UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark one)



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June
30, 2012



or



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



For the transition period from __________
to __________



Commission File Number: 0-12214

DALECO RESOURCES CORPORATION

(Exact name of registrant as specified in
its charter)



|Nevada                                                              |  | 23-2860734                                          
|------------------------------------------------------------------- |  | ----------------------------------------------------
|(State or other jurisdiction of incorporation or organization)      |  | (I.R.S. Employer Identification No.)                
|                                                                    |  |                                                     
|17 Wilmont Mews, 5th Floor
        West Chester, Pennsylvania 19382 |  | (610) 429-0181                                      
|(Address of principal executive offices) (Zip Code)                 |  | (Registrant’s telephone number, including area code)



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.      YesxNo ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo ̈



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.



|Large accelerated filer ̈ |                                                       |  | Accelerated filer ̈        
|------------------------ | ----------------------------------------------------- |  | --------------------------
|Non-accelerated filer ̈   | (Do not check if a smaller
        reporting company) |  | Smaller reporting companyx



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈Nox



APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date:



Shares of Common
Stock outstanding as of July 31, 2012: 49,441,058

Shares of Series
B 8% Cumulative Convertible Preferred Stock outstanding of July 31, 2012: 135,000











DALECO RESOURCES CORPORATION AND SUBSIDIARIES



TABLE OF CONTENTS



|                               |                                                                                       | PAGE
|------------------------------ | ------------------------------------------------------------------------------------- | ----
|                               |                                                                                      
|PART I - FINANCIAL INFORMATION |                                                                                      
|                               |                                                                                       |     
|ITEM 1.                        | CONSOLIDATED FINANCIAL STATEMENTS                                                     |     
|                               | Consolidated Balance Sheets                                                           | 4   
|                               | Consolidated Statements of Operations                                                 | 6   
|                               | Consolidated Statements of Cash Flows                                                 | 7   
|                               | Notes to Unaudited Consolidated Financial Statements                                  | 9   
|                               |                                                                                       |     
|ITEM 2.                        | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23  
|                               |                                                                                       |     
|ITEM 3.                        | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            | 30  
|                               |                                                                                       |     
|ITEM 4.                        | CONTROLS AND PROCEDURES                                                               | 30  
|                               |                                                                                       |     
|PART II - OTHER INFORMATION    |                                                                                      
|                               |                                                                                       |     
|ITEM 1.                        | LEGAL PROCEEDINGS                                                                     | 31  
|                               |                                                                                       |     
|ITEM 1A.                       | RISK FACTORS                                                                          | 31  
|                               |                                                                                       |     
|ITEM 2.                        | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           | 31  
|                               |                                                                                       |     
|ITEM 3.                        | DEFAULTS UPON SENIOR SECURITIES                                                       | 32  
|                               |                                                                                       |     
|ITEM 4.                        | MINE SAFFETY DISCLOSURES                                                              | 32  
|                               |                                                                                       |     
|ITEM 5.                        | OTHER INFORMATION                                                                     | 32  
|                               |                                                                                       |     
|ITEM 6.                        | EXHIBITS                                                                              | 33  
|                               |                                                                                       |     
|SIGNATURES                     |                                                                                       | 34  



- 2 -







CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
STATEMENTS



Some of the information, including all of
the estimates and assumptions, in this report contain forward-looking statements within the meaning of Sections 27A of the Securities
Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical
fact included in this report, including, but not limited to, statements regarding our future financial position, business strategy,
budgets, projected costs, savings and plans, objectives of management for future operations, legal strategies, and legal proceedings,
are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology
such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”,
“believe”, or “continue” or the negative thereof or variations thereon or similar terminology. Except for
statements of historical or present facts, all other statements contained in this report are forward-looking statements. The forward-looking
statements may appear in a number of places and include statements with respect to, among other things: business objectives and
strategic plans; operating strategies; acquisition strategies; drilling wells; oil and gas reserve estimates (including estimates
of future net revenues associated with such reserves and the present value of such future net revenues); estimates of future production
of oil, natural gas and minerals; expected results or benefits associated with recent acquisitions; marketing of oil, gas and minerals;
expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures; expectations
regarding cash flow and future borrowings sufficient to fund ongoing operations and debt service, capital expenditures and working
capital requirements; nonpayment of dividends; expectations regarding competition; impact of the adoption of new accounting standards
and the Company’s financial and accounting systems; and effectiveness of the Company’s control over financial reporting.



These forward-looking statements are subject
to numerous assumptions, risks, and uncertainties. Factors that may cause our actual results, performance, or achievements to be
materially different from those anticipated in forward-looking statements include, among others, the following:



| | • | adverse economic conditions in the United States and globally;
| | - | --------------------------------------------------------------

| | • | difficult and adverse conditions in the domestic and global capital
and credit markets;
| | - | ---------------------------------------------------------------------------------------

| | • | domestic and global demand for oil and natural gas and non-metallic
minerals;
| | - | -----------------------------------------------------------------------------

| | • | volatility of the market prices for crude oil and natural gas and non-metallic
minerals;
| | - | ----------------------------------------------------------------------------------------

| | • | the effects of government regulation, permitting, and other legal requirements;
| | - | -------------------------------------------------------------------------------

| | • | the geologic quality of our properties with regard to, among other things,
the existence of hydrocarbons in economic quantities;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | • | uncertainties about the estimates of our oil and natural gas reserves;
| | - | ----------------------------------------------------------------------

| | • | our ability to increase our production and oil and natural gas income
through exploration and development;
| | - | ----------------------------------------------------------------------------------------------------------

| | • | our ability to successfully apply horizontal drilling techniques and
tertiary recovery methods;
| | - | -----------------------------------------------------------------------------------------------

| | • | the number of well locations to be drilled, the cost to drill, and the
time frame within which they will be drilled;
| | - | --------------------------------------------------------------------------------------------------------------------

| | • | the effects of adverse weather on operations;
| | - | ---------------------------------------------

| | • | drilling and operating risks;
| | - | -----------------------------

| | • | the availability of equipment, such as drilling rigs, transportation
pipelines and mining equipment;
| | - | ----------------------------------------------------------------------------------------------------

| | • | changes in our oil and gas drilling and minerals development plans and
related budgets;
| | - | ---------------------------------------------------------------------------------------

| | • | the adequacy of our capital resources and liquidity including, but not
limited to, access to additional borrowing capacity; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | • | uncertainties associated with our legal proceedings and their outcome.
| | - | ----------------------------------------------------------------------



Because forward-looking statements are subject
to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned
not to place undue reliance on forward-looking statements, which speak only as of the date of the respective document. Other unknown
or unpredictable factors may cause actual results to differ materially from those projected by the forward-looking statements.
Most of these factors are difficult to anticipate and may be beyond our control. Unless otherwise required by law, we undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events,
or otherwise.



All forward-looking statements attributable
to us are expressly qualified in their entirety by these cautionary statements.



- 3 -







PART I – FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements.



DALECO RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS












|                                                     |  | June 30 2012 |            |   | September 30 2011 |  
|---------------------------------------------------- |  | ------------ | ---------- | - | ----------------- | -
|                                                     |  | (Unaudited)  |            |   |                   |  
|ASSETS                                               |  |              |            |   |                   |  
|Current Assets:                                      |  |              |            |   |                   |  
|Cash and Equivalents                                 |  | $            | 464,286    |   |                   | $
|Accounts Receivable                                  |  |              | 280,999    |   |                   |  
|Prepaid Consulting Services Agreement Fees           |  |              | 243,382    |   |                   |  
|Other Current Assets                                 |  |              | 9,788      |   |                   |  
|Total Current Assets                                 |  |              | 998,455    |   |                   |  
|Other Assets:                                        |  |              |            |   |                   |  
|Patent Rights                                        |  |              | -          |   |                   |  
|Accumulated Amortization of Patent Rights            |  |              | -          |   |                   |  
|Net Patent Rights                                    |  |              | -          |   |                   |  
|Patents License Rights                               |  |              | 40,907     |   |                   |  
|Accumulated Amortization of Patents License Rights   |  |              | (32,943    | ) |                   |  
|Net Patents License Rights                           |  |              | 7,964      |   |                   |  
|Prepaid Mineral Royalties – Long-term                |  |              | 509,257    |   |                   |  
|Interest Receivable                                  |  |              | 202,306    |   |                   |  
|Restricted Cash Deposits                             |  |              | 109,549    |   |                   |  
|Prepaid Consulting Services Agreement Fees           |  |              | -          |   |                   |  
|Securities Available for Future Sale                 |  |              | -          |   |                   |  
|Total Other Assets                                   |  |              | 829,076    |   |                   |  
|Property, Plant and Equipment:                       |  |              |            |   |                   |  
|Mineral Properties, at cost                          |  |              | 9,877,128  |   |                   |  
|Accumulated Depreciation, Depletion and Amortization |  |              | (95,000    | ) |                   |  
|Net Mineral Properties                               |  |              | 9,782,128  |   |                   |  
|Oil and Gas Properties, at cost                      |  |              | 4,424,512  |   |                   |  
|Accumulated Depreciation, Depletion and Amortization |  |              | (4,081,939 | ) |                   |  
|Net Oil and Gas Properties                           |  |              | 342,573    |   |                   |  
|Office Equipment, Furniture and Fixtures, at cost    |  |              | 61,502     |   |                   |  
|Accumulated Depreciation                             |  |              | (61,502    | ) |                   |  
|Net Office Equipment, Furniture and Fixtures         |  |              | -          |   |                   |  
|Total Net Property, Plant and Equipment              |  |              | 10,124,701 |   |                   |  
|Total Assets                                         |  | $            | 11,952,232 |   |                   | $



SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS



- 4 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS










|                                                                                                                                                                                                                                                                                                              |  | June 30  2012 |             |   | September 30 2011 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | -
|                                                                                                                                                                                                                                                                                                              |  | (Unaudited)   |             |   |                   |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                                                          |  |               |             |   |                   |  
|Current Liabilities:                                                                                                                                                                                                                                                                                          |  |               |             |   |                   |  
|Accounts Payable                                                                                                                                                                                                                                                                                              |  | $             | 1,373,992   |   |                   | $
|Revenue Payable to Oil and Gas Royalty and Other Working Interest Owners                                                                                                                                                                                                                                      |  |               | 953,121     |   |                   |  
|Federal and State Income Taxes Payable                                                                                                                                                                                                                                                                        |  |               | 192,427     |   |                   |  
|Accrued Interest Expense                                                                                                                                                                                                                                                                                      |  |               | 1,059,954   |   |                   |  
|Accrued Salary Expense                                                                                                                                                                                                                                                                                        |  |               | 687,018     |   |                   |  
|Accrued Expense Reimbursements                                                                                                                                                                                                                                                                                |  |               | 19,051      |   |                   |  
|EV&T Note Payable                                                                                                                                                                                                                                                                                             |  |               | 567,213     |   |                   |  
|CAMI Notes Payable                                                                                                                                                                                                                                                                                            |  |               | 455,943     |   |                   |  
|Notes Payable - Related Parties                                                                                                                                                                                                                                                                               |  |               | 85,256      |   |                   |  
|Premium Finance Note Payable                                                                                                                                                                                                                                                                                  |  |               | 6,821       |   |                   |  
|Note Payable - Other, net of unamortized discount of $7,397 at September 30, 2011                                                                                                                                                                                                                             |  |               | -           |   |                   |  
|Note Payable - First Citizens Bank – Current Portion                                                                                                                                                                                                                                                          |  |               | -           |   |                   |  
|Total Current Liabilities                                                                                                                                                                                                                                                                                     |  |               | 5,400,796   |   |                   |  
|Long-term Debt:                                                                                                                                                                                                                                                                                               |  |               |             |   |                   |  
|Note Payable – First Citizens Bank – Long-term Portion                                                                                                                                                                                                                                                        |  |               | -           |   |                   |  
|7.25% Convertible Debentures, net of unamortized discount of $5,136 and $6,992, respectively                                                                                                                                                                                                                  |  |               | 39,864      |   |                   |  
|Convertible Note Payable, net of unamortized discount of $24,670 and $44,639, respectively                                                                                                                                                                                                                    |  |               | 237,955     |   |                   |  
|Total Long-term Debt                                                                                                                                                                                                                                                                                          |  |               | 277,819     |   |                   |  
|Convertible Accrued Interest on Convertible Note Payable                                                                                                                                                                                                                                                      |  |               | 2,665       |   |                   |  
|Accrued Bonus Expense                                                                                                                                                                                                                                                                                         |  |               | 1,373,831   |   |                   |  
|Series B 8% Cumulative Convertible Preferred Stock Dividends Accrued                                                                                                                                                                                                                                          |  |               | 1,826,239   |   |                   |  
|Future Abandonment  Costs                                                                                                                                                                                                                                                                                     |  |               | 10,000      |   |                   |  
|TOTAL LIABILITIES                                                                                                                                                                                                                                                                                             |  |               | 8,891,350   |   |                   |  
|Commitments and Contingencies                                                                                                                                                                                                                                                                                 |  |               |             |   |                   |  
|SHAREHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                         |  |               |             |   |                   |  
|Preferred Stock – 20,000,000 shares authorized                                                                                                                                                                                                                                                                |  |               |             |   |                   |  
|Series A Preferred Stock - par value of $0.01 per share (outstanding: none)                                                                                                                                                                                                                                   |  |               | -           |   |                   |  
|Series B 8% Cumulative Convertible Preferred Stock – par value of $0.01 per share (outstanding: 135,000 and 145,000 shares, respectively); liquidation preference of $1,350,000 and $1,450,000, respectively, plus arrearages in cumulative dividends of $1,911,914 and $1,914,558, respectively (see Note 8) |  |               | 1,350       |   |                   |  
|Common Stock – 100,000,000 shares authorized – par value of $0.01 per share (outstanding: 49,441,058 and 48,988,914 shares, respectively)                                                                                                                                                                     |  |               | 494,411     |   |                   |  
|Additional Paid-in Capital                                                                                                                                                                                                                                                                                    |  |               | 46,977,519  |   |                   |  
|Accumulated Deficit                                                                                                                                                                                                                                                                                           |  |               | (43,836,398 | ) |                   |  
|Subscriptions Receivable                                                                                                                                                                                                                                                                                      |  |               | (576,000    | ) |                   |  
|Accumulated Other Comprehensive Loss                                                                                                                                                                                                                                                                          |  |               | -           |   |                   |  
|TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                                                                    |  |               | 3,060,882   |   |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                                                    |  | $             | 11,952,232  |   |                   | $



SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS



- 5 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE
30, 2012 AND 2011

(UNAUDITED)












|                                                                |  | Three Months ended June 30 |            |   | Nine Months ended June 30 |  
|--------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | -
|                                                                |  | 2012                       |            |   | 2011                      |  
|Revenues:                                                       |  |                            |            |   |                           |  
|Oil and Gas Sales                                               |  | $                          | 89,228     |   |                           | $
|Well Management Revenue                                         |  |                            | 73,489     |   |                           |  
|Royalty Receipts                                                |  |                            | 719        |   |                           |  
|Mineral Sales                                                   |  |                            | 2,418      |   |                           |  
|Total Operating Revenues                                        |  |                            | 165,854    |   |                           |  
|Expenses:                                                       |  |                            |            |   |                           |  
|Lease Operating Expenses - Oil and Gas                          |  |                            | 70,093     |   |                           |  
|Operating Expenses and Other Costs - Minerals                   |  |                            | 3,608      |   |                           |  
|Production and Severance Taxes – Oil and Gas                    |  |                            | 3,812      |   |                           |  
|Depreciation, Depletion and Amortization                        |  |                            | 18,408     |   |                           |  
|General and Administrative Expenses                             |  |                            | 341,713    |   |                           |  
|Total Expenses                                                  |  |                            | 437,634    |   |                           |  
|Loss From Operations                                            |  |                            | (271,780   | ) |                           |  
|Other Income (Expense):                                         |  |                            |            |   |                           |  
|Gain On Sale of Oil and Gas Properties                          |  |                            | -          |   |                           |  
|Gain on Debt Forgiveness                                        |  |                            | 43,655     |   |                           |  
|Interest and Dividend Income                                    |  |                            | 5,009      |   |                           |  
|Impairment of Securities Available for Future Sale              |  |                            | -          |   |                           |  
|Interest Expense                                                |  |                            | (80,368    | ) |                           |  
|Total Other Income (Expense), Net                               |  |                            | (31,704    | ) |                           |  
|Loss Before Income Taxes                                        |  |                            | (303,484   | ) |                           |  
|Taxes Based on Income                                           |  |                            | -          |   |                           |  
|Net Loss                                                        |  |                            | (303,484   | ) |                           |  
|Preferred Stock Dividends, accumulated and accrued (see Note 8) |  |                            | (27,627    | ) |                           |  
|Net Loss Applicable to Common Shareholders                      |  | $                          | (331,111   | ) |                           | $
|                                                                |  |                            |            |   |                           |  
|Basic and Fully Diluted Net Loss per Share                      |  | $                          | (0.01      | ) |                           | $
|Weighted-average Number of Shares of Common Stock Outstanding   |  |                            | 49,330,093 |   |                           |  



SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS

- 6 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011

(UNAUDITED)












|                                                                                                   |  | 2012 |          |   | 2011 |  
|-------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -
|Cash Flows From Operating Activities:                                                              |  |      |          |   |      |  
|Net Loss                                                                                           |  | $    | (230,736 | ) |      | $
|Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: |  |      |          |   |      |  
|Depreciation, Depletion and Amortization                                                           |  |      | 295,204  |   |      |  
|Amortization of Prepaid Consulting Services Agreement Fees                                         |  |      | 274,430  |   |      |  
|Amortization of Discount on Note Payable – Other                                                   |  |      | 7,397    |   |      |  
|Amortization of Discount on 7.25% Convertible Debentures                                           |  |      | 1,856    |   |      |  
|Amortization of Discount on Convertible Note Payable                                               |  |      | 19,969   |   |      |  
|Non-cash Charge as Interest Expense                                                                |  |      | -        |   |      |  
|Stock-based Compensation Expense                                                                   |  |      | 80,025   |   |      |  
|Non-cash charge for issuance of securities                                                         |  |      | -        |   |      |  
|Gain on Sale of Oil and Gas Properties                                                             |  |      | (898,335 | ) |      |  
|Gain on Debt Forgiveness                                                                           |  |      | (43,655  | ) |      |  
|Impairment of Securities Available for Future Sale                                                 |  |      | 5,699    |   |      |  
|Changes in Operating Assets and Liabilities:                                                       |  |      |          |   |      |  
|Receivables                                                                                        |  |      | 287,709  |   |      |  
|Prepaid Mineral Royalties                                                                          |  |      | (29,989  | ) |      |  
|Other Current Assets                                                                               |  |      | (2,364   | ) |      |  
|Restricted Cash Deposits                                                                           |  |      | (1,071   | ) |      |  
|Accounts Payable                                                                                   |  |      | (142,768 | ) |      |  
|Revenue Payable                                                                                    |  |      | (57,211  | ) |      |  
|Accrued Interest Expense                                                                           |  |      | 134,095  |   |      |  
|Other Accrued Expenses                                                                             |  |      | (10,334  | ) |      |  
|Net Cash Provided By (Used in) Operating Activities                                                |  |      | (310,079 | ) |      |  
|Cash Flows From Investing Activities:                                                              |  |      |          |   |      |  
|Proceeds from Sale of Oil and Gas Properties                                                       |  |      | 898,335  |   |      |  
|Cash Flows From Financing Activities:                                                              |  |      |          |   |      |  
|Payments on Notes and Debt                                                                         |  |      | (192,539 | ) |      |  
|Proceeds from Borrowings                                                                           |  |      | 19,652   |   |      |  
|Net Cash Provided By (Used In) Financing Activities                                                |  |      | (172,887 | ) |      |  
|Net Change in Cash and Equivalents                                                                 |  |      | 415,369  |   |      |  
|Cash and Equivalents at Beginning of Period                                                        |  |      | 48,917   |   |      |  
|Cash and Equivalents at End of Period                                                              |  | $    | 464,286  |   |      | $



- 7 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011

(UNAUDITED)










|Supplemental Information:                                                                                                  |  |   |         |  |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | - | ------- |  |  | - | ------- | -
|Income Taxes Paid                                                                                                          |  | $ | -       |  |  | $ | -       |  
|Interest Paid                                                                                                              |  | $ | 32,596  |  |  | $ | 16,876  |  
|Supplemental Disclosure of Non-cash Transactions:                                                                          |  |   |         |  |  |   |         |  
|Preferred Dividends Not Paid,  Accumulated and Accrued, respectively                                                       |  | $ | 85,676  |  |  | $ | 86,761  |  
|Conversion of Series B 8% Cumulative Preferred Stock into Common Stock                                                     |  | $ | 100,000 |  |  | $ | -       |  
|Issuance of Common Stock in Satisfaction of Series B 8% Cumulative Preferred Stock Dividend Arrearages due a Related Party |  | $ | 88,319  |  |  | $ | -       |  
|Issuance of Common Stock in Payment of Principal on Convertible Note Payable                                               |  | $ | 70,000  |  |  | $ | -       |  
|Issuance of Common Stock in Payment of Principal and Interest on CAMI Note Payable due a Related Party                     |  | $ | 34,264  |  |  | $ | -       |  
|Issuance of Common Stock and Warrants for the Purchase of Common Stock Pursuant to Consulting Services Agreement           |  | $ | -       |  |  | $ | 735,153 |  
|Issuance of Common Stock for Services Performed                                                                            |  | $ | -       |  |  | $ | 42,921  |  
|Issuance of Warrants for the Purchase of Common Stock to Consulting Engineer                                               |  | $ | -       |  |  | $ | 20,691  |  
|Issuance of 7.25% Convertible Debenture in Payment of Principal and Interest on Note Payable - Related Party               |  | $ | -       |  |  | $ | 20,000  |  
|Issuance of 7.25% Convertible Debenture in Payment of Consulting Fees due a Related Party                                  |  | $ | -       |  |  | $ | 14,000  |  
|Conversion of 7.25% Convertible Debentures into Common Stock                                                               |  | $ | -       |  |  | $ | 49,000  |  
|Interest Expense Resulting from Beneficial Conversion Feature of 7.25% Convertible Debentures                              |  | $ | -       |  |  | $ | 25,857  |  
|Interest Expense Resulting from Issuance of Common Stock for Services Performed                                            |  | $ | -       |  |  | $ | 7,154   |  
|Discount on Note Payable Resulting from Issuance of Warrants for the Purchase of Common Stock                              |  | $ | -       |  |  | $ | 33,337  |  
|Premium on 7.25% Convertible Debentures Resulting from Beneficial Conversion Feature                                       |  | $ | -       |  |  | $ | (1,071  | )



SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS



- 8 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



1. CONTINUED OPERATIONS AND GOING CONCERN



The unaudited consolidated financial statements
have been prepared on the basis of a going concern which contemplates that Daleco Resources Corporation and subsidiaries (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. At June 30, 2012, the Company’s
current assets total $998,455. Net loss applicable to common shareholders amounted to $316,412 for the nine months ended June 30,
2012, which reflects a gain on the sale of certain oil and gas properties of $898,335 (see Note 3). The ability of the Company
to meet its current liabilities of $5,400,796 and its total liabilities of $8,891,350 and to continue as a going concern is dependent
upon the availability of future funding, achieving profitability within its mineral segment and ongoing profitability within its
oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability
of its assets. The financial statements do not reflect any adjustments relating to these uncertainties.



During March 2012, the Board of Directors
of the Company (“Board’) created a sub-committee of the Board with oversight responsibilities in respect to the approval
and administration of the Company’s disbursement activities in light of the proceeds from the sale of certain oil and gas
properties (the “Sub-committee”). The Sub-committee is composed of three Directors (Messrs. Gilbert, Grady and Maxwell)
with Mr. Blackstone, Vice President and Chief Accounting Officer, reporting to the Sub-committee in respect to such matters.



