|  |
|--|
|  |
|  |

**UNITED STATES  SECURITIES AND EXCHANGE COMMISSION****WASHINGTON,  DC 20549**

**FORM 10-QSB**

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

  For the quarterly periodended March 31, 2004

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

For the transition period  from__________ to __________

Commission FileNumber 0-12214

**DALECO RESOURCESCORPORATION**

Name  of small business issue as specified in Charter

|                                             |                                 |
|--------------------------------------------------|--------------------------------------|
| Nevada                                           | 23-2860734                           |
| (State or other jurisdiction of incorporation or | (IRS Employer Identification Number) |
| organization)                                    |                                 |
|                                             |                                 |
| 120 North Church Street                          |                                 |
| West Chester, Pennsylvania 19380                 | (610)    429-1258                    |
| (Address of Principal Executive Offices)         | (Issuer’s telephone    number)  |

**APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY**

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 CORPORATEISSUERS**

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

Number of shares outstanding of the issuer’s common stock as of March 31, 2004: 28,337,402

Number of shares outstandingof the issuer’s Series A preferred stock as of March 31, 2004: 8,000

Number of shares outstanding    of the issuer’s Series B preferred stock as of March 31, 2004: 185,000 

 

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|--|
|  |
|  |

 

Back to Contents

|  **INDEX**  |
|-----------------------|
|                  |   |   |
|                  |   | PAGE |
| **PART      I**       | **FINANCIAL      INFORMATION** |   |
|                  |   |   |
| ITEM      1           | FINANCIAL      STATEMENTS (Unaudited) | 3 |
|                  | Consolidated      Balance Sheets | 3 |
|                  | Consolidated      Statement Of Loss | 5 |
|                  | Consolidated      Statement Of Deficit | 6 |
|                  | Consolidated      Statement Of Cash Flow | 7 |
|                  | Notes      to Consolidated Financial Statements | 8 |
|                  |   |   |
| ITEM      2           | MANAGEMENT’S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 28 |
|                  |   |   |
| ITEM      3           | CONTROLS      AND PROCEDURES | 30 |
|                  |   |   |
| PART      II          | OTHER      INFORMATION | 32 |
|                  |   |   |
| ITEM      2           | CHANGE      IN SECURITIES | 32 |
|                  |   |   |
| ITEM      4           | SUBMISSION      OF MATTERS TO A VOTE OF SECURITY HOLDERS | 33 |
|                  |   |   |
| ITEM      6           | Exhibits      and Reports on Form 8-K | 34 |
|                  |   |   |
| SIGNATURES            | 35 |

 

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| **DALECO        RESOURCES CORPORATIONCONSOLIDATED  BALANCE SHEETS AS OF March 31, 2004 AND SEPTEMBER 30, 2003–PREPARED BY MANAGEMENT (UNAUDITED) AND SEPTEMBER 30, 2003 (AUDITED)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                           |
|                                                                                                                                                                                 |   |   | **September    30,** |   |
|                                                                                                                                                                                 | **March    31, 2004** |   | **2003** |   |
|                                                                                                                                                                                 | **(unaudited)**  |   | **(audited)** |   |
|                                                                                                                                                                                 |  |   |  |   |
| **ASSETS**                                                                                                                                                                                |   |   |   |   |   |   |
| **Current Assets**                                                                                                                                                                        |   |   |   |   |   |   |
|                                                                                                                                                                                      | Cash    Accounts | $ | 260,304 |   | $ | 428,968 |   |
|                                                                                                                                                                                      | C/Ds |   | 136,000 |   |   | 136,000 |   |
|                                                                                                                                                                                      | Account receivables |   | 512,097 |   |   | 423,935 |   |
|                                                                                                                                                                                      | Jib Receivables |   | — |   |   | — |   |
|                                                                                                                                                                                      | Prepaid Mineral Royalties    (note 5c) |   | 300,297 |   |   | 270,287 |   |
|                                                                                                                                                                                      | Other Current Assets |   | 4,569 |   |   | 4,569 |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
|                                                                                                                                                                                      |   |   | **Total Current    Assets** | $ | 1,213,266 |   | $ | 1,263,789 |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
| **Other Assets**                                                                                                                                                                          |   |   |   |   |   |   |
|                                                                                                                                                                                      | Prepaid Mineral Royalties    L/T | $ | 265,190 |   | $ | 265,190 |   |
|                                                                                                                                                                                      | Goodwill |   | 813,357 |   |   | 813,357 |   |
|                                                                                                                                                                                      | Accumulated Amortization Goodwill |   | (813,357 | ) |   | (813,357 | ) |
|                                                                                                                                                                                      | Net Goodwill |   | — |   |   | — |   |
|                                                                                                                                                                                      | Debt Placement Costs |   | 869,861 |   |   | 584,815 |   |
|                                                                                                                                                                                      | Accumulated Amortization |   | (608,569 | ) |   | (584,815 | ) |
|                                                                                                                                                                                      | Net Debt Placement Costs |   | 261,292 |   |   | — |   |
|                                                                                                                                                                                      | Equity Placement Costs |   | — |   |   | — |   |
|                                                                                                                                                                                      | Accumulated Amortization    Equity Costs |   | — |   |   | — |   |
|                                                                                                                                                                                      | Net Equity Placement |   | — |   |   | — |   |
|                                                                                                                                                                                      | Other Assets |   | — |   |   | — |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
|                                                                                                                                                                                      |   |   | **Total Other    Assets** | $ | 526,482 |   | $ | 265,190 |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
| **Fixed Assets**                                                                                                                                                                          |   |   |   |   |   |   |
|                                                                                                                                                                                      | Oil and Gas Properties    (note 3) | $ | 12,607,950 |   | $ | 12,607,950 |   |
|                                                                                                                                                                                      | Accumulated DD&A |   | (7,607,950 | ) |   | (7,307,950 | ) |
|                                                                                                                                                                                      |   | Net Oil and Gas Property |   | 5,000,000 |   |   | 5,300,000 |   |
|                                                                                                                                                                                      | Mineral Properties (note 5) |   | 12,609,100 |   |   | 12,609,100 |   |
|                                                                                                                                                                                      | Accumulated DD&A |   | (125,000 | ) |   | (100,000 | ) |
|                                                                                                                                                                                      |   | Net Mineral Property |   | 12,484,100 |   |   | 12,509,100 |   |
|                                                                                                                                                                                      | Timber Properties (note 4) |   | 1,028,342 |   |   | 1,028,342 |   |
|                                                                                                                                                                                      | Accumulated DD&A |   | (1,208,342 | ) |   | (1,028,342 | ) |
|                                                                                                                                                                                      |   | Net Timber Property |   | — |   |   | — |   |
|                                                                                                                                                                                      | Technology/Patent Rights (note 6) |   | 7,767,000 |   |   | 7,767,000 |   |
|                                                                                                                                                                                      | Accumulated DD&A |   | (2,539,938 | ) |   | (2,166,123 | ) |
|                                                                                                                                                                                      |   | Net Tech./Patent Rights |   | 5,227,062 |   |   | 5,600,877 |   |
|                                                                                                                                                                                      | Property, Equipment, Furniture & Fixtures |   | 514,749 |   |   | 514,749 |   |
|                                                                                                                                                                                      | Accum. Depr (P, E, P & P) |   | (499,640 | ) |   | (493,998 | ) |
|                                                                                                                                                                                      |   | Net (P, E, P & P) |   | 15,109 |   |   | 20,751 |   |
|                                                                                                                                                                                      | Leasehold Improvements |   | — |   |   | — |   |
|                                                                                                                                                                                      | Accumulated Amortization (Lse Improvements) |   | — |   |   | — |   |
|                                                                                                                                                                                      |   | Net Lse Improvements |   | — |   |   | — |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
|                                                                                                                                                                                      |   |   | **Total Fixed    Assets** | $ | 22,726,271 |   | $ | 23,430,726 |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |
|                                                                                                                                                                                      |   |   | **Total Assets** | $ | 24,466,019 |   | $ | 24,959,707 |   |
|                                                                                                                                                                                      |   |   |   |  |  |   |  |  |   |

 

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

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| **DALECO RESOURCES          CORPORATION****CONSOLIDATED    BALANCE SHEETS AS OF March 31, 2004 AND SEPTEMBER 30, 2003–PREPARED BY MANAGEMENT (UNAUDITED) AND SEPTEMBER 30, 2003 (AUDITED)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |
|                                                                                                                                                                                              |

|                                                                                                                                                                | **March 31,**   |          | **September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|---------------|-------------------|--------|
|                                                                                                                                                                | **2004**        |          | **2003**          |   |
|                                                                                                                                                                | **(unaudited)** |          | **(audited)**     |   |
|                                                                                                                                                                |                 |               |              |        |  |   |
| **LIABILITIES**                                                                                                                                                     |            |          |              |   |   |   |
| **Current Liabilities**                                                                                                                                             |            |          |              |   |   |   |
|       Trade    A/P                                                                                                                    | $               | 964,750       |              |   | 970,347 |   |
|       Notes    Payable (note 7)                                                                                                       |            | 142,543       |              |   | 142,543 |   |
|       Note    Due related Pty (note 8)                                                                                                |            | 742,410       |              |   | 733,410 |   |
|       HFI    Financing (note 10a)                                                                                                     |            | —       |              |   | 5,154,783 |   |
|       Loans—1stRegional    (note 10d)                                                                                            |            | 100,000       |              |   | 100,000 |   |
|       CAMI    Notes                                                                                                                   |            | 514,881       |              |   | 514,881 |   |
|       Sonata         and Standard EnergyFinancing    (notes 7b and 10b)                                                               |            | 221,126       |              |   | — |   |
|       Accrued Interest Expense (notes 10a and 10b)                                                                                    |            | 329,682       |              |   | 1,786,871 |   |
|       Accrued Dividend Expense (notes 11d and 16)                                                                                     |            | 2,332,950     |              |   | 1,243,043 |   |
|       Accrued Expense    Reimbursements                                                                                               |            | 64,837        |              |   | 60,187 |   |
|       Accrued    Salary Expense                                                                                                       |            | 507,583       |              |   | 364,351 |   |
|             **Total Current Liabilities**                                                               | $               | 5,920,763     |              | $      | 11,075,416 |   |
|                                                                                                                                                                |                 |               |              |        |  |   |
|                                                                                                                                                                |            |          |              |   |   |   |
| Long Term Debt                                                                                                                                                      | $               | 386,970       |              | $      | — |   |
|                                                                                                                                                                |            |          |              |   |   |   |
|       Total    Long Term Debt                                                                                                         | $               | 386,970       |              | $      | — |   |
|                                                                                                                                                                |                 |               |              |        |  |   |
|             **Total Liabilities**                                                                       | $               | 6,307,734     |              | $      | 11,075,416 |   |
|                                                                                                                                                                |                 |               |              |        |  |   |
| **EQUITY**                                                                                                                                                          |            |          |              |   |   |   |
|       Beginning    Retained Earnings                                                                                                  | $               | (20,670,413   | )                 | $      | (24,066,365 | ) |
|                                                                                                                                                                |            |          |              |   |   |   |
|       Current    Period Income/(loss)                                                                                                 |            | (603,105      | )                 |   | (1,027,383 | ) |
|       Dividends    Paid (Cash & Stock)                                                                                            |            |  — |              |   | (10,000 | ) |
|       Add.    Paid in Capital                                                                                                         |            | 39,146,499    |              |   | 38,722,010 |   |
|       Preferred    Stock (note 11)                                                                                                    |            | 1,930         |              |   | 3,160 |   |
|       Common    Stock (note 11)                                                                                                       |            | 283,374       |              |   | 262,849 |   |
|                                                                                                                                                                |            |          |              |   |   |   |
|                         **Total    Equity** | $               | 18,158,285    |              | $      | 13,884,291 |   |
|                                                                                                                                                                |                 |               |              |        |  |   |
|             **Total Liabilities and Equity**                                                            | $               | 24,466,019    |              | $      | 24,959,707 |   |
|                                                                                                                                                                |                 |               |              |        |  |   |

