**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D.C. 20549**

**FORM      10-QSB**

**(Mark      one)**

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

**For      the quarterly period ended **
**December      31, 2006**

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

**For      the transition period from ___________ to ___________**

**Commission      File Number 0-12214**

**DALECO      RESOURCES CORPORATION**

| **Nevada**(State                or other jurisdiction ofincorporation                or organization) | **23-2860734**(IRS                EmployerIdentification                No.) |
|-------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|

| **17                Wilmont Mews, 5****th****Floor****West                Chester, Pennsylvania 19382**(Address                of principal executive offices) |  **(610)                429-0181**(Issuer’s                telephone number) |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|

**APPLICABLE      ONLY TO CORPORATE ISSUERS**

----

**DALECO      RESOURCES CORPORATION AND SUBSIDIARIES**

**TABLE      OF CONTENTS**

|                                              |                                                                                                                      | **PAGE** |
|---------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------|
| **PART                I - FINANCIAL INFORMATION** |                                                                                                                      |     |
|                                              |                                                                                                                      |     |   |
| ITEM                1.                            | CONSOLIDATED                FINANCIAL STATEMENTS                                                                          |     | 3 |
|                                              | Consolidated                Balance Sheets                                                                                |     | 3 |
|                                              | Consolidated                Statements of Income                                                                          |     | 5 |
|                                              | Consolidated                Statements of Cash Flows                                                                      |     | 6 |
|                                              | Consolidated                Statements of Shareholders’ Equity                                                      |     | 7 |
|                                              | Notes                to Consolidated Financial Statements                                                                 |     | 8 |
|                                              |                                                                                                                      |     |   |
| ITEM                2.                            | MANAGEMENT’S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                OPERATIONS |     | 13 |
|                                              |                                                                                                                      |     |   |
| ITEM                3.                            | CONTROLS                AND PROCEDURES                                                                                    |     | 18 |
|                                              |                                                                                                                      |     |   |
| **PART                II - OTHER INFORMATION**    |                                                                                                                      |     |
|                                              |                                                                                                                      |     |   |
| ITEM                1.                            | LEGAL                PROCEEDINGS                                                                                          |     | 20 |
|                                              |                                                                                                                      |     |   |
| ITEM                2.                            | UNREGISTERED                SALE OF EQUITY SECURITIES AND USE OF PROCEEDS                                                 |     | 20 |
|                                              |                                                                                                                      |     |   |
| ITEM                3.                            | DEFAULTS                UPON SENIOR SECURITIES                                                                            |     | 21 |
|                                              |                                                                                                                      |     |   |
| ITEM                4.                            | SUBMISSION                OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                        |     | 21 |
|                                              |                                                                                                                      |     |   |
| ITEM                5.                            | OTHER                INFORMATION                                                                                          |     | 21 |
|                                              |                                                                                                                      |     |   |
| ITEM                6.                            | EXHIBITS                                                                                                                  |     | 21 |
|                                              |                                                                                                                      |     |   |
| **SIGNATURES**                                    |                                                                                                                      | 22       |