As of June 30, 2012, the Company and certain
of its subsidiaries were in default of various obligations and certain debt obligations classified as Current Liabilities in the
accompanying Balance Sheet as set forth in the following table:.



Such defaulted obligations at June 30, 2012
include the following:



|Amounts included in accounts payable:           |  |   |           | 
|----------------------------------------------- |  | - | --------- | 
|Consulting Services and Interest due a Licensor |  | $ | 42,009    | 
|Consulting Services – Blackstone                |  |   | 196,957   | 
|EV&T – fees, expenses and accrued interest      |  |   | 266,438   | 
|EV&T note payable and accrued interest          |  |   | 1,035,598 | 
|CAMI notes payable and accrued interest         |  |   | 931,875   | 
|Accrued salary expense                          |  |   | 687,018   | 
|Total                                           |  | $ | 3,159,895 | 



The majority of the above amounts are owed
to related parties. Such related parties and EV&T are working with the Company to achieve the ultimate extinguishment of the
obligations as the Company attempts to achieve profitability within its mineral segment. See Note 11 concerning payments to certain
parties after June 30, 2012.



See Note 8 regarding the cumulative dividends
in arrears of $1,911,914 at June 30, 2012, applicable to the Series B 8% Cumulative Convertible Preferred Stock.



To obtain capital in the past, the Company’s
capital obtainment methods have included selling its interest in certain oil and gas properties (see Note 3), and borrowing funds
from and issuing Common Stock to related and unrelated parties, as well as utilizing joint venture structures. If the Company is
not successful in increasing its operating cash flows and the preceding financing methods are not available, the Company may not
be able to sustain its operations and may need to seek alternative actions to preserve shareholder value.



In February 2011, the Company entered into
a Consulting Services Agreement with the Musser Group, LLC (“Musser Group”) to perform consulting services for the
Company through February 2013. The Company engaged the Musser Group, an independent contractor, to provide advisory and consulting
services to the Company. The Musser Group is engaged to provide (i) managed services; (ii) strategic business planning and implementation;
and (iii) assistance in directing and executing the implementation of any strategies approved by the Board of Directors of the
Company. The Musser Group’s primary focus is the analysis and validation of market opportunities for the commercialization
of products within the Company’s mineral segment. Its analysis and services are ongoing.



- 9 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



The Company will continue to seek out and
entertain project specific funding commitments and other capital funding alternatives if and when they become available.



2. BASIS OF PRESENTATION



Description of Business



Daleco Resources Corporation (“DRC”)
is a Nevada corporation and its Articles provide for authorized capital stock of 100,000,000 shares of common stock and 20,000,000
shares of preferred stock. The Company is a natural resources holding company whose subsidiaries are engaged in (i) the exploration,
development and production of oil and gas; (ii) the exploration for naturally occurring minerals; (iii) the marketing and sales
of such minerals; and (iv) the marketing and sales of patented products and processes utilizing the Company’s minerals. The
Company's assets consist of two separate categories: oil and gas and non-metallic minerals. The Company’s wholly-owned active
subsidiaries include Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Clean Age Minerals, Inc.
and CA Properties, Inc.



Clean Age Minerals, Inc., through its wholly-owned
subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests, leasehold interests and federal mining claims
containing non-metallic minerals (kaolin and zeolite) in the states of New Mexico, Texas and Utah. CAMI is presently engaged in
the exploration for such minerals and intends to mine the minerals through the use of contract miners and arrangements with its
joint venture partners.



The Company, through its subsidiaries, Westland
Resources Corporation, DRI Operating Company and Deven Resources, Inc., owns and operates oil and gas properties in Texas and West
Virginia. The Company owns (a) working interests in wells in Texas and West Virginia and (b) overriding royalty interests in (i)
seventy wells in the Deerlick Coalbed Methane Field in Alabama and (ii) two wells in Pennsylvania and (iii) one well in Texas.



The Company is primarily engaged in the exploration
for minerals and oil and gas activities.



We follow accounting standards set by the
Financial Accounting Standards Board, commonly referred to as “FASB”. The FASB sets generally accepted accounting principles
(“GAAP”) that we follow to ensure we consistently report our financial position, results of operations, and cash flows.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred
to as the “Codification” or “ASC”. From time to time, the FASB issues an Accounting Standards Update (“ASU”)
which may impact the financial statements and disclosures therein (see “Recent Accounting Pronouncements”).



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 as of 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.



Basis
of Presentation



The unaudited consolidated financial statements
included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated
financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011 (“2011
Annual Report”). In the opinion of management, all adjustments (including normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the period ended June 30, 2012 are not necessarily indicative
of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated
financial statements and the related notes should be read in conjunction with the Company’s audited consolidated financial
statements included in the 2011 Annual Report.



- 10 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Unless otherwise noted, references to “year”
pertain to the Company’s fiscal year, which begins on October 1 and ends on September 30; for example, 2012 refers to fiscal
2012, which is the period from October 1, 2011 to September 30, 2012.



Certain reclassifications have been made to
prior period financial statements to conform to the current period presentation.



Fair Value Measurements



At June 30, 2012, the Company’s only
financial instruments are (a) cash and short-term trade receivables, payables and debt. The carrying amounts reported in the
accompanying consolidated financial statements for such items approximate fair values because of the immediate nature of short-term
maturities of these financial instruments.



Securities
Available for Future Sale.



During March 2012, the Company concluded that
the Securities Available for Future Sale (balance of $1 at September 30, 2011) was permanently impaired and accordingly $5,699
was recognized as Impairment of Securities Available for Future Sale in the accompanying Statement of Operations.



Significant
Accounting Policies



There have been no changes in significant
accounting policies from those disclosed in the 2011 Annual Report.



Recent Accounting Pronouncements



In December
2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
The amendments of this ASU are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU
No. 2011-05 that ASU No. 2011-12 is deferring. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including
the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive
financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years,
beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December
15, 2012, and interim and annual periods thereafter. The Company is currently assessing the impact that the adoption will have
on its financial statements.



In December
2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Offsetting,
otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial
position (balance sheet). Unlike IFRS, U.S. GAAP allows companies the option to present net in their balance sheets derivatives
that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in
the event of default or bankruptcy. To address these differences between IFRS and U.S. GAAP, in January 2011 the FASB and the IASB
(the Boards) issued an exposure draft that proposed new criteria for netting that were narrower than the current conditions currently
in U.S. GAAP. Nevertheless, in response to feedback from their respective stakeholders, the Boards decided to retain their existing
offsetting models. Instead, the Boards have issued common disclosure requirements related to offsetting arrangements to allow investors
to better compare financial statements prepared in accordance with IFRS or U.S. GAAP. ASU 2011-11 requires an entity to disclose
information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those
arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on
or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by
those amendments retrospectively for all comparative periods presented. The Company is currently assessing the impact that the
adoption will have on its financial statements.



- 11 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



In December
2011, the FASB issued ASU No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a
Scope Clarification. ASU No. 2011-10 represents the consensus reached in EITF Issue No. 10-E, "Derecognition of in Substance
Real Estate." The objective of this ASU is to resolve the diversity in practice about whether the guidance in FASB ASC Subtopic
360-20, “Property, Plant, and Equipment — Real Estate Sales,” applies to a parent that ceases to have a controlling
financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse
debt. ASU 2011-10 provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary
that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should
apply the guidance in Codification Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally,
a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of
the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity
ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real
estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to
the real estate is transferred to legally satisfy the debt. ASU 2011-10 should be applied on a prospective basis to deconsolidation
events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement
with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years,
and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for
fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted. The Company
is currently assessing the impact that the adoption will have on its financial statements.



In June
2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU
allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05
eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders'
equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income
or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively.
For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and
annual periods thereafter. Early adoption is permitted. The Company is currently assessing the impact that the adoption will have
on its financial statements.



3. OIL AND GAS PROPERTIES SEGMENT INFORMATION



During the nine months ended June 30, 2012,
there was no major discovery or other event that caused a significant change from the reserve quantity and related information
presented in the 2011 Annual Report. During the nine months ended June 30, 2012, the price the Company receives for its natural
gas production decreased to $5.16 per Mcf from $6.11 per Mcf for the comparable period of 2011; however, from a revenue perspective,
the Company's oil and gas properties are primarily oil producers and the average price per Mcfe increased to $8.22 from $8.20,
respectively.



- 12 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Results of Operations for Oil and Gas Producing
Activities for the three and nine months ended June 30, 2012 and 2011:

|                                                                                                              |  | Three Months Ended June 30 |         |  | Nine Months Ended June 30 |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- |  | ------------------------- | -
|                                                                                                              |  | 2012                       |         |  | 2011                      |  
|Revenues:                                                                                                     |  |                            |         |  |                           |  
|Oil and gas sales                                                                                             |  | $                          | 89,228  |  |                           | $
|Well management revenue                                                                                       |  |                            | 73,489  |  |                           |  
|Royalty receipts                                                                                              |  |                            | 719     |  |                           |  
|Total revenues                                                                                                |  |                            | 163,436 |  |                           |  
|Expenses:                                                                                                     |  |                            |         |  |                           |  
|Lease operating expenses                                                                                      |  |                            | 70,093  |  |                           |  
|Production and severance taxes                                                                                |  |                            | 3,812   |  |                           |  
|Depreciation, depletion, amortization and valuation provisions                                                |  |                            | 15,000  |  |                           |  
|Total expenses                                                                                                |  |                            | 88,905  |  |                           |  
|Revenues in excess of expenses                                                                                |  |                            | 74,531  |  |                           |  
|Gain on Sale of Oil and Gas Properties                                                                        |  |                            | -       |  |                           |  
|Income tax expenses                                                                                           |  |                            | -       |  |                           |  
|Results of operations from oil and gas producing activities (excluding corporate overhead and interest costs) |  | $                          | 74,531  |  |                           | $



Sale of Oil and Gas Property Leasehold
Deep Rights



On January 20, 2012, the Company entered into
a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas
leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe
permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the
amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing
to the Company. At September 30, 2011, the Company has available approximately $25 million of operating loss carryforwards for
Federal income tax purposes which may be applied against future taxable income (as further discussed in Note 10 of the Notes to
Consolidated Financial Statements included in the 2011 Annual Report). The Company will use the proceeds for general working capital
purposes.



There is no material relationship between
the purchaser of the assets and the registrant or any of its affiliates, or any director or officer of the registrant, or any associate
of any such director or officer. A provision of the Agreement requires that the Company shall not make any public announcement
or statement concerning the Agreement other than that which the Company is required to disclose on Form 8-K and other filings with
the Securities and Exchange Commission.



4. MINERAL PROPERTIES SEGMENT INFORMATION



The Company is an exploration stage company
in respect to its mineral holdings.



The Company previously amortized its mineral
properties at a nominal amortization rate as the Company has not produced commercial quantities of any of its mineral deposits.
Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method
in calculating cost depletion.



During fiscal 2010, the Company entered into
an agreement to sell zeolite to be used in certain agricultural applications including but not limited to feed supplements and
soil additives in a ten state area in the south-central part of the US. On August 10, 2012, the Company gave notice to the purchaser
to terminate the agreement in October 2012 pursuant to the notice provision provided in the agreement. The Company intends to seek
alternatives for the sale of its zeolite to be used in agricultural applications.



- 13 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



In December 2009, the proposed Sierra Kaolin
Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of
Operations was approved. This will facilitate the project moving to the next phases, including site preparation for extraction
operations and the continued evaluation of potential product specific marketing arrangements with certain third parties.



On April 8, 2011, in connection with the efforts
of the Musser Group, the Company entered into a Material Supply and Joint Venture Agreement between CAMI (wholly-owned subsidiary)
and VitaminSpice, Inc. (“VSI”) pursuant to which CAMI agrees to supply Clinoptilolite (zeolite) to VSI in connection
with the introduction by VSI of detoxification products into targeted geographic markets. VSI is obligated to utilize CAMI as its
sole supplier of Clinoptilolite. The agreement does not specify any minimum quantity supply requirements of CAMI. In addition to
an initial price per ton for Clinoptilolite to be sold to VSI, CAMI will share in the profits from the sales of such products by
VSI. CAMI has provided material to VSI for use in product and market strategy development, as well as potential clinical studies.
The Company made no shipments of product to VSI and the Company has not received any orders from VSI. VSI has not met certain performance
standards as set forth in the agreement. On April 13, 2012, the Company gave notice to VSI and terminated the agreement pursuant
to the provision in respect to termination for cause. The Company is actively seeking alternatives for the introduction of detoxification
products utilizing the Company’s zeolite (see note 11).



