UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                 FIRST AMENDMENT
                                   FORM 10-QSB

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

For the quarterly period ended March 31, 2005

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

For the transition period from __________________ to ______________

Commission File Number 0-12214

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

Nevada                                      23-2860734
-------------------------------             ------------------------------------
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)

120 North Church Street
West Chester, Pennsylvania 19380            (610) 429-1258
----------------------------------------    ------------------------------------
(Address of Principal Executive Offices)    (Issuer's telephone number)

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

Number of shares outstanding of the issuer's common stock as of March 31, 2005:
28,693,043

Number of shares outstanding of the issuer's Series A preferred stock as of
March 31, 2005: 8,000

Number of shares outstanding of the issuer's Series B preferred stock as of
March 31, 2005: 185,000
<PAGE>

                                      INDEX

                                                                            PAGE
PART I   FINANCIAL INFORMATION

ITEM 1       FINANCIAL STATEMENTS (Unaudited).................................3
             Consolidated Balance Sheet.......................................3
             Consolidated Statements Of Loss..................................5
             Consolidated State of Comprehensive Income (Loss)................6
             Consolidated Statement Of Shareholders' Equity (Deficit).........7
             Consolidated Statements Of Cash Flow.............................8
             Notes to Consolidated Financial Statements.......................9

ITEM 2       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS.............................31

ITEM 3       CONTROLS AND PROCEDURES.........................................33

PART II      OTHER INFORMATION...............................................37

ITEM 2       CHANGE IN SECURITIES............................................37

ITEM 3       SONATA  DEBT....................................................38

ITEM 4       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............42

ITEM 5       OTHER INFORMATION...............................................43

ITEM 6       Exhibits and Reports on Form 8-K................................43

SIGNATURES   ................................................................44


                                      -2-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                                                                  March 31, 2005
ASSETS
Current Assets
         Cash Accounts                                             $    187,774
         C/Ds                                                           133,120
         Account receivables                                            594,391

         Other Current Assets                                             4,569
                                                                   ------------
                              Total Current Assets                 $    919,854
                                                                   ------------
Other Assets
         Prepaid Mineral Royalties L/T                             $    624,567
         Debt Placement Costs                                           878,661
         Accumulated Amortization                                      (705,966)
         Net Debt Placement Costs                                       172,695
         Equity Placement Costs                                           1,800
         Accumulated Amortization Equity Costs                             (450)
         Net Equity Placement                                             1,350
         Available for Sale Securities                                3,264,809
                                                                   ------------

                              Total Other Assets                   $  4,063,421
                                                                   ------------
Fixed Assets
         Oil and Gas Properties (note 3)                           $ 12,607,950
         Accumulated DD&A                                            (8,207,950)
                  Net Oil and Gas Property                            4,400,000
         Mineral Properties (note 5)                                 12,609,100
         Accumulated DD&A                                              (300,000)
                  Net Mineral Property                               12,309,100
         Timber Properties (note 4)                                   1,028,342
         Accumulated DD&A                                            (1,028,342)
                  Net Timber Property                                        --
         Technology/Patent Rights (note 6)                            7,767,000
         Accumulated DD&A                                            (3,773,582)
                  Net Tech./Patent Rights                             3,993,418
         Property, Equipment, Furniture & Fixtures                      514,749
         Accum. Depr (P, E, F &  F)                                    (511,024)
                  Net (P, E, F & F)                                       3,725
                              Total Fixed Assets                   $ 20,706,243
                                                                   ============
                              Total Assets                         $ 25,689,518
                                                                   ============


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      -3-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                                                                  March 31, 2005

LIABILITIES
Current Liabilities
         Trade A/P                                                 $  1,021,615
         Notes Payable (note 7)                                         137,543
         Note Due related Pty (note 8)                                  781,610
         HFI Financing (note 10a)                                            --
         Loans--1st Regional (note 10d)                                 100,000
         CAMI Notes                                                     514,881
         Sonata and Standard Energy  Financing (notes 7b and 10b)       218,333
         Accrued Interest Expense (notes 10a and 10b)                   545,881
         Accrued Dividend Expense (notes 11d and 16)                  1,821,000
         Accrued Expense Reimbursements                                 111,847
         Accrued Salary Expense                                         814,875
         Mandatory Redeemable Preferred Stock                           400,000
                                                                   ------------
                              Total Current Liabilities            $  6,467,585
                                                                   ------------
Long Term Liabilities
         Long Term Debt                                            $    196,577
         Mandatory Redeemable Preferred Stock                                --
                              Total Liabilities                    $  6,664,162
                                                                   ------------
EQUITY
         Beginning Retained Earnings                               $(22,813,627)
         Current Period Income/(loss)                                  (511,295)
         Other Comprehensive Income                                   3,080,179

         Dividends Paid (Preferred Stock)                               (36,630)
         Dividends (Property)                                          (398,393)
         Add. Paid in Capital                                        39,416,342
         Preferred Stock (note 11)                                        1,850
         Common Stock (note 11)                                         286,930

                              Total Equity                         $ 19,025,356
                                                                   ------------
                        Total Liabilities and Equity               $ 25,689,518
                                                                   ============

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      -4-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF LOSS FOR THE QUARTERS ENDED AND THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 -- PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

<TABLE>
<CAPTION>
                                                                 3 Months Ended                 6 Months Ended
                                                                  2005            2004            2005            2004
                                                          ------------    ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>             <C>
Revenue
     O&G Sales                                            $    394,352    $    286,105    $    689,092    $    629,765
     Royalty Receipts                                            9,670           8,972          20,794          16,988
     Mineral Sales                                               8,198           6,918          21,237          25,399
     Well Management                                            41,506          41,506          83,012          58,011
                                                          ------------    ------------    ------------    ------------
         Total revenue                                    $    453,726    $    343,501    $    814,135    $    730,163
                                                          ------------    ------------    ------------    ------------

Expenses
     LOE--Oil and Gas                                     $    123,599    $    260,108    $    314,835    $    473,951
     LOE--Timber                                                    --           2,700              --           6,000
     LOE--Minerals                                               3,950          11,391          19,450          70,875
     Prod Tax                                                   27,807          20,970          50,638          46,110
     DD&A (Fixed Assets)                                       347,209         360,016         732,275         704,457
     Third Party Distributions                                      --           7,223          10,308          16,144
     General and Administrative Expenses                       199,965         163,583         362,695         338,543
     Legal and Professional Fees                                95,397          64,094         152,255         139,809
     Shareholder Information                                    13,575          23,702          17,771          26,900
     Amortization of Debt Costs                                 24,914          23,754          49,829          23,754
     Amortization of Goodwill                                      225              --             450
                                                          ------------    ------------    ------------    ------------
         Total Expenses                                   $    836,641    $    937,541    $  1,710,506    $  1,846,543
                                                          ------------    ------------    ------------    ------------

Other income (expenses)
     Gain on Exchange of PSNet Shares for Ostara Shares         40,402              --          40,402              --
     Interest Income                                                 7              --               7              --
     Interest Expense                                         (168,789)        (43,765)       (207,278)       (185,453)
     Other Income                                                   --          34,700          24,800       5,823,250
                                                          ------------               -    ------------
         Total other income (loss), net                   $   (128,380)   $     (9,065)   $   (142,069)   $  5,637,797
                                                          ------------    ------------    ------------    ------------

Loss before provision for income taxes                    $   (511,295)   $   (603,105)   $ (1,038,440)   $  4,521,417
Provision for income taxes                                          --              --              --              --
                                                          ------------    ------------    ------------    ------------
Net Loss (Note 10)                                        $   (511,295)   $   (603,105)   $ (1,038,440)   $  4,521,417
                                                          ============    ============    ============    ============

Less: Dividends on Class A and B preferred shares              (36,630)        (46,798)        (83,907)        (95,968)
                                                          ------------    ------------    ------------    ------------

Net loss attributable to common shareholders              $   (547,925)   $   (649,903)   $ (1,122,347)   $  4,425,449
                                                          ============    ============    ============    ============

Basic and Fully Diluted Net Loss per Common Share         ($       .02)   ($       .02)   ($       .04)      $.16/$.11

Weighted average number of shares of
         Common shares outstanding
         Basic                                              28,693,043      28,337,402      28,693,043      28,337,402
         Diluted                                            38,142,622      39,356,981      38,142,622      39,356,981
</TABLE>

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      -5-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
AS OF MARCH 31, 2005 AND 2004 -- PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

<TABLE>
<CAPTION>
                                                                      3 Months Ended              6 Months Ended

                                                                  3/31/2005     3/31/2004      3/31/2005      3/31/2004
<S>                                                             <C>            <C>            <C>            <C>
Net Income (Loss)                                               $  (511,295)   $  (603,105)   $(1,038,440)   $ 4,521,417

Other Comprehensive Income
   Unrealized Gains (Losses) On Available For Sale Securities     3,080,179              0      3,080,179              0

Total Comprehensive Income (Loss)                               $ 2,568,884    $  (603,105)   $ 2,041,739    $ 4,521,417
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -6-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 2005 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                                                         March 31, 2005
                                                  -------------------------
Common Stock Outstanding
     Shares
     ------
                Beginning of Period                                  28,693,043
                Issued                                                        0
                Cancelled                                                     0
                                                                   ------------
                End of Period                                        28,693,043
                                                                   ------------
     Value at Par ($.01/Share)                                     $    286,930

Preferred Stock Outstanding
     Shares Class "A"
     ----------------
                Beginning of Period                                           0
                Present as Debt                                               0
                                                                   ------------
                End of Period                                                 0
Value at Par ($.01/Share)                                          $          0

     Shares Class "B"
     ----------------
                Beginning of Period                                     185,000
                Issued                                                        0
                Cancelled                                                     0
                End of Period                                           185,000
     Value at Par ($.01/Share)                                     $      1,850
                                                                   ------------
     Preferred Value at Par ($.01/Share)                           $      1,850

Additional Paid in Capital
                Beginning of Period                                $ 39,416,342
                Equity Issuance Other                                         0
                                                                   ------------
                End of Period                                      $ 39,416,342
                                                                   ------------

Accumulated Retained
Earnings/(Deficit)
                Beginning of Period                                $(22,813,627)
                Income/Loss for Year                                   (511,295)
                Other comprehensive Income                            3,080,179
                Dividends                                               (36,630)
                Dividends (Property)                                   (398,393)
                                                                   ------------
                End of Period                                      $(20,676,766)

Equity
                Beginning of Period                                $ 16,891,495
                End of Period                                      $ 19,025,356
                                                                   ------------
                Change in Equity for Period                        $ (2,133,861)

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -7-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE QUARTERS ENDED AND SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

