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 June 30, 2006

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

For the transition period from __________________ to ______________

Commission File Number 0-12214

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

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

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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution under a
plan confirmed by court.

                                                                  Yes |_| No |_|

                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

Number of shares outstanding of the issuer's common stock as of June 30, 2006:
41,184,624

Number of shares outstanding of the issuer's Series A preferred stock as of June
30,, 2006: 0

Number of shares outstanding of the issuer's Series B preferred stock as of June
30, 2006: 175,000

<PAGE>

                                      INDEX

                                                                            PAGE
                                                                            ----
PART I    FINANCIAL INFORMATION

ITEM 1    FINANCIAL STATEMENTS (Unaudited)
          Consolidated Balance Sheet.....................................      3
          Consolidated Statements of Income (Loss).......................      5
          Consolidated Statements of Cash Flow...........................      6
          Consolidated Statements of Shareholder's Equity................      8
          Notes to Consolidated Financial Statements.....................      9

ITEM 2    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS..........................     35

ITEM 3    CONTROLS AND PROCEDURES........................................     39

PART II   OTHER INFORMATION

ITEM 1    LEGAL PROCEEDINGS..............................................     40

ITEM 2    CHANGE IN SECURITIES...........................................     40

ITEM 3    HELLER DEBT....................................................     41

ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............     43

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

ITEM 6    Exhibits and Reports on Form 8-K...............................     44

SIGNATURES...............................................................     45


                                       -2-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS JUNE 30, 2006--PREPARED BY
MANAGEMENT (UNAUDITED)

                                                                      2006
                                                                   -----------
ASSETS

Current Assets
  Cash Accounts                                                    $   899,277
  C/Ds                                                                 211,080
  Accounts Receivable                                                  333,244
  Prepaid Mineral Royalties S/T (note 5(c)                                  --
  Other Current Assets                                                   8,814
                                                                   -----------
      Total Current Assets                                         $ 1,452,415
                                                                   -----------
Other Assets
  Prepaid Mineral Royalties L/T (note 5(c))                        $   654,567
  Debt Issue Costs (note 2(g))                                         928,661
  Accumulated Amortization                                            (857,621)
    Net Debt Issue Costs                                                71,040
  Equity Placement Costs                                                35,750
  Accumulated Amortization Equity Costs                                (10,228)
                                                                   -----------
    Net Equity Placement                                                25,522
                                                                   -----------
  Securities Available for Future Sale (note 6)                         76,002
                                                                   -----------
  Notes Receivable (note 13(c))                                        576,000
                                                                   -----------
      Total Other Assets                                           $ 1,403,131
                                                                   -----------
Fixed Assets
  Oil and Gas Properties (note 3)                                  $12,761,614
  Accumulated DD&A                                                  (8,979,768)
    Net Oil and Gas Property                                         3,781,846
  Mineral Properties (note 5)                                       12,609,100
  Accumulated DD&A                                                    (550,000)
    Net Mineral Property                                            12,059,100
  Timber Properties (note 4)                                         1,028,342
  Accumulated DD&A                                                  (1,028,342)
    Net Timber Property                                                     --
  Technology/Patent Rights (note 6)                                  6,707,000
  Accumulated DD&A                                                  (3,435,397)
    Net Tech./Patent Rights                                          3,271,603
  Property, Equipment, Furniture & Fixtures                            522,708
  Accum. Depr (Property, Equipment, Furniture & Fixtures)             (516,363)
    Net (Property, Equipment, Furniture & Fixtures)                      6,345
                                                                   -----------
    Total Fixed Assets                                             $19,118,894
                                                                   -----------
    Total Assets                                                   $21,974,440
                                                                   ===========

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -3-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS JUNE 30, 2006--PREPARED BY
MANAGEMENT (UNAUDITED)

                                                                       2006
                                                                   ------------
LIABILITIES

Current Liabilities
  Trade A/P                                                        $    884,790
  Notes Payable (notes 7 and 8(d) )                                      96,689
  Note Due related Party (note 8)                                        45,485
  EV&T Note (note 7(f))                                                 156,000
  Loans--1st Regional (note 10 (b))                                     100,000
  CAMI Note (note 7(c))                                                 514,881
  Sonata and Standard Energy Financing (note 10(a))                          --
  Accrued Interest Expense (notes 7(c), 8 and 10)                       458,918
  Accrued Dividend Expense (notes 11 and 14)                          1,816,679
  Accrued Expense Reimbursements (note 8)                               107,234
  Accrued Salary Expense (note 8)                                       907,583
                                                                   ------------
    Total Current Liabilities                                      $  5,088,259
                                                                   ------------

Long Term Liabilities
  Long Term Debt - EV&T, (note 7(f))                               $    512,050
      Total Long Term Liabilities                                  $    512,050
                                                                   ------------
      Total Liabilities                                            $  5,600,309
                                                                   ------------
EQUITY
  Beginning Retained Earnings                                      $(26,284,075)
  Current Period Income/(loss)                                         (497,272)
  Other Comprehensive Income (Loss)                                     (38,002)
  Dividends Paid (Cash & Stock)                                              --
  Add. Paid in Capital (note 11)                                     42,779,884
  Preferred Stock (note 11)                                               1,750
  Common Stock (note 11)                                                411,846

      Total Equity                                                 $ 16,374,131
                                                                   ------------
    Total Liabilities and Equity                                   $ 21,974,440
                                                                   ============

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -4-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE QUARTERS ENDED AND NINE MONTHS
ENDED JUNE 30, 2006 AND 2005--PREPARED BY MANAGEMENT (UNAUDITED)

<TABLE>
<CAPTION>
                                                         3 Months Ended June 30       9 Months Ended June 30
                                                       -------------------------   --------------------------
                                                           2006          2005          2006          2005
                                                       -----------   -----------   -----------   ------------
<S>                                                    <C>           <C>           <C>           <C>
Revenue
  O&G Sales                                            $   482,835   $   338,090   $ 1,414,938   $  1,027,182
  Royalty Receipts                                          14,775        11,728        56,516         32,521
  Mineral Sales                                              2,539        10,653        12,020         31,890
  Well Management                                           40,006        41,506       120,018        124,518
    Total revenue                                      $   540,155   $   401,977   $ 1,603,492   $  1,216,111
                                                       -----------   -----------   -----------   ------------

Expenses
  LOE - Oil and Gas                                    $   204,136   $   166,625   $   536,304   $    481,459
  LOE--Timber                                                   --            --            --             --
  LOE--Minerals                                              1,319         9,262        11,053         28,712
  Prod Tax                                                  46,523        28,332       140,720         78,970
  DD&A (Fixed Assets)                                      357,700       347,209     1,056,209      1,079,484
  Third Party Distributions                                     --        17,588        27,636         27,897
  General and Administrative Expenses                      236,810       161,564       697,009        524,259
  Legal and Professional Fees                               65,524        69,714       189,634        221,968
  Shareholder Information                                   16,427         6,069        49,393         23,841
  Amortization of Debt Issue Costs                          31,164        26,998        93,493         76,826
  Amortization of Equity Costs                               3,054           225         8,579            675
    Total Expenses                                     $   962,657   $   833,586   $ 2,810,029   $  2,544,091
                                                       -----------   -----------   -----------   ------------