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

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| **DALECO RESOURCES          CORPORATION**CONSOLIDATED STATEMENT      OF LOSS FOR THE QUARTERS ENDING AND THE SIX MONTHS ENDING MARCH 31, 2004 AND 2003 **–** PREPARED BY MANAGEMENT (UNAUDITED) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                       |
|                                                                                                                                                                                                  |

| ** **                                                                                           | **3 Months Ending** | ** ** | ** ** | **6 Months Ending** | ** ** |
|------------------------------------------------------------------------------------------------------|---------------------|------------|------------|---------------------|------------|
| ** **                                                                                           | **2004**            | ** ** | **2003**   | ** **          | **2004**   | ** ** | **2003** | ** ** |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
| **Revenue**                                                                                          |                |       |       |                |       |   |   |   |   |   |   |   |
|       O&G    Sales                                                 | $                   | 286,105    |       | $                   | 327,603    |   | $ | 629,765 |   | $ | 672,060 |   |
|       N    P I Receipts                                                |                |       |       |                | —    |   |   | — |   |   | — |   |
|       Royalty    Receipts                                              |                | 8,972      |       |                | 6,710      |   |   | 16,988 |   |   | 12,018 |   |
|       Timber    Sales                                                  |                |       |       |                | —    |   |   | — |   |   | — |   |
|       Mineral    Sales                                                 |                | 6,918      |       |                | —    |   |   | 25,399 |   |   | — |   |
|             Total    Operating Income    | $                   | 301,995    |       | $                   | 334,313    |   | $ | 672,152 |   | $ | 684,079 |   |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
|       Interest    Income                                               | $                   |       |       |                | —    |   |   | — |   |   | — |   |
|       Well    Management                                               |                | 41,506     |       |                | 16,505     |   |   | 58,011 |   |   | 33,616 |   |
|       Ptr.    Management                                               |                | —    |       |                | —    |   |   | — |   |   | — |   |
|       Other    Income                                                  |                | 34,700     |       |                | —    |   |   | 5,823,250 |   |   | — |   |
|             Total    Other Income        | $                   | 76,206     |       | $                   | 16,505     |   | $ | 5,881,261 |   | $ | 33,616 |   |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
|             Total    Income              | $                   | 378,201    |       | $                   | 350,819    |   | $ | 6,553,514 |   | $ | 717,695 |   |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
| **Expenses**                                                                                         |                |       |       |                |       |   |   |   |   |   |   |   |
|       LOE – Oil    and Gas                                        | $                   | 260,108    |       | $                   | 148,002    |   | $ | 473,951 |   | $ | 306,225 |   |
|       LOE—Timber                                                  |                | 2,700      |       |                | 3,500      |   |   | 6,000 |   |   | 9,000 |   |
|       LOE—Minerals                                                |                | 11,391     |       |                | 14,138     |   |   | 70,875 |   |   | 49,138 |   |
|       N    P I Exp.                                                    |                | —    |       |                | —    |   |   | — |   |   | — |   |
|       Prod    Tax                                                      |                | 20,970     |       |                | 25,977     |   |   | 46,110 |   |   | 53,515 |   |
|       DD&A    (Fixed Assets) 642,512                               |                | 360,016    |       |                | 321,256    |   |   | 704,457 |   |   | 642,512 |   |
|       Third    Party Distributions                                     |                | 7,223      |       |                | 5,808      |   |   | 16,144 |   |   | 9,837 |   |
|             Total    Operational Expense | $                   | 662,408    |       | $                   | 518,682    |   | $ | 1,317,537 |   | $ | 1,070,227 |   |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
|       Interest    Expense                                              |                | 43,765     |       |                | 164,398    |   |   | 185,453 |   |   | 344,748 |   |
|       General    and Administrative Expenses                           |                | 163,583    |       |                | 131,780    |   |   | 338,543 |   |   | 225,462 |   |
|       Legal    and Professional Fees                                   |                | 64,094     |       |                | 112,362    |   |   | 139,809 |   |   | 232,383 |   |
|       Financial    Advisor Fees                                        |                | —    |       |                | —    |   |   | — |   |   | — |   |
|       Shareholder    Information                                       |                | 23,702     |       |                | —    |   |   | 26,900 |   |   | 1,841 |   |
|       Amortization    of Debt Costs                                    |                | 23,754     |       |                | —    |   |   | 23,754 |   |   | — |   |
|       Amortization    of Goodwill                                      |                | —    |       |                | —    |   |   | — |   |   | — |   |
|            Total    Expenses                  | $                   | 981,306    |       | $                   | 927,222    |   | $ | 2,031,996 |   | $ | 1,874,662 |   |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
| Net Income (Loss) before Extraordinary Item (Note 10)                                                | $                   | (603,105   | )          | $                   | (576,404   | ) | $ | (1,266,268 | ) | $ | (1,156,967 | ) |
|                                                                                                 |                     |            | ** ** |                     |            | ** ** |  |  | ** ** |  |  | ** ** |
| Basic and Fully Diluted Net Loss per Common Share                                                    |                | ($.02      | )          |                | ($.02)     |   |   | ($.04 | ) |   | ($.04 | ) |
| Extraordinary Item, Gain On Debt Forgiveness (Note 10)                                               |                | N/A        |       |                | N/A        |   | $ | 5,787,687 |   |   | N/A |   |
| Basic /Fully Diluted Net Effect Gain (Loss)/Share (Note 10)                                          |                | N/A        |       |                | N/A        |   |   | $.20/$/15 |   |   | N/A |   |
| Net Income (Loss)    After Extraordinary Item (Note 10)                                              |                | N/A        |       |                | N/A        |   | $ | 4,521,418 |   |   | N/A |   |
| Basic/Fully Diluted    Income (Loss)/Share (Note 10)                                                 |                | N/A        |       |                | N/A        |   |   | $.16/$.11 |   |   | N/A |   |

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

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| **DALECO RESOURCES          CORPORATION**CONSOLIDATED STATEMENTS      OF DEFICIT FOR THE SIX MONTHSENDED MARCH    31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                               |
|                                                                                                                                                                          |

|                                   | **2004** |        | **2003** |   |
|----------------------------------------|----------|-------------|----------|--------|
|                                   |          |             |     |        |  |   |
| **Deficit – Beginning of Period** | $        | (20,670,413 | )        | $      | (23,086,926 | ) |
| Net loss for the period                |     | (603,105    | )        |   | (576,404 | ) |
| Dividends on Preferred Stock           |     | (57,000     | )        |   | (85,000 | ) |
| **Deficit – End of Period**       | $        | (21,330,518 | )        | $      | (23,748,330 | ) |

   

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

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| **DALECO RESOURCES      CORPORATION**                                                                                                                                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED STATEMENTS        OF CASH FLOW FOR THE QUARTERS ENDING AND SIX MONTHS      ENDING MARCH 31,        2004      AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED) |
|                                                                                                                                                                              |