<TABLE>
<CAPTION>
                                                                             3 Months Ended                   6 Months Ended
                                                                            2005             2004             2005             2004
                                                                     -----------      -----------      -----------      -----------
<S>        <C>                                                       <C>              <C>              <C>              <C>
Operating Activities
Net Income/( loss) for the period                                    $  (511,295)     $  (603,105)     $(1,038,440)     $ 4,521,417
                                                                     -----------      -----------      -----------      -----------
Items not affecting working capital
     Change in DD & A for period                                     $   347,209      $   383,770      $   732,275      $   728,211
     Debt Amortization                                                    25,139           23,754           50,279           23,754
     Gain on Debt Forgiveness                                                 --               --               --       (5,787,687)
     Gain on Exchange of PSNet Shares for Ostara Shares                  (40,402)              --          (40,402)              --
                                                                     -----------      -----------      -----------      -----------
                  Sub Total                                          $   331,946      $   407,524      $   742,152      $(5,035,722)
                                                                     -----------      -----------      -----------      -----------
Items affecting Working Capital:
     (Increase) Decrease in other assets                             $  (171,836)     $        --      $  (212,436)     $  (315,046)
     (Increase) Decrease in accounts receivable                          (39,054)           9,029          (15,794)         (88,162)
     Increase (Decrease) in Trade payables                               (24,282)        (851,908)          83,006           (5,597)
     Increase.(Decrease) in other Accrued Expenses                       102,247           66,027          176,464          147,883
     Gain/(loss) on Sale of Properties                                        --           34,700               --           34,700
                                                                     -----------      -----------      -----------      -----------
                  Sub Total                                          $  (132,925)     $  (742,152)     $    31,240      $  (226,222)
                                                                     -----------      -----------      -----------      -----------

Cash used for operating activities                                   $  (312,274)     $  (937,733)     $  (265,048)     $  (740,527)
                                                                     -----------      -----------      -----------      -----------

Investing Activities
     Sale of fixed assets                                            $   542,621      $        --      $   542,621      $        --
                                                                     -----------      -----------      -----------      -----------
Cash provided from investing activities                              $   542,621      $        --      $   542,621      $        --
                                                                     -----------      -----------      -----------      -----------

Financing Activities
     Increase (decrease) Notes due Related Parties                   $        --      $     6,000      $    30,300      $     9,000
     Increase (decrease) Other Notes due                                   5,000               --            5,000               --
     Increase (decrease) Sonata Note Due                                 (38,900)         (23,606)        (108,052)         608,096
     Increase (decrease) Accrued Interest                                 27,881           69,926          185,942       (1,457,189)
     Increase (decrease) Accrued Dividends                                91,388          850,590         (198,242)       1,084,907
     Dividends Paid                                                     (370,785)              --         (370,785)              --
     Proceeds of Equity Issuance                                              --           26,867          100,150          287,029
     Proceeds of L/ T Debt -                                                  --               --               --           40,000
                                                                     -----------      -----------      -----------      -----------
Cash provided from/(used for) financing activities                   $  (285,416)     $   929,777      $  (355,687)     $   571,843
                                                                     -----------      -----------      -----------      -----------
Net Increase/(decrease) in cash for period                           $   (55,069)     $    (7,956)     $   (78,114)     $  (168,684)
                                                                     ===========      ===========      ===========      ===========

Cash and cash equivalents - Beginning of Period                      $   375,963      $   404,260      $   399,008      $   564,988
Cash and cash equivalents - End of Period                            $   320,894      $   396,304      $   320,894      $   396,304
                                                                     -----------      -----------      -----------      -----------
Change in cash and cash equivalents for the period                   $   (55,069)     $    (7,956)     $   (78,114)     $  (168,684)
                                                                     ===========      ===========      ===========      ===========

Supplementary Disclosure of Non-cash Transactions
         Issuance of common stock for services performed             $        --      $        --      $   100,150      $   253,367
         Payment of dividends in-kind                                $   398,393      $        --      $   398,393      $        --
         Conversion of debt to equity                                $        --      $    26,867      $        --      $    26,867
</TABLE>

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      -8-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

1.    CONTINUED OPERATIONS

      The Company's audited financial statements for its fiscal year ended
September 30, 2004, were audited by the accounting firm of Vasquez & Company LLP
and filed with the Securities and Exchange Commission on January 18, 2005.
Vasquez & Company was retained by the Company to replace its prior auditor, Jay
J. Shapiro, who resigned as the Company's auditor on September 9, 2004. (See the
Company's Form 8-K dated September 14, 2004, Form 8-K dated December 2, 2004 and
Form 8-K dated December 3, 2004). The Audited Numbers referenced herein are
taken from the Company's Audited Financial Statements as filed on January 18,
2005.

      The financial statements have been prepared on the basis of a going
concern, which contemplates that the Company will be able to realize assets and
discharge liabilities in the normal course of business. Accordingly, they do not
give effect to adjustments that would be necessary should the Company be
required to liquidate its assets. For the quarter ended March 31, 2005, the
Company reported a loss of $511,295. The ability of the Company to meet its
total liabilities of $6,664,163, and to continue as a going concern is dependent
upon the availability of future funding, achieving profitable timber operations
and successful development of its mineral assets. On July 24, 2002 ("Closing
Date"), the Company entered into a $10,000,000 Equity Line of Credit Agreement
with Cornell Capital Partners, L.P. ("CCP"). As part of the transaction, the
Company issued to CCP a two year convertible debenture in a face amount of
$300,000. The debenture is convertible into common stock at a price equal to the
lesser of 120% of the final bid price on the Closing Date or 80% of the average
lowest three closing bid prices as reported by Bloomberg of the Company's common
stock for the five trading days immediately preceding the date of the
conversion. The equity line provides for the Company to draw down $75,000 per
week over a three year period. In accordance with the provisions of the Equity
Line of Credit, the Company filed a registration statement on Form SB-2 with the
Securities and Exchange Commission, which became effective on November 7, 2002.
Commencing in November 2002 and concluding in January 2003, CCP converted the
entire Debenture in 5,027,881 shares of common stock at an average price per
share of $0.117 when including all other fees and costs associated with the
issuance of the debentures and $0.06 if just the conversion price without
including other fees and costs. The Equity Line of Credit expires in accordance
with its terms on November 6, 2005.

      The Company will continue to seek and evaluate "project specific" funding
commitments and other capital funding alternatives if and as they become
available.

      As of March 31, 2005, the Company was in default of certain debt
obligations (See Notes 7, 8 and 14 below). The holders of these instruments are
working with the Company to achieve satisfaction of the obligations.


                                      -9-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

2.    Summary of Significant Accounting Policies

      a.    Basis of presentation

      The accompanying unaudited consolidated financial statements of Daleco
Resources and Subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. They do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation, have been included in the accompanying
un-audited financial statements. Operating results for the periods presented are
not necessarily indicative of the results that may be expected for the full
year.

      These financial statements should be read in conjunction with the
financial statements and footnotes on Form 10-KSB for the fiscal year ended
September 30, 2004.

      b.    Use of estimates

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

      c.    Basis of consolidation

      The consolidated financial statements of Daleco Resources Corporation (the
"Company") have been prepared in accordance with generally accepted accounting
principles and include the accounts of the Company and its wholly-owned
subsidiaries Westlands Resources Corporation, Sustainable Forest Industries
Inc., Deven Resources, Inc., Tri-Coastal Energy, Inc., Tri-Coastal Energy, L.P.,
Clean Age Minerals Incorporated, and C.A Properties, Inc. The Company's
investments in oil and gas leases are accounted for using proportionate
consolidation whereby the Company's prorata share of each of the assets,
liabilities, revenues and expenses of the investments are aggregated with those
of the Company in its financial statements. The Companies investments in
minerals are accounted for using purchase accounting methods. All significant
inter-company transactions and balances have been eliminated in the
consolidation.


                                      -10-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

      d.    Oil and gas properties and equipment

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

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

      Effective in the first quarter of 1997, the Company began assessing the
impairment of capitalized costs of proved oil and gas properties and other
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 144 (SFAS 144), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Under this method, the Company generally
assesses its oil and gas properties on a field-by-field basis utilizing its
current estimate of future revenues and operating expenses. In the event net
un-discounted cash flow is less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would consider discounted future
net cash flows. SFAS 144 did not have any impact on the Company's change in
method of assessing impairment of oil and gas properties and other long-lived
assets including $20,000,000 in mineral properties.

      e.    Site restoration, dismantlement and abandonment costs

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


                                      -11-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

      f.    Property and Equipment

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

      g.    Timber Rights

      The Company has recorded the acquisition of timber rights at cost. These
costs are "charged off" as commercial production quantities are produced, and /
or amortized over a set time period as a result of delayed commercialization of
the concession holdings. Where the costs exceed projected net recoverable
amounts, the timber rights are written down to the projected net recoverable
amount. Net recoverable amount is the aggregate of estimated un-discounted
future net revenues from the sale of timber less operating and production
expenses.

      h.    Mineral Acquisition

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

      i.    Debt Issue Costs

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

      j.    Cash and Cash Equivalents

      Cash and cash equivalents include the cash and certificate of deposits
with original maturities of three months or less.

      k.    Fair Value of Financial Instruments

      Cash and cash equivalents, receivables, and all liabilities have fair
values approximating carrying amounts. The loans are to be repaid out of net
cash flows. Additional interest or profit participation is payable after the
payment of principal. The fair value of all debt is based on discounted cash
flow analysis.


                                      -12-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

3.    Oil and Gas and Equipment

<TABLE>
<CAPTION>
                                                            March 31,         March 31,
                                                                 2005              2004
                                                         ------------      ------------
<S>                                                      <C>               <C>
Proven lease acreage costs                               $  5,429,995      $  5,429,995
Proven undeveloped lease acreage costs                      1,745,810         1,745,810
Well costs                                                  5,432,145         5,432,145
                                                         ------------      ------------
                                                         $ 12,607,950      $ 12,607,950
Accumulated depletion, depreciation and amortization       (8,207,950)       (7,457,950)
                                                         ------------      ------------
                                                         $  4,400,000      $  5,150,000
                                                         ============      ============
</TABLE>

(a)   Sale of Oil and Gas Properties

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

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

4.    Timber Rights Acquisition

      The acquisition of the Company's timber interests has been accounted for
by the purchase method. Since the Company's acquisition of Sustainable Forest
Industries, Inc., in 1995, the Company has fully written off its investment in
Sustainable.

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

5.    Mineral Properties

a.    Clean Age Minerals Incorporated. In September 2000, the Company acquired
      Clean Age Minerals Incorporated ("CAMI") by way of merger with the
      Company's wholly owned subsidiary; Strategic Minerals, Inc. CAMI presently
      has only one subsidiary, CA Properties, Inc. ("CAP"). CAP owns or has
      under long-term lease: (a) 5,200 acres (+/-) in Marfa, Presidio County,
      Texas, containing high grade Zeolite; (b) 5,020 acres(+/-) of Calcium
      Carbonate deposits located in the Oro Grande area, Cibola County, New
      Mexico; (c) twenty eight (28) mining claims located in Sierra County, New
      Mexico covering 2,675 acres(+/-) of Kaolin; and (d) eleven (11) Zeolite
      mining claims covering approximately 220 acres(+/-) located in Beaver
      County, Utah.