Operating income (loss)                                $  (422,502)  $  (431,609)  $(1,206,538)  $ (1,327,980)

Other income (expenses)
  Gain on Exchange of PSNet Shares for Ostara Shares            --            --            --         40,402
  Interest Income                                            1,559            --         6,048              7
  Interest Expense                                         (23,658)      (33,570)      (83,231)      (240,848)
  Other Income                                                  --            --      (311,400)        24,800
    Total other income (loss), net                     $   (22,099)  $   (33,570)  $  (388,583)  $   (175,639)
                                                       -----------   -----------   -----------   ------------

Loss before provision for income taxes                 $  (444,601)  $  (465,179)  $(1,595,121)  $ (1,503,619)
Provision for income taxes                                 (52,671)           --       (52,671)            --
Net Loss (note 10)                                     $  (497,272)  $  (465,179)  $(1,647,792)  $ (1,503,619)
                                                       ===========   ===========   ===========   ============

Less: Dividends on Class A and B preferred shares               --            --            --        (83,907)

Net loss attributable to common shareholders           $  (497,272)  $  (465,179)  $(1,647,792)  $ (1,587,526)
                                                       ===========   ===========   ===========   ============

Basic and Fully Diluted Net Loss per Common Share            ($.01)        ($.02)        ($.04)         ($.06)
Weighted average number of shares of
    Common shares outstanding
    Basic                                               41,126,355    29,456,779    40,849,217     28,862,918
    Diluted                                             54,522,286    38,254,710    53,899,510     38,095,281
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -5-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE QUARTERS ENDED AND NINE MONTHS
ENDED JUNE 30, 2006 AND 2005--PREPARED BY MANAGEMENT (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       3 Months Ended June 30        9 Months Ended June 30
                                                                     --------------------------    --------------------------
                                                                        2006           2005           2006           2005
                                                                     -----------    -----------    -----------    -----------
<S>                                                                  <C>            <C>            <C>            <C>
Operating Activities
Net Income/(loss) for the period                                     $  (497,272)   $  (465,179)   $(1,647,792)   $(1,503,619)
                                                                     -----------    -----------    -----------    -----------
Items not affecting working capital
  Change in DD & A for period                                        $   357,700    $   347,209    $ 1,056,209    $ 1,079,484
  Amortization of Debt Issue Costs                                        25,639         27,223         93,493         77,501
  Gain on Debt Forgiveness                                                 8,579             --          8,579             --
  Gain on Exchange of PSNet Shares for Ostara Shares                          --             --             --        (40,402)
  Charge for Issuance of Securities                                           --             --             --             --
  Non-Cash Charge for Issuance of Securities                                  --             --        311,400             --
    Sub Total                                                        $   391,918    $   374,432    $ 1,469,681    $ 1,116,583
                                                                     -----------    -----------    -----------    -----------
Items affecting Working Capital:

  (Increase) Decrease in other assets                                $    (4,950)   $   (45,431)   $    (4,950)   $  (227,867)
  (Increase Decrease in Pre-paid Royalties                                    --             --             --        (30,000)
  (Increase) Decrease in accounts receivable                              59,295         (5,175)       236,077        (20,969)
  Increase (Decrease) in Trade payables                                 (406,778)       274,051         74,983        357,058
  Increase.(Decrease) in other Accrued Expenses                            5,587         75,921        (15,497)       252,382
  Gain/(loss) on Sale of Properties                                           --             --             --             --
    Sub Total                                                        $  (346,846)   $   299,366    $   290,613    $   330,604
                                                                     -----------    -----------    -----------    -----------

Cash Provided from (used for) operating activities                   $  (452,201)   $   208,619    $   112,502    $    56,432
                                                                     -----------    -----------    -----------    -----------

Investing Activities

  Sale of Fixed Assets                                               $        --    $        --    $        --    $   542,621
  Leasing, Acquisition and Well Costs Incurred                           (25,382)            --       (135,517)            --
Cash provided from (used for) investing activities                   $   (25,382)   $        --    $  (135,517)   $   542,621
                                                                     -----------    -----------    -----------    -----------

Financing Activities

  Increase (decrease) Notes due Related Parties (Note 7(b))          $        --    $  (240,800)   $   (25,000)   $  (210,500)
  Payment on Other Notes due (See Note 7)                               (141,744)        (9,208)      (463,772)      (112,259)
  Increase (decrease) Accrued Interest                                    12,086        (15,836)        25,875        170,107
  Increase (decrease) Accrued Dividends                                       --             --             --       (198,241)
  Dividends Paid                                                              --             --             --       (370,785)
  Proceeds of Equity Issuance                                                 --        300,000         45,307        400,150
  Proceeds of L/ T Debt                                                       --             --             --             --
Cash provided from (used for) financing activities                   $  (129,658)   $    34,156    $  (417,590)   $  (321,528)
                                                                     -----------    -----------    -----------    -----------
Net Increase/(decrease) in cash for period                           $  (607,241)   $   242,775    $  (440,605)   $   164,661

Cash and cash equivalents - Beginning of Period                      $ 1,717,598    $   320,894    $ 1,550,962    $   399,008
Cash and cash equivalents - End of Period                            $ 1,110,357    $   563,669    $ 1,110,357    $   563,669
                                                                     -----------    -----------    -----------    -----------
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -6-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE QUARTERS ENDED AND NINE MONTHS
ENDED JUNE 30, 2006 AND 2005--PREPARED BY MANAGEMENT (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  3 Months Ended        9 Months Ended
                                                                     June 30               June 30
                                                               -------------------   -------------------
                                                                 2006       2005       2006       2005
                                                               --------   --------   --------   --------
<S>                                                            <C>        <C>        <C>        <C>
Supplemental Information

Interest Paid                                                  $ 11,573   $ 49,406   $ 57,357   $ 70,741

Income Taxes paid                                              $ 52,671   $     --   $ 52,671   $     --

Supplementary Disclosure of Non-cash Transactions

Conversion from convertible debt to common stock               $     --   $     --   $ 25,000   $     --
Issuance of common stock for services performed                $     --   $ 50,000   $331,701   $150,150
Payment of dividends in-kind                                   $  8,658   $     --   $  8,658   $370,785
Conversion of debt to equity                                   $     --   $250,000   $     --   $250,000
Conversion from preferred stock to common stock (Note 11(a))   $100,000   $     --   $100,000   $     --
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -7-

<PAGE>

DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE THREE MONTHS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

                                                            2006
                                                 --------------------------
Common Stock Outstanding
  Shares
    Beginning of Period                           41,097,698
    Issued                                            86,926
    Cancelled                                              0
                                                 -----------
    End of Period                                 41,184,624
                                                 -----------
  Value at Par ($.01/Share)                                    $    411,846

