UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

For the quarterly period ended 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
<TABLE>
<CAPTION>

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

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


</TABLE>

                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

                                       -1-

<PAGE>

                                      INDEX

<TABLE>
<CAPTION>
                                                                     PAGE

<S>        <C>                                                        <C>
PART I     FINANCIAL INFORMATION

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

ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS.....................    29

ITEM 3     CONTROLS AND PROCEDURES.................................    31

PART II    OTHER INFORMATION.......................................    33

ITEM 2     CHANGE IN SECURITIES....................................    33

ITEM 3     HELLER DEBT.............................................    34

ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....    37

ITEM 5     OTHER INFORMATION.......................................    38

ITEM 6     Exhibits and Reports on Form 8-K........................    38

SIGNATURES.........................................................    39

</TABLE>

                                       -2-

<PAGE>

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


<TABLE>
<CAPTION>
                                                 MARCH 31, 2005

<S>                                                         <C>
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
      Other Assets                                      171,836
                                                 --------------

               TOTAL OTHER ASSETS                      $970,448
                                                 --------------

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                               (1,208,342)
           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                  $22,596,545
                                                 --------------


</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                       -3-

<PAGE>

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


<TABLE>
<CAPTION>
                                                                  MARCH 31, 2005

<S>                                                                       <C>
LIABILITIES
CURRENT LIABILITIES
      Trade A/P                                                    $1,021,616
      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                        $6,467,586
                                                               --------------

LONG TERM LIABILITIES
      Long Term Debt                                                 $196,577
      Mandatory Redeemable Preferred Stock                                ---
                      TOTAL LIABILITIES                            $6,664,163
                                                               --------------

EQUITY
      Beginning Retained Earnings                                $(22,813,627)
      Current Period Income/(loss)                                   (551,697)
      Dividends Paid (Cash & Stock)                                  (407,416)
      Add. Paid in Capital                                         39,416,342
      Preferred Stock (note 11)                                         1,850
      Common Stock (note 11)                                          286,930
                         TOTAL EQUITY                             $15,932,382
                                                               --------------

                 TOTAL LIABILITIES AND EQUITY                     $22,596,545
                                                               --------------


</TABLE>


                 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)
  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                 $(168,782)    $(9,065)   $(182,478) $5,637,797
                                                   ----------  ----------  -----------  ----------

Loss before provision for income taxes              $(551,697)  $(603,105) $(1,078,842) $4,521,417
Provision for income taxes                                ---         ---          ---         ---
                                                   ----------  ----------  -----------  ----------

Net Loss (Note 10)                                  $(551,697)  $(603,105) $(1,078,842) $4,521,417
                                                   ----------  ----------  -----------  ----------

Less: Dividends on Class A and B preferred shares     (36,631)    (46,798)     (83,907)    (95,968)
                                                   ----------  ----------  -----------  ----------

Net loss attributable to common shareholders        $(588,328)  $(649,903) $(1,162,749) $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 SHAREHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 2005 AND 2004 -- PREPARED BY MANAGEMENT (UNAUDITED)


<TABLE>
<CAPTION>
                                       MARCH 31, 2005
                                       --------------


<S>                                               <C>
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                (551,697)
         Dividends                           (407,416)
                                       --------------

         End of Period                   $(23,772,740)

EQUITY
         Beginning of Period              $16,891,496
         End of Period                    $15,932,383
                                       --------------

         Change in Equity for Period        $(959,113)

</TABLE>


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       -6-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENT 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>
OPERATING ACTIVITIES
Net Income/(loss) for the period                    $(551,697) $(603,105) $(1,078,842)  $4,521,418
                                                    ---------  ---------  -----------  -----------

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)
                                                    ---------  ---------  -----------  -----------

                     Sub Total                       $372,348   $407,524     $782,554  $(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      147,882
   Gain/(loss) on Sale of Properties                      ---     34,700          ---       34,700
                                                    ---------  ---------  -----------  -----------

                     Sub Total                      $(132,925) $(742,152)     $31,240    $(226,223)
                                                    ---------  ---------  -----------  -----------

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      185,943   (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                      $370,785      $ ---     $370,785        $ ---
   Conversion of debt to equity                         $ ---    $26,867        $ ---     $ 26,867

</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      -7-
<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 $551,697. The ability of the Company to meet its total liabilities of
$6,664,161, 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.