----

**PART        I - FINANCIAL INFORMATION**

**Item        1. Consolidated Financial Statements.**

**DALECO        RESOURCES CORPORATION**

**CONSOLIDATED      BALANCE SHEETS**

**(UNAUDITED)**

|                                                                                                       |   | **December                  31****2006** |              | **September                  30****2006** |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-------------------|-------------------------------------------|--------|
| **ASSETS**                                                                                                 |   |                                     | (unaudited)  |                                      |   |   |   |
| **Current                  Assets:**                                                                       |   |                                     |              |                                      |   |   |   |
| Cash                  and Equivalents                                                                      |   | $                                        | 374,572           |                                      | $      | 463,842 |   |
| Accounts                  Receivable - net of allowance for doubtful accounts of                  $150,000 |   |                                     | 517,797           |                                      |   | 394,323 |   |
| Other                  Current Assets                                                                      |   |                                     | 6,700             |                                      |   | 8,813 |   |
| Total                  Current Assets                                                                      |   |                                     | 899,069           |                                      |   | 866,978 |   |
| **Other                  Assets:**                                                                         |   |                                     |              |                                      |   |   |   |
| Equity                  Placement Costs                                                                    |   |                                     | 35,750            |                                      |   | 35,750 |   |
| Accumulated                  Amortization of Equity Placement Costs                                        |   |                                     | (16,111           | )                                         |   | (13,282 | ) |
| Net                  Equity Placement Costs                                                                |   |                                     | 19,639            |                                      |   | 22,468 |   |
| Securities                  Available for Future Sale                                                      |   |                                     | 19,001            |                                      |   | 38,001 |   |
| Prepaid                  Mineral Royalties –                  Long-term                              |   |                                     | 749,835           |                                      |   | 719,835 |   |
| Notes                  Receivable                                                                          |   |                                     | 576,000           |                                      |   | 576,000 |   |
| Interest                  Receivable                                                                       |   |                                     | 61,533            |                                      |   | 49,556 |   |
| Total                  Other Assets                                                                        |   |                                     | 1,426,008         |                                      |   | 1,405,860 |   |
| **Fixed                  Assets:**                                                                         |   |                                     |              |                                      |   |   |   |
| Oil                  and Gas Properties                                                                    |   |                                     | 5,346,966         |                                      |   | 5,324,222 |   |
| Accumulated                  Depreciation, Depletion and Amortization                                      |   |                                     | (4,194,992        | )                                         |   | (4,138,292 | ) |
| Net                  Oil and Gas Properties                                                                |   |                                     | 1,151,974         |                                      |   | 1,185,930 |   |
| Mineral                  Properties                                                                        |   |                                     | 12,609,100        |                                      |   | 12,609,100 |   |
| Accumulated                  Depreciation, Depletion and Amortization                                      |   |                                     | 650,000           |                                      |   | (600,000 | ) |
| Net                  Mineral Properties                                                                    |   |                                     | 11,959,100        |                                      |   | 12,009,100 |   |
| Technology                  and Patent Rights                                                              |   |                                     | 6,594,500         |                                      |   | 6,594,500 |   |
| Accumulated                  Amortization                                                                  |   |                                     | (3,611,623        |                                      |   | (3,467,260 | ) |
| Net                  Technology and Patent Rights                                                          |   |                                     | 2,982,877         |                                      |   | 3,127,240 |   |
| Equipment,                  Furniture and Fixtures                                                         |   |                                     | 191,151           |                                      |   | 162,708 |   |
| Accumulated                  Depreciation                                                                  |   |                                     | (158,624          | )                                         |   | (156,782 | ) |
| Net                  Equipment, Furniture and Fixtures                                                     |   |                                     | 32,527            |                                      |   | 5,926 |   |
| Total                  Fixed Assets                                                                        |   |                                     | 16,126,478        |                                      |   | 16,328,196 |   |
| **TOTAL                  ASSETS**                                                                          |   | $                                        | 18,451,555        |                                      | $      | 18,601,034 |   |