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
    Converted to Common                              (10,000)
    Cancelled                                              0
                                                 -----------
    End of Period                                    175,000
                                                 -----------
    Value at Par ($.01/Share)                                  $      1,750
                                                               ------------
    Preferred Value at Par                                     $      1,750
                                                               ------------

Additional Paid in Capital
    Beginning of Period                                        $ 42,771,996
    Equity Issuance Other                                                 0
    Excess of Redemption Amount                                       7,888
                                                               ------------
    End of Period                                              $ 42,779,884
                                                               ------------

Accumulated Retained
Earnings/(Deficit)
    Beginning of Period                                        $(26,284,075)
    Income(Loss) for Period                                        (497,272)
    Other Comprehensive Income (Loss)                               (38,002)
                                                               ------------
    Dividends (Property)
    End of Period                                              $(26,819,349)
                                                               ------------

Equity
    Beginning of Period                                        $ 16,900,749
    End of Period                                              $ 16,374,131
                                                               ------------
    Change in Equity for Period                                $  (526,618)
                                                               ------------

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       -8-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

1.    CONTINUED OPERATIONS

      The financial statements have been prepared on the basis that assumes the
      Company is a going concern, which contemplates that the Company will be
      able to realize assets and discharge liabilities in the normal course of
      business. Accordingly, they do not give effect to adjustments that would
      be necessary should the Company be required to liquidate its assets. For
      the quarter ending June 30, 2006, the Company has reported a loss of
      $497,272. The ability of the Company to meet its total liabilities of
      $5,600,309 and to continue as a going concern is dependent upon the
      availability of future funding, achieving profitability within its mineral
      segment and ongoing profitability within its oil and gas operations.

      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"). On November 7, 2005, the Equity Line of Credit expired and the
      Company elected not to renew it.

      On September 15, 2005, the Company concluded a Private Placement of
      6,500,000 shares of its Common Stock at a price of $.25 per share. (See
      Footnote 11 below). The proceeds of this offering ($1,625,000) were used
      to satisfy the Kane Debt. (See Footnote 14a below), retire some debt of
      the Company (See Footnotes 7 and 8 below) and provide working capital.
      Additionally, the Company's agreements with Tecumseh Professional
      Associates ("TPA") for the operating, mining and marketing of the
      Company's New Mexico Oro Grande Calcium Carbonate and Sierra Kaolin(TM)
      had substantially reduced the Company's need for operating capital in
      prior periods. During the third fiscal quarter of 2006, the Company's
      agreement with TPA pertaining to the calcium carbonate deposit was not
      renewed by TPA for the operating year commencing August 4, 2006. As a
      result, the Company will now be responsible for all development and
      marketing efforts associated with this property.

      The Company will continue to research and entertain project specific
      funding commitments and other capital funding alternatives if and as they
      become available.

      As of June 30, 2006, the Company and certain of its subsidiaries were in
      default of certain debt obligations (See Notes 7 and 8 below). The holders
      of these instruments are working with the Company to achieve the ultimate
      extinguishment of the obligations.


                                       -9-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

2.    Summary of Significant Accounting Policies

      a.    Use of estimates

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

      b.    Basis of consolidation

      The consolidated financial statements of Daleco Resources Corporation (the
      "Company") have been prepared in accordance with generally accepted
      accounting principles and include the accounts of Daleco and its
      wholly-owned subsidiaries Westlands Resources Corporation, Sustainable
      Forest Industries Inc., Deven Resources, Inc., Tri-Coastal Energy, L.P.,
      Clean Age Minerals, Incorporated, CA Properties, Inc., and The Natural
      Resources Exchange, 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 Company's investments in minerals are accounted for using
      purchase accounting methods.

      c.    Oil and gas properties and equipment

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

      Costs of exploratory wells found to be dry during the year 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 estimated operating and production
      expenses.


                                      -10-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      Effective in August 2001, 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 or Disposal 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
      mineral properties and the related environmental patent.

      d.    Site restoration, dismantlement and abandonment costs

      The salvage value of the Company's producing wells or mining related
      assets 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.
      Since, to date, all mining and exploration of the Company's mineral
      deposits is conducted by contract mining companies, the Company has not
      accrued any specific mine restoration costs. As the mining activity
      increases, the Company will accrue site restoration costs as appropriate.

      e. Property and Equipment

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

      f.    Asset Acquisition

      When and where appropriate, the Company records the acquisition of assets
      at cost.


                                      -11-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      g.    Debt Issue Costs

      Debt issue costs represent those costs associated with the restructuring
      of the Heller Financial, Inc. loan and conversion to the Sonata Note in
      Fiscal 2004, as well as its Lucas and Kane Bridge Financings (See Note
      10(a)). These costs are being amortized over the term of the Notes. As of
      June 30, 2006, the un-amortized debt issuance costs on the Company's books
      amounted to $71,040.

      h.    Cash and Cash Equivalents

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

      i.    Fair Value of Financial Instruments

      Cash and cash equivalents, receivables, and all liabilities have fair
      values approximating carrying amounts. Additional interest or profit
      participation is payable after the repayment of principal. The fair value
      of all debt is based on discounted cash flow analysis.

3.    Oil and Gas and Equipment

                                                         6/30/2006
                                                        -----------
Proven lease acreage costs                              $ 5,448,142

Proven undeveloped lease acreage costs                  $ 1,745,810

Well costs                                              $ 5,567,662
                                                        -----------
                                                        $12,761,614

Accumulated depletion, depreciation and amortization    $(8,979,768)
                                                        -----------

Residual Book Value                                     $ 3,781,846
                                                        ===========

(a)   Sale of Oil and Gas Properties

      In fiscal 2004, the Company sold its working interests in 34 wells located
      in Pontotoc County, Oklahoma. In the aggregate, the value of this group of
      wells to the Company did not exceed their net abandonment liabilities. As
      such, the wells were sold for the assumption of those contingent
      liabilities. In December 2004, the Company's loan from Heller Financial,
      Inc. was acquired by Sonata. (See Footnote 7 below.)


                                      -12-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

4.    Timber Properties

      The Company has fully written off its investment in its timber interests
      and is looking to divest itself of its timber interests.

5.    Mineral Properties

a.    Clean Age Minerals Incorporated

      Clean Age Minerals Incorporated ("CAMI), through its wholly owned
      subsidiary, , CA Properties, Inc. ("CAP"), owns or has under long-term
      lease: (a) 5,200 acres(+/-) in Marfa, Presidio County, Texas, containing
      high grade zeolite; (b) 5,020 acres(+/-) of calcium carbonate deposits
      located in the Oro Grande area, Cibola County, New Mexico; (c) twenty
      eight (28) mining claims located in Sierra County, New Mexico, covering
      2,675 acres(+/-) of kaolin; and (d) eleven (11) zeolite mining claims
      covering approximately 220 acres(+/-) located in Beaver County, Utah.