                                      -13-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

b.    Minerals and Equipment

                                        March 31, 2005    March 31, 2004
                                        --------------    --------------
      Proven undeveloped lease costs     $ 12,609,100      $ 12,609,100
      Mine development costs                       --                --
      Accumulated depletion and
           depreciation                      (300,000)         (125,000)
                                         ------------      ------------
                                         $ 12,309,100      $ 12,484,100
                                         ============      ============

      (1) The Company has begun to amortize its mineral properties at a nominal
      amortization rate of $200,000 per year subject to higher adjustments per
      year as production increases. During the quarter ended March 31, 2005, the
      Company took a charge of $50,000 towards the annual amount. The Company is
      utilizing a modified unit-of-production basis in determining its
      amortization rates for its mineral properties.

c.    Prepaid Royalties. The Company receives a credit in the nature of "prepaid
      royalties" for rents paid on the Marfa Zeolite Lease, Presidio County,
      Texas, and a portion of the New Mexico Oro Grande Limestone Lease in
      Cibola County, New Mexico. During Fiscal Year 2003 the Company commenced
      definition mining activities on its Kaolin deposits in Sierra County, New
      Mexico for the purpose of testing the minerals and producing samples for
      sales. The Company commenced production of its New Mexico Calcium
      Carbonate properties in Fiscal Year 2003. It anticipates the commencement
      of the commercial production of its Kaolin deposits in the last quarter of
      calendar year 2005. The Company commenced production of its Zeolite
      deposit in the first quarter of Fiscal Year 2004. The Company did make
      limited sales of its CA Series products in Fiscal Year 2003 primarily for
      testing to confirm their suitability for certain applications. The Company
      began the commercial sales of one of its CA Series Products under the
      trade name "ReNuGen" in the first quarter of 2004. Testing of the
      Company's Kaolin was commenced in December 2002 to confirm its properties
      in various applications in the paper, paint and coating industries.


                                      -14-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

6.    Patents & Technology

      a. CA Series Patent. As part of the acquisition of Clean Age Minerals
      Incorporated (See Note 5(a) above), the Company also acquired U.S. Patent
      No: 5387738. This patent, owned by Clean Age Minerals Incorporated
      (previously owned by Matrix-Loc, Inc. which was acquired by Clean Age
      Minerals Incorporated as a result of Matrix-Loc's merger with Clean Age
      Minerals as of March 18, 2002), deals with a reagent and process for the
      remediation of water and contaminated soils. The Company has obtained a
      Trademark "ReNuGen(TM)" for its CA-1 Series for use in waste treatment
      plants. It also obtained the Trademark Sierra Gold(TM) for one of its
      calcium carbonate products.

      b. I-Squared and I-Top Technology. Pursuant to an agreement effective
      December 1, 2004 ("Asset Sale Agreement") the Registrant agreed to sell
      its I-Squared and I-Top technology to PSNet Communications in exchange for
      3,000,000 shares of PSNet common stock ("PSNet Shares"). Of the PSNet
      Shares to be issued, two-thirds of the PSNet Shares were to be issued to
      the shareholders of the Registrant and one-third of the PSNet Shares were
      to be issued to the Registrant. Under the terms of the Asset Sale
      Agreement, the Registrant is prohibited from selling the PSNet Shares it
      received in the transaction for a period of one year after the Closing
      Date. The "Closing Date" for the transaction was initially established as
      December 10, 2004 or such other mutually agreeable date. The Asset
      Purchase Agreement required PSNet to file a registration statement with
      the Securities and Exchange Commission to register the PSNet Shares so
      that the PSNet Shares issued to the Registrant's shareholders would be
      freely trading shares. The Registrant and PSNet agreed to extend the
      Closing Date until PSNet's registration statement became effective and it
      had the requisite number of freely trading PSNet Shares required for
      distribution to the Registrant's shareholders as of the Record Date (as
      that term is defined below). The Asset Purchase Agreement required PSNet
      to use its best efforts to have an effective date for its registration
      statement of on or before March 31, 2005. There was no market for the
      PSNet Shares at the time the Company entered into the Asset Purchase
      Agreement.

      In a press release dated January 13, 2005, Ostara Corporation ("Ostara")
      announced that it had acquired PSNet. As successor in interest to PSNet,
      commencing on or about March 31, 2005, Ostara issued its common stock to
      the Registrant and its shareholders of record as of January 6, 2005
      ("Record Date) in place of the PSNet Shares. In accordance with the
      provisions of the Asset Sale Agreement, approximately, 2,050,000 shares of
      Ostara common stock were issued, in the nature of a special dividend, to
      the shareholders of record of the Registrant as of the Record Date. The
      Registrant received 950,000 shares of Ostara common stock that cannot be
      sold for a period of one year. Warrants for 15,000,000 shares of Ostara
      common stock were also issued under the Asset Sale Agreement. For each
      share of Ostara common stock issued to the Registrant's shareholders as of
      the Record Date five warrants were also issued. The warrants have a term
      of one (1) year and have an exercise price as follows:


                                      -15-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

            a. For the first 90 days after the Closing Date, the exercise price
      per share of Stock shall be $2.00.

            b. For the 91st through the 180th day after the Closing Date, the
      exercise price per share of Stock shall be $4.00.

            c. For the 181st day through the 270th day after the Closing Date,
      the exercise price per share of Stock shall be $6.00.

            d. For the 271st day through the first anniversary of the Closing
      Date the exercise price per share of Stock shall be $8.00.

      One share of Ostara common stock was issued for each 14 shares of the
      Registrant's common stock held as of the Record Date. In addition to the
      Ostara common stock issued, each Record Date Shareholder received a
      warrant to purchase (5) additional shares of Ostara common stock for each
      share of Ostara common stock issued.

      Since the Company had effective equitable title to the original 3,000,000
      shares of Ostara common stock as of January 13, 2005 (the date Ostara
      reported the acquisition of PSNet) and thus "beneficial ownership" of
      those shares until they were distributed to the Company's shareholders,
      the Company recognized as a gain from the exchange of securities (PSNet
      shares for Ostara shares) of $$40,402, . This amount reflects both the
      market price of the Ostara common stock and the calculated value of the
      associated warrants on January 13, 2005.

            As of March 31, 2005, the 950,000 shares of Ostara common stock held
      by the Company were carried at $3,264,809. Under an accounting rule, the
      warrants, even though price higher than the market value of the stock into
      which they are convertible, also have a value.

7.    Notes Payable

a.    During the year ended September 30, 1995, the Company received $1,100,000
      in return for two notes payable, with the producing wells of the Company
      used as collateral. Interest of 10% per annum was due monthly. In fiscal
      1996, the Company repaid $300,000 of the outstanding balance. In fiscal
      1997, the remaining $800,000 was converted into 16,000 shares of 10%
      cumulative preferred stock, at $50.00 per share ("Series A Preferred
      Stock"). The Series A Preferred Stock was subject to a put on August 20,
      1999. The holders of the Series A Preferred Stock filed a lawsuit in the
      Los Angeles Superior Court, California against the Company, as well as Mr.
      Amir and Mr. Erlich as guarantors. Mr. Amir satisfied his obligation under
      his guarantee and purchased one-half, or 8,000 shares of the Series A
      Preferred Stock, of the 16,000 shares of the Series A Preferred Stock
      owned by the Kanes. The Company and Mr. Erlich entered into a Stipulation
      for the Entry of Judgment granting the Company until August 1, 2001 in
      which to satisfy the put for the remaining 8,000 shares of Series A
      Preferred Stock plus accumulated interest. (See Litigation Note 14). Mr.
      Amir converted his Series A Preferred shares into 408,163 shares of
      Company common stock. A portion of the dividends ($32,213) due Mr. Amir on
      the Series A Preferred Stock was paid to Mr. Amir in the third quarter of
      fiscal 2002. (See Note 8(a)). As of March 31, 2005, the Company owed the
      Kanes $131,184 of accrued but unpaid interest. By Agreement dated January
      20, 2005, the Company agreed to satisfy its full obligation to the Kanes
      on or before July 5, 2005. (See Note 14(a)).


                                      -16-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

b.    During fiscal 1998, the Company borrowed $145,000 from four (4) persons.
      The debt was evidenced by Notes that matured on November 21, 1998. The
      Notes earned interest at 2% over the prime rate charged by the Huntingdon
      National Bank of Columbus, Ohio, through the maturity date, and 18%
      thereafter. The Note holders were also given warrants. (See Note 11(b)--
      Warrants) $75,000 in principal amount plus accrued interest due to Sonata
      Investment Company, Ltd. ("Sonata") was paid to Sonata on November 30,
      2001. On June 7, 2002, Mr. Lincoln converted his Note in the amount of
      $20,000, plus accrued and unpaid interest of $13,528, into 49,818 shares
      of common stock. The debt was converted at a price of $.673 per share,
      which represented the average of the bid and closing prices for the five
      day period prior to the conversion. As of March 31, 2005, $50,000 in
      principal amount under two of these Notes remains outstanding. On August
      1, 2001, the Company borrowed $42,000 from Standard Energy Company. This
      loan earned interest at 2% per annum. The Standard Energy Company loan was
      satisfied on November 30, 2001. Since June 30, 2002, only two of the
      original four (4) notes, each in the face amount of $25,000, remain
      outstanding. The accrued but unpaid interest on these two notes as of
      March 31, 2005 is $51,482.

c.    Pursuant to Paragraph 5.1 of the Agreement and Plan of Merger by and among
      Clean Age Minerals Incorporated ("CAMI") and Strategic Minerals, Inc.
      ("SMI") and the Company dated September 19, 2000, obligations of CAMI to
      certain officers, directors and third parties were to have been satisfied
      by SMI or the Company within one (1) year of the merger. (Subsequent to
      the merger, SMI's name was changed to Clean Age Minerals, Inc.) The
      indebtedness totaled (including the Martin Debt as defined in Note 8(b)
      below) $514,881 and was evidenced by Notes dated September 19, 2000. The
      Notes were due and payable on or before September 18, 2001 and provide for
      interest at the rate of 8% per annum. These Notes remain outstanding. As
      of March 31, 2005, the total amount payable on these notes is $700,239
      representing principal of $514,881 and accrued but unpaid interest of
      $185,358.


                                      -17-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

8.    Due to (from) Related Parties

      (a)   Due to (from) Amir

      Mr. Amir has entered into four (4) Notes with the Company as follows:

      (1) Note dated October 1, 1995, bearing interest at the rate of prime plus
      3% in the principal amount of $91,062. This amount remains outstanding as
      of March 31, 2005.

      (2) Note dated October 1, 1995 bearing interest at the rate of 7% in the
      principal amount of $528,548 remains outstanding as of March 31, 2005.

      (3) Note dated July 20, 1998 in the face amount of $25,000 (See Note 7(b))
      bearing interest at the rate of 2% over the prime rate charged by the
      Huntingdon National Bank of Columbus, Ohio, through the maturity date,
      November 21, 1998 and 18% thereafter.