----

**DALECO        RESOURCES CORPORATION**

**CONSOLIDATED        BALANCE SHEETS**

**(UNAUDITED)**

|                                                                                                                                                                                          |   | **December                  31****2006** |              | **September                  30****2006** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-------------------|-------------------------------------------|--------|
| **LIABILITIES                  AND SHAREHOLDERS’ EQUITY**                                                                                                                               |   |                                     | (unaudited)  |                                      |   |   |   |
| **Current                  Liabilities:**                                                                                                                                                     |   |                                     |              |                                      |   |   |   |
| Accounts                  Payable                                                                                                                                                             |   | $                                        | 1,392,319         |                                      | $      | 1,142,398 |   |
| Federal                  Income Taxes Payable                                                                                                                                                 |   |                                     | 86,046            |                                      |   | 86,046 |   |
| Note                  Payable                                                                                                                                                                 |   |                                     | 0                 |                                      |   | 35,284 |   |
| Note                  Payable – Related Party                                                                                                                                           |   |                                     | 45,485            |                                      |   | 45,485 |   |
| EV&T                  Note – Current Portion                                                                                                                                        |   |                                     | 156,000           |                                      |   | 156,000 |   |
| Note                  Payable – First Regional                                                                                                                                          |   |                                     | 100,000           |                                      |   | 100,000 |   |
| CAMI                  Note                                                                                                                                                                    |   |                                     | 514,881           |                                      |   | 514,881 |   |
| Accrued                  Interest Expense                                                                                                                                                     |   |                                     | 430,470           |                                      |   | 420,172 |   |
| Accrued                  Dividends Payable                                                                                                                                                    |   |                                     | 1,602,915         |                                      |   | 1,802,915 |   |
| Accrued                  Expense Reimbursements                                                                                                                                               |   |                                     | 62,930            |                                      |   | 100,446 |   |
| Accrued                  Bonus Expense                                                                                                                                                        |   |                                     | 80,000            |                                      |   | 0 |   |
| Accrued                  Salary Expense                                                                                                                                                       |   |                                     | 900,951           |                                      |   | 904,267 |   |
| ** **Total                  Current Liabilities                                                                                                                                          |   |                                     | 5,371,997         |                                      |   | 5,307,894 |   |
| **Long-term                  Liabilities:**                                                                                                                                                   |   |                                     |              |                                      |   |   |   |
| Long-term                  Debt - EV&T                                                                                                                                                    |   |                                     | 468,414           |                                      |   | 496,524 |   |
|  **TOTAL                  LIABILITIES**                                                                                                                                                  |   |                                     | 5,840,411         |                                      |   | 5,804,418 |   |
|                                                                                                                                                                                          |   |                                     |              |                                      |   |   |   |
| **SHAREHOLDERS’                  EQUITY:**                                                                                                                                              |   |                                     |              |                                      |   |   |   |
| Preferred                  Stock – 20,000,000 shares authorized                                                                                                                         |   |                                     |              |                                      |   |   |   |
| Series                  B Preferred Stock (outstanding: December 31, 2006 - 145,000 shares;                  September 30, 2006 – 165,000 shares)                                       |   |                                     | 1,450             |                                      |   | 1,650 |   |
| Common                  Stock – 100,000,000 shares authorized (outstanding: December 31, 2006 –                  42,354,676 shares; September 30, 2006 – 41,423,635 shares) |   |                                     | 423,547           |                                      |   | 414,236 |   |
| Additional                  Paid in Capital                                                                                                                                                   |   |                                     | 44,359,401        |                                      |   | 43,759,251 |   |
| Retained                  Earnings (Deficit)                                                                                                                                                  |   |                                     | (32,007,625       | )                                         |   | (31,231,893 | ) |
| Accumulated                  Other Comprehensive Income (Loss)                                                                                                                                |   |                                     | (165,629          | )                                         |   | (146,629 | ) |
| **TOTAL                  SHAREHOLDERS’ EQUITY**                                                                                                                                         |   |                                     | 12,611,144        |                                      |   | 12,796,616 |   |
|                                                                                                                                                                                          |   |                                     |              |                                      |   |   |   |
| **TOTAL                  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                         |   | $                                        | 18,451,555        |                                      | $      | 18,601,034 |   |