      On or about February 14, 2005, the Company entered into a Development and
      Operating Agreement with Tecumseh Professional Associates ("TPA") covering
      the Company's Calcium Carbonate lease in Cibola County, New Mexico. On or
      about March 11, 2005, the Company entered into the Sierra Kaolin(TM)
      Operating Agreement with TPA covering the Company's Kaolin Claims in
      Sierra County, New Mexico. Under these agreements, TPA has assumed the
      duties to mine, test and market the Company's Sierra Kaolin(TM) and
      Calcium Carbonate. By letter dated May 4, 2006, TPA advised the Company
      that it did not intend to renew its Operating Agreement covering the
      Calcium Carbonate Lease for another year. Under the terms of the Operating
      Agreement, TPA has the obligation to maintain the Calcium Carbonate Lease
      though August 3, 2006, to include, but not limited to, the production and
      sale of the requisite quantity of Calcium Carbonate for the lease year
      commencing August 4, 2005 and ending on August 3, 2006. Thereafter, TPA
      shall have no duties, responsibilities or benefits under the Operating
      Agreement or the Limestone Lease. (See Footnote 5(c) below.). By letter
      dated July 27, 2006, NZ Travertine, LLC, the Lessor of the Calcium
      Carbonate Lease, agreed to accept a payment of $46,000, paid by TPA, in
      lieu of the minimum annual production as required under paragraphs 6 & 7
      of the Calcium Carbonate Lease. TPA also agreed to amend the Calcium
      Carbonate Lease to provide that NZ Travertine, LLC, could produce up to
      50,000 tons of dimensional stone each lease year. This was an increase
      from 10,000 tons as provided in the Amendment to Limestone Agreement dated
      September 10, 2004.


                                      -13-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

b.    Minerals and Equipment

                                           6/30/2006
                                          -----------
Proven undeveloped lease costs            $12,609,100
Mine development costs                              0
Accumulated depletion and depreciation       (550,000)
                                          -----------
Residual Book Value                       $12,059,100
                                          ===========

      (1) The Company has begun to amortize its mineral properties at a nominal
      amortization rate of $200,000 per year subject to higher adjustments per
      year as production increases. During the three months ended June 30, 2006,
      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. The Company has continued production of its Zeolite for use in its
      sales of ReNuGen (trademark applied for) and for testing in air and
      purification and soil decontamination. The Company began the commercial
      sales of one of its CA Series Products under the brand name "ReNuGen"
      (trademark applied for) in the first quarter of 2004.

      Commencing in Fiscal Year 2005, operations were conducted on the Company's
      Sierra Kaolin(TM) deposits in Sierra County, New Mexico by TPA for the
      purpose of confirming the quantity and quality of the Sierra Kaolin(TM)
      and to provide samples to prospective customers. The Company's Calcium
      Carbonate properties were operated initially by the Company and,
      commencing in February 2005, by TPA. By letter dated May 4, 2006, TPA
      advised the Company that it did not intend to renew its Operating
      Agreement covering the Calcium Carbonate Lease for another year. Under the
      terms of the Operating Agreement, TPA had the obligation to maintain the
      Calcium Carbonate Lease through August 3, 2006, to include, but not
      limited to, the production and sale of the requisite quantity of Calcium
      Carbonate for the lease year commencing August 4, 2005 and ending on
      August 3, 2006. Thereafter, TPA shall have no duties, responsibilities or
      benefits under the Operating Agreement or the Limestone Lease. Under the
      terms of the Operating Agreement for the Calcium Carbonate Lease, in
      August 2005, TPA paid the Advanced Minimum Royalty as required by the
      Limestone Lease. By letter dated July 27, 2006, NZ Travertine, LLC, the
      Lessor of the Calcium Carbonate Lease, agreed to accept a payment of
      $46,000, paid by TPA, in lieu of the minimum annual production as required
      under paragraphs 6 & 7 of the Calcium Carbonate Lease. TPA also agreed to
      amend the Calcium Carbonate Lease to provide that NZ Travertine, LLC,
      could produce up to 50,000 tons of dimensional stone each lease year. This
      was an increase from 10,000 tons as provided in the Amendment to Limestone
      Agreement dated September 10, 2004.


                                      -14-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

6.    Patents & Technology

      a. CA Series Patent. As part of the acquisition of Clean Age Minerals
      Incorporated (See Note 5(a) above), the Company also acquired U.S. Patent
      No: 5387738. This patent, owned by Clean Age Minerals Incorporated, deals
      with a reagent and process for the remediation of water and contaminated
      soils. The Company has applied for the trademark "ReNuGen" for its CA-1
      Series for use in waste treatment plants. It also has applied for the
      trademark "Sierra Gold" for one of its calcium carbonate products.

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

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


                                      -15-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

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

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

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

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

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

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

            As of June 30, 2006, the 950,031 shares of Ostara common stock held
      by the Company were carried at $76,002. Since the market price for the
      Ostara common shares has not exceeded the prevailing warrant exercise
      price, the warrants associated with the transaction were not exercised by
      the Company and have expired in accordance with their terms.

7.    Notes Payable

a.    Kane Note: On or about August 15, 2005, the Company's obligation to the
      Kanes was fully satisfied. (See Note 14(a)). The Series A Preferred Shares
      owned by the Kanes were reacquired by the Company and cancelled on the
      books of the Company.


                                      -16-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

b.    July 1998 Notes: During fiscal 1998, the Company borrowed $145,000 from
      four (4) persons. As of October 31, 2005, all of the July 1998 Notes had
      been satisfied. One of the notes was held by Mr. Amir, who converted his
      $25,000 note into common stock.

c.    Clean Age Acquisition Note: Pursuant to Paragraph 5.1 of the Agreement and
      Plan of Merger by and among Clean Age Minerals Incorporated ("CAMI"),
      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. 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 June 30, 2006, the total amount payable on these notes
      is $751,729 representing principal of $514,881 and accrued but unpaid
      interest of $236,848.

d.    Lucas Note: On or about September 1, 2004, the Company's wholly owned
      subsidiary, CA Properties, Inc. borrowed $40,000 from Herbert L. Lucas, an
      individual and former director of Clean Age Minerals, Inc. Mr. Lucas is
      owed additional sums from the Company's acquisition of Clean Age Minerals,
      Inc. in September 2000 (See Note 8(b) below). The note is due on or before
      August 31, 2006, and earns interest at the Prime Rate of interest charged
      from time to time by PNC National Bank, Philadelphia, Pennsylvania, plus
      3%. Payments of principal were to have commenced on October 1, 2004 in 24
      equal installments plus accrued and unpaid interest through the date of
      payment. In consideration for making the Loan, Mr. Lucas was granted
      Warrants for 20,000 shares of common stock. The exercise price of the
      Warrants is $0.44 per share. The warrants expire on August 31, 2006.