|                                                                        |                           |     |   |                     |     |
|-----------------------------------------------------------------------------|--------------------------------|----------|--------|--------------------------|----------|
|                                                                        |  **3      Months Ending** |     |   | **6      Months Ending** |     |
|                                                                        |                           | **2004** |   |                     | **2003** |   |   | **2004** |   |   | **2003** |   |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| **Operating      Activities**                                               |                           |     |   |                     |     |   |   |   |   |   |   |   |
| Net Income/(loss)      for the period                                       | $                              | (603,105 | )      | $                        | (576,404 | ) | $ | 4,521,418 |   | $ | (1,156,967 | ) |
| Items not affecting      working capital                                    |                           |     |   |                     |     |   |   |   |   |   |   |   |
|    Change      in DD & A for period                      | $                              | 383,770  |   | $                        | 321,256  |   | $ | 728,211 |   | $ | 642,512 |   |
|    Debt      Amortization                                    |                           | 23,754   |   |                     | —  |   |   | 23,754 |   |   |   |   |
|    Amortization      of Good Will                            |                           | —  |   |                     | —  |   |   | —  |   |   | — |   |
|    Extraordinary      Item                                   |                           | —  |   |                     | —  |   |   | (5,787,687 | ) |   | — |   |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
|       Sub      Total                          | $                              | 407,524  |   | $                        | 321,256  |   | $ | (5,035,722 | ) | $ | 642,512 |   |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| Items affecting Working      Capital:                                       |                           |     |   |                     |     |   |   |   |   |   |   |   |
|    (Increase)      Decrease in other assets                  | $                              | —  |   | $                        | 800      |   | $ | (285,046 | ) | $ | 800 |   |
|    (Increase)      Decrease in Pre-paid Royalties            |                           | —  |   |                     | —  |   |   | (30,000 | ) |   | — |   |
|    (Increase)      Decrease in accounts receivable           |                           | 9,029    |   |                     | 225,733  |   |   | (88,162 | ) |   | 463,336 |   |
|    Increase      (Decrease) in Trade payables                |                           | (851,908 | )      |                     | (147,155 | ) |   | (5,597 | ) |   | (359,791 | ) |
|    Increase (Decrease)           in other Accrued Expenses   |                           | 66,027   |   |                     | 33,403   |   |   | 147,882 |   |   | 94,880 |   |
|    Gain/(loss)      on Sale of Properties                    |                           | 34,700   |   |                     | —  |   |   | 34,700 |   |   | — |   |
|       Sub      Total                          | $                              | (742,152 | )      |                     | $112,781 |   | $ | (226,223 | ) | $ | 199,225 |   |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| **Cash provided      (used) for operating activities**                      | $                              | (937,733 | )      | $                        | (142,367 | ) | $ | (740,527 | ) | $ | (315,230 | ) |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| **Investing      Activities**                                               |                           |     |   |                     |     |   |   |   |   |   |   |   |
|    (Increase)/decrease      in Investment in Subsidiaries    | $                              | —  |   | $                        | —  |   | $ | — |   | $ | — |   |
|    Leasing,      Acquisition and Well Costs Incurred         |                           | —  |   |                     | —  |   |   | — |   |   | — |   |
|                                                                        |                           |     |   |                     |     |   |   |   |   |   |   |   |
| **Cash Provided      from/(used for) Investing Activities**                 | $                              | —  |   | $                        | —  |   | $ | — |   | $ | — |   |
|                                                                        |                           |     |   |                     |     |   |   |   |   |   |   |   |
| **Financing      Activities**                                               |                           |     |   |                     |     |   |   |   |   |   |   |   |
|    Increase/(decrease)      Notes due Related Parties        | $                              | 6,000    |   | $                        | 19,000   |   | $ | 9,000 |   | $ | 19,000 |   |
|    Increase/(decrease)      Other Notes due                  |                           | —  |   |                     | —  |   |   | —  |   |   | — |   |
|    Increase/(decrease)      Sonata Note Due                  |                           | (23,606  | )      |                     | —  |   |   | 608,096 |   |   | — |   |
|    Increase/(decrease)      Accrued Interest                 |                           | 69,926   |   |                     | (36,823  | ) |   | (1,457,189 | ) |   | (39,679 | ) |
|    Increase/(decrease)      Accrued Dividends                |                           | 850,590  |   |                     | 85,000   |   |   | 1,084,907 |   |   | 170,000 |   |
|    Dividends      Paid                                       |                           | —  |   |                     | —  |   |   | — |   |   | — |   |
|    Proceeds      of Equity Issuance                          |                           | 26,867   |   |                     | 262,075  |   |   | 287,029 |   |   | 357,075 |   |
|    Proceeds           of L/Debt                              |                           | —  |   |                     | (225,000 | ) |   | 40,000 |   |   | (300,000 | ) |
| **Cash provided      from/(used for) financing activities**                 | $                              | 929,777  |   | $                        | 104,252  |   | $ | 571,843 |   | $ | 206,396 |   |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| **Net Increase/(decrease)      in cash for period**                         | $                              | (7,956   | )      | $                        | (38,115  | ) | $ | (168,684 | ) | $ | (108,834 | ) |
|                                                                        |                           |     |   |                     |     |   |   |   |   |   |   |   |
| **Cash and      Cash Equivalents – Beginning of Period**               | $                              | 404,260  |   | $                        | 554,963  |   | $ | 564,988 |   | $ | 625,682 |   |
| **Cash and      Cash Equivalents – End of Period**                     | $                              | 396,304  |   | $                        | 516,848  |   | $ | 396,304 |   | $ | 516,848 |   |
|    **Change      in Cash FY 1st Qtr.**                       | $                              | (7,956   | )      | $                        | (38,115  | ) | $ | (168,684 | ) | $ | (108,834 | ) |
|                                                                        |                                |          |   |                          |          |   |  |  |   |  |  |   |
| SEE      ACCOMPANYING NOTES TO FINANCIAL STATEMENTS     |

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| **DALECO RESOURCES      CORPORATION**                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NOTES TO           CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS      ENDED MARCH          31, 2004      AND 2003 – 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 its assets. For the  quarter ending March 31, 2004, the Company reported a loss of $603,105. The  ability of the Company to meet its total liabilities of $6,307,734, and to continue  as a going concern is dependent upon the availability of future funding, achieving  profitable timber operations and successful development its mineral assets.  On July 24, 2002 (“Closing Date”), the Company entered into a $10,000,000  Equity Line of Credit Agreement with Cornell Capital Partners, L.P. (“CCP”).  As part of the transaction, the Company issued to CCP a two year convertible  debenture in a face amount of $300,000. The debenture is convertible into common  stock at a price equal to the lesser of 120% of the final bid price on the Closing  Date or 80% of the average lowest three closing bid prices as reported by Bloomberg  of the Company’s common stock for the five trading days immediately preceding  the date of the conversion. The equity line provides for the Company to draw  down $75,000 per week over a three year period. In accordance with the provisions  of the Equity Line of Credit, the Company filed a registration statement on  Form SB-2 with the Securities and Exchange Commission, which became effect on  November 7, 2002. Commencing in November 2002 and concluding in January 2003,  CCP converted the entire Debenture in 5,027,881 shares of common stock at an  average price per share of $0.117 when including all other fees and costs associated  with the issuance of the debentures and $0.06 if just the conversion price without  including other fees and costs.

The Company will continueto seek and evaluate “project specific” funding commitments and other capitalfunding alternatives if and as they become available.

As of March 31, 2004,    the Company was in default of certain debt obligations (See Notes 7, 8 and    14 below). The holders of these instruments are working with the Company to    achieve the extinguishment of the 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.

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| **DALECO RESOURCES      CORPORATION**                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NOTES TO           CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS      ENDED MARCH          31, 2004      AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|                                                                                                                                                                          |

|   |   |                            |
|--------|--------|---------------------------------|
|   | **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, Sustainable Forest Industries Inc., Deven Resources, Inc., Tri-Coastal  Energy, Inc., Tri-Coastal Energy, L.P., Clean Age Minerals Incorporated, CA  Properties, Inc. and 16/6, Inc. 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.  The Companies investments in minerals are accounted for using purchasing accounting  methods. 

|   | **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. 

 	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, theCompany began assessing the impairment of capitalized costs of proved oil andgas properties and other long-lived assets in accordance with Statement of FinancialAccounting Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of. Under this method, the Companygenerally assesses its oil and gas properties on a field-by-field basis utilizingits current estimate of future revenues and operating expenses. In the eventnet un-discounted cash flow is less than the carrying value, an impairment lossis recorded based on estimated fair value, which would consider discounted futurenet cash flows. SFAS 121 did not have any impact on the Company’s changein method of assessing impairment of oil and gas properties and other long-livedassets including $20,000,000 in mineral properties. 

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| **DALECO    RESOURCES CORPORATION**                                            |
|--------------------------------------------------------------------------------|
| **NOTES TO    CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS**         |
| **ENDED MARCH    31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|                                                                                |

|   |   |                                                         |
|--------|--------|--------------------------------------------------------------|
|   | **d.** | **Site restoration,    dismantlement and abandonment costs** |

The salvage value of producing wells or mining deposits is expected to exceed the cost of site restoration and abandonment. As a result, no such costs are accrued in these financial statements. The Company has not accrued any costs associated with the potential abandonment and restoration of mineral extraction mine sites to date. Any required site-specific restoration cost accruals will be made once mineral extraction is initiated. 

|   | **e.** | **Property    and Equipment** |
|--------|--------|-------------------------------|

 	Property and equipment are recorded at cost and depreciated over the straight-line method over a period of five years. The carrying value of property and equipment is impaired from time to time in addition to typical depreciation charges based on independent appraisals of the operational condition of the specific unit of property and/or equipment. 

|   | **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.** | **Mineral    Acquisition** |
|--------|--------|----------------------------|

 	The Company has recorded the acquisition of Clean Age Minerals Incorporated and associated mineral rights at cost. 

|   | **h.** | **Debt Issue    Costs** |
|--------|--------|-------------------------|

 	Debt issue costs of $285,046 were capitalized in the quarter ending December 31, 2003, and represent those costs associated with Sonata Investment Company, Ltd.’s acquisition of Heller Financial, Inc. loan and the restructuring of the Heller Loan (see Note 10). 

|   | **i.** | **Cash and    Cash Equivalents** |
|--------|--------|----------------------------------|

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

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| **DALECO    RESOURCES CORPORATION**                                            |
|--------------------------------------------------------------------------------|
| **NOTES TO    CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS**         |
| **ENDED MARCH    31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|                                                                                |

|   |   |                                       |
|--------|--------|--------------------------------------------|
|   | **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. loan 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. The fair value of all debt is based on discounted cash flow analysis. 

| **3.** | **Oil and    Gas and Equipment** |
|--------|----------------------------------|

|                                                 |     | **March 31,** |   |   | **March 31,** |   |
|------------------------------------------------------|----------|---------------|--------|--------|---------------|--------|
| **2004**                                             | **2003** |
|                                                      |          |               |        |
| Proven lease acreage costs                           | $        | 5,429,996     |   | $      | 5,429,996     |   |
| Proven undeveloped lease acreage costs               | $        | 1,745,810     |   | $      | 1,745,810     |   |
| Well costs                                           | $        | 5,432,145     |   | $      | 5,432,145     |   |
|                                                 |          |               |   |        |               |   |
|                                                 | $        | 12,607,950    |   | $      | 12,607,950    |   |
| Accumulated depletion, depreciation and amortization |     | 7,457,950     |   |   | 6,432,950     |   |
|                                                 |          |               |   |        |               |   |
|                                                 | $        | 5,150,000     |   | $      | 6,175,000     |   |
|                                                 |          |               |   |        |               |   |

| **(a)** | **Sale of Oil and Gas Properties** |
|---------|------------------------------------|

On or about July 31, 2002 but effective as    of July 1, 2002, the Company sold certain oil and gas properties in Oklahoma,    consisting of 11 gross wells and 1.08 net wells, to the operator. These properties    were marginal properties and wells with the revenues from production being    just slightly above lease operating costs. Since these properties were part    of the collateral for the Heller Loan (See Note 10(a)), all the proceeds  from the sale went to Heller.

In January, 2004, the Company sold certain    inactive oil wells in Pontotoc County, Oklahoma for net proceeds amounting    to $30,500 and the assumption of all residual abandoning liabilities. The    proceeds from the sale of these wells went to reduce the Sonata Loan (See  Note 10(a)).

| **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.

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| **DALECO    RESOURCES CORPORATION**                                            |
|--------------------------------------------------------------------------------|
| **NOTES TO    CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS**         |
| **ENDED MARCH    31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|                                                                                |

 	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 the Company given 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. The Company has fully written off its investment in Sustainable. 