      (4) Note dated June 17, 2002 bearing interest at the rate of 7% in the
      principal amount of $137,000.

      As of March 31, 2005, the outstanding principal and accrued but unpaid
      interest on the obligations listed under numbers 1 through 4 to Mr. Amir
      amounted to $932,513.

      Mr. Amir was also entitled to a cash payment of $25,000 under his Key Man
      Contract on June 30, 2002. This bonus has not been paid (See Note 13(b)).

      Prior to conversion of his Series A Preferred Stock into common stock, Mr.
      Amir was entitled to have received dividends in the amount of $91,551 of
      which $59,338 remains outstanding (See Note 7(a)).

      As of March 31, 2005, the Company owed Mr. Amir $35,011 in un-reimbursed
      business expenses and $208,335 in accrued but unpaid salary.

      During 2002, the Company paid Mr. Amir $170,000 in partial payment of the
      accrued and unpaid interest on his notes, un-reimbursed expenses and
      dividends attributable to the Class A Preferred Stock. These payments were
      reflected in prior financial statements. Mr. Amir subsequently advanced
      the Company an additional $137,000 (see 8(a)(4) above).


                                      -18-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

      Mr. Amir converted $10,000 of indebtedness into 71,942 shares of Common
      Stock as of December 3, 2002. The conversion was at the average of the
      closing bid and asking price for the Common Stock for the five trading
      days prior to the date of conversion.

      As of March 31, 2005, the Company was indebted to Mr. Amir in the
      aggregate amount of $1,260,195.

(b)   By virtue of the merger of Clean Age Minerals Incorporated ("CAMI") with
      Strategic Minerals, Inc. on September 19, 2000, Strategic Minerals, Inc.
      assumed the obligation of CAMI to Mr. Robert E. Martin in the amount of
      $134,811 ("Martin Debt"). The Martin Debt was to have been satisfied on or
      before September 18, 2001 but was not and remains outstanding. As of March
      31, 2005, the Martin Debt amounts to $183,228 representing $134,811 in
      principal and $48,417 in accrued but unpaid interest. The Martin Debt is
      evidenced by a Note providing for an annual rate of interest of 8%. These
      amounts are included in the amounts shown for the Company's obligation to
      the former officers and directors of Clean Age Minerals Incorporated. (See
      Note 7(c)). As of March 31, 2005, the Company owed Mr. Martin $237,501 in
      accrued but unpaid salary and $26,064 in accrued and unpaid reimbursable
      business expenses.

(c)   Novinskie Debt. Under the terms of Mr. Novinskie's employment agreement
      (See Note 13(b)), Mr. Novinskie was to have received a cash bonus of
      $25,000 as of September 30, 2002. This bonus was not paid. As of March 31,
      2005, the Company owed Mr. Novinskie $50,024 in un-reimbursed expenses and
      $208,338 in accrued but unpaid salary and $25,000 in accrued and unpaid
      bonuses (as discussed previously).

      Mr. Novinskie converted $10,000 of indebtedness into 71,942 shares of
      Common Stock as of December 3, 2002. The conversion was at the average of
      the closing bid and asking price for the Common Stock for the five trading
      days prior to the date of conversion. As of March 31, 2005, the Company
      was indebted to Mr. Novinskie in the aggregate amount of $283,362.


                                      -19-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

9.    Debentures

                                               March 31, 2005     March 31, 2004
                                               --------------     --------------

            8% Convertible Debentures                      $0            $30,000

      a.    8% Convertible Debentures

      On September 11, 1996, the Company issued $1,310,000 of 8% convertible
      debentures with interest payable in stock only and accruing until
      conversion or redemption after the term of two years. The placement
      agent's fees were 10% of the gross proceeds and 12,111 warrants at $10.07
      expiring November 16, 2001. The debentures may be converted after a
      holding period of 45 days after closing at the lessor of: (1) the fixed
      conversion price ($10.171875), or (2) 75% of the average closing bid price
      for the five trading days immediately preceding the date of conversion. As
      of September 30, 2004, $1,310,000 of the 8% debentures had been converted
      into 990,963 common shares. No 8% debentures were outstanding.

10.   Long-Term Debt

      Long-term debt of the Company consists of the following:

a.    Sonata Loan

            In August 1997, the Company entered into an arrangement with Heller
      Financial, Inc. ("Heller") whereby Heller agreed to provide the Company
      with up to $15,000,000 to rework existing horizontal wells, re-complete
      its vertical wells as horizontal wells, and develop additional acreage.
      Under the terms of the agreement, all of the properties of Westlands were
      transferred to a newly formed limited partnership, Tri-Coastal Energy,
      L.P., the general partner of which is Tri-Coastal Energy, Inc.,
      (Tri-Coastal) and the sole limited partner of which is Westlands.
      Westlands is also the sole shareholder of Tri-Coastal Energy, Inc. The
      amount outstanding (principal and accrued interest) under this arrangement
      as of September 30, 2003 and 2002, was $6,708,474 and $6,967,975,
      respectively. Interest on the borrowings was at prime plus 2%. Principal
      was paid out of 85% of the net cash flow from the properties. Additional
      interest was payable from 50% of the net cash flow from these properties
      after the payment of principal. In January 1999, Heller declared the loan
      to be in default, due to the pledged properties failure to generate the
      required interest payments. This failure was solely attributable to the
      low worldwide prices for oil. As a result, the full amount of the Heller
      Loan had been reclassified as current debt. With the recovery of oil
      prices, the Heller Loan had come back into compliance and on October 15,
      2003, Heller declared the Heller Loan to be in full compliance. The
      obligations to Heller were non-recourse to the Company and payable solely
      out of the oil and properties pledged to Heller as collateral. By
      agreement between Heller and Tri-Coastal, the Termination Date of the
      Heller Loan was extended from October 15, 2003 until January 31, 2004. In
      the Company's third fiscal quarter (March through June 2003) Heller
      advised Tri-Coastal that it was desirous of liquidating Tri-Coastal's oil
      and gas properties in full satisfaction of the Heller Loan. Heller had
      previously wanted Tri-Coastal to sell its oil and gas properties, however,
      a purchase price acceptable to Heller could not be obtained.


                                      -20-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

            At Heller's request, Tri-Coastal engaged Madison Energy Advisors to
      assist in marketing Tri-Coastal's properties.

            Through Tri-Coastal's efforts, Sonata Investment Company, Ltd.,
      ("Sonata") an affiliate of Standard Energy Company of Columbus, Ohio,
      became aware of Heller's desire to either sell the Tri-Coastal properties
      or sell the Heller Loan.

            Sonata is an independent, privately held company that is not
      affiliated with the Company in management, ownership or in any other
      fashion. The Company has done other financings with Sonata previously, and
      the Company has consulted for Sonata and/or its affiliated entities
      regarding oil and gas projects, acquisitions, exploration and development
      plays.

      t 12 6 Sonata and Heller arrived at an agreement by which Sonata would
purchase the Heller Loan for $605,000. Sonata simultaneously entered into an
agreement with Tri-Coastal and the Company whereby Sonata would advance to
Tri-Coastal/Daleco an additional $50,000 for working capital and reduce the
amount of the Heller Loan to $655,000 ("Sonata Loan"). In consideration of
Sonata's reduction of the Heller Loan from $5,154,783 to $655,000, Daleco agreed
to:

            (1) issue to Sonata or its nominee 250,000 shares of Daleco Common
      Stock (see Note 11);

            (2) grant Sonata or its nominee warrants for 250,000 shares of
      Daleco Common Stock at $.906 per share with an expiration date of December
      31, 2007 (see Note 11(b)); and

            (3) extend the expiration dates for the warrants currently held by
      Sonata until December 31, 2007 (see Note 11 (b))


                                      -21-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

            On December 31, 2003, Sonata acquired the Heller Loan from Heller
      Financial, Inc. for $605,000. Tri-Coastal made a principal reduction
      payment of $23,298 to Sonata on December 31,2003. This payment was
      consistent with the provisions of both the Heller Loan and the Sonata Loan
      and was made in the ordinary course.

            Tri-Coastal, Sonata and Daleco entered into a Second Amended Loan
      Agreement amending the Heller Loan Agreement dated August 22, 1997
      ("Heller Loan Agreement") and the First Amended Loan Agreement dated March
      27, 1998 ("First Amended Loan Agreement") (hereinafter the Heller Loan
      Agreement, First Amended Loan Agreement and the Second Amended Loan
      Agreement are collectively referred to as the "Sonata Loan Agreement").

            The Sonata Loan Agreement provides that the Heller Loan: (i) was
      reduced to a three (3) year loan in the principal amount of $655,000 plus
      interest at the prime rate, to move, as established by the National City
      Bank, Columbus, Ohio plus three percent ("Sonata Loan"); (ii) will be
      repaid out of 85% of the net revenues from Tri-Coastal's oil and gas
      properties, but in no event will the amount of interest and principal paid
      in any six month period be less than one-sixth of the original face amount
      of the Sonata Loan, less any prepayments, plus all accrued and unpaid
      interest with the full amount of the Sonata Loan plus all accrued and
      unpaid interest paid in full on or before December 30, 2006; (iii) 66
      2/3rds of the net cash flow from production from Tri-Coastal's assets
      after satisfaction of the Sonata Loan; (iv) the issuance of stock and
      warrants as set forth above; and (v) Daleco's guaranty of the Sonata Loan.

            Under the terms of the Sonata Loan Agreement, the Sonata Loan will
      become a general obligation of the Company.

            As a result of the purchase of the Heller Loan and the entry into
      the Sonata Loan Agreement in the first quarter of fiscal year 2004, the
      Company realized:

            (1) Reduction of the Heller Loan from $5,154,783 to $655,000;

            (2) Reduction in accrued interest payable of $1,572,000;

            (3) Transaction costs recorded as Debt Placement Costs on the
      Balance Sheet of $285,046 consisting of:


                                      -22-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

                  (a) $226,500 for issuance of the 250,000 shares of common
            stock;

                  (b) $48,546 for the extension of warrants held by Sonata; and

                  (c) $10,000 in legal costs associated with the transaction.

            The transaction resulted in a net benefit amounting to $5,787,687.

      As of March 31, 2005, the amount owed to Sonata was $399,910 of which
      $181,577 is classified as long-term debt on the Company's financial
      statements.

      b.    First Regional Bank

      In September 1998, the Company assumed a $100,000 loan with First Regional
      Bank when it acquired Haly Corporation. Interest is at 6.9% and the loan
      matures December 12, 2005. The loan is secured by personal assets of Dov
      Amir an officer and Director of the Company.

      c.    Mr. Erlich, a former officer and director of the Company loaned
            $87,543 ("Loan Amount") to the Company. This loan is evidenced by a
            Note dated February 1, 2000 and has no maturity date. The Note
            provides that the Loan Amount shall earn interest at the rate of
            nine percent (9%) per annum. As of March 31, 2005, the total
            principle and accrued interest on the Note was $130,877.

      d.    In December 2004, the Company borrowed $40,000 under a loan
            agreement with an existing shareholder ("Lucas Note"). The note has
            a primary term of two years and bears an interest rate of 7.5% per
            annum. As of March 31, 2005, the total amount due under this note is
            $41,754 including $1,754 in accrued interest and $40,000 in
            principle of which $15,000 is classified as long-term debt.