----

**DALECO        RESOURCES CORPORATION**

**CONSOLIDATED        STATEMENTS OF INCOME**

**FOR        THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 **

**(UNAUDITED)**

|                                                                                                                                                                                                                                                                          |   | **2006** |      | **2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| **Revenues:**                                                                                                                                                                                                                                                                 |   |     |      |     |   |   |   |
| Oil                  and Gas Sales                                                                                                                                                                                                                                            |   | $        | 213,039   |     | $      | 411,343 |   |
| Royalty                  Receipts                                                                                                                                                                                                                                             |   |     | 10,800    |     |   | 19,236 |   |
| Mineral                  Sales                                                                                                                                                                                                                                                |   |     | 5,700     |     |   | 8,336 |   |
| Well                  Management Revenue                                                                                                                                                                                                                                      |   |     | 63,878    |     |   | 40,006 |   |
| Total                  Operating Revenues                                                                                                                                                                                                                                     |   |     | 293,417   |     |   | 478,921 |   |
| **Expenses:**                                                                                                                                                                                                                                                                 |   |     |      |     |   |   |   |
| Lease                  Operating Expenses - Oil and Gas                                                                                                                                                                                                                       |   |     | 155,699   |     |   | 122,191 |   |
| Lease                  Operating Expenses - Minerals                                                                                                                                                                                                                          |   |     | 15,536    |     |   | 9,583 |   |
| Production                  and Severance Taxes                                                                                                                                                                                                                               |   |     | 18,227    |     |   | 33,646 |   |
| Depreciation,                  Depletion and Amortization                                                                                                                                                                                                                     |   |     | 252,905   |     |   | 348,005 |   |
| Third                  Party Distributions                                                                                                                                                                                                                                    |   |     | 4,456     |     |   | 27,636 |   |
| Stock                  Based Compensation Expense                                                                                                                                                                                                                             |   |     | 139,000   |     |   | 0 |   |
| Bonus                  Expense                                                                                                                                                                                                                                                |   |     | 80,000    |     |   | 0 |   |
| General                  and Administrative Expenses                                                                                                                                                                                                                          |   |     | 255,128   |     |   | 202,392 |   |
| Legal                  and Professional Fees and Expenses                                                                                                                                                                                                                     |   |     | 135,323   |     |   | 75,063 |   |
| Shareholder                  Information Expenses                                                                                                                                                                                                                             |   |     | 3,213     |     |   | 6,898 |   |
| Amortization                  of Debt Placement Costs                                                                                                                                                                                                                         |   |     | 0         |     |   | 31,164 |   |
| Amortization                  of Equity Placement Costs                                                                                                                                                                                                                       |   |     | 2,829     |     |   | 2,470 |   |
| Total                  Expenses                                                                                                                                                                                                                                               |   |     | 1,062,316 |     |   | 859,048 |   |
| **Other                  Income (Expense):**                                                                                                                                                                                                                                  |   |     |      |     |   |   |   |
| Interest                  Income                                                                                                                                                                                                                                              |   |     | 12,649    |     |   | 0 |   |
| Interest                  Expense                                                                                                                                                                                                                                             |   |     | (19,482   | )        |   | (31,491 | ) |
| Cost                  of Other Services Performed                                                                                                                                                                                                                             |   |     | 0         |     |   | (311,400 | ) |
| Total                  Other Income (Expense), Net                                                                                                                                                                                                                            |   |     | (6,833    | )        |   | (342,891 | ) |
| Income                  (Loss) Before Income Taxes                                                                                                                                                                                                                            |   |     | (775,732  | )        |   | (723,018 | ) |
| Taxes                  based on Income                                                                                                                                                                                                                                        |   |     | 0         |     |   | 0 |   |
| Net                  Income (Loss)                                                                                                                                                                                                                                            |   |     | (775,732  | )        |   | (723,018 | ) |
| Less                  Dividends (Property)                                                                                                                                                                                                                                    |   |     | 0         |     |   | 0 |   |
| Net                  Income (Loss) Attributable to Common Shareholders                                                                                                                                                                                                        |   | $        | (775,732  | )        | $      | (723,018 | ) |
| Basic                  and Fully Diluted Net Income (Loss) per Share (based on weighted-average                  outstanding Common Stock of 41,973,216 and 40,396,601 for the three                  months                  ended December 31, 2006 and 2005, respectively) |   | $        | (0.02     | )        | $      | (0.02 | ) |