 	The Company has maintained its concession rights since the inception of timber operations in 1997.

|   | **5.**       | **Mineral Properties**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | **a.**  | **Clean****Age            Minerals Incorporated. Clean****Age            Minerals Incorporated.**In            September 2000, the Company acquired Clean Age Minerals Incorporated            (“CAMI”) by way of merger with the Company’s wholly            owned subsidiary; Strategic Minerals, Inc. CAMI has three (3) subsidiaries,            CA Properties, Inc., Matrix-Loc, Inc. and Lone Star Minerals, Inc.    (collectively “CAP”).                                                             |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |         | CAP owns or has        under long-term lease: (a) 5,200 acres (±) in Marfa, Presidio        County, Texas, containing high grade Zeolite; (b) 5,020 acres(±)        of Calcium Carbonate deposits located in the Oro Grande area, Cibola        County, New Mexico; (c) twenty eight (28) mining claims located in Sierra        County, New Mexico covering 2,675 acres(±) of Kaolin; and (d)        eleven (11) Zeolite mining claims covering approximately 220 acres(±)    located in Beaver County, Utah. |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | **b.**       | **Minerals and Equipment**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **3/31/2004** | ** ** | ** ** | **3/31/2003** |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|------------|---------------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        |               |       |            |               |   |
|   |   | Proven undeveloped lease costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | $      | 12,609,100    |       | $          | 12,609,100    |   |
|   |   | Mine development costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | —       |       |       | —       |   |
|   |   | Accumulated         depletion and Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (125,000      | )          |       | —       |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $      | 12,484,100    |       | $          | 12,609,100    |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        |               |       |            |               |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |      (1).     The      Company has begun to amortize its mineral properties at a nominal amortization      rate of $100,000 per year subject to higher adjustments per year as production      increases. During the quarter ending March 31, 2004, the Company took a      charge of $25,000 towards the annual amount. The Company is utilizing a      modified unit of production basis in determining its amortization rates    for its mineral properties. |

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **c.** | **Prepaid          Royalties.**The          Company receives a credit in the nature of “prepaid royalties” for          rents paid on the Marfa Zeolite Lease, Presidio County, Texas, and    a portion of the New Mexico Oro Grande Limestone Lease in Cibola County, New          Mexico. During Fiscal year 2003 the Company conducted mining activities          on its Kaolin deposits      in Sierra County, New Mexico for the purpose of testing the minerals and      producing samples for sales. The Company commenced production of its New      Mexico Calcium Carbonate properties in Fiscal Year 2003. It anticipates      the commencement of the commercial production of its Kaolin deposits in      Fiscal Year 2004, and has commenced production of its Zeolite deposit in      the first quarter of Fiscal Year 2004. The Company did make limited sales      of its CA Series products in Fiscal Year 2003 primarily for testing to      confirm their suitability for certain applications. The Company began the      commercial sales of one of its CA Series Products under the tradename “ReNuGen” in      the first quarter of 2004. Testing of the Company’s Kaolin was commenced      in December 2002 to confirm its properties in various applications in the      paper, paint and coating industries. A portion of the Prepaid royalties      ($265,190) attributable to the Calcium Carbonate deposits are not anticipated      to be fully recovered in Fiscal Year 2004 and are carried as Long Term      Assets. The remainder of the prepaid royalties ($300,297) are anticipated      to be fully used in Fiscal Year 2004 andare listed as Current Assets. |

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| **DALECO RESOURCES    CORPORATION**                                                                                                                                     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NOTES TO          CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS      ENDED MARCH          31, 2004 AND 2003 – PREPAREDBY MANAGEMENT (UNAUDITED)**  |
|                                                                                                                                                                         |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **6.** | **Patents & Technology**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | As part of the acquisition      of Clean Age Minerals Incorporated (See Note 5(a) above), the Company also      acquired U.S. Patent No: 5387738. This patent, owned by Clean Age Minerals      Incorporated (previously owned by Matrix-Loc, Inc. which was acquired by      Clean Age Minerals Incorporated as a result of Matrix-Loc’s merger      with Clean Age Minerals as of March 18, 2002), deals with a reagent and      process for the remediation of water and contaminated soils. The Company’s      subsidiary 16/6, Inc. patent application on its I2 Technology as denied      by the United States Patent Office on June 13, 2003. The Company has elected,      at this time, not to appeal the Patent Office Examiner’s decision      or proceed with the “independent build-out” of the technology    in a proprietary but unpatented form.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **7.** | **Notes Payable**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| a.     | 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. In fiscal 1996, the Company repaid $300,000      of the outstanding balance. In fiscal 1997, the remaining $800,000 was      converted into 16,000 shares of 10% cumulative preferred stock, at $50.00      per share (“Series A Preferred Stock”). The Series A Preferred      Stock was subject to a put on August 20, 1999. The holders of the Series      A Preferred Stock filed a lawsuit in the Los Angeles Superior Court, California      against the Company, as well as Mr. Amir and Mr. Erlich as guarantors.      Mr. Amir satisfied his obligation under his guarantee and purchased one-half,    or 8,000 shares of the Series A Preferred Stock, of the 16,000 shares of the    Series A Preferred Stock owned by the Kanes. The Company and Mr. Erlich entered    into a Stipulation        for the Entry of Judgment granting the Company until August 1, 2001 in        which to satisfy the put for the remaining 8,000 shares of Series A Preferred        Stock plus accumulated interest. (See Litigation Note 14). Mr. Amir converted        his Series A Preferred shares into 408,163 shares of Company common stock.        A portion of the dividends ($32,213) due Mr. Amir on the Series A Preferred        Stock was paid to Mr. Amir in the third quarter of fiscal 2002. (See        Note 8(a)). As of March 31, 2004, the Company owed the Kanes $70,000    of accrued but unpaid interest. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

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| **DALECO RESOURCES    CORPORATION**                                                                                                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NOTES TO          CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS       ENDED MARCH          31, 2004 AND 2003 – PREPAREDBY MANAGEMENT (UNAUDITED)**  |
|                                                                                                                                                                          |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b.     | During fiscal          1998, the Company borrowed $145,000 from four (4) persons. The debt          was evidenced by Notes that 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 Note holders were also given warrants. (See Note11(b)— Warrants) $75,000 in principal amount plus accrued interest due toSonata Investment Company, Ltd. (“Sonata”)was paid to Sonata on November 30, 2001. On June 7, 2002, Mr. Lincoln convertedhis Note in the amount of $20,000, plus accrued and unpaid interest of $13,528,into 49,818 shares of common stock. The debt was converted at a price of $.673per share, which represented the average of the bid and closing prices for thefive day period prior to the conversion. Presently, only two of the 4 Notes comprising$50,000, in the aggregate, of the original $145,000 remain outstanding. On August1, 2001, the Company borrowed $42,000 from Standard Energy Company. This loanearned interest at 2% per annum. The Standard Energy Company loan was satisfiedon November 30, 2001. Since June 30, 2002, only two of the original four (4)notes, each in the face amount of $25,000, remain outstanding. The accrued butunpaid interest on these two notes as of March 31, 2004 is $30,218. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| c.     | Pursuant    to Paragraph 5.1 of the Agreement and Plan of Merger by and among Clean    AgeMinerals Incorporated(“CAMI”) and Strategic Minerals, Inc. (“SMI”) and the Companydated September 19, 2000, obligations of CAMI to certain officers, directorsand third parties were to have been satisfied by SMI or the Company within one(1) year of the merger. The indebtedness totaled (including the Martin Debt asdefined in Note 8(b) below) $514,881 and was evidenced by Notes dated September19, 2000. The Notes were due and payable on or before September 18, 2001 andprovide for interest at the rate of 8% per annum. These Notes remain outstanding.As of March 31, 2004, the total amount payable on these notes is $659,047 representingprincipal of $514,881 and accrued but unpaid interest of $144,166.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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| **DALECO RESOURCES    CORPORATION**                                                                                                                           |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NOTES TO          CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH    31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)**  |
|                                                                                                                                                               |

|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | **8.**  | **Due to (from) Related    Parties**                                                                                                                                                                                                                                                                                                                                                        |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   | **(a)** | **Due to (from) Amir**                                                                                                                                                                                                                                                                                                                                                                      |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | Mr. Amir has entered into    four (4) Notes with the Company as follows:                                                                                                                                                                                                                                                                                                                    |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | (1)     Note        dated October 1, 1995, bearing interest at the rate of prime plus 3 percent        in the principal amount of $91,062. This amount remains outstanding as    of March 31, 2004.                                                                                                                                                                |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | (2)     Note        dated October 1, 1995 bearing interest at the rate of 7% as a result        of various advances as to the Company in the principal amount of $484,348    as of March 31, 2004.                                                                                                                                                                 |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | (3)     Note        dated July 20, 1998 in the face amount of $25,000 (See Note 7(b)) bearing        interest at the rate of 2% over the prime rate charged by the Huntingdon        National Bank of Columbus, Ohio, through the maturity date, November    21, 1998 and 18% thereafter.                                                                          |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | (4)      Note          dated June 17, 2002 bearing interest at the rate of 7% in the principal    amount of $137,000.                                                                                                                                                                                                                                         |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | As of March 31, 2004, the        outstanding principal and accrued but unpaid interest on the obligations    listed under numbers 1 through 4 to Mr. Amir amounted to $807,758.                                                                                                                                                                                                             |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | Mr. Amir was also entitled        to a cash payment of $25,000 under his Key Man Contract on June 30, 2002.    This bonus has not been paid (See Note 13(b)).                                                                                                                                                                                                                               |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | Prior to conversion of        his Series A Preferred Stock into common stock, Mr. Amir was entitled        to have received dividends in the amount of $91,551 of which $59,338    remains outstanding (See Note 7(a)).                                                                                                                                                                     |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | As of March 31, 2004, the        Company owed Mr. Amir $10,809 in un-reimbursed business expenses and    $137,504 in accrued but unpaid salary.                                                                                                                                                                                                                                             |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    | During 2002, the Company        paid Mr. Amir $170,000 in partial payment of the accrued and unpaid interest        on his notes, unreimbursed expenses and dividends attributable to the        Class A Preferred Stock. These payments were reflected in the prior financial        statements. Mr. Amir subsequently advanced the Company an additional    $137,000 (see 8(a)(4) above). |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                        |

