
                           acquired Haly Corporation. Interest is at 6.9% and
                           the loan matures in 1999. The loan is secured by
                           personal assets of an officer of the Company.

10.      Capital Stock
<TABLE>
<CAPTION>
                                                                        SHARES
                                                      -------------------------------------------
                                                       NUMBER OF COMMON       NUMBER OF PREFERRED
                                                      SHARES, PAR VALUE          SHARES PAR VALUE         DOLLAR
                                                        $0.01 PER SHARE           $0.01 PER SHARE         AMOUNT
Authorized                                                   20,000,000                10,000,000
                                                             ----------                ----------
<S>                                                          <C>                          <C>         <C>
Balance as at September 30, 1996                              1,315,485                               $8,860,984
Issued upon conversion of Debentures                            963,307                                1,424,133
Issued for acquisition of
Deven Resources, Inc.                                           260,000                                2,392,000
Issued for professional services rendered                       217,996                                  609,014
Issued upon conversion of Notes Payable                                                    16,000        800,000
                                                                                           ------
Balance as at September 30,1997                               2,756,788                    16 000     14,086,131
Issued for Professional Services Rendered                       194,900                     -----        273,377
                                                              ---------                              -----------
Fractional shares                                                  (46)                                      (5)
Balance as at September 30, 1998                              2,951,642                    16,000    $14,359,503
                                                              =========                    ======    ===========
Issued upon conversion of notes payable                         126,906                     -----         61,440
                                                                -------                     -----         ------
Balance as of December 31, 1998                               3,078,548                    16,000     14,420,943
                                                              =========                    ======     ==========
</TABLE>


Upon  re-domestication  of the Company into the U.S. as of October  1,1997,  par
value was established at $0.01 per share for both common and preferred stock.


                                       13
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

         a.       Common Stock Options

                           In January 1995, the Company granted fully vested
                           common stock purchase options expiring on January 6,
                           2000 for 85,000 common shares at $2.50 per share. On
                           the same date, the common stock purchase options
                           previously outstanding, which expired on September
                           5,1995 for 35,670 common shares at $3.20 per share,
                           were gifted back to the Company and canceled. The
                           following summary sets out the activity in common
                           stock purchase options:

                                                      1998          1997
--------------------------------------------------------------------------
Outstanding and Exercisable
at beginning of year                                 35,000       700,000
--------------------------------------------------------------------------
Canceled                                             15,000     (350,000)
--------------------------------------------------------------------------
Granted                                             120,000         -----
--------------------------------------------------------------------------
Exercised                                             -----         -----
--------------------------------------------------------------------------
Outstanding and Exercisable
at end of year                                      140,000        35,000
                                                    =======        ======
--------------------------------------------------------------------------

                           In October 1995, the Financial Accounting Standards
                           Board issued Statement of Financial Accounting
                           Standards No. 123, Accounting for Stock-Based
                           Compensation, (SFAS 123). SFAS 123 permits the
                           Company's continued use of the intrinsic value based
                           method prescribed by Accounting Principles Board
                           Opinion No. 25 (APB 25). SFAS 123 requires additional
                           disclosures, including proforma calculations of net
                           earnings and earnings per share, as if the fair value
                           method of accounting prescribed by SFAS 123 had been
                           applied. The fair value of stock options and
                           compensation cost are measured at the date of grant.

                           The common stock purchase options were issued for
                           past services at an exercise price of $2.50 per share
                           when the underlying stock was at $2.245 per share.
                           Had compensation cost been determined based on the
                           fair value of the common stock purchase options using
                           the provisions of SFAS 123, the Company's net loss
                           and loss per share in 1995 would have increased by
                           $161,500 and $0.10, respectively.

                           For the proforma calculation, the fair value of each
                           option on the date of grant was estimated using the
                           Black-Scholes option pricing model and the following
                           assumptions for awards in 1995: zero dividend yield
                           expected volatility of 119.64%, risk -free interest
                           rate of 7.84%, and expected life of 5 years. Using
                           these assumptions, the grant-date fair value per
                           share of the options granted in 1995 was $1.80.