                                      -23-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

11.   Capital Stock

<TABLE>
<CAPTION>
                                                                                                          NUMBER OF
                                                                                                           SERIES B
                                                                               NUMBER OF SERIES           PREFERRED
                                                  NUMBER OF COMMON                  A PREFERRED          SHARES PAR
                                                 SHARES, PAR VALUE            SHARES PAR VALUE          VALUE $0.01
                                                   $0.01 PER SHARE          $0.01 PER SHARE (1)       PER SHARE (1)
                                                   ---------------          -------------------       -------------
<S>                                                     <C>                         <C>                 <C>
Balance as of March 31, 2004                            28,337,402                       8,000             185,000

Issuance on payment of obligations (5)                      20,000
     By Murphy Communications

     Issued on Conversion of Debenture                       9,641

Issuance on Payment of Obligations to W. Smith              20,000
Private Placement                                          306,000

                                                        ----------                  ----------          ----------
Ending Balance as of March 31, 2005                     28,693,043                       8,000             185,000
                                                        ==========                  ==========          ==========
</TABLE>

(1)   On February 28, 2002, the Shareholders approved an amendment to the
      Articles of Incorporation of the Company, providing for an increase in the
      authorized common stock of the Company from 20,000,000 shares to
      50,000,000 shares of Common Stock. The Shareholders also approved the
      change of the Company's state of incorporation from Delaware to Nevada.
      This was affected through the merger of Daleco Resources Corporation, a
      Delaware corporation ("Old Daleco") with and into Daleco Resources
      Corporation of Nevada, a Nevada corporation ("New Daleco"). The merger was
      consummated as of March 26, 2002. The Articles of Incorporation of New
      Daleco provide for authorized capital stock of 50,000,000 shares of common
      stock, par value $0.01 and 20,000,000 shares of preferred stock, par value
      $0.01.

(2)   The Company issued 20,000 shares of common stock to Murphy Communications
      in consideration of its undertaking and assisting the Company with
      shareholder relations and communications.

(3)   The Company issued 9,641 shares of Common stock to the remaining holders
      of its 8% Debenture under the Debenture's required redemption terms.

(4)   On December 13, 2004, the Company sold 300,000 shares of common stock to
      three individuals pursuant to a private placement under Section 506 of
      Regulation D, promulgated under the Securities Act of 1933, as amended.
      The price per share was $0.30. The proceeds of the sale were used to cover
      the costs of the Company's audit for fiscal 2004, and re-audit of fiscal
      year 2003. In addition to the legal fees associated with the offering,
      6,000 were issued to the selling broker as consideration for its selling
      commission.

(5)   On December 1, 2004, the Company issued 20,000 shares to William Smith in
      consideration and compensation for his work in promoting the Company's
      patented product marketed under the Trademark ReNuGen(TM). The shares were
      registered utilizing Form S-8. (See the Company's Form 8-K dated December
      1, 2004).

      During the period ended March 31, 2005, the Company issued shares of it
      common stock in-lieu of monetary payments to certain third party venders,
      directors, attorneys and/or employees of the Company for services, debt
      and/or products provided. (See Note 2above.) In accordance with procedures
      established by SFAS 123, the Company values the stock consideration paid
      for all such market priced services, debt and/or products at the fair
      market value of the security issued at the time of its issuance. The
      Company has followed the practice of utilizing the average of the bid and
      offer closing prices for its stock for the five business days immediately
      preceding the issuance date as a measure of the fair market value of its
      securities


                                      -24-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

      a.    Common Stock Options

The Company granted the following options / warrants to purchase common stock as
of March 31, 2005.

<TABLE>
<CAPTION>
                                                               Number of           Weighted Average
                                                           Options / Warrants      Price per Share
                                                          ---------------------   -------------------
<S>                                                            <C>                   <C>
Options / Warrants Outstanding - March 31, 2004                9,289,579             $     0.96

Employee Stock Option
Granted                                                          400,000             $     0.85
Expired                                                               --                     --
Exercised                                                             --                     --
Cancelled                                                             --                     --

Stockholder warrants
Granted                                                          520,000             $     0.77
Expired                                                               --                     --
Exercised                                                             --                     --
Cancelled                                                     (2,240,000)            $     2.42

Options / Warrants Outstanding - March 31, 2005                7,969,579             $     0.53
</TABLE>

Stock Based Compensation

In March 2004, the shareholders of the Company approved the Independent
Director's Incentive Stock Option Plan. Two Directors, Messrs. Pryor and Lord
Gilbert qualified for option awards under the plan during fiscal 2004. Each of
these Directors received option for 200,000 common shares at an exercise price
equal to $0.85 per share. These option rights vest over a three-year period (but
only while the recipient is a Director), 100,000 shares in the first year, and
50,000 shares in each of years two and three. The options expire five (5) years
after issuance.


                                      -25-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

Of the 5,900,000 options outstanding, 4,781,300 are held by current officers,
directors and employees of the Company. The exercise price for the options held
by insiders range from $0.25 per share to $1.08 per share.

All stock options issued to employees have an exercise price not less than the
fair value of the Company's common stock on the date of grant, and in accounting
for such options utilizing the intrinsic value method there is no related
compensation expense recorded in the Company's financial statements. Had the
Company determined compensation cost based on the fair value of the stock option
on their dates of grant pursuant to SFAS 123, the Company's net income (loss)
and earnings (loss) per share would have changed to the pro forma amounts
presented below:

                                             For the three-months ended March 31
                                                       2005           2004
                                                  ---------      ---------
Net loss attributable to common shareholders
 (as reported)                                    $(588,328)     $(649,903)

Stock based employee
  compensation expense determined
  under fair value based method for
  all awards                                        (70,089)       (91,343)
                                                  ---------      ---------

Pro forma net income (loss)                       $(658,417)     $(741,246)
                                                  =========      =========

Per Share
         As reported                              $   (0.02)     $   (0.02)
         Pro forma                                $   (0.02)     $   (0.03)

There were no options granted during the quarters ended March 31, 2005 and 2004.

      b.    Warrants


                                      -26-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

(1)   Common Stock Warrants Attached to Debenture

On September 15, 2004, the Company entered into the First Amendment to Master
Distribution and Marketing Agreement (See Exhibit 10.36 to the Company's Annual
Report) ("First Amendment"). Under the terms of the First Amendment, Sumitomo's
2,240,000 warrants were cancelled.

(2)   Financing Sources

On July 21, 1998, a total of 263,638 warrants expiring on November 20, 2003 were
granted to four persons who loaned the Company a total of $145,000 in July 1998.
(See Note 7b). The expiration date for these warrants was extended from November
20, 2003 to November 20, 2005 in Fiscal Year 2000. The warrants may be exercised
at any time before the expiration date at an exercise price of $0.55

On November 28, 2001, a total of 435,941 warrants to purchase common stock were
granted to Sonata Investment Ltd. (warrants for 395,273 shares of common stock
("Sonata Warrant")) and Standard Energy (warrants for 40, 668 shares of common
stock ("Standard Warrant")) as consideration for entering into the Loan
Conversion Agreement dated August 1, 2001. The Loan Conversion Agreement
extended the date by which the Company had to satisfy its obligations to both
Sonata Investment Company, Ltd. ("Sonata") (See Note 10(a)) and Standard Energy
Company ("Standard") and granted both Sonata and Standard the right to convert
the debt into common stock of the Company at such time as the Company advised
Sonata and Standard of its intent to satisfy the Company's obligations to one or
both entities. Sonata and Standard are affiliated entities. The exercise price
was fixed at $1.05. The Sonata and Standard Warrants were to have expired August
1, 2002. However, the Company agreed to extend the termination date of the
Sonata and Standard Warrants until July 31, 2004 in exchange for Sonata's
relinquishing its twenty percent (20%) interest in the net profits of the
Company's subsidiary Sustainable Forest Industries, Inc. (See Note 10(a)). As
additional consideration for the acquisition of the Heller Loan, the expiration
date for the Sonata and Standard Warrants was extended until December 31, 2007.
250,000 warrants were also issued to Sonata Investment Company as additional
consideration for acquisition of the Heller Loan at an exercise price of $.906
per share with an expiration date of December 31, 2007 (See Note 10(a)).

On September 1, 2004, the Company granted to Herbert L. Lucas warrants for
20,000 shares of common stock with an exercise price of $.44 per share. The
warrants expire on August 31, 2006. The Warrants were given in consideration for
Mr. Lucas having made a loan of $40,000 to the Company's wholly-owned
subsidiary, CA Properties, Inc. (See Note 10 (d) above.)


                                      -27-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

(3)   Terra Silex Warrant

Under a Stock Purchase Agreement dated September 11, 2001 by and among the
Company and Terra Silex Holding, LLC, Terra Silex was granted a warrant for
250,000 shares ("Terra Silex Warrant") at an exercise price of $1.25 The Terra
Silex Warrant expires on December 31, 2006.

(4)   Smith Warrants

On September 1, 2004, the Company granted Mr. William Smith, a recognized expert
in sewage treatment facilities and the processing of municipal waste, warrants
for 250,000 shares of common stock at an exercise price of $.65 per share. The
warrants granted to Mr. Smith expire on August 31, 2007. They were issued to Mr.
Smith in consideration for his assistance and expertise in the marketing and
development of the Company's potential product ReNuGen(TM) used in sewage waste
facilities.

(5)   Conley & Anthony Warrants

On February 27, 2003, warrants for 300,000 shares of Stock at a price of $0.13
per share were granted to each of Mr. Robert Conley and Mr. Bob Anthony in
consideration for their consultation and individual expertise in regard to
product development and application market identification with regard to the
Company's potential Sierra Kaolin(TM) and Zeolite products respectively.

Payment of Accrued Dividends

There were no cash dividend payments on either Series of Preferred Stock made
during the period March 31, 2004 to March 31, 2005. See also Note 14(a),
regarding payment of accrued dividends on the Series A Preferred Stock held by
the Kanes through March 31, 2005.

12.   Income Taxes

      The Company has no current and deferred taxes payable. The Company and its
oil and gas subsidiaries have significant tax losses to be applied against
future income attributable to its oil and gas properties. The subsidiary
Companies' tax filings show net operating losses to be applied against future
taxable income in the amount of approximately $26.7 million to be utilized in
various years through 2009. The tax benefit of these losses is estimated to be
approximately $10 million. No potential benefit of these losses has been
recognized in the accounts. To the extent the Company has income attributable to
its mineral properties, this income may be subject to Federal taxation.