Patent Rights - CAMI was the owner
of U.S. Patent No. 5,387,738 upon which an engineered product was based which utilized all naturally occurring non-hazardous minerals
for the remediation of sites contaminated with hazardous and/or toxic materials. Such patent expired on February 7, 2012.



Patent License Rights - In February
2010, the Company entered into a License Agreement concerning two US method patents for the treatment of sanitary wastewaters.
Such patents utilize the Company’s zeolite. The license applies to the US and covers the use of the patented technology in
water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies
to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian
Affairs. At June 30, 2012, the Company owes the licensor for consulting fees pursuant to the License Agreement and interest totaling
$42,009. Such amount is included in Accounts Payable in the accompanying balance sheet. See Note 11.



Trademark - The Company has a trademark
for the Company’s ReNuGenTM, a product used to enhance the efficacy of conventional waste water treatment plants.



Results of Operations for Minerals Properties
Activities for the three and nine months ended June 30, 2012 and 2011:

|                                                                                                           |  | Three Months Ended June 30 |        |   | Nine Months Ended  June 30 |  
|---------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | -------------------------- | -
|                                                                                                           |  | 2012                       |        |   | 2011                       |  
|Mineral Sales                                                                                              |  | $                          | 2,418  |   |                            | $
|Operating and other expenses                                                                               |  |                            | (3,608 | ) |                            |  
|Depreciation, depletion, amortization and valuation provisions:                                            |  |                            |        |   |                            |  
|Amortization of Patent and Patent License Rights                                                           |  |                            | (3,408 | ) |                            |  
|                                                                                                           |  |                            | (4,598 | ) |                            |  
|Income tax expenses                                                                                        |  |                            | -      |   |                            |  
|Results of operations from mineral properties activities (excluding corporate overhead and interest costs) |  | $                          | (4,598 | ) |                            | $



- 14 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



5. NOTES PAYABLE



Note Payable - Other



During January 2011, the Revocable Trust Created
by Ian B. Jacobs under Agreement dated November 25, 1999, an unrelated entity, loaned the Company $60,000. Such note required monthly
payments of principal and interest (5.5%) totaling $2,645. In January 2012, the Company entered into an amended and restated note
with a maturity date of March 12, 2012. The Company paid the principal balance and interest due on the note during March 2012.



In connection with this loan, the Company
issued warrants for the purchase of 500,000 shares of Common Stock at a purchase price of $0.15 per share. The warrants expire
on December 31, 2015. In recording the transaction, the Company allocated the value of the proceeds to the note and the warrants
based on their relative fair values. The fair value of the warrants was determined using the Black-Scholes valuation model using
the following assumptions: a contractual term of 5 years, risk free interest rate of 1.99%, dividend yields of 0%, and volatility
of 163%. The allocated value of the warrants was $33,337 and such amount was recorded as a discount on the note. The discount was
amortized over the life of the note and $7,397 and $17,995 is included in interest expense during the nine months ended June 30,
2012 and 2011, respectively.



Premium Finance Agreement



During November 2011, the Company entered
into a Premium Finance Note Payable for $19,652 to finance certain insurance premiums. The maturity date of the note is October
1, 2012 and the interest rate is 12.4%. Consistent with the provisions of the note, the Company is required to make monthly payments
of principal and interest of $1,899. The balance of the Note at June 30, 2012 is $6,821.



CAMI Notes



During April 2012, the Board and the Audit
Committee approved the payment of $50,000 in cash and the issuance of 158,290 shares of Common Stock in full satisfaction of a
note due the Estate of Eric Haessler, an affiliate of Carl A. Haessler, a Director. The note had a principal balance of $58,938
and accrued and unpaid interest related to such note totaled $60,044 at the time of repayment. The Company valued the stock at
$25,327 based on the closing price of $0.16 per share. The total consideration payment (cash and common stock) of $75,327 was $43,655
less than the $118,982 of principal and interest owed by the Company. Accordingly, the Company recognized a gain on debt forgiveness
of $43,655.



EV&T
Note and Fees and Expenses



At June 30, 2012, the outstanding balance
of the EV&T Note was $567,213 and accrued but unpaid interest totaled $468,385.



During April 2012, the Company paid $25,000
to EV&T on the balance due by the Company for fees and expenses. At June 30, 2012, the Company owes EV&T $266,438 for services
performed and interest thereon and such amount is included in Accounts Payable at June 30, 2012. See Note 11.



First Citizens
Bank



During April 2012, the Board and Audit Committee
approved and the Company paid the entirety of the principal and interest due First Citizens Bank totaling $21,650. Certain assets
of Amir (“Amir Assets”) were pledged as collateral for the Company’s note payable to First Citizens Bank. Thus,
the Company has fulfilled its obligation of a provision of the Convertible Note Payable to Amir regarding the Amir Assets.



- 15 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Convertible
Note Payable and Amir Settlement Agreement



On July 12, 2011, the Company entered into
a Settlement Agreement with Dov Amir (“Amir”), a former director/officer of the Company, as discussed in Note 6 of
the Notes to Consolidated Financial Statements included in the 2011 Annual Report. Among other provisions, certain assets of Amir
shall remain pledged as collateral for the Company’s note payable to First Citizens Bank and Amir was granted the right to
convert any and all amounts due him under the note into shares of Common Stock at a conversion price of $0.25 per share. As a result
of granting the conversion rights relating to the note, the Company recognized $46,938 as a discount on the note at July 12, 2011,
resulting from the beneficial conversion feature. The discount was determined based on the fair value of the Company’s Common
Stock in comparison to the conversion price on the date of the note.



During April 2012, the Board and the Audit
Committee approved and the Company paid $70,000 in cash and issued 140,000 shares of Common Stock to Amir in payment of interest
due of $11,471 and a $128,529 reduction in the principal balance of the note. See the above discussion regarding the Company’s
note payable to First Citizens Bank. The total consideration (cash and common stock) of $93,800 was $46,200 less than the $140,000
of total principal reduction and interest paid; however, the total consideration paid of $93,800 was $1,400 less than the $95,200
if-converted value of the principal and interest. The if-converted value was determined based on the conversion price of $0.25
per share per the terms of the note and valuing the 560,000 if-converted shares at $0.17 per share. The Company did not recognize
any gain on extinguishment of such portion of the indebtedness due to the existence of the conversion privilege. See Note 7.



Further, each month the Company evaluates
the beneficial conversion feature in respect to the interest accrued on the note during such month and determines if any discount
is applicable to the beneficial conversion feature related to such interest. The Company has determined that no discount is applicable
to the accrued interest relating to the beneficial conversion privilege through June 30, 2012.



The discount is being amortized over the life
of the note and $14,709 and $19,969 is included in interest expense during the three and nine months ended June 30, 2012, respectively.
Such amortization includes $12,939 as a result of the repayment of a portion of the debt as discussed above. The unamortized balance
of the discount at June 30, 2012 was $24,670. The effective interest rate through June 30, 2012 was approximately 7%. As of June
30, 2012, the principal balance due on the note was $262,625 and accrued interest on the note totals $2,665. The if-converted value
of the Convertible Note and Interest Payable at June 30, 2010 approximates $169,786.



6. 7.25% CONVERTIBLE DEBENTURES



During the nine months ended June 30, 2012,
the Company did not issue any Debentures nor were any Debentures converted to Common Stock. The Company closed the offering period
for the Debentures in January 2012. Debentures held by a Director totaling $45,000 are outstanding at June 30, 2012. During the
three months ended June 30, 2012 and, 2011, the Company recognized contractual coupon interest of $813 and $814, respectively,
and amortization of the discount of $619 and $617, respectively. During the nine months ended June 30, 2012 and, 2011, the Company
recognized contractual coupon interest of $2,449 and $2,131, respectively, and amortization of the discount of $1,856 and $1,956,
respectively. Such amounts are included in interest expense. The effective interest rate approximates 16%. The if-converted value
of the Debentures at June 30, 2012, approximates $51,000. Accrued and unpaid interest due on the Debentures totals $7,091 at June
30, 2012. The Director that holds the Debentures has agreed to waive any amounts due him pursuant to the terms of the Debentures
until November 1, 2012.



7. RELATED PARTIES



Certain Personal Loans



During March 2012, the Audit, Compensation
and Nominating and Governance Committees of the Board of Directors (“Board”) (collectively, “AC&N Committees”)
became aware of personal loans entered into in September 2005 totaling in excess of $400,000 from Amir, a former director/officer
of the Company, to four individuals. It is the understanding of the AC&N Committees (based on oral representations of Mr. Amir)
that (i) the proceeds of such loans were used to fund the exercise in September 2005 of options (granted to such individuals in
September 2000) to purchase shares of Common Stock (at $0.25 per share); (ii) two of such individuals are current employees of
the Company, including the Interim CEO/CFO/President and a current Director; (iii) one of such individuals is a former employee
of the Company; (iv) one of such individuals is a former Director and Secretary of the Company and has served and is serving as
general counsel (EV&T) to the Company; (v) the sole collateral for each of the loans is the Common Stock acquired by each individual
upon the exercise of each option; and (vi) there is no agreement between Amir and such individuals regarding their voting rights
related to the Common Stock owned by such individuals and Amir.



- 16 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Haessler Obligations



During May
2012, Carl Haessler, a Director, elected to convert 10,000 shares of Series B 8% Cumulative Convertible Preferred Stock into
80,000 shares of Common Stock at the conversion rate of $1.25 per share of Common Stock. Also, Mr. Haessler accepted 73,854
shares of Common Stock as satisfaction for any and all dividends due him ($92,318 of which $88,319 were accrued) in respect
to his direct holdings of 30,000 shares of Series B 8% Cumulative Convertible Preferred Stock through the date of the
conversion of 10,000 of such shares.



Employment Agreements



On March 30, 2012, the Compensation Committee
of the Board recommended, and the Board approved, modifications to each of the employment agreements of Messrs. Novinskie and Blackstone
whereby, effective April 3, 2012, the Company shall have until July 31, 2012 to give notice of non-renewal of each of the employment
agreements. See Note 11.



Blackstone Obligations



During April and
June 2012, Mr. Blackstone was paid $70,000 of the balances due him. At June 30, 2012, the Company owed Mr. Blackstone, an officer
of the Company, unpaid consulting fees of $196,957. See Note 11.



8. CAPITAL STOCK



Common Stock



The Company issued 452,144 shares of Common
Stock during the nine months ended June 30, 2012 as follows:



|                                                                               |  | Shares of Common Stock Issued |        
|------------------------------------------------------------------------------ |  | ----------------------------- | -------
|Estate of Eric Haessler (see Note 5)                                           |  |                               | 158,290
|Dov Amir (see Note 5)                                                          |  |                               | 140,000
|Carl A. Haessler (see Note 7):                                                 |  |                               |        
|Conversion 10,000 shares of Series B 8% Cumulative Convertible Preferred Stock |  |                               | 80,000 
|Payment in satisfaction of  Series B dividend obligation                       |  |                               | 73,854 



Series A Preferred Stock



No shares of Series A Preferred Stock were
issued during the nine months ended June 30, 2012. No shares were outstanding at June 30, 2012 and 2011, and September 30, 2011.



Series B 8% Cumulative Convertible Preferred
Stock



No
shares of Series B Preferred Stock, par value of $0.01 per share, were issued during
the nine months ended June 30, 2012. During the nine months ended June 30, 2012, 10,000 shares of Series B Preferred Stock were
converted into 80,000 shares of Common Stock as discussed in Note 7.