----

**DALECO        RESOURCES CORPORATION**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

**FOR        THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 **

**(UNAUDITED)**

|                                                                                                                                                  |   | **2006** |     | **2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| **Cash                  Flows From Operating Activities:**                                                                                            |   |     |     |     |   |   |   |
| Net                  Income (Loss)                                                                                                                    |   | $        | (775,732 | )        | $      | (723,018 | ) |
| Adjustments                  to Reconcile Net Income (Loss) to Net Cash Provided by (Used in)                  Operating                  Activities: |   |     |     |     |   |   |   |
| Depreciation,                  Depletion and Amortization                                                                                             |   |     | 252,905  |     |   | 348,005 |   |
| Amortization                  of Debt and Equity Placement Costs                                                                                      |   |     | 2,829    |     |   | 33,634 |   |
| Bonus                  Expense                                                                                                                        |   |     | 80,000   |     |   | 0 |   |
| Stock                  Based Compensation Expense                                                                                                     |   |     | 139,000  |     |   | 0 |   |
| Non-cash                  Charge for Issuance of Securities                                                                                           |   |     | 0        |     |   | 311,400 |   |
| Changes                  in operating assets and liabilities:                                                                                         |   |     |     |     |   |   |   |
| Other                  Current Assets                                                                                                                 |   |     | 2,113    |     |   | 0 |   |
| Pre-paid                  Royalties                                                                                                                   |   |     | (30,000  | )        |   | 0 |   |
| Receivables                                                                                                                                           |   |     | (135,451 | )        |   | 84,076 |   |
| Accounts                  Payable                                                                                                                     |   |     | 249,921  |     |   | 271,794 |   |
| Other                  Accrued Expenses                                                                                                               |   |     | (40,832  | )        |   | (16,746 | ) |
| Net                  Cash Provided by (Used in) Operating Activities                                                                                  |   |     | (255,247 | )        |   | 309,145 |   |
| **Cash                  Flows From Investing Activities:**                                                                                            |   |     |     |     |   |   |   |
| Additions                  to Property                                                                                                                |   |     | (51,187  | )        |   | (20,000 | ) |
| Net                  Cash Used in Investing Activities                                                                                                |   |     | (51,187  | )        |   | (20,000 | ) |
| **Cash                  Flows From Financing Activities:**                                                                                            |   |     |     |     |   |   |   |
| Increase                  (decrease) in Notes due Related Parties                                                                                     |   |     | 0        |     |   | (25,000 | ) |
| Increase                  (decrease) in Other Notes Due and Debt                                                                                      |   |     | (63,394  | )        |   | (155,489 | ) |
| Increase                  (decrease) in Accrued Interest                                                                                              |   |     | 10,298   |     |   | 700 |   |
| Proceeds                  of Equity Issuances                                                                                                         |   |     | 270,260  |     |   | 25,000 |   |
| Net                  Cash Provided by (Used in) Financing Activities                                                                                  |   |     | 217,164  |     |   | (154,789 | ) |
| Net                  Change in Cash and Equivalents                                                                                                   |   |     | (89,270  | )        |   | 134,356 |   |
| Cash                  and Equivalents at Beginning of year                                                                                            |   |     | 463,842  |     |   | 1,550,962 |   |
| Cash                  and Equivalents at End of Period                                                                                                |   | $        | 374,572  |     | $      | 1,685,318 |   |
|                                                                                                                                                  |   |     |     |     |   |   |   |
| **Supplemental                  Information:**                                                                                                        |   |     |     |     |   |   |   |
| Income                  Taxes Paid                                                                                                                    |   | $        | 0        |     | $      | 0 |   |
| Interest                  Paid                                                                                                                        |   | $        | 9,184    |     | $      | 30,791 |   |
| **Supplemental                  Disclosure of Non-cash Transactions:**                                                                                |   |     |     |     |   |   |   |
| Conversion                  of Debt to Equity                                                                                                         |   | $        | 0        |     | $      | 25,000 |   |
| Issuance                  of Common Stock for Services Performed                                                                                      |   | $        | 0        |     | $      | 311,400 |   |
| Payment                  of Dividends in-kind                                                                                                         |   | $        | 200,000  |     | $      | 0 |   |