                                       -8-

<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.

                                       -9-

<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.

                                      -10-

<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.

                                      -11-

<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

                                      -12-

<PAGE>

DALECO RESOURCES CORPORATION

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


       claims located in Sierra County, New Mexico covering 2,675 acres(+-)
       of Kaolin; and (d) eleven (11) Zeolite mining claims covering
       approximately 220 acres(+-) located in Beaver County, Utah.


B. MINERALS AND EQUIPMENT

<TABLE>
<CAPTION>
                                        March 31, 2004   March 31, 2005
                                        --------------  ---------------


<S>                                                <C>              <C>
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
                                        --------------  ---------------


</TABLE>
       (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.


6. PATENTS & TECHNOLOGY

       As part of the acquisition of Clean Age Minerals Incorporated (See Note
       5(a) above), the Company also acquired U.S. Patent No: 5387738. This
       patent, owned by Clean Age Minerals Incorporated (previously owned by
       Matrix-Loc, Inc. which was acquired by Clean Age Minerals Incorporated as
       a result of Matrix-Loc's merger with Clean Age Minerals as of March 18,
       2002), deals with a

                                      -13-

<PAGE>

DALECO RESOURCES CORPORATION

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


       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 for one of its calcium carbonate products. Effective, March 31,2005,
       the Company consummated its sale of its I-Squared and I-Top technology to
       Ostara Corporation. The Company had entered into an agreement with PSNet
       Communications effective December 1, 2004 ("Asset Sale Agreement")
       pursuant to which 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. In January, 2005, PSNet was acquired by Ostara Corporation. In
       accordance with the Asset Sale Agreement, approximately, 2,050,000 shares
       of Ostara were issued, in the nature of a special dividend, to the
       shareholders of record of the Company on January 6, 2005. The Company
       retained its own share of Ostara shares at a carrying amount of $171,836
       as of March 31, 2005.


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 $131,7184 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)).

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.

                                      -14-

<PAGE>

DALECO RESOURCES CORPORATION

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


       ("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 principle 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.


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.

                                      -15-

<PAGE>

DALECO RESOURCES CORPORATION

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


       (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).

       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

                                      -16-

<PAGE>

DALECO RESOURCES CORPORATION

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


       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.


9. DEBENTURES

<TABLE>
<CAPTION>
                          March 31, 2005 March 31, 2004
                           --------------  --------------


<S>                                   <C>             <C>
       8% Convertible Debentures       $0         $30,000

</TABLE>
    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

                                      -17-

<PAGE>

DALECO RESOURCES CORPORATION

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


       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 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.

          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);

                                      -18-

<PAGE>

DALECO RESOURCES CORPORATION

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


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

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

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

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

                                      -19-

<PAGE>

DALECO RESOURCES CORPORATION

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


         (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 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.c.

       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.

                                      -20-

<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
                                          NUMBER OF               NUMBER OF       SERIES B
                                             COMMON                SERIES A      PREFERRED
                                        SHARES, PAR               PREFERRED     SHARES PAR
                                        VALUE $0.01  SHARES PAR VALUE $0.01    VALUE $0.01
                                          PER SHARE           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 effected through the merger of Daleco Resources Corporation, a
       Delaware corporation ("Old Daleco") with and into Daleco Resources
       Corporation of Nevada, a Nevada corporation ("New Daleco"). The merger
       was consummated as of March 26, 2002. The Articles of Incorporation of
       New Daleco provide for authorized capital stock of 50,000,000 shares of
       common stock, par value $0.01 and 20,000,000 shares of preferred stock,
       par value $0.01.