      As of June 30, 2006, a total of $9,301 is owed to Mr. Lucas represented as
      $9,146 in principal which is classified as short-term debt and $155 in
      accrued interest.

e.    May 2005 Note: On May 10, 2005, the Company borrowed $50,000 from four (4)
      individuals, Steven P. Roche ($20,000) and David Grady ($10,000) each of
      whom are employees of Tecumseh Professional Associates, Thomas Smith
      ($10,000) and Alfonso Knoll ($10,000). Mr. Knoll was a Director of the
      Company at the time of the loan and served as the Interim Chief Executive
      Officer of the Company from May though July 2005. Mr. Roche served as a
      member of the Board of Directors of the Company from July 2005 through
      March 2006. (See 8-K dated July 19, 2005). Each lender was given a Note
      for his loan by the Company. The Note matured on May 10, 2006, and earned
      interest at a rate equal to the Federal Funds Rate on May 10, 2005.
      Additionally, each lender received 50,000 shares of Company common stock
      for each $10,000 lent to the Company. As of June 30, 2006, all of the
      Notes have been retired.


                                      -17-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

f.    EV&T Note: On September 30, 2005, but effective as of September 1, 2005
      ("Effective Date"), the Company entered into a Settlement Agreement with
      and issued a Note to its counsel, Ehmann, Van Denbergh & Trainor, P.C.
      ("EV&T") to resolve and deal with the Company's outstanding legal fees. As
      of September 1, 2005, the Company owed EV&T $825,355 for services
      performed, costs and expenses ("Debt"). Under the Agreement, the Company
      paid EV&T $25,355 in cash at signing and entered into a three year Note
      for the remainder of the Debt. The Note and Agreement provides for Debt to
      earn interest at the rate of five percent (5%) per annum on the
      outstanding balance from time to time. The Debt is to be repaid in 35
      monthly installments of $13,000, commencing on October 1, 2005, with the
      remainder due and payable on August 1, 2008 ("Remainder Amount"). The
      Remainder Amount shall be paid: (1) one half in Daleco Common Stock,
      valued at fifty cents ($.50) per share; and (2) one-half in immediately
      available Federal Funds unless EV&T elects to take some or all of such
      balance in Daleco Common Stock valued at One Dollar ($1.00) per share. The
      Debt shall become immediately due and payable on a date prior to August 1,
      2008 if: (x) the Company is acquired for stock or cash, whether by
      purchase or merger; (y) the sale of an asset of the Company for a price in
      excess of $5 Million Dollars; or (z) the Company raises, other than debt,
      an amount greater than $5 Million dollars. Should the Note go into
      default, the interest rate shall increase to 12% per annum and the entire
      outstanding principal and all accrued and unpaid interest shall
      immediately become payable in immediately available Federal Funds. As of
      June 30, 2006, the current portion of the EV&T Note is $156,000, and the
      long term portion is $512,050.

8.    Due to Related Parties

(a)   Due to 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 principal amount has been
      satisfied as of March 31, 2006.

      (2) Note dated October 1, 1995, bearing interest at the rate of 7% as a
      result of various subsequent advances to the Company. The principal amount
      as of June 30, 2006, is $45,485.

      (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. This principal amount has been
      satisfied as of March 31, 2006.


                                      -18-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      (4) Note dated June 17, 2002, bearing interest at the rate of 7% in the
      principal amount of $137,000. The principal amount of this Note was
      satisfied as of March 31, 2006.

      As of June 30, 2006, the outstanding principal and accrued but unpaid
      interest on the obligations listed under numbers 1 through 4 to Mr. Amir
      amounted to $216,355, which includes $45,485 in principal and $170,870 in
      accrued interest.

      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(a))
      and remains outstanding as of June 30, 2006.

      Prior to conversion of his Series A Preferred Stock into common stock, Mr.
      Amir was entitled to have received dividends in the amount of $59,338 of
      which $59,338 remains outstanding as of June 30, 2006 (See Note 7(a) and
      Note 14(a)).

      As of June 30, 2006, the Company owed Mr. Amir $42,959 in un-reimbursed
      business expenses and $245,835 in accrued but unpaid salary.

      As of June 30, 2006, the Company was indebted to Mr. Amir in the aggregate
      amount of $589,487.

(b)   Due to Martin: 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 June 30, 2006, the Martin Debt amounts to $196,613
      representing $134,811 in principal and $61,802 in accrued but unpaid
      interest (see Note 7(c)). 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 June
      30, 2006, the Company owed Mr. Martin $245,835 in salary and $19,051 in
      unpaid reimbursable business expenses. As of June 30, 2006, the Company
      was indebted to Mr. Martin in the aggregate amount of $461,499.

(c)   Due to Novinskie:. Under the terms of Mr. Novinskie's employment agreement
      (See Note 13(b)), Mr. Novinskie was to have received a cash bonus of
      $25,000 as of September 30, 2002. This bonus was not paid. As of June 30,
      2006, the Company owed Mr. Novinskie $297,277 consisting of $26,438 in
      un-reimbursed expenses, $245,839 in salary and $25,000 in bonuses.


                                      -19-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

(d)   Un-reimbursed business expense due for other corporate officers as a group
      was $18,786 as of June 30, 2006.

(e)   Due to Erlich. In 1996 and reissued as of October 2000, Mr. Erlich entered
      into an unsecured loan to the Company in the aggregate amount of $87, 543.
      The loan has no maturity date. The loan earns interest at the rate of 9%
      per annum. As of June 30, 2006, an aggregate amount of $138,589 is due Mr.
      Erlich. This amount consists of $87,543 in principal and $51,046 in
      accrued interest. (See Erlich Litigation, Note 14 (b) below.)

9.    Debenture

      The Company has no Debentures issued or outstanding.

10.   Debt

      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
      ("Heller Loan"). 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 the sole shareholder of Tri-Coastal Energy, Inc.

      On December 30, 2003, Sonata Investment Company, Ltd., ("Sonata") an
      affiliate of Standard Energy Company of Columbus, Ohio, purchased 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 ("Second Amended Loan
      Agreement"). 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);

                                      -20-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--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 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 Second Amended 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 3%; (ii) will be repaid out of 85% of the net
      revenues from Tri-Coastal's oil and gas properties, but in no event will
      the amount of interest and principal paid in any six month period be less
      than one-sixth of the original face amount of the Sonata Loan, less any
      prepayments, plus all accrued and unpaid interest with the full amount of
      the Sonata Loan plus all accrued and unpaid interest paid in full on or
      before December 30, 2006; (iii) 66 2/3rds of the net cash flow from
      production from Tri-Coastal's assets after satisfaction of the Sonata
      Loan; (iv) the issuance of stock and warrants as set forth above; and (v)
      Daleco's guaranty of the Sonata Loan.

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

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

            (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:


                                      -21-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

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

            (b)   $48,546 for the extension of warrants held by Sonata; and
                  $10,000 in legal costs associated with the transaction.

      On June 8, 2006, the Sonata Loan was satisfied in full.

      b.    First Regional Bank Loan:

      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, 2006. The loan is secured by the personal assets of
      Dov Amir, an officer and Director of the Company.