----

**DALECO        RESOURCES CORPORATION**

**CONSOLIDATED          STATEMENTS OF SHAREHOLDERS’ EQUITY**

**FOR        THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 **

**(UNAUDITED)**

|                                                                |   | **2006** |            | **2005** |   |
|---------------------------------------------------------------------|--------|----------|-----------------|----------|--------|
| **Common                  Stock Outstanding:**                      |   |     |            |     |   |   |   |
| Shares:                                                             |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   |     | 41,423,635      |     |   | 40,343,043 |   |
| Issued                                                              |   |     | 931,041         |     |   | 645,455 |   |
| Cancelled                                                           |   |     | 0               |     |   | 0 |   |
| End                  of Period                                      |   |     | 42,354,676      |     |   | 40,988,498 |   |
| **Value                  at Par ($.01/Share)**                      |   | **$**    | **423,547**     |     | **$**  | **409,885** |   |
|                                                                |   |     |            |     |   |   |   |
| **Preferred                  Stock Outstanding:**                   |   |     |            |     |   |   |   |
| Shares                  of Series “B”:                  |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   |     | 165,000         |     |   | 185,000 |   |
| Issued                                                              |   |     | 0               |     |   | 0 |   |
| Converted                  to Common                                |   |     | 20,000          |     |   | 0 |   |
| Cancelled                                                           |   |     | 0               |     |   | 0 |   |
| End                  of Period                                      |   |     | 145,000         |     |   | 185,000 |   |
| **Preferred                  Stock - Value at Par ($.01/Share)**    |   | **$**    | **1,450**       |     | **$**  | **1,850** |   |
|                                                                |   |     |            |     |   |   |   |
| **Additional                  Paid in Capital:**                    |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   | $        | 43,759,251      |     | $      | 42,415,834 |   |
| Equity                  Issuances                                   |   |     | 270,260         |     |   | 329,954 |   |
| Stock                  Based Compensation                           |   |     | 139,000         |     |   | 0 |   |
| Preferred                  Excess Amount                            |   |     | 190,890         |     |   | 0 |   |
| End                  of Period                                      |   | **$**    | **44,359,401**  |     | **$**  | **42,745,788** |   |
|                                                                |   |     |            |     |   |   |   |
| **Accumulated                  Retained Earnings (Deficit):**       |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   | $        | (31,231,893     | )        | $      | (25,062,929 | ) |
| Income                  (Loss) for the Period                       |   |     | (775,732        | )        |   | (723,018 | ) |
| End                  of Period                                      |   | **$**    | **(32,007,625** | **)**    | **$**  | **(25,785,947** | **)** |
|                                                                |   |     |            |     |   |   |   |
| **Accumulated                  Other Comprehensive Income (Loss):** |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   | $        | (146,629        | )        | $      | (25,617 | ) |
| Other                  Comprehensive Loss for the Period            |   |     | (19,000         | )        |   | (43,421 | ) |
| End                  of Period                                      |   | **$**    | **(165,629**    | **)**    | **$**  | **(69,038** | **)** |
|                                                                |   |     |            |     |   |   |   |
| **Total                  Equity:**                                  |   |     |            |     |   |   |   |
| Beginning                  of Period                                |   | $        | 12,796,616      |     | $      | 17,732,568 |   |
| End                  of Period                                      |   |     | 12,611,144      |     |   | 17,302,638 |   |
| Change                  in Equity for the Period                    |   | **$**    | **(185,470**    | **)**    | **$**  | **(429,930** | **)** |

----

**DALECO        RESOURCES CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.        Continued Operations**

**2.        Summary of Significant Accounting Policies**

***Basis        of Presentation***

***Significant        Accounting Policies***

----

**DALECO        RESOURCES CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Use        of Estimates***

**3.        Capital Stock**

| ***Common                  Stock*** |   |
|-------------------------------------|--------|

|                                                                            |   | Common                  Shares |       |
|---------------------------------------------------------------------------------|--------|--------------------------------|------------|
| Balance                  as of September 30, 2006                               |   |                           | 41,423,635 |   |
| Issued                  Pursuant to a Private Placement (1)                |   |                           | 400,000    |   |
| Issued                  upon conversion of Series B Preferred Stock (2)         |   |                           | 160,000    |   |
| Issued                  for payment of dividends on Series B Preferred Stock(2) |   |                           | 160,000    |   |
| Issued                  to Terra Silex (3)                                      |   |                           | 200,241    |   |
| Issued                  for payment of certain debt (4)                         |   |                           | 10,800     |   |
| Balance                  as of December 31, 2006                                |   |                           | 42,354,676 |   |
|                                                                            |   |                           |       |   |
| ***Series                  B Preferred Stock***                                 |   |                           |       |   |