                                      -28-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

13.   Employment Contracts and Commitments

a.    On November 16, 2001, the Company entered into a Stock Purchase Agreement
      with SCOA ("SCOA SPA"). As a condition to the closing of the SCOA SPA,
      SCOA required that the Company enter into Key Man Employment Contracts
      ("Key Man Contracts") with Messrs. Robert E. Martin, Gary J. Novinskie and
      Dov Amir. The Key Man Contracts are for an initial three (3) year term.
      The Key Man Contracts provide for acceleration of the vesting of incentive
      options should the Key Man be terminated prior to the expiration of the
      term of the Key Man Contracts. Each of Messrs. Novinskie and Amir are
      granted options for 500,000 shares of Company Common Stock while Mr.
      Martin was granted options for 1,000,000 shares of Common Stock. There are
      like provisions for the acceleration of the salary due each employee over
      the life of the Contract. (See Note 8.)

b.    The Key Man Contract also provided for a bonus to Messrs. Novinskie and
      Amir of $50,000 to be paid one-half in cash and one-half in stock. (See
      Note 13(a) above). Mr. Novinskie's cash bonus has not been paid. Mr.
      Amir's bonus also has not been paid. (See Note 8.) Under Mr. Martin's Key
      Man Contract, he was granted a salary of $50,000 for the six month period
      April 1, 2002 through September 30, 2002 ($8,333.34 per month), and
      $100,000 per year for the remaining two (2) years of his Key Man Contract.
      In accordance with his contract, the Company commenced paying Mr. Martin's
      salary as of April 1, 2002. (See Note 8(b)).

14.   Litigation Settlement and Pending Litigation

a.    Kane v. Daleco Resources Corp., et. al. On or about January 14, 2000,
      Stanley B. Kane, et. al. commenced an action in the Superior Court, Los
      Angeles, California to enforce their right to have the Company repurchase
      16,000 shares (stated value $50.00 per share) of Series A, 10% Cumulative
      Preferred Stock. The Plaintiffs had the right to put the stock to the
      Company on August 20, 1999, which they did. Although the Company continued
      to pay quarterly dividends on the Series A Preferred Stock, it did not
      redeem the shares due to its lack of liquidity. Also named in the suit
      were Messrs. Dov Amir (a current officer and director of the Company) and
      Mr. Louis Erlich (who was an officer and director of the Company at the
      time of the issuance of the Series A Preferred Stock) who had given
      personal guaranties to the Plaintiffs. On September 18, 2000 a Final
      Judgement was entered in Los Angeles Superior Court in favor of the Kanes
      and against Daleco and Lou Erlich in the principal amount of $441,315.43
      ("Final Judgement").


                                      -29-
<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

      Mr. Amir satisfied his obligation under his guaranty to purchase one-half
      or 8,000 shares from the Plaintiffs and was dismissed from the case on
      September 19, 2000. The Company entered into Stipulation for the Entry of
      Final Judgment and Judgment thereon ("Final Judgment") as to Daleco
      Resources Corporation, pursuant to which the Company shall have until
      August 1, 2001 in which to redeem the remaining 8,000 shares for $400,000
      plus accrued dividends through the date of settlement at a rate of ten
      percent (10%) per annum. The Kanes have been granting the Company an
      extension of the August 1, 2001 date on a month-to-month basis. On
      December 7, 2001, the Company paid the Kanes $90,000 representing all
      accrued and unpaid dividends on the Series A Preferred Stock through
      December 31, 2001. The Company has paid all dividends due and payable to
      the Kanes for periods through the fiscal quarter ending June 30, 2002. As
      of March 31, 2005 the sum due to the Kanes under the Judgment was $641,184
      plus attorney's fees.

      Mr. Erlich filed a Cross Complaint against the Company for payment of his
      obligation under his guarantee and his loans to the Company. (See Note
      7(a)). The Company and Mr Erlich have agreed to stay his counterclaim
      until the Company can satisfy the Erlich Note (See Note 7(d)) and the suit
      will be dismissed.

      On January 20, 2005, the Company entered into an Agreement with the Kanes
      providing for payment in full of the $400,000 in principal plus all
      accrued and unpaid interest and costs under the Final Judgment by July 5,
      2005. The Agreement also provides that should the Company not have
      satisfied the Final Judgement in full by May 1, 2005, then the Company
      would pay to the Kanes an amount equal to $75,000 per week until the Final
      Judgement plus all accrued and unpaid interest and costs are satisfied in
      full.

      Under the Agreement, the Company may not make any payments to Mr. Amir or
      Mr. Erlich until the Final Judgement is paid in full. Additionally,
      repayments of certain third party costs are also restructured in the
      amount. The Company believes that it will have paid off the entire Final
      Judgement by May 1, 2005.

      The Company did not make a payment to the Kanes on or before May 2, 2005.
      Rather, management, with the approval of the Board of Directors,
      negotiated an amendment to the Agreement of January 20, 2005 ("First
      Amendment") by which the Company was required to pay $50,000 on or before
      May 11, 2005 with the remainder of all monies due the Kanes under the
      Final Judgment, as well as interest and attorney's fees by August 10,
      2005. The payment of $50,000 was made to the Kanes by wire transfer on May
      11, 2005. The First Amendment is dated as of May 9, 2005 and was approved
      by the Board of Directors on May 9, 2005.


                                      -30-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND 2004 - PREPARED BY MANAGEMENT (UNAUDITED)
================================================================================

15.   Acquisitions/Mergers

      Daleco's 16/6, Inc.

      As of September 3, 2004, 16/6, Inc., a wholly owned subsidiary of Daleco,
was merged with and into Daleco Resources Corporation. 16/6, Inc. no longer
exists as a separate entity.

16.   New Accounting Standard

      In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. This Statement establishes standard for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances). The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets, and certain obligations that can be settled with shares of stock.

      Effective July 1, 2003, Daleco adopted the Statement as required, for its
mandatory redeemable Series A, 10% Cumulative Convertible Preferred Stock,
stated value $50.00 and par value $.01, in line with the satisfaction of its
$400,000 obligation to Mr. Kane, as mentioned under Note 14(a). As a result, the
preferred securities, previously included as part of the statement of
shareholders' equity, were reclassified to a liability account.

      In accordance with the requirements of SFAS No. 150, prior period amounts
have not been reclassified to be in conformity with the current presentation.


                                      -31-
<PAGE>

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

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

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

      During the second fiscal quarter, ended March 31, 2005 the Company
      continued to pursue its plans for the commercialization of the mineral
      holdings of its wholly owned subsidiary, Clean Age Minerals, Inc. as its
      primary objective. Sustainable Forest Industries, Inc., the Company's
      wholly owned subsidiary involved in tropical timber, continued its efforts
      to develop market awareness for its products while the Company's
      subsidiaries active in the oil and natural gas sector focused on its
      operations to maintain production levels.


                                      -32-
<PAGE>

      The Company's performance during its second fiscal quarter ended March 31,
      2005, was influenced by a variety of factors typical within the natural
      resource sectors which were beyond the control of management, such as the
      variability of the demand for and the pricing of crude oil and natural gas
      within the Company's operating areas and the demand and pricing, both
      domestically or internationally, for the Company's timber and industrial
      minerals. As in previous periods, the Company remained highly dependent on
      the revenues derived from the sale of its oil and natural gas production.
      During the quarter ended March 31, 2005, the Company's energy segments
      benefited from higher oil and gas prices. These benefits translated into
      37% higher revenues reaching $404,022 in 2005 versus $295,077 in the 2004
      fiscal quarter. The Company's net operating margins from the segment also
      increased for the quarter ending March 31, 2005 to a level of $252,616 as
      compared to $13,999 for the prior year's quarter. The significant quarter
      to quarter improvement in oil and gas operating margins is directly
      associated with the combination of sustained higher product prices, wells
      being returned to producing status and a return to more normal level of
      well operating expenses in the Company's second quarter (i.e., reduced
      well repair expense in quarter).

      During the quarter, the Company's direct operational expenditures related
      to its mineral holdings declined to a level of $3,950 as compared to the
      prior year's quarter level of $11,391 This reduction is the result of the
      Company utilizing its available stock piles of mineral products (i.e.
      Sierra Gold (TM) and ReNuGen (TM)) to supply the current quarter's demand.
      Deliveries of the above Calcium Carbonate and Kaolin mineral products
      improved during the quarter which increased revenues by about 19% quarter
      to quarter to a level of $8,198 for the period ended March 31, 2005. To
      date, application testing of ReNuGen (TM) has been successful at several
      sites. Information gained from these test applications has been
      instrumental in increasing awareness and acceptance of the product with
      the targeted Waste Water Treatment industry. Additional applications for
      Clean Age Minerals' CA-Series engineered products are undergoing
      investigative work . The Company's efforts to commercialize the Sierra
      Kaolin products from its New Mexico Kaolin deposit are ongoing and are
      focused on product development as well as the identification of
      opportunities for both joint venturing and/or the internal development of
      Kaolin processing capabilities. During the quarter ending March 31, 2005,
      the Company entered into operating agreements with Tecumseh Professional
      Associates ("TPA") to secure its services as site manager for its Calcium
      Carbonate and Kaolin mineral deposits (see TPA Discussion).

      Within its timber segment, the efforts of Sustainable Forest Industries
      were held at minimal levels as a result of the Company's capital
      restraints. Plans are to continue to facilitate the introduction of a
      construction shingles product utilizing the Wallaba tropical hardwood
      species later this fiscal year. Market surveys and certification testing
      have indicated that the Wallaba Roofing and Siding Shingles have
      significant performance capabilities as compared to products currently
      available on the market. Efforts also continue to identify distribution
      and financing partners to support these efforts.


                                      -33-
<PAGE>

      For the three month period ended March 31, 2005, total operating revenues
      increased by $110,225 (32%) to a level of $453,726 for the quarter. Direct
      operating expenses declined by $147,036 (48%), exclusive of non-cash
      charges, The decline in direct operating expenses and the subsequent
      improvement in general operating margins is directly attributed to the
      impact of the Company's efforts during the immediate preceding calendar
      which focused on returning certain of the company's oil and gas wells to a
      producing status and the return to more normal level of "repair well
      expenses" for the Company's operated oil and gas properties as compared
      with the prior year's period. For the quarter, the Company recorded a loss
      of $511,295 as compared to a loss of $603,105 for the prior fiscal year's
      first quarter.

Item 3 -    Controls and Procedures

            Sarbanes-Oxley Act

      On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
      2002 ("SOA"). The SOA is the first major revision to the securities laws
      since the enactment of the Securities Act of 1933 and the Securities and
      Exchange Act of 1934. The SOA, promulgated in large part in response to
      the collapse of Enron/Worldcom, covers a variety of measures all of which
      will not be covered here.

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

      The Company believes that it has historically provided its financials in
      this fashion, having separately reported and presented each segment of the
      Company's business for the past few years.

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


                                      -34-
<PAGE>

      Because the drafting and approval of all the Company's reports is a
      collective process, the suggestions of the SOA to establish Disclosure
      Committees, a Disclosure Controls Monitor, conduct internal drafting
      sessions, distribution of draft reports and dealing with internal trading
      policies are presently either not applicable or are already implemented,
      have been and are part of the Company's operating procedures.