Shares of Series B Preferred Stock outstanding
at June 30, 2012, and September 30, 2011, totaled 135,000 and 145,000 shares, respectively. Such shares are convertible into shares
of Common Stock on the basis of their $10.00 per share stated value, at the exchange rate per common share of 85% of the average
of the closing price of the Common Stock for the five trading days immediately preceding the date when shares of Series B Preferred
Stock are delivered to the Company for conversion, but in no event shall the conversion price be less than $1.25 per share. Thus,
at June 30, 2012, the 135,000 shares of Series B Preferred Stock were convertible into 1,080,000 shares of Common Stock.



- 17 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Further, the shares of Series B Preferred
Stock (i) earn dividends at the rate of 8% per annum computed on the basis of a 365 day year, and (ii) have priority in liquidation
to the extent of the stated value of $10.00 per share plus any unpaid dividends over any other preferred stock, common stock or
any other stock issued after September 19, 2000. At June 30, 2012, the liquidation preference totals $3,261,914 (stated value of
$1,350,000 plus arrearages in cumulative dividends of $1,911,914).



Dividends



There were no cash dividend payments in respect
to Common Stock or either series of Preferred Stock during the nine months ended June 30, 2012.



During the fourth quarter of fiscal
2011, the Company paid $59,338 of dividends on the Company's Series A Preferred Stock by issuing 237,352 shares of Common
Stock. During the third quarter of 2012, Carl Haessler, a Director, accepted 73,854 shares of Common Stock as satisfaction
for any and all dividends due him ($92,318 of which $88,319 were accrued) in respect to his direct holdings of 30,000 shares
of Series B 8% Cumulative Convertible Preferred Stock through the date of the conversion of 10,000 of such shares. See Note
7.



The only dividends paid prior to fiscal 2011
on the Company's Series B Preferred Stock were in shares of Common Stock at the time of conversion of the respective shares of
such Preferred Stock into Common Stock. At September 30, 2011, accrued but unpaid dividends on Series B Preferred Stock totaled
$1,914,558. As of October 1, 2011, the beginning of fiscal 2012, the Company no longer accrues dividends on the Series B Preferred
shares due to the very low probability that the holders of the Series B Preferred Stock at September 30, 2011, will elect to convert
such shares into shares of Common Stock. Also, the Company is not required to pay dividends by issuing shares of its Common Stock.
The Company intends to pay dividends on the Series B Preferred shares when its financial condition makes any such payment appropriate.
At June 30, 2012, the cumulative dividends in arrears applicable to the Series B Preferred Stock totals $1,911,914.



Options and Warrants to Purchase Common
Stock

|                                                       |  | Number of Options and Warrants |           |   | Weighted Average Price
per Share |  
|------------------------------------------------------ |  | ------------------------------ | --------- | - | -------------------------------- | -
|Options and warrants outstanding at September 30, 2011 |  |                                | 5,650,000 |   |                                  | $
|Options expired                                        |  |                                | (200,000  | ) |                                  | $
|Options and warrants outstanding at June 30, 2012      |  |                                | 5,450,000 |   |                                  | $



Summarized information relating to the stock
options to purchase Common Stock outstanding as of June 30, 2012, is as follows:



|                         |             |  | Options Outstanding                             |  |           | Options Exercisable                       | 
|------------------------ | ----------- |  | ----------------------------------------------- |  | --------- | ----------------------------------------- | 
|Exercise Price per Share |             |  | Number of Shares Underlying Options Unexercised |  |           | Weighted Average Exercise Price Per Share | 
|                         | $0.21-$0.28 |  |                                                 |  | 2,350,000 |                                           | 



Stock-based Compensation



During the nine months ended
June 30, 2012, the Company granted no options for the purchase of shares of Common Stock.There
are options to purchase 1,850,000 shares of Common Stock outstanding as of June 30, 2012, which options are held by current officers,
Directors and employees of the Company (“Insiders”). The exercise prices for the options held by Insiders range from
$0.21 per share to $0.28 per share.



- 18 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Stock-based compensation expense relating
to stock options granted to Insiders is recorded in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.
The Company recorded stock-based compensation expense (i) for the three months ended June 30, 2012 and 2011 of $20,851 and $26,101,
respectively, and (ii) for the nine month periods then ended of $80,025 and $51,420, respectively. Such expense is included in
General and Administrative Expenses. No tax benefit has been recognized. Compensation costs are based on the fair value at the
grant date. The fair value of the options has been estimated by using the Black-Scholes option-pricing model with the following
assumptions: risk free interest rates between 2.05% and 4.52%; expected life of five years; and expected volatility between 37%
and 167%. See Note 11.



Net Income (Loss) Per Share



Net income (loss) per share is computed in
accordance with FASB ASC Topic 260, Earnings per Share. Basic net income (loss) per share is calculated by dividing the
net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, dilutive
common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive.



Options and warrants to purchase shares of
Common Stock were outstanding during the periods but have not been included in the computation of diluted earnings per share because
such shares would have an anti-dilutive effect on net loss per share and the average price at which such options and warrants are
exercisable was in excess of the market price of the Common Stock at June 30, 2012. The shares of Common Stock issuable upon the
conversion of the 7.25% Convertible Debentures (see Note 6) have not been included in the computation of diluted earnings per share
because such shares would have an anti-dilutive effect on net loss per share. The shares of Common Stock issuable upon the conversion
of the Convertible Note Payable (see Note 6) have not been included in the computation of diluted earnings per share because such
shares would have an anti-dilutive effect on net loss per share and because the price at which such shares are convertible was
in excess of the market price of the Common Stock at June 30, 2012.The shares of Common Stock issuable upon the conversion of the
Series B 8% Cumulative Convertible Preferred Stock have not been included in the computation of diluted earnings per share because
the price ($1.25) at which such shares are convertible was in excess of the market price of the Common Stock at June 30, 2012.
No other adjustments were made for purposes of per share calculations.



9. INCOME TAXES



At June 30, 2012, the Company has current
federal and state taxes payable of $192,427 and no deferred tax asset or liability. At June 30, 2012, accrued interest related
to the federal and state income taxes totaled $95,089. Interest expense related to tax liabilities is included in Interest Expense
in the accompanying Consolidated Statement of Operations. The federal income tax liabilities arose primarily from alternative minimum
tax for fiscal 2004.



During February 2012, the Company entered
into an installment agreement with the Department of Treasury – Internal Revenue Service (“IRS”) in respect to
income taxes and interest thereon relating to alternative minimum tax for fiscal 2004. The agreement requires monthly payments
of not less than $2,150 commencing in February 2012 and continuing for 72 months or until the balance ($153,514 as of February
1, 2012) has been paid in full. The IRS has filed a notice of Federal tax lien. The Company will request audit reconsideration
and continue to submit information to the IRS which supports the Company’s position that it was not subject to alternative
minimum tax related to fiscal 2004.



The Company accounts for income taxes in accordance
with FASB ASC Topic 740, “Income Taxes”. ASC 740 requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and
any available operating loss or tax credit carryforwards. The Company has available at September 30, 2011, operating loss carryforwards
of approximately $25 million, which may be applied against future taxable income and will expire in various years through 2025.
The amount of an ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent,
in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot
be determined at this time. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established
a valuation allowance equal to the tax effect of the loss carryforwards; therefore, no net deferred tax asset has been recognized.
No potential benefit of these losses has been recognized in the financial statements. The Company may be subject to IRC code section
382 which could limit the amount of the net operating loss and tax credit carryovers that can be used in future years.



- 19 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



Below is a reconciliation of the reported
amount of income tax expense attributable to continuing operations for the period to the amount of income tax expense that would
result from applying domestic federal statutory tax rates to pretax loss for the three and nine months ended June 30, 2012 and
2011:



|                                                                               |  | Three Months Ended June 30 |     |    | Nine Months Ended June 30 | 
|------------------------------------------------------------------------------ |  | -------------------------- | --- | -- | ------------------------- | 
|                                                                               |  | 2012                       |     |    | 2011                      | 
|Income tax expense (benefit) computed at the statutory Federal income tax rate |  |                            | (35 | )% |                           | 
|Change in valuation allowance                                                  |  |                            | 35  | %  |                           | 
|Effective income tax rate                                                      |  |                            | 0   | %  |                           | 



Included in the table below are the components
of income tax expense for the three and nine months ended June 30, 2012 and 2011:



|                                      |  | Three Months Ended June 30 |          |   | Nine Months Ended June 30 |  
|------------------------------------- |  | -------------------------- | -------- | - | ------------------------- | -
|                                      |  | 2012                       |          |   | 2011                      |  
|Current income tax expense (benefit)  |  | $                          | -        |   |                           | $
|Deferred income tax expense (benefit) |  |                            | (106,219 | ) |                           |  
|Valuation allowance                   |  |                            | 106,219  |   |                           |  
|Total income tax expense (benefit)    |  | $                          | -        |   |                           | $



10. PENDING LITIGATION



During October 2009, a working interest owner
commenced an action against a subsidiary of the Company (“WRC”) in the District Court of Burleson County, Texas, for
an accounting of expense and revenues for six wells. WRC, through its Texas counsel, has filed a general denial of the claim. In
November 2009, WRC provided the plaintiff with a complete accounting for all wells in question. The plaintiff has sought additional
discovery and WRC has provided additional information. The action is ongoing. See Note 11.



During September 2010, a complaint was filed
against WRC in the District Court of Burleson County, Texas, seeking judgment in respect to $92,921 owed to a vendor of WRC. In
November 2010, the vendor agreed to dismiss its complaint against WRC after a settlement agreement was reached whereby WRC made
an initial payment of $30,000 in cash and delivered 357,677 shares of the Company’s Common Stock (consideration to the vendor
of $42,921). The Company did not retire the remaining obligation by March 1, 2011, as required by the settlement agreement. During
the nine months ended June 30, 2011, the Company recognized $7,154 of interest expense relating to the fair value of the shares
of its Common Stock issued to such vendor. In December 2011, WRC paid $5,000 to such vendor. In March 2012, WRC paid the remaining
obligation of $15,000.



- 20 -







DALECO RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011



11. SUBSEQUENT EVENTS



Consulting Services and Interest due
a Licensor



On August 1, 2012, the Company paid $13,278
to a Licensor on balances due it on June 30, 2012 (see Note 1). The Licensor rescinded its July 23, 2012 notice of termination
of the limited license agreement.



EV&T Fees and Expenses



On August 8, 2012, the Company paid $13,110
to EV&T on balances due it as of June 30, 2012 (see Notes 1 and 5).



Employment Agreements



Blackstone - On July 31, 2012, the
Company extended the employment agreement of Mr. Blackstone (Vice President and Chief Accounting Officer) through October 4, 2013.
On August 8, 2012, the Company paid a $20,000 to Mr. Blackstone on balances due him as of June 30, 2012 (see Note 7).



Novinskie - On July 31, 2012, the Company
and Mr. Novinskie, President and Chief Financial Officer, agreed to an extension of Mr. Novinskie’s employment agreement
through September 30, 2013. The extension requires a modification of the employment agreement whereby such agreement was extended
through September 30, 2013.



Parrish – By action of the Board
of Directors on July 31, upon finalization of an employment agreement with Michael D. Parrish to be the Chief Executive Officer
of the Company, Mr. Parrish will be appointed a Director of the Company (effective May 18, 2012). The initial term of Mr. Parrish’s
employment will expire on November 20, 2012 unless certain performance targets have been achieved. Such targets include the obtainment
of at least $1 million of capital from a third party and cash-on-hand in an amount of at least $650,000 by November 1, 2012. The
agreement provides for base salary and escalations thereof upon the attainment of certain performance targets as well as renewal
provisions. Mr. Parrish was granted an option for the purchase of 1.2 million shares of Common Stock at $0.15 per share. Such option
vests 50% on each of the first and second anniversary dates of his employment agreement and expire on the third anniversary date.
Further, should certain performance benchmarks be met during the initial year of the agreement, Mr. Parrish shall be awarded 600,000
shares of Common Stock over a six month period. During the quarter ended June 30, 2012, the Company did not recognize any stock-based
compensation expense related to the agreement as a result of the contingencies specified in the agreement and it is not definitive.
The Company paid compensation to Mr. Parrish pursuant to an agreement between him and the Compensation Committee and such expense
is recognized in the financial statements for the periods ended June 30, 2012.