|                                                                        |   | Preferred                  Shares |    |
|-----------------------------------------------------------------------------|--------|-----------------------------------|---------|
| Balance                  as of September 30, 2006                           |   |                              | 165,000 |   |
| Conversion                  of Series B Preferred Stock to Common Stock (2) |   |                              | (20,000 | ) |
| Balance                  as of December 31, 2006                            |   |                              | 145.000 |   |

|   | (1)  | In                  October 2006, the Company concluded a Private Placement of 400,000                  shares                  of Common Stock at a price of $0.51 per share. |
|--------|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

| (2)   | In                November 2006, 20,000 shares of Series B Preferred Stock were converted                to                160,000 shares of Common Stock and 160,000 shares of Common Stock                were                issued in payment of accrued but unpaid dividends due on the Series                B                Preferred Stock. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| (3)   | In                December 2006, the Company issued 200,241 shares of Common Stock                at a                price of $0.25 per share to Terra Silex Holdings, LLC, pursuant to                the                anti-dilution provision of the Stock Purchase Agreement dated September                20, 2001. See Exhibit 10.13 to the Annual Report on Form 10-KSB for                the                year ended September 30, 2006. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| (4)   | In                November 2006, the Company issued 10,800 shares of Common Stock in                payment                of certain debt owed to a previous director of the                Company. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**DALECO        RESOURCES CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Options        and Warrants***

|                                                                    |   | Number                  of Options/Warrants |       | Weighted                  Average Price per Share |   |
|-------------------------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------------|--------|
| Options                  and Warrants Outstanding at September 30, 2006 |   |                                        | 14,222,305 |                                              | $      | 1.05 |   |
| Stock                  Options Granted (1)                              |   |                                        | 200,000    |                                              |   |   |   |
| Options                  and Warrants Outstanding at December 31, 2006  |   |                                        | 14,422,305 |                                              | $      | 1.05 |   |

| (1) | In                  October 2006, Mr. Blackstone was granted an option for 200,000                  shares of                  Common Stock under his employment agreement. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Exercise                  price |       | Options                  Outstanding |   | Weighted                  Average Exercise Price |   | Weighted                  Average Remaining Life (Years) |   | Options                  Exercisable |   | Weighted                  Average Exercise Price |   |
|---------------------------------|------------|--------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------------------|--------|
| $                               | 0.43-$1.08 |                                 |   | 4,600,000                                        |   | $                                                        | 0.71   |                                 |   | 2.71                                             |   |   | 3,025,000 |   | $ | 0.85 |   |

***Stock        Based Compensation***

----

**DALECO        RESOURCES CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Net        Income (Loss) Per Share**

**Payment        of Accrued Dividends**

**4.**
**Employment        Contracts and Commitments**

----

**DALECO        RESOURCES CORPORATION**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

| **5.** | **Litigation                  Settlement and Pending                  Litigation** |
|--------|------------------------------------------------------------------------------------|

----

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

**Forward        Looking Statements**

----

| ·   | volatility                of the market price for both crude oil and natural                gas; |
|--------------------|--------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | volatility                of the market price for the Company’s                minerals; |
|--------------------|------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | market                capacity and demand for the Company’s                minerals; |
|--------------------|--------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | the                timing, effects and success of the Company’s acquisitions, exploration and                development activities; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | the                timing, quantity and marketability of                production; |
|--------------------|-------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | effectiveness                of management’s strategies and decisions; |
|--------------------|------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | competition; |
|--------------------|--------------|
|   |   |
|--------|--------|
| ·   | changes                in the legal and/or regulatory environment and/or changes in accounting                standards; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | policies                and practices or related interpretations by auditors and/or regulatory                agencies; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| ·   | climatic                conditions; and |
|--------------------|-----------------------------------------|
|   |   |
|--------|--------|
| ·   | unanticipated                problems, issues or events. |
|--------------------|----------------------------------------------------------|