(2)    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

                                      -21-

<PAGE>

DALECO RESOURCES CORPORATION

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


       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 ReNuGenTM. 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


    A. COMMON STOCK OPTIONS

The Company granted the following options / warrants to purchase common stock as
of March 31, 2005.
<TABLE>
<CAPTION>
                                                              Weighted
                                                   Number of   Average
                                                   Options /  Price per
                                                   Warrants     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>

                                      -22-

<PAGE>

DALECO RESOURCES CORPORATION

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



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.

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:
<TABLE>
<CAPTION>
                                                            For the three-months
                                                               ended March 31
                                                                 2005       2004
                                                            ---------  ---------


<S>                                                               <C>        <C>
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)

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

                                      -23-

<PAGE>

DALECO RESOURCES CORPORATION

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



    B. WARRANTS

(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.)

                                      -24-

<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 ReNuGenTM 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
subsidiary have significant tax losses to be applied against future income. 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.

                                      -25-

<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").

                                      -26-

<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 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,
       repayment 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.

                                      -27-

<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.

                                      -28-

<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.

       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

                                      -29-

<PAGE>


       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 have been
       instrumental in increasing awareness and acceptance of the product with
       the targeted Waste Water Treatment industry. Additional applications for
       Clean Age Minerals' CA-Series engineered products are undergoing
       investigative work . The Company's efforts to commercialize the Sierra
       Kaolin products from its New Mexico Kaolin deposit are ongoing and are
       focused on product development as well as the identification of
       opportunities for both joint venturing and/or the internal development of
       Kaolin processing capabilities. 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.

       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

                                      -30-

<PAGE>


       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 $551,697 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

                                      -31-

<PAGE>


       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."

       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.

                                      -32-

<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. In accordance with the Asset Purchase Agreement
       dated as of December 1, 2004, a distribution of Ostara Corporation common
       stock ("Ostara Stock") was made to the holders of record of the Company's
       common Stock as of January 6, 2005 ("Record Date") ("Record Date
       Shareholders"). As of the Record Date there were 28,693,043 shares of
       Daleco common stock issued

                                      -33-

<PAGE>

       and outstanding held by approximately 1,762 Record Date Shareholders. On
       March 31, 2005, Ostara issued 2,050,000 shares of Ostara Stock to the
       Record Date Shareholders. The distribution has been accounted for as a
       special dividend by the Company. One share of Ostara Stock was issued for
       each 14 shares of Daleco common stock held as of the Record Date. In
       addition to the Ostara Stock issued, each Record Date Shareholder
       received a short term warrant to purchase (5) additional shares of Ostara
       Stock for each share of Ostara Stock issued.

Item 3 Heller 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.

                                      -34-

<PAGE>

         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:

         (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

                                      -35-

<PAGE>

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:

         (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>

                                      -36-

<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:
<TABLE>
<CAPTION>

NAME OF NOMINEE          FOR     AGAINST   ABSTAIN
-------------------  ----------  -------  ---------

<S>                         <C>      <C>        <C>
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

</TABLE>
       2. Ratification of Vasquez & Company LLP as the Company's independent
accountant for Fiscal Year 2005.
<TABLE>
<CAPTION>
               FOR     AGAINST  ABSTAIN
           ----------  -------  -------

<S>               <C>      <C>      <C>
           25,831,506   80,063   58,909

</TABLE>
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.

                                      -37-

<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

                                      -38-

<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
<TABLE>
<S>                  <C>                           <C>
Dated: May 13, 2005  By:  /s/ Gary J. Novinskie
                          ----------------------------
                          Gary J. Novinskie, President

</TABLE>
    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

<TABLE>
<S>                                                   <C>
Date: May 13, 2005   /s/ Gary J. Novinskie
                    -------------------------------------
                    Gary J. Novinskie
                    President and Chief Financial Officer

</TABLE>
<TABLE>
<S>                                <C>
Date: May 13, 2005   /s/ Alfonso Knoll
                    ------------------
                    Alfonso Knoll
                    Chief Executive Officer

</TABLE>

                                      -39-