ZeoSure, LLC



On July 3, 2012, CAMI entered into an operating
agreement for ZeoSure LLC (“ZLLC”) as one of the LLC’s two managing members. ZLLC was formed for the purpose
of developing human consumption products including but not limited to detoxification and digestive supplements and human consumable
products utilizing CAPI’S Clinoptilolite zeolite mineral focusing on markets throughout the world with a primary emphasis
on markets in the United States and Asia. CAMI and SafeHatch LLC, an entity controlled by an individual affiliated with the Musser
Group, are the managing members and each owns 47.5% of ZLLC. The remaining 5% of ZLLC is owned by the Musser Group. The operating
agreement has not been ratified by the Audit Committee of the Board of Directors of the Company. The members of ZLLC intend to
seek initial capital of $1 million from third parties and enter into product marketing and distribution agreements with participants
active within the dietary supplements market in the next few months.



Pending Litigation (see Note 10)



On July 26, 2012, WRC and certain owners of
overriding royalty and working interests in oil and gas wells operated by WRC agreed to the general terms of a settlement agreement.
Pursuant to the settlement agreement’s general terms, WRC will pay $120,000 in cash for (i) settlement of all amounts due
from WRC to such certain owners and (ii) the acquisition of the working interest ownership position of the respective entities.
The parties will also enter into mutual releases and the litigation will be terminated with prejudice. The final settlement agreement
is being reviewed by the parties’ respective counsel prior to final execution.



- 21 -







DALECO
RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2012
AND 2011





Management’s Evaluation



Management performed an evaluation of Company
activity through the date the unaudited consolidated financial statements were prepared for issuance, and concluded that there
are no other significant subsequent events requiring disclosure.



- 22 -







| | Item 2. | Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
| | ------- | --------------------------------------------------------------------------------------



OVERVIEW



This
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters
that we consider being important in understanding the results of our operations for the three and nine months ended June 30, 2012
and our financial condition as of June 30, 2012. Our fiscal year begins on October 1 and ends on September 30. Unless otherwise
noted, references to "year" pertain to our fiscal year; for example, 2012 refers to fiscal 2012, which is the period
from October 1, 2011 to September 30, 2012. Unless otherwise noted, references to "quarter" pertain to a quarter
of our fiscal year; for example, the third quarter of 2012 refers to the three months in the period from April 1, 2012 to June
30, 2012 (the “current quarter”). In the discussion that follows, we analyze the results of our operations for the
three and nine months ended June 30, 2012, including the trends in our overall business, followed by a discussion of our financial
condition.



The
following discussion should be read in conjunction with our consolidated financial statements and the notes thereto, all included
elsewhere in this report. The forward-looking statements in this section and other parts of this report involve risks and uncertainties
including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption
"Forward-Looking Statements."



Results
of Operations



For the three and nine months ended June 30,
2012 and 2011:



|                                                                     |  | Three Months Ended June 30 |          |   | Nine Months Ended June 30 |  
|-------------------------------------------------------------------- |  | -------------------------- | -------- | - | ------------------------- | -
|                                                                     |  | 2012                       |          |   | 2011                      |  
|Oil and Gas Sales                                                    |  | $                          | 89,228   |   |                           | $
|Total Operating Revenues                                             |  | $                          | 165,854  |   |                           | $
|Gain on Sale of Oil and Gas Properties                               |  | $                          | -        |   |                           | $
|Net Income (Loss)                                                    |  | $                          | (303,484 | ) |                           | $
|                                                                     |  |                            |          |   |                           |  
|Oil and Gas Production and Cost Information:                         |  |                            |          |   |                           |  
|Production:                                                          |  |                            |          |   |                           |  
|Oil (Bbl)                                                            |  |                            | 537      |   |                           |  
|Gas (Mcf)                                                            |  |                            | 7,066    |   |                           |  
|Mcfe                                                                 |  |                            | 10,288   |   |                           |  
|Average Price:                                                       |  |                            |          |   |                           |  
|Oil (per Bbl)                                                        |  | $                          | 95.58    |   |                           | $
|Gas (per Mcf)                                                        |  | $                          | 5.36     |   |                           | $
|Mcfe                                                                 |  | $                          | 8.67     |   |                           | $
|                                                                     |  |                            |          |   |                           |  
|Lease Operating Expenses and Production and Severance Taxes per Mcfe |  | $                          | 7.18     |   |                           | $

_____

Bbl = One barrel of oil or condensate

Mcf = One thousand cubic feet

Mcfe = One thousand cubic feet
gas equivalent



- 23 -







CONSULTING SERVICES AGREEMENT



On February 25, 2011, the Company entered
into a Consulting Services Agreement with the Musser Group, LLC (“Musser Group”) to perform consulting services for
the Company through February 2013. The Company engaged the Musser Group, an independent contractor, to provide advisory and consulting
services to the Company. The Musser Group is engaged to provide (i) managed services; (ii) strategic business planning and implementation;
and (iii) assistance in directing and executing the implementation of any strategies approved by the Board of Directors of the
Company. The Musser Group’s primary focus is the analysis and validation of market opportunities for the commercialization
of products within the Company’s mineral segment. Its analysis and services are ongoing. See “COMMERCIALIZATION OF
EXISTING ASSETS” below.



The Company issued 2,400,000 shares of Common
Stock to individuals associated with the Musser Group in connection with the Consulting Services Agreement with the Musser Group.
Also, the Company issued to individuals associated with the Musser Group warrants for the purchase of 2,500,000 shares of Common
Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing
price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants
are exercisable through February 24, 2016. The Company filed a registration statement under the Securities Act of 1933 on Form
S-8 for the shares of Common Stock issued to individuals associated with the Musser Group. The Company determined the fair value
of the shares of Common Stock and the warrants issued to individuals associated with the Musser Group to be $735,153 and recorded
such amount as prepaid consulting fees. The prepaid consulting fees are being amortized over the life of the agreement.



OIL AND NATURAL GAS OPERATIONS



See Note 3 of Notes to Unaudited Consolidated
Financial Statements.



Oil and Gas Sales



Oil and Gas Sales decreased 4% to $89,228
for the current quarter from $93,011 for the third quarter of 2011. Oil and Gas Sales increased 12% to $289,997 for the three quarters
of 2012 from $259,119 for the three quarters of 2011. See the table above in respect to production, average prices and lease operating
expenses and production and severance taxes per Mcfe. The level of oil production experienced during the current fiscal periods
increased primarily as a result of four wells being brought back “on-line” (certain wells had been “off-line”
during portion of 2011 and 2012 for repair) which offset the anticipated decline in production from the wells. At June 30, 2012,
two wells in Texas were off-line awaiting repairs to certain mechanical items such as tubing, rods, down-hole pumps and/or pumping
units. Generally, a well is off-line for less than two months; however, rig availability from third party contractors impacts the
timing of the well work.



Gain on Sale of Oil and Gas Properties



On January 20, 2012, the Company entered into
a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas
leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe
permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the
amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing
to the Company.



Well Management Revenue



Well Management Revenue increased 3% to $73,489
for the current quarter from $71,440 for the third quarter of 2011. Well Management Revenue increased 1% to $216,368 for the three
quarters of 2012 from $214,319 for the three quarters of 2011. Such increases are a result of certain being brought back “on-line”
as discussed above. The amounts which may be charged by the Company for well management are set forth in the joint operating agreements
governing the wells operated by the Company.



Lease Operating Expenses and Production
and Severance Taxes



Lease Operating Expenses and Production and
Severance Taxes increased 91% to $73,905 for the current quarter from $38,756 for the third quarter of 2011. Such expenses and
taxes increased 36% to $166,833 for the three quarters of 2012 from $122,940 for the three quarters of 2011.The increases (from
the 2011 periods) in Lease Operating Expenses and Production and Severance Taxes per Mcfe are primarily the result of costs incurred
to restore production from certain wells as discussed above.



- 24 -







Depreciation, Depletion and Amortization
(“DD&A”) - Oil and Gas



DD&A – Oil and Gas totaled $15,000
and $24,644 for the current quarter and for the third quarter of 2011, respectively. DD&A – Oil & Gas totaled $45,000
for the three quarters of 2012 and $75,344 for the three quarters of 2011, respectively. Such decrease is primarily the result
of the upward revision of proved developed reserves at the end of 2011 resulting primarily from the increase in oil and gas prices
which the Company receives for its oil and gas production.



Minerals
Operations



See Note 4 of Notes to Unaudited Consolidated
Financial Statements.



The Company is an Exploration Stage company
in respect to its mineral holdings.



Minerals Sales



Minerals sales totaled $2,418 and $1,256 for
the current quarter and for the third quarter of 2011, respectively. Mineral sales totaled $4,951 for the three quarters of 2012
and $9,107 for the three quarters of 2011, respectively, and this decrease in mineral sales for the nine months ended June 30,
2012, resulted from no shipments of zeolite being made during 2012 in respect to the feed supplements.



Minerals Exploration Expenses



The Company did not incur minerals exploration
expenses during the periods ended June 30, 2012 and 2011. These expenses are primarily for costs associated with the exploration
and quantification of mineral resources and mineral reserves. Such expenses related to the kaolin reserves were the responsibility
of the Company’s partner in such project.



Minerals Operating Expenses and Other
Costs



Minerals operating expenses and other costs
totaled $3,608 and $23,694 for the current quarter and for the third quarter of 2011, respectively. Such expenses and costs totaled
$9,957 for the three quarters of 2012 and $33,988 for the three quarters of 2011, respectively. The fiscal 2011 periods include
$20,691 of expense relating to the fair value of a warrant granted to an engineering consultant for the purchase of 100,000 shares
of Common Stock of the Company.



DD&A - Minerals



DD&A - Minerals totaled $3,408 and $147,771
for the current quarter and for the third quarter of 2011, respectively. Such expenses and costs totaled $250,204 for the three
quarters of 2012 and $443,313 for the three quarters of 2011, respectively. Such amounts are amortization of Patent Rights and
Patents License Rights. The Company’s patent expired in February 2012. Once the Company produces commercial quantities of
any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.



DD&A
- Other



DD&A - Other totaled $1,459 and $4,227
for the three and nine months ended June 30, 2011, respectively. The related assets were fully depreciated as of the end of 2011.



General
and Administrative Expenses



General and administrative expenses totaled
$341,713 and $284,818 for the current quarter and for the third quarter of 2011, respectively. The Company recorded stock-based
compensation expense of $20,851 and $26,101 for the current quarter and for the third quarter of 2011, respectively. The
Company recorded amortization expense of$91,143 and $91,142 for the current quarterrelated
to the prepaid consulting fees paid to the Musser Group (see “Consulting Services Agreement” discussed above).



- 25 -







General and administrative expenses totaled
$980,615 for the three quarters of 2012 and $755,317 for the three quarters of 2011, respectively. The Company recorded stock-based
compensation expense of $80,025 for the three quarters of 2012 and $51,420 for the three quarters of 2011, respectively. The
Company recorded amortization expense of$274,430 for the three quarters of 2012 and $125,196 for the three quarters of
2011, respectively, related to the prepaid consulting fees paid to the Musser Group (see “Consulting
Services Agreement” discussed above).



During the third quarter of 2012, the Company
incurred increased compensation expense of $31,250 in connection with the arrangement with Mr. Parrish as discussed in note 11
of the Notes to Unaudited Consolidated Financial Statements.



Interest
Expense



Interest expense totaled $80,368 and $102,716
for the current quarter and for the third quarter of 2011, respectively. Interest expense totaled $243,741 for the three quarters
of 2012 and $242,306 for the three quarters of 2011, respectively.



During the first three quarters of 2011, the
Company recognized $7,154 as interest expense relating to the issuance of its Common Stock as discussed in Note 10 of the Notes
to Unaudited Consolidated Financial Statements.



During the three quarters of 2012 and 2011,
the Company recognized $29,222 and $19,951, respectively, as interest expense regarding the amortization
of discounts on debt issuances as discussed in Notes 5 and 6of the Notes to Unaudited Consolidated Financial Statements.