                                       14
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

         b.       Common Stock Warrants

                           Common stock warrants outstanding at December 31,
                           1999, consist of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
     Issuance                      Expiration Date               Amount       Price Per Share
---------------------------------------------------------------------------------------------
<S>                                         <C> <C>               <C>              <C>  
Acquisition of Sustainable        September 30, 2000              50,000           $3.50
---------------------------------------------------------------------------------------------
Consulting Agreements               May 8, 2001 to               160,000           $3.50
                                    October 1, 2001
---------------------------------------------------------------------------------------------
Consulting Agreement              September 30, 2001              10,000          $10.00
---------------------------------------------------------------------------------------------
8% Debenture Holders and         September 11, 2001 to           186,470       $4.386 to
Placement Agents (1.)                June 8, 2002                                 $10.81
---------------------------------------------------------------------------------------------
$145,000 Loan                      November 20, 2003             263,638            $.55
---------------------------------------------------------------------------------------------
</TABLE>

         (1.)     Common Stock Warrants Attached to Debenture

                  In connection with the issuance of the 8% convertible
                  debentures in September 1996; a number of warrants were
                  granted to the holders of the debentures, the agents, and
                  subagents who placed the debentures.

                  With respect to the warrants granted to the debenture holders
                  and subagents, the warrants were granted in three equal
                  installments of September 11, 1996; November 26, 1996; and
                  June 8,1997. These warrants will expire five years from the
                  date of each installment: September 11, 2001; November 26,
                  2001; and June 8, 2002. The number of shares of common stock
                  into which the warrants may be converted and the exercise
                  price of the warrants were determined by (among other
                  variables and future events) the amount of debentures still
                  outstanding on each date of grant, and the average closing bid
                  price of the Company's common stock for the five trading days
                  immediately preceding each date of grant.

                  On September 11, 1996, a total of 12,211 warrants expiring on
                  September 11, 2001 were granted to the agents. The warrants
                  may be exercised at any time before the expiration date by
                  either of the two methods as follows: (1) each warrant may be
                  exercised for one common share with an exercise price of
                  $10.73, or (2) all or a portion of the warrants may be
                  exercised on a cashless basis where a reduced number of shares
                  of common stock will be issued based upon the difference
                  between the average closing price of the Company's common
                  stock for the five business days immediately preceding the
                  date of exercise and the exercise price, divided by the
                  average closing market price, times the number of warrants
                  being exercised.

         c.       Net Income Per Share

                           Net income per share was calculated on the basis of
                           the weighted average number of shares outstanding
                           which amounted to 3,078,548 for the period ended
                           December 31, 1998. For the period ended December 31,
                           1998 the exercise of the options and warrants
                           outstanding as at year end did not have a dilutive
                           effect on the net income per share.

12.      Income Taxes

         The Company has no current and deferred taxes payable. The Company and
         its subsidiary have significant tax losses to be applied against future
         income. The 


                                       15
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

         subsidiary Company's tax filings show net operating losses
         to be applied against future taxable income in the amount of
         approximately $27 million to be utilized in various years through 2009.
         The tax benefit of these losses is estimated to be approximately $10
         million. No potential benefit of these losses has been recognized in
         the accounts.

 13.     Employment Contracts and Commitments

         In connection with the acquisition of Sustainable and under Management
         Agreement dated April 17, 1995, the Company agreed to engage two key
         officers for a period of seven years ending April 17, 2002. The two key
         officers are entitled to a base salary of $75,000 plus additional
         incentive payments each based upon a percentage of net income of
         Sustainable. At the time of termination for any reason, the key
         officers are entitled to a severance payment equal to the total of the
         annual base salary plus additional annual incentive payments he is then
         receiving multiplied by the remaining years, or portions thereof, of
         the contract period. During fiscal 1997, the Company reached a
         settlement with one of the officers in the total amount of $60,000 to
         be paid at $5,000 per month through February 1998.