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| **DALECO RESOURCES          CORPORATION****NOTES    TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHSENDED MARCH 31, 2004AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                       |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Mr. Amir converted $10,000 of indebtedness        into 71,942 shares of Common Stock as of December 3, 2002. The conversion        was at the average of the closing bid and asking price for    the Common Stock for the five trading days prior to the date of conversion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | As of March 31,        2004, the Company was indebted to Mr. Amir in the aggregate amount of    $1,061,039.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (b)    | By virtue of the        merger of Clean Age Minerals Incorporated (“CAMI”) with Strategic        Minerals, Inc. on September 19, 2000, Strategic Minerals, Inc. assumed        the obligation of CAMI to Mr. Robert E. Martin in the amount of $134,811        (“Martin Debt”). The Martin Debt was to have been satisfied        on or before September 18, 2001 but was not and remains outstanding.        As of March 31, 2004, the Martin Debt amounts to $172,520 representing        $134,811 in principal and $37,709 in accrued but unpaid interest. The        Martin Debt is evidenced by a Note providing for an annual rate of interest        of 8%. These amounts are included in the amounts shown for the Company’s        obligation to the former officers and directors of Clean Age Minerals        Incorporated. (See Note 7(c)). As of March 31, 2004, the Company owed        Mr. Martin $137,501 in accrued but unpaid salary and $12,864 in accrued    and unpaid reimbursable business expenses.  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (c)    | Novinskie            Debt. Under            the terms of Mr. Novinskie’s employment agreement (See Note            13(b)), Mr. Novinskie was to have received a cash bonus of $25,000            as of September 30, 2002. This bonus was not paid. As of March 31,            2004, the Company owed Mr. Novinskie $40,418 in unreimbursed expenses            and $137,505 in accrued but unpaid salary and $25,000 in accrued    and unpaid bonuses (as discussed previously).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Mr. Novinskie converted $10,000 of        indebtedness into 71,942 shares of Common Stock as of December 3, 2002.        The conversion was at the average of the closing bid and asking price        for the Common Stock for the five trading days prior to the date of conversion.        As of March 31, 2004, the Company was indebted to Mr. Novinskie in the    aggregate amount of $177,923.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **9.** | **Debentures**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|   |   |                      |     |       |     |   |
|--------|--------|---------------------------|----------|------------|----------|--------|
|   |   |                      | **2003** | ** ** | **2002** |   |
|   |   |                      |          |       |          |   |
|   |   | 8% Convertible Debentures | $30,000  |       | $30,000  |   |
|   |   |                      |     |       |     |   |
|   |   |                      |     |       |     |   |

|   | **a.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | **8% Convertible Debentures** |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                          |
|   | 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 twoyears. The placement agent’s fees were 10% of the gross proceeds and 12,111warrants at $10.07 expiring November 16, 2001. The debentures may be convertedafter a holding period of 45 days after closing at the lessor of: (1) the fixedconversion price ($10.171875), or (2) 75% of        the average closing bid price for the five trading days immediately preceding        the date of conversion. As of March 31, 2004, $1,280,000 of the 8% debentures    had been converted into 981,322 common shares. |

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| **DALECO RESOURCES          CORPORATION****NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS      ENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                |

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| **10.** | **Long-Term    Debt**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|    | Long-term        debt of the Company consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|    | **a.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **Sonata Loan** |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|    | In          August 1997, the Company entered into an arrangement with Heller Financial,          Inc. (“Heller”) whereby Heller 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 Energy, Inc. The amount          outstanding (principal and accrued interest) under this arrangement          as of September 30, 2003 and 2002, was $6,708,474 and $6,967,975, respectively.          Interest on the borrowings was at prime plus 2%. Principal was paid          out of 85% of the net cash flow from the properties. Additional interest          was payable from 50% of the net cash flow from these properties after          the payment of principal. In January 1999, Heller declared the loan          to be in default, due to the pledged properties failure to generate          the required interest payments. This failure was solely attributable          to the low worldwide prices for oil. As a result, the full amount of          the Heller Loan had been reclassified as current debt. With the recovery          of oil prices, the Heller Loan had come back into compliance and on          October 15, 2003, Heller declared the Heller Loan to be in full compliance.          The obligations to Heller were non-recourse to the Company and payable          solely out of the oil and properties pledged to Heller as collateral.          By agreement between Heller and Tri-Coastal, the Termination Date of          the Heller Loan was extended from October 15, 2003 until January 31,          2004. In the Company’s third fiscal quarter (March through June          2003) Heller advised Tri-Coastal that it was desirous of liquidating          Tri-Coastal’s oil and gas properties in full satisfaction of the          Heller Loan. Heller had previously wanted Tri-Coastal to sell its oil          and gas properties, however, a purchase price acceptable to Heller          could not be obtained. |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|    | At          Heller’s request, Tri-Coastal engaged Madison Energy Advisors          to assist in marketing Tri-Coastal’s properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |
|    | Through          Tri-Coastal’s efforts, Sonata Investment Company, Ltd., (“Sonata”)          an affiliate of Standard Energy Company of Columbus, Ohio, became aware          of Heller’s desire to either sell the Tri-Coastal properties or          sell the Heller Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

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| **DALECO RESOURCES          CORPORATION****NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS      ENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Sonata          is an independent, privately held company that is not affiliated with          the Company in management, ownership or in any other fashion. The Company          has done other financings (see Note 10(b) below) with Sonata previously,          and the Company has consulted for Sonata and/or its affiliated entities          regarding oil and gas projects, acquisitions, exploration and development          plays.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Sonata          and Heller arrived at an agreement by which Sonata would purchase the          Heller Loan for $605,000. Sonata simultaneously entered into an agreement          with Tri-Coastal and the Company whereby Sonata would advance to Tri-Coastal/Daleco          an additional $50,000 for working capital and reduce the amount of          the Heller Loan to $655,000 (“Sonata Loan”). In consideration          of Sonata’s reduction of the Heller Loan from $5,154,783 to $655,000,          Daleco agree to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | (1)   issue          to Sonata or its nominee 250,000 shares of Daleco Common Stock (see          Note 11);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | (2)   grant          Sonata or its nominee warrants for 250,000 shares of Daleco Common          Stock at $.906 per share with an expiration date of December 31, 2007          (see Note 11(b)); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | (3)   extend          the expiration dates for the warrants currently held by Sonata until          December 31, 2007 (see Note 11 (b))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | On December          31, 2003, Sonata acquired the Heller Loan from Heller Financial, Inc.          for $605,000. Tri-Coastal made a principal reduction payment of $23,298          to Sonata on December 31,2003. This payment was consistent with the          provisions of both the Heller Loan and the Sonata Loan and was made          in the ordinary course.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Tri-Coastal,          Sonata and Daleco entered into a Second Amended Loan Agreement amending          the Heller Loan Agreement dated August 22, 1997 (“Heller Loan          Agreement”) and the First Amended Loan Agreement dated March 27,          1998 (“First Amended Loan Agreement”) (hereinafter the Heller          Loan Agreement, First Amended Loan Agreement and the Seconded Amended          Loan Agreement are collectively referred to as the “Sonata Loan          Agreement”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The        Sonata Loan Agreement provides that the Heller Loan: (i) was reduced        to a three (3) year loan in the principal amount of $655,000 plus interest        at the prime rate, to move, as established by the National City Bank,        Columbus, Ohio plus three percent (“Sonata Loan”); (ii) will be repaid        out of 85% of the net revenues from Tri-Coastal’s oil and gas properties,        but in no event will the amount of interest and principal paid in any        six month period be less than one-sixth of the original face amount of        the Sonata Loan, less any prepayments, plus all accrued and unpaid interest        withthe full amount of the Sonata Loan plus all accrued and unpaid        interest paid in full on or before December 30, 2006; (iii) 66 2/3rds of        the net cash flow from production from Tri-Coastal’s assets after        satisfaction of the Sonata Loan; (iv) the issuance of stock and warrants    as set forth above; and (v) Daleco’s guaranty of the Sonata Loan. |

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| **DALECO RESOURCES          CORPORATION****NOTES TO CONSOLIDATED      FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                           |

|   |                                                                                                                                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Under          the terms of the Sonata Loan Agreement, the Sonata Loan will become    a general obligation of the Company.                                              |
|   |                                                                                                                                                                    |
|   | As a result          of the purchase of the Heller Loan and the entry into the Sonata Loan    Agreement in the first quarter of fiscal year 2004, the Company realized: |
|   |                                                                                                                                                                    |

|   | (1)                                                                                                                                                                                                                                                                                                                              | Reduction of    the Heller Loan from $5,154,783 to $655,000;                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                             |
|   | (2)                                                                                                                                                                                                                                                                                                                              | Reduction       in accrued interest payable of $1,572,000;                                                  |
|   |                                                                                                                                                                                                                                                                                                                             |
|   | (3)                                                                                                                                                                                                                                                                                                                              | Transaction       costs recorded as Debt Placement Costs on the Balance Sheet of $285,046    consisting of: |
|   |                                                                                                                                                                                                                                                                                                                             |                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                             | (a)                                                                                                         | $226,500 for issuance of the 250,000 shares of common stock; |
|   |                                                                                                                                                                                                                                                                                                                             |                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                             | (b)                                                                                                         | $48,546 for the extension of warrants held by Sonata; and |
|   |                                                                                                                                                                                                                                                                                                                             |                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                             | (c)                                                                                                         | $10,000    in legal costs associated with the transaction. |
|   |                                                                                                                                                                                                                                                                                                                             |                                                                                                        |   |
|   | The    transaction resulted in an extraordinary net benefit amounting to $5,787,687.                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                             |                                                                                                        |   |
|   | As        a result of the extraordinary benefit resulting from Sonata’s acquisition        of the Heller Loan as set forth above, the “Earnings Per Share Calculations” comparison        for the quarter ending December 31, 2003, the fiscal quarter when the    transaction occurred, was recorded as follows: |

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| **DALECO RESOURCES          CORPORATION****NOTES                TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS       ENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                           |

|                                                                                                                                                                     |   |   |                             |   |   |         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------|--------|--------|--------------|
|                                                                                                                                                                     |   |   | **Fiscal       Quarters Ending** |   |
|                                                                                                                                                                     |   |        |                                  |        |        |              |   |
|                                                                                                                                                                     |   |   | **12/31/03**                     |   |   | **12/31/02** |   |
|                                                                                                                                                                     |   |        |                                  |   |        |              |   |
|                                                                                                                                                                     |   |   |                             |   |   |         |   |
| Net Income (loss) (before extraordinary gain)                                                                                                                            |   | $      | (663,163                         | )      | $      | (580,564     | ) |
| Basic and Fully    Diluted Income (loss)/Share, (calculated on 28,307,975 shares outstanding)                                                                            |   |   | ($.02                            | )      |   | ($.03        | ) |
|                                                                                                                                                                     |   |   |                             |   |   |         |   |
| Extraordinary Item, Gain on debt forgiveness                                                                                                                             |   | $      |  5,787,687                  |   |   |         |   |
| Net Gain (Loss)/share, Basic and fully       Diluted                                                                                                                     |   |   | $.20/$.15                        |   |   |         |   |
|                                                                                                                                                                     |   |   |                             |   |   |         |   |
| Net Income (loss)(including extraordinary gain)                                                                                                                          |   | $      | 5,124,523                        |   | $      | (580,564     | ) |
| Basic and Fully       Diluted Income (loss)/Share    (calculated on 28,307,975 shares outstanding,    Basic & 39.327,554 shares, Fully Diluted Basis) |   |   | $.18/$.13                        |   |   | ($.03        | ) |