                                      -22-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

11.   (a) Capital Stock

<TABLE>
<CAPTION>
                                                                                                            NUMBER OF
                                                                                                            SERIES B
                                                                                     NUMBER OF SERIES       PREFERRED
                                                                NUMBER OF COMMON       A PREFERRED         SHARES PAR
                                                               SHARES, PAR VALUE     SHARES PAR VALUE      VALUE $0.01
                                                               $0.01 PER SHARE(1)   $0.01 PER SHARE (1)   PER SHARE (1)
                                                               ------------------   -------------------   -------------
<S>                                                                <C>                       <C>             <C>
Balance as of June 30, 2005                                        29,943,043                0               185,000

Issued pursuant to the exercise of Options (Note 2)                 2,000,000

Issued pursuant to Private Placement(9/05) (Note 3)                 6,500,000

Issued for the payments of services (S8) (Note 5)                     100,000

Issued pursuant to Stock Purchase Agreement under
  Employment Agreements (Note 4)                                    1,800,000

Issued pursuant to the exercise of Warrants (Note 6)                   45,455

Issued pursuant to Special Stock Award for Directors
  Services (Note 7)                                                   600,000

Issued pursuant to Private Placement terms For Placement
  Agent fees                                                          109,200

Issued on the conversion of Series B Preferred, plus accrued
  and unpaid interest(9)                                               86,926               --               (10,000)
                                                                   ----------              ---               -------
Ending Balance as of June 30, 2006                                 41,184,624                0               175,000
                                                                   ----------              ---               -------
</TABLE>

(1)   On March 16, 2006, the shareholders approved the increase in the
      authorized number of shares of common stock from 50,000,000 to 100,000,000
      shares, par value $0.01.The Articles of Incorporation of the Company
      authorize 20,000,000 shares of preferred stock, par value $0.01. The
      Series B Preferred Stock issued and outstanding has a stated value of $10
      per share.

(2)   In August of 2005, certain employees and individuals exercised expiring
      Options priced at $0.25 per share.

(3)   On September 15, 2005, the Company closed a private placement for
      6,500,000 shares of Common Stock at $.25 per share. (See footnote 11
      Options and Warrants below).


                                      -23-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

(4)   Under his employment agreement (see footnote 13(c)), Mr. Benediktson was
      offered the right to purchase 1,000,000 shares of common stock at the
      price of $.37 per share. Mr. Benediktson exercised this right on or about
      September 6, 2005. Under his employment agreement (See footnote 13(c)),
      Mr. Trynin was offered the right to purchase up to 800,000 shares of
      common stock at a price of $.37 per share. Mr. Trynin exercised this right
      on or about September 6, 2005.

(5)   The Company issued 100,000 shares of common stock to Thomas R. Smith in
      consideration of his services in connection with the handling of the
      Company's obligation to the Kane Interests.

(6)   In October 2005, Mr. Amir exercised the warrant attached to his July 1998
      Note for 45, 455 shares of Common Stock. (See Footnote 7(b). The exercise
      price was $.55 per share.

(7)   600,000 shares of stock were granted to two directors for serving on a
      Special Committee of the Board of Directors to identify and recruit new
      management and independent directors for the Company. These shares were
      approved by the Shareholders at the Annual Meeting on Shareholders on
      March 16, 2006.

(8)   Under the terms of the Company's Private Placement (see footnote 3(b)
      above), Placement agent fees amounting to 7% of the funds raised directly
      through the agent were paid in common stock to the agents. Through the
      close of the quarter ending June 30, 2006, a total of 109,200 shares have
      been issued in accordance with the placement offering terms.

(9)   The Series B Preferred shares have a stated value of $10 pre share. They
      are convertible into common stock at of 85% of the average closing price
      of the Company's common stock for the five trading days immediately
      preceding the date on which the Series B Preferred shares are delivered to
      the Company for conversion but in no event shall the conversion price be
      less than $1.25 per share. Thus, the 10,000 shares of Series B Preferred
      stock converted had a value of $100,000 which, at a conversion price of
      $1.25, equated to 80,000 shares of common stock. The remaining 6,926
      shares represented accrued and unpaid interest on the 10,000 shares of
      Series B Preferred stock converted.


                                      -24-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      (b) Options and Warrants: The Company granted the following options /
      warrants to purchase common stock as of June 30, 2006.

<TABLE>
<CAPTION>
                                                     Number of        Weighted Average
                                                 Options / Warrants    Price per Share
                                                 ------------------   ----------------
<S>                                                 <C>                      <C>
Options / Warrants Outstanding - June 30, 2005       6,919,579               $0.57
                                                                             -----

Employee Stock Option
Granted(1)                                           1,150,000
Expired                                               (500,000)
Exercised(2)                                        (2,000,000)
Cancelled                                                   --

Stockholder warrants
Granted(3)                                           6,500,000
Expired(4)                                             (81,819)
Exercised (5)                                          (45,455)
Cancelled                                                   --

Options / Warrants Outstanding - June 30, 2006      11,942,305               $1.13
                                                   -----------               -----
</TABLE>

(1)   The Company granted Richard A. Thibault options for 500,000 shares as part
      of his Employment Agreement. As a result of their being elected to the
      Board of Directors, Messrs: C. Maxwell and W. Pipkin each received an
      option for 200,000 shares under the Company's Independent Director's
      Incentive Stock Option Plan. An option for 250,000 shares was granted to
      David L. Matz under his Employment Agreement.

(2)   Options for 2,000,000 shares were exercised in the fourth quarter of
      Fiscal 2005. These options were issued on September 18, 2000, with a five
      (5) year term and had an exercise price of $.25 per share. Of the options
      exercised, 1,381,300 were held by current officers, a director and
      employees of the Company. A former director or those who had purchased
      options from an employee held the remaining 618,700 options.


                                      -25-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

(3)   On September 21, 2005, the Company closed a private placement for
      6,500,000 shares (See footnote 11 Common Stock above). The investors
      received warrants for 6,500,000 shares of common stock. These warrants are
      exercisable in two tranches. The first tranche consists of one warrant for
      one share of common stock for each two shares of common stock purchased by
      the investor in the private placement ("Participation Warrant"). The
      exercise price for the Participation Warrant is $1.00 per share. The
      Participation Warrant must be exercised on or before the close of business
      on September 20, 2006. If and only if the investor exercises the
      Participation Warrant, the investor will be entitled to exercise the
      second tranche warrant, consisting of a warrant for one share of common
      stock for each two shares of common stock purchased by the investor in the
      private placement ("Contingent Warrant"). The exercise price for the
      Contingent Warrant is $2.00 per share. The Contingent Warrant must be
      exercised on or before the close of business on September 20, 2007.

(4)   On November 20, 2005, the Warrants attached to the July 1998 Notes held by
      two of the Note holders for a total of 81,819 shares of Common Stock
      expired. (See note 7(b).)

(5)   In October 2005, Mr. Amir exercised his warrant for 45,455 shares of
      Daleco Common Stock with an exercise price of $.55 per share. (see Note
      7(b)).

      (c)   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 an 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. Mr. Pryor
      resigned from the Board in May 2005. As such he was only vested in options
      for 150,000 shares at the time of his resignation.