During the nine months ended June 30, 2011,
the Company recognized $25,857 as interest expense resulting from the beneficial conversion feature of the 7.25% Convertible Debentures.
The Debentures are discussed in Note 6 of the Notes to Unaudited Consolidated Financial Statements.



Gain
on debt forgiveness



During the third quarter of 2012, the Company
recognized gain on debt forgiveness of $43,655 as discussed in Note 5 of the Notes to Unaudited Consolidated Financial Statements.



Liquidity
and Capital Resources



Liquidity and Capital Resources



The Company’s cash flow used in operating
activities was $310,079 for the nine months ended June 30, 2012. Accounts payable decreased $142,768 during such period. Funds
have been and are being deployed in efforts to enhance the commercial viability of the Company’s existing resource assets,
to identify potential expansion opportunities and to retire obligations associated with the Company’s assets. The Company’s
net cash at June 30, 2012 totaled $464,286. See “Sale of Oil and Gas Property Leasehold Deep Rights” below.



During March 2012, the Board of Directors
of the Company (“Board’) created a sub-committee of the Board with oversight responsibilities in respect to the approval
and administration of the Company’s disbursement activities in light of the proceeds from the sale of certain oil and gas
properties (the “Sub-committee”). The Sub-committee is composed of three Directors (Messrs. Gilbert, Grady and Maxwell)
with Mr. Blackstone (Vice President and Chief Accounting Officer) reporting to the Sub-committee in respect to such matters.



See Note 8 of the Notes to Unaudited Consolidated
Financial Statements regarding the cumulative dividends in arrears of $1,911,914 at June 30, 2012, applicable to the Series B 8%
Cumulative Convertible Preferred Stock



As of June 30, 2012, the Company and certain
of its subsidiaries were in default of various obligations and certain debt obligations (see Notes to Unaudited Consolidated Financial
Statements and Notes 1, 6, 7, 9, 10 and 11 of the Notes to Consolidated Financial Statements included in the 2011 Annual Report).



The majority of the amounts below are owed
to related parties. Such related parties and EV&T are working with the Company to achieve the ultimate extinguishment of the
obligations as the Company attempts to achieve profitability within its mineral segment. See Note 11 of the Notes to Unaudited
Consolidated Financial Statements concerning payments to certain parties after June 30, 2012.



- 26 -







Such defaulted obligations (classified as
Current Liabilities in the accompanying Balance Sheet) at June 30, 2012 include the following:



|Amounts included in accounts payable:           |  |   |           | 
|----------------------------------------------- |  | - | --------- | 
|Consulting Services and Interest due a Licensor |  | $ | 42,009    | 
|Consulting Services – Blackstone                |  |   | 196,957   | 
|EV&T – fees, expenses and accrued interest      |  |   | 266,438   | 
|EV&T note payable and accrued interest          |  |   | 1,035,598 | 
|CAMI notes payable and accrued interest         |  |   | 931,875   | 
|Accrued salary expense                          |  |   | 687,018   | 
|Total                                           |  | $ | 3,159,895 | 



To obtain capital in the past, the Company’s
capital obtainment methods have included selling its interest in certain oil and gas properties, and borrowing funds from and issuing
Common Stock to related and unrelated parties, as well as utilizing joint venture structures. If the Company is not successful
in increasing its operating cash flows and the preceding financing methods are not available, the Company may not be able to sustain
its operations and may need to seek alternative actions to preserve shareholder value.



Liquidity is a measure of a Company’s
ability to access cash. The Company has historically addressed its long-term liquidity requirements through the issuance of equity
securities and borrowings or debt financing for certain activities. The Company estimates its capital needs to approximate $1 million
for the next four quarters and approximately $4 million over the next two years to satisfy debt payments to unrelated parties,
pay current operating costs and expenses and to fund the Company’s growth initiatives. The Company believes the related parties
will continue working with the Company to achieve the ultimate extinguishment of obligations due such parties.



At present, the Company does not have in place
a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the
need for such a credit facility. For desired acquisitions or project enhancements, the Company must seek project specific financing.
See Note 11 of the Notes to the Unaudited Consolidated Financial Statements regarding ZeoSure LLC. None of the Company’s
properties are encumbered.



The prices the Company receives for its oil
and gas and the level of production have a significant impact on the Company’s cash flows. The Company is unable to predict,
with any degree of certainty, the prices the Company will receive for its future oil and gas production and the success of the
Company’s exploration, exploitation and production activities. Increases in the sales of the Company’s minerals, which
to date have not been mined in substantial commercial quantities, will also affect cash flow.



In an effort to address the liquidity shortfall,
the Company continues its cost containment procedures which have included staff decreases, sold certain of its oil and gas properties,
and is evaluating the sale of certain additional oil and gas properties. It may take months and possibly longer to sell these properties
at a suitable price. The market is affected by many factors, such as general economic conditions, availability of financing, interest
rates and other factors, including supply and demand that are beyond our control. We cannot predict whether we will be able to
sell a property for the price or on terms acceptable to us or whether any price or other terms offered by a prospective purchaser
would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of any
property.



During July 2011, the Company entered into
a Settlement Agreement with Dov Amir (“Amir”), a former director of the Company, whereby, among other provisions, (a)
the Company issued 412,292 shares of Common Stock ($0.25 per share) in payment of a portion of amounts due to Amir on a note payable
($45,485) and Series A Preferred Stock Dividends ($59,338); (b) the option granted to Amir in December 2009 to purchase 500,000
shares of Common Stock became fully vested; (c) certain assets of Amir shall remain pledged as collateral for the Company’s
note payable to First Citizens Bank; and (d) the Company entered into a note payable to Amir for the balance of all amounts due
Amir ($391,154). The note matures on December 31, 2015 with interest at 4% per annum, compounded annually. The note does not require
any interim payments by the Company. Further, Amir was granted the right to convert any and all amounts due him under the note
into shares of Common Stock at a conversion price of $0.25 per share. During the third quarter of 2012, the Company made a payment
on the note as discussed in Note 6 of the Notes to Unaudited Consolidated Financial Statements.



- 27 -







During April 2012, the Company paid $50,000
in cash and issued of 158,290 shares of Common Stock in full satisfaction of a note due an affiliate of Carl A. Haessler, a Director,
as discussed in Note 5 of the Notes to Unaudited Consolidated Financial Statements.



During
May 2012, Carl Haessler, a Director, elected to convert 10,000 shares of Series B 8% Cumulative Convertible Preferred Stock into
80,000 shares of Common Stock at the conversion rate of $1.25 per share of Common Stock. Also, Mr. Haessler accepted 73,854 shares
of Common Stock as satisfaction for any and all dividends due him ($92,318 of which $88,319 were accrued) in respect to his direct holdings of 30,000 shares
of Series B 8% Cumulative Convertible Preferred Stock through the date of the conversion of 10,000 of such shares. See
Note 7 of the Notes to Unaudited Consolidated Financial Statements.



See Note 11 of the Notes to Unaudited Consolidated
Financial Statements regarding various working capital requirements as discussed therein.



Sale of Oil and Gas Property Leasehold
Deep Rights



On January 20, 2012, the Company entered into
a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas
leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe
permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the
amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing
to the Company. See Note 3 of the Notes to Unaudited Consolidated Financial Statements. The Company will use the proceeds for general
working capital purposes.



Commercialization of Existing Assets



The Company has identified fifteen (15) potential
development and redevelopment opportunities associated with its existing leasehold acreage in Texas. The economic viability and
development timing of these opportunities were evaluated in terms of the prevailing market conditions as part of the Company’s
annual reserve estimates. The development timing is impacted by producing wells as certain acreage is not available to be included
in a developmental unit until production from certain currently producing wells becomes uneconomic. At September 30, 2011, such
reserves were reclassified from proved to probable reserves as no progress was made during fiscal 2011 to convert such reserves
to proved developed reserves. The Company believes that the potential for the development of such locations will occur within the
next few years as a result of renewed interest in the area of its properties. The prevailing oil price and the development of properties
in “resource plays” in the area of the Company’s acreage are major factors contributing to such interest. At
September 30, 2011, the Company has assigned probable and possible reserves to the fifteen (15) potential developmental locations.
The Company is actively seeking financing of approximately $2.5 million for its share of the estimated drilling and completion
costs of such development opportunities. To obtain the capital necessary to develop these, the Company (1) continues to seek project
specific funding commitments and other capital funding alternatives and (2) is evaluating the sale of certain oil and gas producing
properties.



The Company continues to pursue plans to commercialize
its kaolin and zeolite projects which are critical for the Company to achieve profitability and establish the Company as a market
innovator in industrial minerals. Those plans have progressed from the data acquisition and analysis phase into ongoing mineral
processing and facility design phase. The Company and its current partner and potential other partners are actively investigating
various commercial applications for its mineral based products. The Company continues to focus on establishing business and or
financial relationships that will provide the necessary capital to effectively exploit its kaolin and zeolite mineral resource
holdings.



Zeolite



In respect to sanitary wastewater treatment
applications, the Company continues to supply material for use in a sequential batch reactor facility located in Pennsylvania and
the Company has provided material for a confirmation test of the use of its ReNuGen(TM) product in an alternate design
treatment plant. Certain small scale tests have progressed to the point where larger scalable pilot tests of commercial applications
for zeolite are in progress in respect to soil additives, animal waste treatment and treatment of industrial wastewaters.



- 28 -







In October, 2009, the Company entered into
an agreement to sell zeolite to be used in certain agricultural applications limited to feed supplements in a ten state area in
the south-central part of the US. The Company has made limited shipments since fiscal 2010. The development of this market has
been hampered as a result of economic and environmental factors affecting the purchaser. On August __, 2012, the Company gave notice
to the purchaser to terminate the agreement in October 2012 pursuant to the notice provision provided in the agreement. The Company
intends to seek alternatives for the sale of its zeolite to be used in agricultural applications. The Company anticipates that
it will continue to sell material but cannot predict when, or if, increased shipments might occur.



In February 2010, the Company entered into
a License Agreement concerning two US method patents for the treatment of wastewaters. Such patents utilize the Company’s
zeolite. The license applies to the US and covers the use of the technology in water, wastewater and waste treatment in animal
feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal
facilities, military bases and lands administered by the US Bureau of Indian Affairs. The Company issued 140,000 shares of its
Common Stock in consideration for the License Agreement. The Company recorded $40,907 as Patents License Rights based on an average
price of $0.29 per share.



On April 8, 2011, in connection with the efforts
of the Musser Group, the Company entered into a Material Supply and Joint Venture Agreement between CAMI (wholly-owned subsidiary)
and VitaminSpice, Inc. (“VSI”) pursuant to which CAMI agrees to supply Clinoptilolite (zeolite) to VSI in connection
with the introduction by VSI of detoxification products into targeted geographic markets. VSI is obligated to utilize CAMI as its
sole supplier of Clinoptilolite. The agreement does not specify any minimum quantity supply requirements of CAMI. In addition to
an initial price per ton for Clinoptilolite to be sold to VSI, CAMI will share in the profits from the sales of such products by
VSI. CAMI has provided material to VSI for use in product and market strategy development, as well as potential clinical studies.
The Company made no shipments of product to VSI and the Company has not received any orders from VSI. VSI has not met certain performance
standards as set forth in the agreement. On April 13, 2012, the Company gave notice to VSI and terminated the agreement pursuant
to the provision in respect to termination for cause.



On July 3, 2012, CAMI entered into an operating
agreement for ZeoSure LLC (“ZLLC”) as one of the LLC’s two managing members. ZLLC was formed for the purpose
of developing human consumption products including but not limited to detoxification and digestive supplements and human consumable
products utilizing CAPI’S Clinoptilolite zeolite mineral focusing on markets throughout the world with a primary emphasis
on markets in the United States and Asia. CAMI and SafeHatch LLC, an entity controlled by an individual affiliated with the Musser
Group, are the managing members and each owns 47.5% of ZLLC. The remaining 5% of ZLLC is owned by the Musser Group. The operating
agreement has not been ratified by the Audit Committee of the Board of Directors of the Company. The members of ZLLC intend to
seek initial capital of $1 million from third parties and enter into product marketing and distribution agreements with participants
active within the dietary supplements market in the next few months..