 

 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **The              Company views the Sonata acquisition of the Heller Loan and the              Sonata Loan Agreement as an unusual and infrequent (non-recurring)              event and****therefore              treated the net financial impact on the Company’s financial    statements as an extraordinary gain.** |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |
|   | As of March 31, 2004, $46,904 of principal    and $6,895 of interest had been paid to Sonata on the Sonata Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |
|   | **b.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **Sonata            Investment Company,LTD.**(See also Note10(a) above).                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |
|   | During          the third quarter of fiscal 1997, Sustainable entered into a loan agreement          with Sonata Investment Company, LTD. for $250,000, which remained outstanding          as of December 31, 2000. Sustainable had the right to request an additional          $250,000 prior to December 31, 1999, which was not exercised. The Company          and Westlands were guarantors of the loan with Westland’s (now          Tri-Coastal Energy, L.P.) wells being pledged as collateral, subordinated          to the Heller Financing. The loan was to have been 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 received          a profits participation of 25% of the net profits of Sustainable while          the loan was outstanding and 20% after the loan is repaid (after payout).          While the obligations were outstanding, Sonata sought and the Company          agreed to grant Sonata additional collateral to secure its loan in          the nature of a security interest in the Patent then owned by Matrix-Loc          and the mineral leases owned by subsidiaries of CAMI. The totality          of the Sonata debt, plus all accrued and unpaid interest was satisfied          on November 30, 2001, and all collateral for the loan was released. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |
|   | **c.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **First Regional Bank**                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |
|   | In September          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 December 12,        2004. The loan is secured by personal assets of Dov Amir an officer and    Director of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                           |

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| **DALECO RESOURCES          CORPORATION****NOTES                TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS       ENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                           |

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | d.     | Mr. Erlich, a former officer and director        of the Company loaned $87,543 (“Loan Amount”) to the Company.        This loan is evidenced by a Note dated February 1, 2000 and has no maturity        date. The Note provides that the Loan Amount shall earn interest at the        rate of nine percent (9%) per annum. As of March 31, 2004, the total        principle and accruedinterest on the Note amounts were $130,877. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |

| **11.** | **Capital Stock** |
|---------|-------------------|
|    |              |

|                                             |                                               |             | **NUMBER       OF COMMON SHARES,       PAR VALUE $0.01 PER    SHARE** | ** **  | **NUMBER       OF SERIES A       PREFERRED SHARES    PAR VALUE $0.01 PER SHARE (1)** |          | **NUMBER       OF SERIES       B PREFERRED SHARES       PAR VALUE       $0.01 PER    SHARE(1)** |   |
|--------------------------------------------------|----------------------------------------------------|------------------|-----------------------------------------------------------------------|-------------|-------------------------------------------------------------------------------------------|---------------|-------------------------------------------------------------------------------------------------|--------|
|                                             |                                               |             |                                                                       |        |                                                                                           |          |                                                                                                 |   |
|                                             |                                               |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
| Balance as of March 31, 2003                     |                                               |  25,754,261 |                                                                  | 8,000       |                                                                                      |  375,000 |                                                                                            |
| Issuance on the conversion    of (2)             |                                               | 1,520,000        |                                                                  |        |                                                                                      | (190,000      | )                                                                                               |
|                                             | Series B Preferred                                 |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
| Issuance on Payment    of Dividends (2)          |                                               | 552,950          |                                                                  |        |                                                                                      |          |                                                                                            |
|                                             | On Series B Preferred                              |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
| Issuance to Sonata    as payment for (3)         |                                               | 250,000          |                                                                  |        |                                                                                      |          |                                                                                            |
|                                             | L/T Debt Financing                                 |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
| Issuance on Terms    of Terra Silex Financing(4) |                                               | 220,169          |                                                                  |        |                                                                                      |          |                                                                                            |
| Issuance on payment    of obligations (5)        |                                               | 40,022           |                                                                  |        |                                                                                      |          |                                                                                            |
|                                             | By H. P. Pryor, a    Director of the Company & |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
|                                             | Mr. Lyons, a printer    used by the Company        |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
|                                             | R.A. Lenser and Associates                         |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
|                                             |                                               |             |                                                                  |        |                                                                                      |          |                                                                                            |   |
| Ending Balance as    of March 31, 2004           |                                               | 28,337,402       |                                                                  |  8,000 |                                                                                      | 185,000       |                                                                                            |
|                                             |                                               |             |                                                                       |        |                                                                                           |          |                                                                                                 |   |
|                                             |                                               |             |                                                                  |        |                                                                                      |          |                                                                                            |   |

| (1)    | On February 28, 2002, the Shareholders approved an amendment to the Articles of Incorporation of the Company, providing for an increase in the authorized common stock of the Company from 20,000,000 shares to 50,000,000 shares of Common Stock. The Shareholders also approved the change of the Company’s state of incorporation from Delaware to Nevada. This was effected through the merger of Daleco Resources Corporation, a Delaware corporation (“Old Daleco”) with and into Daleco Resources Corporation of Nevada, a Nevada corporation (“New Daleco”). The merger was consummated as of March 26, 2002. The Articles of Incorporation of New Daleco provide for authorized capital stock of 50,000,000 shares of common stock, par value $0.01 and 20,000,000 shares of preferred stock, par value $0.01. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (2)    | During Fiscal Year 2003,       the holders of Series B Preferred Stock converted 190,000 shares of Preferred       Stock for 1,520,000 shares of Common Stock. The stock was converted at       the price of $1.25 per share of Common Stock. The Series B Preferred Stock       has a face value of $10.00 per share. Interest was also paid in common       stock at    the time of conversion.                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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| **DALECO RESOURCES          CORPORATION****NOTES    TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS****ENDED    MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                               |

|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (3)  | On December 31,        2003, Sonata Investment Company, Ltd. (“Sonata”) acquired the        Heller Loan (See Note 10(a)) and reduced the face amount of the Loan.        As a condition of and as part of the fee for acquiring the Heller Loan        (See Note 10(a)) and reducing the loan to $655,000 Sonata was given 250,000        shares of common stock. The closing price for the Company’s common        stock on December 30, 2003, he day prior to the award, was $.906 per    share. The value of the stock given to Sonata was thus $226,500.                                                                                                                                                                                                                                                       |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (4)  | Terra Silex Holding,        LLC was issued 220,169 shares of Common Stock in accordance with Paragraph        6.3 of the Terra Silex Stock Purchase Agreement at a price of $.117 per        share. Paragraph 6.3 of the Terra Silex Stock Purchase Agreement, Antidilution,        gives Terra Silex Holdings, LLC the right to purchase stock should the        Company sell over 500,000 shares in “one block”. The conversion        of the Cornell Capital Debenture triggered Terra Silex’s right to    exercise the antidilution provisions of its agreement with the Company.                                                                                                                                                                                                                         |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (5)  | As of February        28, 2003, Mr. Pryor, a director of the Company, converted $450.75 of        debt owed to him by the Company into 3,563 shares of common stock. Mr.        Lyons accepted 7,032 shares in full satisfaction of the Company’s obligation        to his printing company. R.A. Lenser and Associates accepted 29,472 shares        of Common Stock in satisfaction of $26,867 owed by the Company for oil    and gas engineering services.                                                                                                                                                                                                                                                                                                                                                           |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |      | During the period ending March 31, 2004,        the Company issued shares of it common stock in-lieu of monetary payments        to certain third party venders, directors, attorneys and/or employees        of the Company for services, debt and/or products provided. (See Note        5 above.) In accordance with procedures established SFAS 123, the Company        values the stock consideration paid for all such market priced services,        debt and/or products at the fair market value of the security issued        at the time of its issuance. The Company has followed the practice of        utilizing the average of the bid and offer closing prices for its stock        for the five business days immediately preceding the issuance date as    a measure of the fair market value of its securities |

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| **DALECO RESOURCES          CORPORATION****NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS****ENDED      MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |

|   | **a.** | **Common Stock Options** |
|--------|--------|--------------------------|

|        |        |                                                             | **March 31,** |   | **March 31,** |   |
|--------|--------|-------------------------------------------------------------|---------------|--------|---------------|--------|
|        |        |                                                             | **2004**      |   | **2003**      |   |
|   |   |                                                        |               |   |               |   |
|   |   | Outstanding    and Exercisable at beginning of period (1)   | 5,500,000     |   | 6,110,000     |   |
|   |   | Canceled                                                    | —       |   | (524,384      | )      |
|   |   | Granted (2)                                                 | 400,000       |   | —       |   |
|   |   | Reclassified                                                | —       |   | (85,616       | )      |
|   |   | Exercised                                                   | —       |   | (—      | )      |
|   |   | Outstanding         and Exercisable at end of    period (3) | 5,900,000     |   | 5,500,000     |   |
|   |   |                                                        |               |   |               |   |
|   |   |                                                        |          |   |          |   |

|   | (1)     Of          the 5,900,000 options outstanding, 4,830,000 are held by current officers,          directors and employees of the Company. The exercise price for the    options held by insiders range from $0.25 per share to $1.08 per share.                                                                                                                                                                                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | (2)     Options          for 400,000 shares          of Common Stock at a price of $.853 were grant to two independent directors,          Mr. Pryor (200,000) and Lord Gilbert (200,000)          under the Company’s Non-Qualified Independent Director Stock          Option Plan as approved by the Shareholders of the Company at it’s          the Annual Shareholder’sMeeting on March 25, 2004.                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | (3)     The        Company accounts for all stock-based compensation (options) in accordance        with the Financial Accounting Standard Boards Statement of Financial        Accounting Standards No. 123 (SFAS 123).SFAS 123 permits the Company’s use of the intrinsic value method prescribedby Accounting Principles Board Opinion No. 25. Under SFAS 123, the fair valueof stock options and compensation costs are measured as of the grant date. |

|   |   |                      |
|--------|--------|---------------------------|
|   | **b.** | **Common Stock Warrants** |

CommonStock warrantsoutstandingat March 31, 2004, consist of the following(1):

| **Issuance**                       |   | **Expiration Date**  |   | **Amount (1)** |   | **Price    Per Share** |   |   |
|------------------------------------|--------|----------------------|--------|----------------|--------|------------------------|--------|--------|
|                                    |   |                      |   |                |   |                        |   |   |
| Financing    Sources (1) & (2) |   | November 20, 2005 to |   |           |   |                   |   |   |
|                               |   | December 31, 2007    |   | 699,579        |   | $0.55       to $1.05   |   |   |
| Terra Silex Warrant (3)            |   | December 31, 2006    |   | 250,000        |   | $1.25                  |   |   |
| SCOA Warrants(4)                   |   | November 15, 2006    |   | 2,240,000      |   | $2.00 to $3.00         |   |   |