         In connection with the acquisition of Deven and under the Stock
         Purchase Agreement dated October 1,1996, the Company agrees that should
         certain Deven officers be involuntarily terminated, other than in
         response to the Deven Officer's gross negligence, willful misconduct,
         ineptitude or inability to perform the duties of his position,
         ("Involuntary Personnel Action") on or before September 30, 2001
         ("Coverage Period"), the said Deven Officer who was the object of said
         Involuntary Personnel Action shall be entitled to receive a sum equal
         to 150% of the aggregate base salary plus the cash equivalent of all
         benefits for the period of time between the date of the Involuntary
         Personnel Action and the remaining portion of the Coverage Period
         ("Settlement Consideration").

         However, the Settlement Consideration shall not be less than two years
         severance even though the period between the Involuntary Personnel
         Action and the expiration of the Coverage Period be less than two
         years.

         The Company had two contracts with financial advisors during fiscal
         1997. The first expired in May 1997; the second expired October 31,
         1997. Neither contract was renewed.

 14.     Litigation Settlement

         In April 1997, the Company commenced an Adversary Action styled Daleco
         Resources Corporation v. Reserve Production Inc., Liquidating Trust and
         Leonard Pipkin, Trustee, in the United States Bankruptcy Court for the
         Eastern District of Texas, Tyler Division, Case No. 97-6036. The case
         was commenced to enforce the Company's rights under that certain Asset
         Purchase Agreement dated December 20, 1996 (Asset Purchase Agreement)
         as approved by the Bankruptcy Court on February 13, 1997. In the
         Adversary Action, the Company alleged that the defendants' had failed
         to meet their conditions to Closing under the Asset Purchase Agreement
         and were thus required to refund the Company's $100,000 Earnest Money
         Deposit and pay for the reworking of the Jody Well. Subsequent to the
         commencement of the Company's adversary action, a case was commenced in
         the United States District Court for the Eastern District of Texas,
         Tyler Division, styled Reserve Production Liquidating Trust v. Daleco
         Resources Corporation, Westlands Resources Corporation, David F.
         Lincoln, Gary J. Novinskie and C. Warren Trainor, C.A. No.: 6:97 CV 705
         ("District Court Action"). The District Court 


                                       16
<PAGE>
DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

         Action was in essence a counter claim against the Company and three of
         is directors asserting matters, which should have been addressed in an
         answer to the Adversary Action. The Company filed a motion to dismiss
         the District Court Action; however, prior to ruling on the Company's
         Motion, the Adversary Action was resolved through Court mandated
         mediation. Under the terms of the settlement, the Company's Earnest
         Money Deposit was returned and the Reserve Production Inc., Liquidating
         Trust, Reserve Production Liquidating partnership, and Leonard Pipkin,
         trustee, were required to resolve all outstanding claims for the
         reworking of the Jody Well.

         The Company incurred $224,875 in costs to settle this litigation.

 15.     Acquisitions

         During fiscal 1997, the Company completed the acquisitions of Deven
         Resources, Inc. and Haly Corporation.

         All of the outstanding stock of Deven was acquired on October 1, 1996
         in exchange for 2.6 million shares of Daleco stock plus $150,000 in
         cash. The market value of the stock was approximately $2.4 million. The
         acquisition was accounted for as a purchase resulting in oil and gas
         properties of $1.5 million, goodwill of $1.25 million less liabilities
         assumed of $200,000. Deven receives an annual management fee of
         $200,000 from a partnership of which it has a 1% general partner
         interest.

         All of the outstanding stock of Haly, a related party, was acquired on
         September 30, 1997. Daleco issued 3 million shares of common stock to
         Messrs. Amir and Erlich along with $1,000 cash. In exchange, the
         Company received and retired 3 million shares of common stock owned by
         Haly along with interests in wells owned by Haly. The acquisition was
         accounted for as a purchase. The amounts due Haly were written off into
         common stock less the First Regional Bank loan assumed by Daleco (see
         Note 11).

         Mid Continent:

                           On March 27, 1998, but affective as of November 1,
         1997, Tri-Coastal Energy acquired in the States of Kansas and Oklahoma
         consisting of 298 wells, 6,409 gross and 4,828 net acres. The purchase
         price for the acquisition was $2,315,000. The purchase was funded by an
         Amendment to the Heller Transaction, which increased the Heller
         Transaction Loan Commitment to $19,000,000. An additional $2,294,397
         was drawn down by Tri-Coastal at closing for development of the
         Mid-Continent properties.