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

      The SEC has acknowledged that a "one-size fits all" approach to
      establishing effective disclosure controls and procedures is not
      appropriate and has not prescribed any specific disclosure controls and
      procedures. Rather, the SEC expects "each company to develop a process
      that is consistent with its business and internal management and
      supervisory practice." The Company believes that it has fully complied
      with the intent of the SOA and Regulations promulgated by the SEC.

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


                                      -35-
<PAGE>

      After receipt of and in response to a comment letter from the Securities
      and Exchange Commission ("SEC") and after discussion with the Staff of the
      SEC, all of which focused the Company on an issue of the adequacy of the
      financial statements as contained in the Company's Form 10-QSB for the
      quarter ending March 31, 2005, the Company's Board of Directors, Audit
      Committee and Chief Financial Officer, after consultation with the
      Company's independent accountants, elected to restate its financial
      statements in this quarterly report. The Company believes that this
      restatement was not due to any defect in the effectiveness of the
      Company's disclosure controls and procedures. The Company has in the past
      and will continue to refer any issue regarding the proper presentation of
      its financial statements its independent accountants. However, as noted
      below, the Company is considering taking other steps to further ensure
      that its disclosure controls and procedures are effective.

      The accounting issue in question which precipitated the Company's decision
      to restated its financials for the fiscal quarter ending March 31, 2005,
      deals with the treatment of the stock and warrants received by the Company
      is the transaction with PSNet Communications (a private company) and
      subsequently with its successor in interest Ostara Corporation (a public
      corporation). (See Part II, Item 2(b) of this Form 10-QSB.) The Company
      believed, at the time of its initial filing of its Form 10-QSB for the
      period ending March 31, 2005, that its presentation clearly and accurately
      represented the transaction. The Company accounted for its investment in
      privately held PSNet at cost. After Ostara acquired PSNet, the Company
      continued to account for the investment in Ostara at cost, the original
      recorded investment in PSNet. The Company relied upon the FAS 115 glossary
      definition of fair value "Quoted market prices in active markets are the
      best evidence of fair value." Since Ostara is not actively traded but
      thinly traded in the pink sheets, the Company interpreted its receipt of
      3,000,000 Ostara common stock and related warrants as outside the scope of
      FAS 115. Approximately 2,050,000 of the 3,000,000 shares of Ostara common
      stock received by the Company under the terms of the transaction were, by
      contract, distributed to the shareholders of the Company and the issuance
      and distribution of those shares was solely in the hands of Ostara. The
      Company believed that by accounting for the Ostara common stock
      distributed to its shareholders on its financial statements it would be
      misleading anyone who reviewed the Company's quarterly financial
      statements as to the true value of the Company. Likewise, since the
      approximately 950,000 shares of Ostara common stock received by the
      Company could not be sold for a period of one year under the terms of the
      Asset Sale Agreement, the accounting for those shares based on the market
      value of the Ostara common stock would also be misleading. Finally, the
      Company believed that any value given to the 15,000,000 Warrants attached
      to the Ostara common stock should also not be valued until the market
      value of the Ostara common stock approximated the exercise price of the
      warrant. The exercise price of the warrants started at $2.00 per share for
      the first 90 days and then escalated $2.00 per share for each of the three
      remaining quarters of the warrants one-year term.


                                      -36-
<PAGE>

      However, after giving consideration to all matters and information brought
      to its attention subsequent to its initial filing, the Company realized
      that since it had effective equitable title to the original 3,000,000
      shares of Ostara common stock as of January 13, 2005 (the date Ostara
      reported the acquisition of PSNet) and thus "beneficial ownership" of
      those shares until they were distributed to the Company's shareholders, it
      must recognize as a gain from the exchange of securities (PSNet shares for
      Ostara shares) an amount equal to $40,402. This amount reflects both the
      market price of the Ostara common stock and the calculated value of the
      associated warrants as of January 13, 2005. Based upon this analysis and
      after discussion with its independent accountants, the Company elected to
      restate its financial statements for the fiscal quarters ending March 31,
      2005 and June 30, 2005.

      Disclosure Controls and Procedures: The Registrant's Board of Directors,
      Audit Committee and Chief Financial Officer have reevaluated the
      Registrant's disclosure controls and procedures (as defined in Rule
      13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
      amended ("'34 Act")) and believes that they are effective to provide
      reasonable assurance that information required to be disclosed by the
      Registrant in reports filed or submitted by it under the '34 Act are
      recorded, processed, summarized and reported within the time periods
      specified in the '34 Act rules and form, and to provide reasonable
      assurance that information required to be disclosed by the Company is
      accumulated and communicated to the Company's management, including the
      Company's Chief Executive Officer and Chief Financial Officer, as
      appropriate to allow timely decisions regarding disclosure. The Registrant
      believes that the Ostara type transaction is not one that the Registrant
      encounters in its normal course of business and should not be a recurring
      event. However, the Registrant is evaluating ways to ensure that its
      financial statements are always presented in a clear, concise and accurate
      manner. To achieve that result, the Registrant is considering: (1)
      expanding its internal accounting staff; (2) when confronted with an
      accounting presentation of a complex transaction in the future, seeking
      the opinion of additional financial reporting advisory firms; and, (3) to
      the extent permissible and permitted by regulation and law, seeking
      guidance from the Division of Corporate Finance of the Securities and
      Exchange Commission, regarding the applicable accounting principal and
      presentation in question.


                                      -37-
<PAGE>

PART II. OTHER INFORMATION

Item 1.  None

Item 2.  Change in Securities.

      (a)Pursuant to the Second Amended Loan Agreement dated December 31, 2003
      between Sonata Investment Company, Ltd. ("Sonata"), Tri-Coastal Energy,
      L.P. and Daleco, Sonata, or its nominee was given 250,000 shares of Daleco
      common stock. The average of the closing bid and asking price on December
      30, 2003 for Daleco common stock was $.906. The Company recorded a cost of
      $226,500 for the issuance of these shares. The Company also issued to
      Sonata, or its nominees, warrants for 250,000 shares of Daleco common
      stock at an exercise price of $.906 per share. These warrants have an
      expiration date of December 31, 2007. Daleco also extended the expiration
      date for other warrants held by Sonata with exercise prices ranging from
      $.55 to $1.05 until December 31, 2007. The Company recorded a cost of
      $48,546 resulting from the extension of these warrants.

      In October 2003, Terra Silex Holdings, Inc. exercised its rights under
      Paragraph 6.3 of the Terra Silex Stock Acquisition Agreement, dated
      September 11, 2001 ("Terra Silex Agreement"). Paragraph 6.3 of the Terra
      Silex Agreement gives Terra Silex the right to acquire additional shares
      of Daleco common stock if Daleco were to sell more than 500,000 shares in
      one block. The conversion of the Cornell Capital debenture was the event
      that triggered Terra Silex's right under Paragraph 6.3 Terra Silex
      purchased 220,169 shares at a price of $.117 per share.

      Effective September 15, 2004, the Company entered into the First Amendment
      to the Master Distribution and Marketing Agreement ("First Amendment")
      with Sumitomo Corporation of America ("Sumitomo"). (See the Company's Form
      8-K dated September 15, 2004). Under the First Amendment, the warrants to
      purchase up to 1,700,000 shares of the Company's common stock granted in
      the Company's Stock Purchase Agreement with Sumitomo dated as of November
      16, 2001 and the warrants to purchase up to 540,000 shares of the
      Company's common stock granted in the Company's Master Distribution and
      Marketing Agreement with Sumitomo dated as of November 16, 2001 were
      cancelled.

      (b) Special Dividend. Pursuant to an agreement with PSNet Communications
      effective December 1, 2004 ("Asset Sale Agreement") the Company agreed to
      sell its I-Squared and I-Top technology to PSNet in exchange for 3,000,000
      shares of PSNet common stock ("PSNet Shares"). Of the PSNet Shares to be
      issued, two-thirds of the PSNet Shares were to be issued to the
      shareholders of the company and one-third of the PSNet Shares were to be
      retained by the Company for a period of one year after the Closing Date.
      The "Closing Date" for the transaction was established December 10, 2004
      or such other mutually agreeable . The Asset Purchase Agreement required
      PSNet to file a registration statement with the Securities and Exchange
      Commission to register the PSNet Shares so that the PSNet Shares issued to
      the Registrant's shareholders would be freely trading shares. The
      Registrant and PSNet agreed to extend the Closing Date until PSNet's
      registration statement became effective and it had the requisite number of
      freely trading PSNet Shares required for distribution to the Registrant's
      shareholders as of the Record Date (as that term is defined below). The
      Asset Purchase Agreement required PSNet to use its best efforts to have an
      effective date for its registration statement of on or before March 31,
      2005. There was no market for the PSNet Shares at the time the Company
      entered into the Asset Purchase Agreement.


                                      -38-
<PAGE>

      In a press release dated January 13, 2005, Ostara Corporation, a public
      corporation ("Ostara"), announced that it had acquired PSNet. As successor
      in interest to PSNet, Ostara issued its common stock in place of the PSNet
      Shares to the Company and its shareholders of record as of January 6, 2005
      ("Record Date). Since Ostara was a publicly traded company, the Closing
      Date became January 13, 2005. In accordance with the provisions of the
      Asset Sale Agreement, approximately, 2,050,000 shares of Ostara common
      stock were issued, in the nature of a special dividend, to the
      shareholders of record of the Company as of the Record Date. The Company
      retained, in accordance with the Asset Sale Agreement, 950,000 shares of
      Ostara common stock. The Asset Sale Agreement prohibits the Company from
      selling the Ostara common stock received by it in the transaction for a
      period of one year. Warrants for 15,000,000 shares of Ostara common stock
      were also issued under the Asset Sale Agreement. For each share of Ostara
      common stock issued to the Company's shareholders as of the Record Date
      five warrants were also issued. The warrants have a term of one (1) year
      and have an exercise price as follows:

            a. For the first 90 days after the Closing Date, the exercise price
      per share of Stock shall be $2.00.

            b. For the 91st through the 180th day after the Closing Date, the
      exercise price per share of Stock shall be $4.00.

            c. For the 181st day through the 270th day after the Closing Date,
      the exercise price per share of Stock shall be $6.00.

            d. For the 271st day through the first anniversary of the Closing
      Date the exercise price per share of Stock shall be $8.00.

      One share of Ostara common stock was issued for each 14 shares of Daleco
      common stock held as of the Record Date. In addition to the Ostara common
      stock issued, each Record Date Shareholder received a warrant to purchase
      (5) additional shares of Ostara common stock for each share of Ostara
      common stock issued.


                                      -39-
<PAGE>

Item 3      Sonata Debt.