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| **DALECO RESOURCES          CORPORATION****NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS****ENDED      MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |

|   | **(1)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Financing Sources**      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   | On        July 21, 1998, a total of 263,638 warrants expiring on November 20, 2005        were granted to four persons who loaned the Company a total of $145,000        in July 1998. (See Note 7b). The warrants may be exercised at any time        before the expiration date, November 20, 2005, at an exercise price of    $0.55.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   | (2)      On        November 28, 2001, a total of 435,941 warrants to purchase common stock        were granted to Sonata Investment Ltd. (warrants for 395,273 shares of        common stock (“Sonata Warrant”)) and Standard Energy (warrants        for 40, 668 shares of common stock (“StandardWarrant”)) as consideration for entering into the Loan Conversion Agreementdated August 1, 2001. The Loan Conversion Agreement extended the date by whichthe Company had to satisfy its obligations to both Sonata Investment Company,Ltd. (“Sonata”) (See Note 10(b)) and Standard Energy Company (“Standard”)and granted both Sonata and Standard the right to convert the debt into commonstock of the Company at such time as the Company advised Sonata and Standardof its intent to satisfy the Company’s obligations to one or both entities.Sonata and Standard are affiliated entities. The exercise price was fixed at$1.05. The Sonata and Standard Warrants were to have expired August 1, 2002.However, the Company agreed to extend the termination date of the Sonata andStandard Warrants until July 31, 2004 in exchange for Sonata’s relinquishingits twenty percent (20%) interest in the net profits of the Company’s subsidiarySustainable Forest Industries, Inc. (See Note 10(b)). As additional considerationfor the acquisition of the Heller Loan, the expiration date for the Sonata andStandard Warrants was extended until December 31, 2007. 250,000 warrants werealso issued to Sonata Investment Company as additional consideration for acquisitionthe Heller Loan at an exercise price of $.906 per share with an expiration dateof December 31, 2007 (See Note 10(a)). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   | **(3)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Terra    Silex Warrant** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   | Under a Stock        Purchase Agreement dated September 11, 2001 by and among the Company        and Terra Silex Holding, LLC, Terra Silex was granted a warrant for 250,000        shares (“Terra Silex Warrant”) at an exercise price of $1.25    The Terra Silex Warrant expires on December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   | **(4)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Sumitomo    Warrants**   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                       |
|   |  Under        a Stock Purchase Agreement by and among Sumitomo Corporation of America        (“SCOA”) and the Company dated as of November 16, 2001, SCOA        was granted warrants for 1,700,000 shares of common stock with a five        (5) year term at exercise prices ranging from $2.00 per share for the        first 850,000 shares, $2.50 per share for the next 510,000 shares and        $3.00 per share for the remaining 340,000 shares. The Company and SCOA        also entered into a Master Distribution and Marketing Agreement dated    as of November 16, 2001 under which        SCOA was granted warrants for 540,000 shares. These warrants have a five        (5) year term and have an exercise price of $2.00 per share for the first        108,000 shares, $2.50 pen share for the next 162,000 shares and $3.00    per share for the remaining 270,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

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| **DALECO          RESOURCES CORPORATION****NOTES TO CONSOLIDATED      FINANCIAL STATEMENTS FOR THE THREE MONTHSENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)**                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | **c.** | **Net Income Per Share** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Net income per share (primary        basis) was calculated on the primary basis of the weighted average number        of common shares outstanding that amounted to 28,337,402 (Fully Diluted        - 39,756,981 for the period ending March 31, 2003 (March 31, 2004 - 25,754,261).        For the periods ending March 31, 2004 and 2003, the exercise of the options        and warrants outstanding as at year end did not have a dilutive effect    on the net income per share (see also Note 10(a)). |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | **d.** | **Payment of Accrued Dividends** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $1,384,021 of accrued dividends        attributable to the 8% Cumulative Convertible Preferred Stock issued        in the acquisitionof CAMI (“CAMI Preferred”) was paid in 1,058,168 shares of Common Stockupon conversion of 1,816,800 shares of the CAMI Preferred Stock to Common Stockcommencing October, 2001 through March 31, 2004. See also Note 14(b), regardingpayment of accrued dividends on the Series A Preferred Stock held by the Kanesthrough March 31, 2004. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| **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 subsidiary Company’s tax filings show net operating losses to        be applied against future taxable income in the amount of approximately        $26.1 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** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | On November 16, 2001, the        Company entered into a Stock Purchase Agreement with SCOA (“SCOA        SPA”). As a condition to the closing of the SCOA SPA, SCOA required        that the Company enter into Key Man Employment Contracts (“Key Man        Contracts”) with Messrs. Robert E. Martin, Gary J. Novinskie and        Dov Amir. The Key Man Contracts are for an initial three (3) year term.        The Key Man Contracts provide for acceleration of the vesting of incentive        options should the Key Man be terminated prior to the expiration of the        term of the Key Man Contracts. Each of Messrs. Novinskie and Amir are        granted options for 500,000 shares of Company Common Stock while Mr.        Martin was granted options for 1,000,000 shares of Common Stock. There    are like provisions for the acceleration        of the salary due each employee over the life of the Contract. (See Note        11a.) The Key Man Contract also provided for a bonus to Messrs. Novinskie        and Amir of $50,000 to be paid one-half in cash and one-half in stock.        (See Note 13(a) above). Mr. Novinskie’s cash bonus has not been        paid. Mr. Amir’s bonus also has not been paid. (See Note 8.) Under        Mr. Martin’s Key Man Contract, he was granted a salary of $50,000        for the six month period April 1, 2002 through September 30, 2002 ($8,333.34        per month), and $100,000 per year for the remaining two (2) years of        his Key Man Contract. In accordance with his contract, the Company commenced    paying Mr. Martin’s salary as of April 1, 2002. (See Note 8(b)). |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |

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| **DALECO          RESOURCES CORPORATION****NOTES TO CONSOLIDATED      FINANCIAL STATEMENTS FOR THE THREE MONTHSENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)** |
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|                                                                                                                                                                                          |
|                                                                                                                                                                                     |   |
|                                                                                                                                                                                     |   |   |
| **14.**                                                                                                                                                                                  | **Litigation Settlement    and Pending Litigation** |
|                                                                                                                                                                                     |   |   |
| a.                                                                                                                                                                                       | Kane            v. Daleco Resources Corp., et. al. On or about January 14, 2000,            Stanley B. Kane, et. al. commenced an action in the Superior Court,            Los Angeles, California to enforce their right to have the Company            repurchase 16,000 shares (stated value $50,000 purchase) of Series    A, 10% Cumulative Preferred Stock. The    Plaintiffs had the right to put the stock to the Company on August 20, 1999,    which they did. Although the Company continued to pay quarterly dividends    on the Series A Preferred Stock, it did not redeem the shares due to its    lack of liquidity. Also named in the suit were Messrs. Dov Amir (a current    officer and director of the Company) and Mr. Louis Erlich (who was an officer    and director of the Company at the time of the issuance of the Series A Preferred    Stock) who had given personal guaranties to the Plaintiffs. |
|                                                                                                                                                                                     |   |   |
|                                                                                                                                                                                     | Mr.          Amir satisfied his obligation under his guaranty to purchase one-half          on 8,000 shares from the Plaintiffs. The Company entered into Stipulation          for the Entry of Final Judgment and Judgment thereon as to Daleco Resources          Corporation, pursuant to which the Company shall have until August          1, 2001 in which to redeem the remaining 8,000 shares for $400,000          plus accrued dividends through the date of settlement at a rate of          ten percent (10%) per annum. The Kanes have been granting the Company          an extension of the August 1, 2001 date on a month-to-month basis.          On December 7, 2001, the Company paid the Kanes $90,000 representing          all accrued and unpaid dividends on the Series A Preferred Stock through          December 31, 2001. The Company has paid all dividends due and payable          to the Kanes for periods through the fiscal quarter ending June 30,    2002.Payments for the    last seven quarters ending March 31, 2004, in the amount of $70,000, are    still outstanding. |
|                                                                                                                                                                                     |   |   |
|                                                                                                                                                                                     | Mr.          Erlich has filed a Cross Complaint against the Company for payment          of his obligation under his guarantee and his loans to the Company.          (See Note 7(a)).The          Company and Mr Erlich have agreed to stay his counterclaim until January          1, 2005 during which time the Company can satisfy the Erlich Note (See    Note 7(d)) and the suit will be dismissed. |

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| **DALECO          RESOURCES CORPORATION****NOTES TO CONSOLIDATED      FINANCIAL STATEMENTS FOR THE THREE MONTHSENDED MARCH 31, 2004 AND 2003 – PREPARED BY MANAGEMENT (UNAUDITED)**                                                                                      |
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| **15.**                                                                                                                                                                                                                                                                       | **Acquisitions** |
|                                                                                                                                                                                                                                                                          |   |   |
|                                                                                                                                                                                                                                                                          | **Daleco’s    16/6, Inc.** |
|                                                                                                                                                                                                                                                                          |   |
| Effective          July 7, 2001, Daleco acquired 16/6, Inc., a software development firm          The I2 technology covers the ability to extract certain text documentation          from existing published documents from the Internet and micro-payments    thereof. |
|                                                                                                                                                                                                                                                                          |
|  Daleco          acquired all of the outstanding capital stock of 16/6, Inc. in exchange          for 1,000,000 shares of common stock of Daleco.                                                                                                                        |

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| Item    2 | MANAGEMENT’S          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION    AND RESULTS OF OPERATIONS. |
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    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, events 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 outsideof the Company’s control. Any one, or a combination, of these factors couldmaterially affect the results of the Company’s operations. These factorsinclude: competitive pressures, inflation, trade restrictions, interest ratefluctuations and other capital market conditions, weather, future and optionstrading in, and the availability of natural resources and services from othersources. Forward-looking statements are made by or on behalf of the Company’sknowledge of its business and the environment in which it operates, but becauseof the factors listed above, as well as other environmental factors over whichthe Company has no control, actual results may differ from those in the forward-lookingstatements. Consequently, all of the forward-looking statements made are qualifiedin their entirety by these cautionary statements and there can be no assurancethat the actual results or developments anticipated by the Company will be realizedor, even if substantially realized, that they will have the expected effect onthe business and/or operations of the Company. 

    During the second fiscal quarter, ending March 31, 2004 the Company continued    to pursue its plans for the commercialization of the mineral holdings of    its wholly owned subsidiary, Clean Age Minerals, Inc. as its primary objective.    Sustainable Forest Industries, Inc., the Company’s wholly owned subsidiary    involved in tropical timber, continued its efforts to develop market awareness    for its products while the Company’s subsidiaries active in the oil    and natural gas sector focused on its operations to maintain production levels.    