Kaolin



The efforts of the Company and Tecumseh Professional
Associates LLC (“TPA”) relative to the Sierra Kaolin deposit are ongoing. The venture’s efforts to commercialize
the Sierra Kaolin deposit have focused on an initial target area encompassing approximately 32 acres out of the project’s
2,740 acres. The test minerals extracted from the target area have been processed into product formulations determined by independent
consultants to be suitable (a) for coatings, fillers and pigments for use within the paint and paper manufacturing industries,
and (b) as an additive in cement formulations. The analysis results of the processed minerals with respect to its physical properties
including brightness, color, opacity, strength, and oil absorption have indicated that commercially viable products can be produced
from the deposit’s extracted minerals.



In December 2009, the Sierra Kaolin Open Pit
Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations
was approved. Mine site plans have been prepared to facilitate planned extraction operations. Since receiving project approval,
the venture, with the assistance of its consultants, has made technical presentations of the product formulations to entities active
(a) in the specialty cement applications and (b) on both the demand and supply sides of the coatings, fillers and pigments sectors
of the paint and paper industries. While the feedback from these presentations has been encouraging, market conditions within the
paper and housing industries have not been favorable; however, interest in the Sierra Kaolin deposit’s minerals for use in
meta-kaolin applications has remained favorable. As such the project manager is focusing its commercialization efforts in this
area.



During the first three quarters of 2012, in
addition to the meta-kaolin applications, because of its natural brightness, interest has been expressed relative to the use of
the Sierra Kaolin material as a possible economic substitute and/or extender for titanium oxide within the filter and coating industries.
TPA has also been in discussions with entities within the mining sector relative to other joint venture opportunities involving
the mineral claims controlled by the Sierra Kaolin project. To date, the discussions have been exploratory in nature.



- 29 -







Off-balance
Sheet Arrangements



The Company has no “off-balance sheet
arrangements” and does not expect to enter into any such arrangements in the foreseeable future. However, the request for
project financing for ZeoSure LLC is expected to be presented to potential third parties in the next few weeks and management of
the Company will evaluate alternative financing structures as part of any negotiations with those potential sources of capital.



CRITICAL ACCOUNTING
POLICIES



There have been no changes in significant
accounting policies from those disclosed in the 2011 Annual Report on Form 10-K.



RECENT Accounting
PRONOUNCEMENTS



See Note 2 of the Notes
to Unaudited Consolidated Financial Statements.



FORWARD LOOKING STATEMENTS



The forward-looking statements in this section
and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies,
and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements
as a result of various factors. See the “CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS” contained on page
3 of this Quarterly Report on Form 10-Q.



All forward-looking statements speak only
as of the date made. All subsequent forward-looking statements are expressly qualified in their entirety by the cautionary statements
above. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement or reflect
events or circumstances after the date on which the forward-looking statement is made, or to reflect the occurrence (or non-occurrence)
of anticipated (or unanticipated) events or circumstances.



Item 3.
Quantitative and Qualitative Disclosures About Market Risk.



None.



Item 4. Controls and Procedures.



Based on management’s evaluation (with
the participation of our Interim Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by this
report, our Interim CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to provide reasonable assurance
that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated
and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.



There were no changes in our internal controls
over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.



Code of Ethics



The Board of Directors of the Company has
adopted a Code of Ethics (see Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September
30, 2007) for all of the Company's employees, officers and Directors. Each officer and Director of the Company annually affirms
that he has read the Company’s Code of Ethics and agrees to be bound thereby.



- 30 -







PART II. OTHER INFORMATION



Item 1. Legal
Proceedings.



None.



Item 1A. Risk
Factors.



Not required for smaller reporting companies.



Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.



Recent Sales of Unregistered Securities





Settlement Agreement & Convertible
Note Payable



On July 12, 2011, the Company entered into
a Settlement Agreement with Dov Amir (“Amir”), a former director of the Company, whereby, among other provisions, (a)
the Company issued 412,292 shares of Common Stock ($0.25 per share) in payment of a portion of amounts due to Amir on a note payable
($45,485) and Series A Preferred Stock Dividends ($59,338); (b) the option granted to Amir in December 2009 to purchase 500,000
shares of Common Stock became fully vested; (c) certain assets of Amir shall remain pledged as collateral for the Company’s
note payable to First Citizens Bank; and (d) the Company entered into a note payable to Amir for the balance of all amounts due
Amir ($391,154). The note matures on December 31, 2015 with interest at 4% per annum, compounded annually. The note does not require
any interim payments by the Company. Further, Amir was granted the right to convert any and all amounts due him under the note
into shares of Common Stock at a conversion price of $0.25 per share.



During April 2012, the Board and the Audit
Committee approved and the Company paid $70,000 in cash and issued 140,000 shares of Common Stock to Amir in payment of interest
due of $11,471 and a $128,529 reduction in the principal balance of the note. See the above discussion regarding the Company’s
note payable to First Citizens Bank. The total consideration (cash and common stock) of $93,800 was $46,200 less than the $140,000
of total principal reduction and interest paid; however, the total consideration paid of $93,800 was $1,400 less than the $95,200
if-converted value of the principal and interest. The if-converted value was determined based on the conversion price of $0.25
per share per the terms of the note and valuing the 560,000 if-converted shares at $0.17 per share.



Payment Related to a CAMI Note Payable



During April 2012, the Board and the Audit
Committee approved the payment of $50,000 in cash and the issuance of 158,290 shares of Common Stock in full satisfaction of a
note due an affiliate of Mr. Haessler, a Director. The note had a principal balance $58,938 and accrued and unpaid interest related
to such note totaled $60,044 at the time of repayment. The Company valued the stock at $25,327 based on the closing price of $0.16
per share. The total consideration payment (cash and common stock) of $75,327 was $43,655 less than the $118,982 of principal and
interest owed by the Company.



Shares Issued in Satisfaction of Dividend
Payment Obligation Associated with Series B 8% Cumulative Convertible Preferred Stock



During May 2012, Carl Haessler, a Director,
elected to convert 10,000 shares of Series B 8% Cumulative Convertible Preferred Stock into 80,000 registered shares of Common
Stock at the conversion rate of $1.25 per share of Common Stock. Also, Mr. Haessler accepted 73,854 unregistered shares of Common
Stock as satisfaction for any and all dividends due him ($92,318 of which $88,319 were accrued) in respect to his direct holdings of 30,000 shares of Series
B 8% Cumulative Convertible Preferred Stock through the date of the conversion of 10,000 of such shares.



Options and Warrants



There were no
options awarded or warrants granted for the purchase of shares of Common Stock or Preferred Stock during the nine months ended
June 30, 2012, nor were any options or warrants exercised.



- 31 -







Options to purchase 2,350,000 shares of Common
Stock are outstanding as of June 30, 2012. The exercise prices for the options range from $0.21 per share to $0.28 per share (average
exercise price of $0.22 per share).



At June 30, 2012, warrants for the purchase
of 3,100,000 shares of stock at an average exercise price of $0.15 per share are outstanding.



Issuer Purchases of Equity Securities



The Company does not have a stock purchase
program for its equity securities.



| |  | Item 3. Defaults Upon Senior Securities.
| |  | ----------------------------------------



| | a) | The Company is in default of certain obligations as discussed in Note 1 of the Notes to Unaudited
Consolidated Financial Statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------



| | b) | The arrearage in respect to dividends on Series B Preferred Stock totals $1,911,914 at June 30,
2012.
| | -- | -----------------------------------------------------------------------------------------------------



Item
4. Mine Safety Disclosures.



| |  | None.
| |  | -----



Item 5. Other
Information.



Employment Agreements



Blackstone - On July 31, 2012, the
Company extended the employment agreement of Mr. Blackstone (Vice President and Chief Accounting Officer) through October 4, 2013.



Novinskie - On July 31, 2012, the Company
and Mr. Novinskie, President and Chief Financial Officer, agreed to an extension of Mr. Novinskie’s employment agreement
through September 30, 2013. The extension requires a modification of the employment agreement whereby such agreement was extended
through September 30, 2013.



Parrish – By action of the Board
of Directors on July 31, upon finalization of an employment agreement with Michael D. Parrish to be the Chief Executive Officer
of the Company, Mr. Parrish will be appointed a Director of the Company (effective May 18, 2012). The initial term of Mr. Parrish’s
employment will expire on November 20, 2012 unless certain performance targets have been achieved. Such targets include the obtainment
of at least $1 million of capital from a third party and cash-on-hand in an amount of at least $650,000 by November 1, 2012. The
agreement provides for base salary and escalations thereof upon the attainment of certain performance targets as well as renewal
provisions. Mr. Parrish was granted an option for the purchase of 1.2 million shares of Common Stock at $0.15 per share. Such option
vests 50% on each of the first and second anniversary dates of his employment agreement and expire on the third anniversary date.
Further, should certain performance benchmarks be met during the initial year of the agreement, Mr. Parrish shall be awarded 600,000
shares of Common Stock over a six month period. During the quarter ended June 30, 2012, the Company did not recognize any stock-based
compensation expense related to the agreement as a result of the contingencies specified in the agreement and it is not definitive.
The Company paid compensation to Mr. Parrish pursuant to an agreement between him and the Compensation Committee and such expense
is recognized in the financial statements for the periods ended June 30, 2012.



ZeoSure, LLC



On July 3, 2012, CAMI entered into an operating
agreement for ZeoSure LLC (“ZLLC”) as one of the LLC’s two managing members. ZLLC was formed for the purpose
of developing human consumption products including but not limited to detoxification and digestive supplements and human consumable
products utilizing CAPI’S Clinoptilolite zeolite mineral focusing on markets throughout the world with a primary emphasis
on markets in the United States and Asia. CAMI and SafeHatch LLC, an entity controlled by an individual affiliated with the Musser
Group, are the managing members and each owns 47.5% of ZLLC. The remaining 5% of ZLLC is owned by the Musser Group. The operating
agreement has not been ratified by the Audit Committee of the Board of Directors of the Company. The members of ZLLC intend to
seek initial capital of $1 million from third parties and enter into product marketing and distribution agreements with participants
active within the dietary supplements market in the next few months.



- 32 -







Item 6. Exhibits.



|Exhibit Number                                                                                                                                        |  | Description                                                                                                                                                   |  | Located At                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------
|10.24                                                                                                                                                 |  | Notice of Waiver Date, effective April 3, 2012, concerning Employment Agreement of Gary J. Novinskie (dated November 30, 2001 – see Exhibits 10.5 and 10.26)  |  | Incorporated by reference to Exhibit 10.24 to the Quarterly report on Form 10-Q for the quarter ended March 31, 2012
|10.25                                                                                                                                                 |  | Notice of Waiver Date, effective April 3, 2012, concerning Employment Agreement of Richard W. Blackstone (dated October 4, 2006 – see Exhibits 10.20 and10.6) |  | Incorporated by reference to Exhibit 10.25 to the Quarterly report on Form 10-Q for the quarter ended March 31, 2012
|31.1                                                                                                                                                  |  | Certification of President (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            |  | Filed Herewith                                                                                                      
|31.2                                                                                                                                                  |  | Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              |  | Filed Herewith                                                                                                      
|32.1                                                                                                                                                  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                        |  | Filed Herewith                                                                                                      
|                                                                                                                                                      |  |                                                                                                                                                               |  |                                                                                                                     
|The Registrant incorporates by reference its Exhibit List as attached to its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.



- 33 -







SIGNATURES



Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



|                        | DALECO RESOURCES CORPORATION                                 
|----------------------- | -------------------------------------------------------------
|                        | (Registrant)                                                 
|                        |                                                              
|Dated:  August 20, 2012 | /s/ Gary J. Novinskie                                        
|                        | Gary J. Novinskie                                            
|                        | President, Chief Financial Officer and Director              
|                        | (Principal Executive Officer and Principal Financial Officer)
|                        |                                                              
|Dated:  August 20, 2012 | /s/ Richard W. Blackstone                                    
|                        | Richard W. Blackstone                                        
|                        | Vice President and Chief Accounting Officer                  
|                        | (Principal Accounting Officer)                               



- 34 -