----

**Results        of Operations**
**:**

*Quarter        ended December 31, 2006, compared to quarter ended December 31,        2005:*

|                               |   | **2006** |     | **2005** |   |
|------------------------------------|--------|----------|----------|----------|--------|
|                               |   |     |     |     |   |
| Net                  Income (Loss) |   | $        | (775,732 | )        | $      | (723,018 | ) |
| Revenues                           |   | $        | 293,417  |     | $      | 478,921 |   |

|                                         |   | **2006** |   | **2005** |   |
|----------------------------------------------|--------|----------|--------|----------|--------|
| Production:                                  |   |     |   |     |   |   |   |
| Oil                  (Bbl)                   |   |     | 1,179  |     |   | 3,213 |   |
| Gas                  (Mcf)                   |   |     | 21,074 |     |   | 26,152 |   |
| Average                  price:              |   |     |   |     |   |   |   |
| Oil                  (per Bbl)               |   | $        | 58.17  |     | $      | 63.98 |   |
| Gas                  (per Mcf)               |   | $        | 6.85   |     | $      | 7.87 |   |
| Lease                  Operating Expense and |   |     |   |     |   |   |   |
| Production                  Tax per Mcfe     |   | $        | 6.18   |     | $      | 3.43 |   |

----

----

**Depreciation,        Depletion and Amortization: Oil and Gas**

**Depreciation,        Depletion and Amortization: Minerals**

**Stock        Based Compensation Expense:**

**Bonus        Expense:**

**General        and Administrative Expenses, Legal and Professional Fees and Shareholder        Information Expenses:**

**Interest        Expense and Financing Costs**
**:**

**Liquidity        and Capital Resources**
**:**

----

**Acquisition        and Growth:**

**Off        Balance Sheet Arrangements**
**:**

**Historical        Cash Flow**
**:**

----

**Other        Sources of Cash:**

**Item        3. Controls and Procedures.**

***EVALUATION        OF DISCLOSURE CONTROLS AND PROCEDURES***

***CHANGES        IN INTERNAL CONTROL OVER FINANCIAL REPORTING***

----

***DISCLOSURE        CONTROLS***

----

**PART        II. OTHER INFORMATION**

**Item        1. Legal Proceedings.**

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

----

**Item        3. Defaults Upon Senior Securities.**

**Item        4. Submission of Matters to a Vote of Security Holders.**

**Item        5. Other Information.**

**Item        6. Exhibits.**

| Exhibit |   |                                                                                      |   |                            |
|---------|--------|-------------------------------------------------------------------------------------------|--------|---------------------------------|
| Number  |   | Description                                                                               |   | Located                  at     |
| 31.1    |   | Certification                  of CEO under Section 302 of the Sarbanes-Oxley Act of 2002 |   | Filed                  Herewith |
|    |   |                                                                                      |   |                            |
| 31.2    |   | Certification                  of CFO under Section 302 of the Sarbanes-Oxley Act of 2002 |   | Filed                  Herewith |
|    |   |                                                                                      |   |                            |
| 32.1    |   | Certification                  of CEO under Section 906 of the Sarbanes-Oxley Act of 2002 |   | Filed                  Herewith |
|    |   |                                                                                      |   |                            |
| 32.2    |   | Certification                  of CFO under Section 906 of the Sarbanes-Oxley Act of 2002 |   | Filed                  Herewith |

----

**SIGNATURES**

|                                    |                                                                                     |                                       |
|-----------------------------------------|------------------------------------------------------------------------------------------|--------------------------------------------|
|                                    | **DALECO                  RESOURCES CORPORATION**                                        |
|                               |                                                                                |                                  |
| Dated:                February 14, 2007 |                                                                                          |  /s/                Gary J. Novinskie |
|                                    | Gary                  J. NovinskiePresident                  and Chief Financial Officer |

|                                   |                                                                                                                                          |                                            |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|
|                                   | **DALECO                    RESOURCES CORPORATION**                                                                                           |
|                              |                                                                                                                                     |                                       |
| Date:                February 14, 2007 |                                                                                                                                               | /s/                Stephan V. Benediktson  |
|                                   | Stephan                    V. BenediktsonChairman                    of the Board of Directors and Chief Executive                    Officer |
|                                   |                                                                                                            |                                       |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------|
|                                   |                                                                                                            |                                       |
| Date:                February 14, 2007 |                                                                                                                 | /s/                Gary J. Novinskie  |
|                                   | Gary                    J. NovinskiePresident                    and Chief Financial                    Officer |

----