      In August 1997, the Company entered into an arrangement with Heller
      Financial, Inc. ("Heller") whereby Heller agreed to provide the Company
      with up to $15,000,000 to rework existing horizontal wells, re-complete
      its vertical wells as horizontal wells, and develop additional acreage.
      Under the terms of the agreement, all of the properties of Westlands were
      transferred to a newly formed limited partnership, Tri-Coastal Energy,
      L.P., the general partner of which is Tri-Coastal Energy, Inc.,
      (Tri-Coastal) and the sole limited partner of which is Westlands.
      Westlands is also the sole shareholder of Tri-Coastal Energy, Inc. The
      amount outstanding (principal and accrued interest) under this arrangement
      as of September 30, 2003 and 2002, was $6,708,474 and $6,967,975,
      respectively. Interest on the borrowings was at prime plus 2%. Principal
      was paid out of 85% of the net cash flow from the properties. Additional
      interest was payable from 50% of the net cash flow from these properties
      after the payment of principal. In January 1999, Heller declared the loan
      to be in default, due to the pledged properties failure to generate the
      required interest payments. This failure was solely attributable to the
      low worldwide prices for oil. As a result, the full amount of the Heller
      Loan had been reclassified as current debt. With the recovery of oil
      prices, the Heller Loan had come back into compliance and on October 15,
      2003, Heller declared the Heller Loan to be in full compliance. The
      obligations to Heller were non-recourse to the Company and payable solely
      out of the oil and properties pledged to Heller as collateral. By
      agreement between Heller and Tri-Coastal, the Termination Date of the
      Heller Loan was extended from October 15, 2003 until January 31, 2004. In
      the Company's third fiscal quarter (March through June 2003) Heller
      advised Tri-Coastal that it was desirous of liquidating Tri-Coastal's oil
      and gas properties in full satisfaction of the Heller Loan. Heller had
      previously wanted Tri-Coastal to sell its oil and gas properties, however,
      a purchase price acceptable to Heller could not be obtained.

      At Heller's request, Tri-Coastal engaged Madison Energy Advisors to assist
      in marketing Tri-Coastal's properties.

      Through Tri-Coastal's efforts, Sonata Investment Company, Ltd., ("Sonata")
      an affiliate of Standard Energy Company of Columbus, Ohio, became aware of
      Heller's desire to either sell the Tri-Coastal properties or sell the
      Heller Loan.

      Sonata is an independent, privately held company that is not affiliated
      with the Company in any fashion. The Company has done other financings
      (see Note 10 (a) above) with Sonata previously, and the Company has
      consulted for Sonata and/or its affiliated entities regarding oil and gas
      projects, acquisitions, exploration and development.

      Sonata and Heller arrived at an agreement by which Sonata would purchase
      the Heller Loan for $605,000. Sonata simultaneously entered into an
      agreement with Tri-Coastal and the Company whereby Sonata would advance to
      Tri-Coastal/Daleco an additional $50,000 for working capital and reduce
      the amount of the Heller Loan to $655,000 ("Sonata Loan"). In
      consideration of Sonata's reduction of the Heller Loan from $5,154,783 to
      $655,000, Daleco agreed to:


                                      -40-
<PAGE>

            (1) issue to Sonata or its nominee 250,000 shares of Daleco Common
      Stock;

            (2) grant Sonata or its nominee warrants for 250,000 shares of
      Daleco Common Stock at $.906 per share with an expiration date of December
      31, 2007; and

            (3) extend the expiration dates for the warrants currently held by
      Sonata until December 31, 2007.

      On December 31, 2003, Sonata acquired the Heller Loan from Heller
      Financial, Inc. for $605,000. Tri-Coastal made a principal reduction
      payment of $23, 298 to Sonata on December 31,2003. This payment was
      consistent with both the provisions of the Heller Loan and the Sonata Loan
      and was made in the ordinary course.

      Tri-Coastal, Sonata and Daleco entered into a Second Amended Loan
      Agreement amending the Heller Loan Agreement dated August 22, 1997
      ("Heller Loan Agreement") and the First Amended Loan Agreement dated March
      27, 1998 ("First Amended Loan Agreement") (hereinafter the Heller Loan
      Agreement, First Amended Loan Agreement and the Second Amended Loan
      Agreement are collectively referred to as the "Sonata Loan Agreement").

      The Sonata Loan Agreement provides that the Heller Loan: (i) was reduced
      to a three (3) year loan in the principal amount of $655,000 plus interest
      at the prime rates, to move, as established by the National City Bank,
      Columbus, Ohio plus three percent ("Sonata Loan"); (ii) will be repaid out
      of 85% of the net revenues from Tri-Coastal's oil and gas properties, but
      in no event will the amount of interest and principal paid in any six
      month period be less than one-sixth of the original face amount of the
      Sonata Loan, less any prepayments, plus all accrued and unpaid interest
      with the full amount of the Sonata Loan plus all accrued and unpaid
      interest paid in full on or before December 30, 2006; (iii) 66 2/3rds of
      the net cash flow from production from Tri-Coastal's assets after
      satisfaction of the Sonata Loan; (iv) the issuance of stock and warrants
      as set forth above; and (v) Daleco's guaranty of the Sonata Loan.

      Under the terms of the Sonata Loan Agreement, the Sonata Loan will become
      a general obligation of the Company.

      As a result of the purchase of the Heller Loan and the entry into the
      Sonata Loan Agreement, the Company realized:


                                      -41-
<PAGE>

            (1) Reduction of the Heller Loan from $5,154,783 to $655,000;

            (2) Reduction in accrued interest payable of $1,572,000;

            (3) Transaction costs recorded as Debt Placement Costs on the
      Balance Sheet of $285,046 consisting of:

                  (a) $226,500 for issuance of the 250,000 shares of common
            stock;

                  (b) $48,546 for the extension of warrants held by Sonata; and

                  (c) $10,000 in legal costs associated with the transaction.

      The transaction resulted in an extraordinary net benefit amounting to
      $5,787,687.

      As a result of the extraordinary benefit resulting from Sonata's
      acquisition of the Heller Loan as set forth above, the "Earnings Per Share
      Calculations" should be compared as follows:

<TABLE>
<CAPTION>
                                                                     1st Fiscal Quarter  Fiscal Year End
                                                                          12/31/03           9/30/04
                                                                          --------           -------
<S>                                                                     <C>               <C>
Net Income (loss) (before gain on debt forgiveness)                     $  (663,164)      $(2,231,957)
Basic and Fully Diluted Income (loss)/Share                             ($      .02)      ($      .08)
(calculated on 28,307,975 shares outstanding)

Net Gain on debt forgiveness                                            $ 5,787,687       $ 5,787,687
Basic and Fully Diluted Net Gain (Loss)/share                           $0.20/$0.15       $0.20/$0.15

Net Income (including gain on debt forgiveness)                         $ 5,124,523       $ 3,555,730
Basic and Fully Diluted Net Income (Loss)/Share                         $0.18/$0.13       $0.13/$0.09
     calculated on 27,829,106 weighted average shares outstanding,
     Basic & 39,327,554 shares, Fully Diluted at 12/31/03 and
     28,206,666 weighted shares outstanding, Basic & 37,816,622
     shares, Fully Diluted Basis at 9/30/04)
</TABLE>


                                      -42-
<PAGE>

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

      On February 24, 2005, the Company held its Annual Meeting of the
Shareholders. At the Annual Meeting, the following matters were voted upon:

      1. Election of Directors: The following persons were elected to serve as
directors of the Company until the next Annual Meeting of Shareholders: Dov
Amir, Gary J. Novinskie, Alfonso Knoll, H. Paul Pryor, and Robert E. Martin. The
votes for these directors were as follows:

NAME OF NOMINEE             FOR                AGAINST             ABSTAIN
---------------             ---                -------             -------
Dov Amir                 24,862,784               0              1,107,694
Gary J. Novinskie        25,268,092               0                702,387
Robert E. Martin         25,925,564               0                 44,914
Alfonso Knoll            24,752,845               0              1,217,630
Lord Gilbert (John)      25,878,492               0                 91,986
H. Paul Pryor            25,889,564               0                 80,914

      2. Ratification of Vasquez & Company LLP as the Company's independent
accountant for Fiscal Year 2005.

                 FOR                     AGAINST                  ABSTAIN
                 ---                     -------                  -------
              25,831,506                 80,063                   58,909

The Company incorporates by reference its definitive Proxy Statement filed with
the Securities and Exchange Commission on February 1, 2005, filed in accordance
Regulation 14A under the Securities and Exchange Act of 1934, as amended.


                                      -43-
<PAGE>

Item 5      Other Information

      a. Registrants Definitive Proxy Statement dated January 25, 2005.

      b. The Company's common stock was trading on the Over the Counter Market,
      Bulletin Board ("OTCBB"). On December 12, 2004, the Company's securities
      were assigned to trade on the "Pink Sheets Market." This change was the
      result of the Company's filing its re-audited financial statements for the
      fiscal year ended September 30, 2003 late. The refilling of the Company's
      2003 audited statements was necessitated by the Company's prior auditor
      not being qualified under the PCAOB (as required by the Sarbanes-Oxley Act
      of 2002) at the time of the issuance of the Company's financial statements
      in January 2004. (See the Company's Form 8-K's dated September 14, 2004,
      and December 2, 2004.) The Company has subsequently filed all required
      financial statements and has taken and continues to take steps to return
      its securities to the OTCBB market. The Company has never received
      official written notice from any party as to the formal removal of its
      securities from the OTCBB and only learned of this move from securities
      traders. On or about March 14, 2005 the Company's shares were again listed
      on the Over the OTCBB.

      c. Commencing on March 31, 2005, the 2,000,050 shares of Ostara Common
      Sock and equivalent warrant rights were distributed to the Shareholders of
      the Company as a special dividend in accordance with the Asset Acquisition
      Agreement dated December 1, 2004 by and among PSNet, Inc.(subsequently
      merged with Ostara Corporation) and the Company ("AAA"). Under the terms
      of the AAA, the Company transferred to Ostara its I-Squared and I-Top
      information technologies in exchange for 3,000,000 unrestricted shares of
      common stock and the warrant rights to acquire an additional 15,000,000
      shares. The warrant rights are for a period of one year and have an
      escalating exercise price starting at $2.00 per share and rising to $8.00
      per share on a quarterly basis. The distribution of the Ostara common
      stock and warrants were managed and handled directly by Ostara Corporation
      stock transfer agent, PacWest Transfer.

ITEM 6      Exhibits and Reports on Form 8-K

            a. Exhibit 10.38 on Form 8-K dated February 17, 2005.
            b. Exhibit 10.39 on Form 8-K dated February 28, 2005.
            c. Exhibit 10.40 on Form 8-K dated March 16, 2005


                                      -44-
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          DALECO RESOURCES CORPORATION


Dated:  December 16, 2005           By:   /s/ Gary J. Novinskie
                                          ----------------------------
                                          Gary J. Novinskie, President

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

                                           DALECO RESOURCES CORPORATION


Date:  December 16, 2005                   /s/ Gary J. Novinskie
                                               ---------------------------------
                                           Gary J. Novinskie
                                           President and Chief Financial Officer


Date: December 16, 2005                    /s/ Stephan V. Benediktson
                                               ---------------------------------
                                           Stephan V. Benediktson
                                           Chief Executive Officer


                                      -45-