      Of the 2,350,000 options outstanding, current officers, directors and
      employees of the Company hold 2,200,000. The exercise price of the options
      held by insiders ranges from $0.53 per share to $1.08 per share. On
      September 18, 2005, 500,000 options awarded on September 18, 2000 expired.
      These options had an exercise price of $.25.

      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 for the
      quarter ended June 30, 2006 would have changed to the pro forma amounts
      presented below:


                                      -26-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

                                             2006        2005
                                          ---------   ---------
Net income (loss) (as reported)           $(497,273)  $(465,179)

Stock based employee
  compensation expense determined
  under fair value based method for
  all awards                                (96,487)    (70,089)

Pro forma net income (loss)               $(593,760)  $(535,268)
                                          ---------   ---------

Basic and diluted loss per common share
    As reported                           $   (0.01)  $   (0.02)
    Pro forma                             $   (0.01)  $   (0.02)

      The fair value of the options granted during the quarter ending June 30,
      2006, was estimated using the Black-Scholes option-pricing model with the
      following assumptions: risk free interest rate between 3.14 and 5.81%,
      expected life of five (5) years; and, expected volatility between 131% and
      157%.

      The following table summarizes information about stock options outstanding
as of June 30, 2006:

                            Weighted     Weighted                   Weighted
                             Average     Average                    Average
  Exercise      Options     Exercise    Remaining       Options     Exercise
   price      Outstanding     Price    Life (Years)   Exercisable     Price
-----------   -----------   --------   ------------   -----------   --------
$0.43-$1.08    3,500,000      $0.70      2.56 yrs      2,350,000     $0.81


                                      -27-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      (d)   Warrants

(1)   Sumitomo Warrants

      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)   July 1998 Note Warrants

      On July 21, 1998, a total of 263,638 warrants expiring on November 20,
      2003, were granted to four persons who lent the Company a total of
      $145,000 in July 1998. (See Note 7(b)). The expiration date for these
      warrants was extended from November 20, 2003 to November 20, 2005 in
      Fiscal Year 2000. In October 2005, Mr. Amir exercised his warrants. The
      warrants held by two holders of the July 1998 Notes totaling 81,819 shares
      expired on November 20, 2005. (See Note 7(b)). The warrants held by the
      remaining Note Holder, Sonata Investment Co. Ltd, were extended. See Note
      11 (d)(3) below.)

(3)   Sonata Warrants

      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(b)) 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(b)).
      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)).


                                      -28-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

(4)   Lucas Warrant

      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 of Mr. Lucas having made a loan of $40,000 to the Company's
      wholly owned subsidiary, CA Properties, Inc. (See Note 7(d) above.)

(5)   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.

(6)   William 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 of his assistance and
      expertise in the marketing and development of the Company's potential
      product ReNuGen (trademark applied for) used in sewage waste facilities.

(7)   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 Mr. Robert Conley and Mr. Bob Anthony in
      consideration of their consultation and individual expertise in regard to
      product and application development as well as market identification with
      regard to the Company's potential Sierra Kaolin(TM) and Zeolite products
      respectively. These warrants expire on February 26, 2008. On July 3, 2006,
      Mr. Anthony executed a portion of his warrant for 100,000 shares.

(8)   Private Placement Warrants.

      On September 21, 2005, the Registrant closed a private placement offering
      for 6,500,000 shares of the Registrant's Common Stock pursuant to an
      Exemption under Section 506 of Regulation D. The Offering was for Units
      consisting of 20,000 shares of Common Stock at $.25 per share plus
      warrants for the Registrant's Common Stock. The Investors are entitled to
      Warrants for one share of Common Stock for each two (2) shares of Common
      Stock purchased pursuant to the Offering in the first year after the
      purchase of the Common Stock ("Participation Warrants") and Contingent
      Warrants for one share of Common Stock for each two (2) shares of Common
      Stock purchased pursuant to the Offering in the second year after the
      purchase of the Common Stock and the exercise of the Participation
      Warrants ("Contingent Warrants"). The price per Unit was $5,000 with a
      minimum purchase of five (5) Units ($25,000).


                                      -29-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      The shares issued under the Offering and upon the exercise of the Warrants
      will be unregistered, will bear a restrictive legend and are subject to
      certain piggyback registration rights and demand registration rights.

      The proceeds of the Offering, $1,625,000 was used to satisfy the
      Registrant's obligation to retire its Class A Preferred Stock (See "Kane
      Litigation", footnote 14(a) to the Registrant's Annual Report of Form
      10-KSB for the period ending September 30, 2005 and footnote 14(a) to the
      Company's quarterly report for the period ending June 30, 2005) and for
      general working capital.

      (e)   Net Income Per Share

      Net income per share (primary basis) was calculated on the primary basis
      of the weighted average number of common shares outstanding that totaled
      41,126,355 for the period ended June 30, 2006 (2005 - 29,456,779). For the
      periods ended June 30, 2006 and 2005, the exercise of the options and
      warrants outstanding as at year-end did not have a dilutive effect on the
      net income per share.

      (f)   Payment of Accrued Dividends

      There were no cash dividend payments on either Series of Preferred Stock.
      A total of 552,950 shares of common stock were issued to the holders of
      the 8% Cumulative Convertible Preferred Stock (Series "B") ("CAMI
      Preferred") issued in the acquisition of CAMI in satisfaction of accrued
      dividends during fiscal 2004. See also Note 14(b), regarding payment of
      accrued dividends on the Series A Preferred Stock held by the Kanes
      through September 30, 2003.

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. In
      the third quarter, the Company booked a tax obligation to the Commonwealth
      of Pennsylvania in the amount of $52,671. This charge resulted from the
      Commonwealth of Pennsylvania's disallowance of certain deductions in prior
      years' returns.


                                      -30-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

13.   Employment Contracts and Commitments

a.    On or about November 16, 2001, but effective as of October 1, 2001, the
      Company entered into Key Man Employment Contracts ("Key Man Contracts")
      with Messrs. Robert E. Martin, Gary J. Novinskie and Dov Amir. The Key Man
      Contracts were for an initial three (3) year term. The Key Man Contracts
      provided 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 were 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
      Key Man Contracts. (See Note 11(a)). The Key Man Contracts 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. Mr. Novinskie's cash bonus has not been
      paid (See Note 8(c)) and Mr. Amir's cash bonus has not been paid (See Note
      8(a)). 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 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. Mr. Martin
      resigned from the Company in May, 2005. (See Note 8(b)). The Board of
      Directors voted on June 15, 2006 not to extend Mr. Amir's Key Man Contract
      beyond September 30, 2006. In accordance with its terms, Mr. Novinskie's
      Key Man Contract was automatically extended for another two years until
      September 30, 2008.

b.    Effective August 1, 2005, the Company entered into employment contracts
      with Mr. Stephan V. Benediktson, Chief Executive Officer of the Company,
      and Mr. Nathan Trynin, Vice Chairman of the Board of Directors, copies of
      which are set forth on Exhibits 10.41 and 10.42 as filed with the SEC on
      Form 8-K on or about September 15, 2005. Under the terms of their
      employment agreements neither party is entitled to a salary unless and
      until the Company raises a minimum of $1,000,000, exclusive of debt. Once
      the $1,000,000 or more is raised, Mr. Benediktson's salary will be $10,000
      per month and Mr. Trynin's salary will be $5,000 per month. Each of Mr.
      Benediktson and Mr. Trynin was given the right to acquire stock of the
      Company at the average of the bid and ask closing price for the five
      trading days prior to the effective dates of their contracts. Each party
      exercised that right. The employment contracts also contain bonus
      provisions tied to the performance of the Company's stock. Mr. Benediktson
      and Mr. Trynin entered into Notes with the Company totaling $576,000 to
      cover their purchase of the stock offered by their Employment Agreements.
      The Notes are for five years and earn interest at the prime rate charged
      from time to time by the PNC Bank, Philadelphia, Pennsylvania. The Company
      holds the stock as collateral for the Notes. The stock will not be
      released to either Mr. Benediktson or Mr. Trynin unless and until their
      Notes are satisfied in full in accordance with their terms.