16.      Subsequent event

         On December 18, 1998, an unaffiliated company agreed to purchase
         1,848,566 shares of common stock for $9 Million. The Company has not
         yet received the proceeds on this sale.


                                       17

<PAGE>

ITEM 2 -          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                  -----------------------------------------------------------
                  AND RESULTS OF OPERATIONS.
                  --------------------------

                  The Private Securities Litigation Reform Act of 1995 (the
                  "Reform Act") provides a safe harbor for forward-looking
                  statements made by or on behalf of the Company. All
                  statements, other than statements of historical facts, which
                  address activities, event or developments that the Company
                  expects or anticipates will or may occur in the future,
                  including such things as the anticipated development of
                  revenues, acquisition of additional properties or the
                  obtaining of capital, business strategy, development trends in
                  the industry segments in which the Company is active,
                  expansion and growth of the Company's business and operations
                  and other such matters are forward-looking statements. To take
                  advantage of the safe harbor provisions provided by the Reform
                  Act, the Company is identifying certain factors that could
                  cause actual results to differ materially from those expressed
                  in any forward-looking statements, whether oral or written,
                  made by or on behalf of the Company. Many of these factors
                  have previously been identified in filings or statements made
                  by or on behalf of the Company.

                  All phases of the Company's operations are subject to
                  influences outside of the Company's control. Any one, or a
                  combination, of these factors could materially affect the
                  results of the Company's operations. These factors include:
                  competitive pressures, inflation, trade restrictions, interest
                  rate fluctuations and other capital market conditions,
                  weather, future and options trading in, and the availability
                  of natural resources and services from other sources.
                  Forward-looking statements are made by or on behalf of the
                  Company's knowledge of its business and the environment in
                  which it operates, but because of the factors listed above, as
                  well as other environmental factors over which the Company has
                  no control, actual results may differ from those in the
                  forward-looking statements. Consequently, all of the
                  forward-looking statements made are qualified in their
                  entirety by these cautionary statements and there can be no
                  assurance that the actual results or developments anticipated
                  by the Company will be realized or, even if substantially
                  realized, that they will have the expected effect on the
                  business and/or operations of the Company.

                  The Company's performance during its first fiscal Quarter
                  ended December 31, 1998, was influenced by a variety of
                  factors:

                           -Oil prices remained depressed, which resulted in a
                            net loss from oil and gas operations. The Company,
                            like most domestic independents, is unable to
                            influence the price of oil. The announcements by
                            OPEC of its intent to reduce production and thus
                            increase the demand for oil on a worldwide basis
                            should, if it occurs, materially benefit the Company
                            through the resultant increase in oil pricing.

                                       18
<PAGE>

                           -. In the second quarter of Fiscal 1998, the Company
                            acquired properties in Oklahoma and Kansas adding a
                            total of 298 new wells. This addition resulted in an
                            increase in operating expenses over the comparable
                            period in Fiscal 1998.

                           -The Company's timber subsidiary, Sustainable Forest
                            Industries continues to attempt to market Guyana
                            woods domestically. To date, while there has been a
                            tremendous interest shown in the potential for
                            Guyana woods, especially in the railroad industry,
                            no substantial contracts have been obtained.

                           -On December 18, 1998, the Company entered into a
                            contract with Infinite Networks Corporation whereby
                            the Company agreed to sell 1, 848,566 shares of
                            common stock for $9 Million. This agreement has yet
                            to be consummated. The closing of this transaction
                            will enable the Company to move forward with planned
                            development of its existing assets, acquire
                            additional assets, retire its preferred stock and
                            bring current all outstanding payables.


PART II.     OTHER INFORMATION

ITEM 6       Exhibits and Reports on Form 8-K

             None.


                                       19
<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                          DALECO RESOURCES CORPORATION



Date:  May 20, 1999                                /s/ Gary J. Novinskie      
                                                   ---------------------------
                                                   Gary J. Novinskie
                                                   President


Date:  May 20, 1999                                /s/ Edward J. Furman       
                                                   ---------------------------
                                                   Edward J. Furman
                                                   Chief Financial Officer



                                       20