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The Company’s    performance during its second fiscal quarter ended March 31, 2004, was influenced    by a variety of factors typical within the natural resource sectors which    were beyond the control of management, such as the variability of the demand    for and the pricing of crude oil and natural gas within the Company’s    operating areas and the demand and pricing, both domestically or internationally,    for the Company’s timber and industrial minerals. As in previous periods,    the Company remained highly dependent on the revenues derived from the sale    of its oil and natural gas production. During the quarter ending March 31,    2004, the Company’s energy segments benefited from higher oil and gas    prices. These benefits however did not translate into significantly higher    net operating margins from the segment as a result of ‘down-hole’ problems    in several wells. The required incremental well repair work increased outlays    in this expense category by roughly 75% ($112,106) over the prior year’s    quarter
    During the quarter, the Company’s direct expenditures related to the    commercialization of its mineral holdings remained substantially constant    as compared to prior year’s period. Clean Age Minerals continued its    ongoing contract extraction operations and mineral product deliveries from    both its Calcium Carbonate mine in New Mexico and its Zeolite deposit in    Texas. The focus of both operations has been on “seeding” the targeted    markets with “trial material” to gain end-user awareness while    developing market support inventory levels. As of March 31, 2004, commercial    quality inventories of Calcium Carbonate have reached targeted levels of    25,000 tons as part of the Company’s operating venture with ANP Inc.,    its project partner. Extraction and product preparation efforts associated    with Clean Age Minerals’ Zeolite deposit have also continued. The main    focus for these efforts has been the Company’s ongoing market introduction    of its ReNuGenTM product which is based on its CA-Series environmental    technology. To date, application testing of ReNuGenTM has been successful    at several sites, Information gained from these test applications have been    instrumental in increasing awareness and acceptance of the product with the    targeted Waste Water Treatment industry. Additional applications for Clean    Age Minerals’ CA-Series engineered products are undergoing investigative    work. The Company’s efforts to commercialize the Sierra Kaolin products    from its New Mexico Kaolin deposit are ongoing and are focused on product    development as well as the identification of opportunities for both joint    venturing and/or the internal development of Kaolin processing capabilities.  

Within its timber segment, Sustainable Forest    Industries has continued its efforts to commercially market tropical hardwoods    into domestic markets. Plans are to introduce a construction shingles product    utilizing the Wallaba tropical hardwood species later this fiscal year. Market    surveys and certification testing have indicated that the Wallaba Roofing    and Siding Shingles have significant performance capabilities as compared    to products currently available on the market. Efforts are also under way  to identify distribution and financing partners to support these efforts. 

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For the three month period ending March 31,    2004, total operating revenues increased nominally by $27,382 (7.8%) while    direct operating expenses increased by $104,966 (53.7%) as compared with    the same quarter last year. The increase in direct operating expense is associated    with increased levels of activity in all business segments but was most impacted    by higher levels of expenditures for producing well maintenance within the    oil and natural gas sector. For the quarter, the Company recorded a loss    of $603,105 as compared to a loss of $576,404 for the prior fiscal year’sfirst quarter.
Item 3 Controls and Procedures   Sarbanes-Oxley Act 
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002(“SOA”). The SOA is the first major revision to the securities lawssince the enactment of the Securities Act of 1933 and the Securities and ExchangeAct of 1934. The SAO, promulgated in large part in response to the collapse ofEnron/Worldcom demise, covers a variety of measures all of which will not becovered here. 

The SOA is applicable to all publicly traded reporting companies no matter howsmall or large. The SOA provides for additional controls such as the chief executiveofficer’s certificate regarding the accuracy of the Company’s financialstatements and providing for a criminal penalty for making a false statementto the certification by an executive officer that the financial statements donot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements, in light of the circumstances under whichthe statement were made, not misleading with respect to the period covered bythe annual report. The certification also requires that the executive officerof the company certify that the financial statements and other materials presentedin the annual report fairly present all material respects the financial condition,results of operations and cash flows of the Company as of and for the periodscovered by the annual report. This requirement exceeds the previous requirementthat the financial statements merely be presented in accordance with generallyaccepted accounting principles. 

The Company believes that it has historically provided its financials in thisfashion, having separately reportedand presented each segment of the Company’s business for the past few years. 

The SOA also suggests but doesnot presently require that a “Disclosure Committee” be established.Rules of the exchange on which the Company’s Common Stock, NASDAQ, willrequire the establishment of “disclosure controls.” This committeewould consider the materiality of information and determine disclosure obligationson a timely basis. This committee would, in essence, become the Company’s “watchman” forpublic disclosures. The Company has not, as of the date of this report, establishedsuch a committee. The Company has only six employees, and three independent directors.All parties are intricately involved in the decision making processes at the Company and no disclosureor decision not to disclose information is made without the input of inside management,counsel and at least one, if not more, independent directors. At such time asthe Company changes its method of operation and/or increases the number of employees,it will reconsiderthe creation of a “Disclosure Committee.” 

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Because the drafting and approvalof all the Company’s reports is a collective process, the suggestions ofthe SOA to establish Disclosure Committees, a Disclosure Controls Monitor, conductinternal drafting sessions, distribution of draft reports and dealing with internaltrading policies are presently either not applicable or are already implemented,have been and are part of the Company’soperating procedures. 

The SOA also provides for certain controls on auditors and the accounting industry.The Company only utilizes its auditors for auditing purposes. As such, the Companyfeels that it is and will be in full compliance with the final regulations promulgatedby the Securitiesand Exchange Commission (“SEC”) under the SOA. 

The SEC has acknowledged that a “one-size fits all” approach to establishingeffective disclosure controls and procedures and has not prescribed any specificdisclosure controls and procedures. Rather, the SEC expects “each companyto develop a process that is consistent with its business and internal managementand supervisory practice.” The Company believes that it has fully compliedwith the intent of the SOA and Regulationspromulgated by the SEC. 

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PART      II. OTHER INFORMATION   Item 1. None   Item      2. Change in Securities.
There were no sales of securities by the registrant during the quarter endingMarch 31, 2004.

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Item 3None
(See Note 10 to the Company’s Financial Statements)
Item 4Submission of Matters to a Vote of Security    Holders. 
On March 25, 2004, the Company held its Annual Meeting of the Shareholders. Atthe Annual Meeting, the following matters were voted upon: 
 1.Election of Directors: The following        persons were elected to serve as directors of the Company until the next        Annual Meeting of Shareholders: Dov Amir, Gary J. Novinskie, Alfonso        Knoll, H. Paul Pryor, Robert G. Graustein and Robert E. Martin. The votes    for these directors were as follows:
 
NAME OF NOMINEEFOR  AGAINST ABSTAIN    Dov Amir23,332,048 0 1,558,910 Gary J. Novinskie23,321,846 0 1,569,112 Robert E. Martin23,163,256 0 1,727,702 Alfonso Knoll22,898,043 0 1,992,915 Robert G. Graustein22,926,944 0 1,926,014 Lord Gilbert (John)24,212,676 0   678,282 H. Paul Pryor23,333,457 0 1,557,501 
 
  2.Ratification of Jay J.        Shapiro as the Company’s independent    accountant for Fiscal Year 2004.    FOR AGAINST ABSTAIN    24,830,217 59,314 1,427
 
 3.Approval of the Company’s Non-Qualified Independent Director    Stock Option Plan.    FOR AGAINST ABSTAIN    9,113,966 1,753,846 12,992,803
The Company incorporates by reference its definitive Proxy Statement filed withthe Securities and Exchange Commission on February 4, 2004, filed in accordanceRegulation 14A under the Securities and Exchange Act of 1934, as amended. 

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Item 5Other Information   Registrants Definitive Proxy Statement    dated February 4, 2004.  ITEM 6Exhibits and Reports on Form 8-K    None.
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**SIGNATURES**

     In accordance    with Section 13 or 15(d) of the Exchange Act, the registrant caused this    report to be signed on its behalf by the undersigned, thereuntoduly authorized.
 **DALECO    RESOURCES CORPORATION**   Dated: May 13, 2004By:/s/ Gary J. Novinskie    Gary J. Novinskie,          President
     In accordance    with the requirements of the Exchange Act, the registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
**DALECO    RESOURCES CORPORATION**   Date: May 13, 2004By:/s/ Gary          J. Novinskie    Gary J. Novinskie  President and    Director   Date: May 13, 2004  /s/ Dov    Amir    Dov Amir  Chief Executive Officer and Chairman    of the Board of Directors
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**CERTIFICATION**

     I, Gary J.    Novinskie, certify that:

     1.   I    have reviewed this quarterly report on Form 10-QSB for the quarter endingMarch 31, 2003 of Daleco Resources Corporation.

     2.   Based    on my knowledge, this quarterly report does not contain any untrue statement    of a material fact or omit to state a material fact necessary to make the    statements made, in light of the circumstances under which such statements    were made, not misleading with respect to the period covered by this annualreport;

     3.   Based    on my knowledge, the financial statements, and other financial information    included in this quarterly report, fairly present in all material respects    the financial condition, results of operations and cash flows of the registrantas of, and for, the periods presented in this quarterly report; 

     4.   The    registrant’s other certifying officers and I are responsible for establishing    and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-14 and 15d-14) for the registrant and have:

          (a)   designed    such disclosure controls and procedures to ensure that material information    relating to the registrant, including its consolidated subsidiaries, is made    known to us by others within those entities, particularly during the periodin which this quarterly report is being prepared; 

          (b)   evaluated    the effectiveness of the registrant’s disclosure controls and procedures    as of a date within 90 days prior to the filing date of this quarterly report    (the “Evaluation Date”);and

          (c)   presented    in this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

     5.   The    registrant’s other certifying officers and I have disclosed, based on    our most recent evaluation, to the registrant’s auditors and the audit    committee of registrant’s board of directors (or persons performingthe equivalent functions):

           (a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and

 

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          (b)     any fraud, whether      or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and 

     6.   The      registrant’s other certifying officers and I have indicated in this      quarterly report whether there were significant changes in internal controls      or in other factors that could significantly affect internal controls subsequent      to the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.
   Date: May 13,    2004 /s/ Gary J. Novinskie   Gary J. Novinskie  President and Chief Financial Officer    
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In connection with the  Quarterly Report of Daleco Resources Corporation (the “Company”) on Form 10-QSB for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dov Amir, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906  of the Sarbanes-Oxley Act of 2002, that: 
 (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and    (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.   /s/ Dov Amir  Dov Amir  Chief Executive Officer May 13, 2004   -38-