                                      -31-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

c.    On March 10, 2006, the Company entered into an Employment Agreement with
      Richard A. Thibault (See Form 8-K dated March 13, 2006). Mr. Thibault
      joined the Company as Vice President - Minerals. Under the terms of the
      Agreement, in addition to his base salary, Mr. Thibault was granted
      options for 500,000 shares at an exercise price equal to the then market
      price of the Company's common stock. On January 23, 2006, the Company
      entered into an Employment Agreement with David L. Matz. Mr. Matz joined
      the Company as Vice President - Oil & Gas. Under the terms of the
      Agreement, in addition to his base salary, Mr. Matz was granted options
      for 250,000 shares at an exercise price equal to the then market price of
      the Company's common stock.

14.   Litigation Settlement and Pending Litigation

a.    Kane v. Daleco Resources Corp., et. al. On or about January 14, 2000,
      Stanley B. Kane, et. al. commenced an action in the Superior Court, Los
      Angeles, California to enforce their right to have the Company repurchase
      16,000 shares (stated value $50,000 purchase) of Series A, 10% Cumulative
      Preferred Stock. The Plaintiffs had the right to put the stock to the
      Company on August 20, 1999, which they did. Although the Company continued
      to pay quarterly interest on the Series A Preferred Stock, it did not
      redeem the shares. Also named in the suit were Messrs. Dov Amir (a current
      officer and director of the Company) and Mr. Louis Erlich (who was an
      officer and director of the Company at the time of the issuance of the
      Series A Preferred Stock) who had given personal guaranties to the
      Plaintiffs.

      Mr. Amir satisfied his obligation under his guaranty to purchase one-half
      or 8,000 shares from the Plaintiffs. The Company entered into Stipulation
      for the Entry of Final Judgment and Judgment thereon as to Daleco
      Resources Corporation, pursuant to which the Company had until August 1,
      2001, to redeem the remaining 8,000 shares for $400,000 plus accrued
      interest through the date of settlement at a rate of 10% per annum. The
      Kanes granted 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 March 31, 2003. The Company satisfied its obligation to the
      Kanes by payment of $643,819 in August 2005. As a result of the
      satisfaction of this judgment, the 8,000 shares of Series A Preferred
      Stock held by the Kanes were returned to the Company and cancelled.


                                      -32-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      Mr. Erlich has filed a Cross Complaint against the Company for payment of
      his obligation under his guarantee. With the satisfaction of the Kane
      Litigation, Mr. Erlich's Cross Complaint was dismissed.

b.    Erlich Litigation:

      On February 5, 2004, Mr. Erlich commenced an action in the Superior Court
      of the State of California Beverly Hills District, Case No: SC080498
      against the Company demanding payment of an unsecured loan to the Company
      in the principal amount of $98, 048. The loan has no maturity date. On
      March 24, 2004, Mr. Erlich withdrew the Complaint without prejudice, but
      reserved the right to re-file his complaint should the loan not be
      satisfied by January 1, 2005. On May 2, 2006, the Louis Erlich and Lydia
      O. Erlich Revocable Living Trust filed an action for force payment of the
      Note. The Company has made a $75,000 payment towards the outstanding
      principal amount due and is negotiating with the Trustee of the Trust for
      payment of the remaining principal and accrued interest by the second
      quarter of Fiscal 2007.

15.   Acquisitions/Mergers

      During the quarter ended June 30, 2006, the Company did not acquire any
asset or participate in any mergers.

16.   Recent Accounting Pronouncements

      In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.
      SFAS 154 applies to all voluntary accounting principle changes as well as
      the accounting for and reporting of such changes. SFAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005.

      SFAS 154 requires voluntary changes in accounting principle be
      retrospectively applied to financial statements from previous periods
      unless such application is impracticable. Changes in depreciation,
      amortization, or depletion for long-lived, non-financial assets are
      accounted for as a change in accounting estimate that is affected by a
      change in accounting principle, under the newly issued standard.

      SFAS 154 replaces APB Opinion No. 20 and SFAS 3. SFAS 154 carries forward
      many provisions of Opinion 20 and SFAS 3 without change including those
      provisions related to reporting a change in accounting estimate, a change
      in reporting entity, correction of an error and reporting accounting
      changes in interim financial statements. The FASB decided to completely
      replace Opinion 20 and SFAS 3 rather than amending them in keeping to the
      goal of simplifying U.S. GAAP. The provisions of SFAS No. 154 are not
      expected to have a material effect on the Company's consolidated financial
      position or results of operation.

      In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
      Assets, an amendment of APB Opinion No. 29". SFAS 153 addresses the
      measurement of exchanges of nonmonetary assets. It eliminates the
      exception from fair value measurement for nonmonetary exchanges of similar
      productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for
      Nonmonetary Transactions, and replaces it with an exception for exchanges
      that do not have commercial substance. SFAS 153 specifies that a
      nonmonetary exchange has commercial substance if the future cash flows of
      the entity are expected to change significantly as a result of the
      exchange.

      The exception under APB 29 required that some nonmonetary exchanges,
      although commercially substantive, be recorded on a carryover basis. SFAS
      153 eliminates the exception to fair value for exchanges of similar
      productive assets and replaces it with a general exception for exchange
      transactions that do not have commercial substance--that is, transactions
      that are not expected to result in significant changes in the cash flows
      of the reporting entity.


                                      -33-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 2006--PREPARED BY MANAGEMENT (UNAUDITED)

      SFAS 153 is effective on January 1, 2006. The adoption of SFAS 153 is not
      expected to have an impact on the Company's consolidated financial
      statements or disclosures.

      In December 2004, the FASB issued Statement of Financial Accounting
      Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)")
      which replaces SFAS No. 123, Accounting for Stock-Based Compensation and
      supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
      SFAS No. 123(R) requires that companies recognize all share-based payments
      to employees, including grants of employee stock options, in the financial
      statements. The cost will be based on the fair value of the equity or
      liability instruments issued and recognized over the respective vesting
      period of the stock option. Pro forma disclosure of this cost will no
      longer be an alternative under SFAS No. 123(R). SFAS 123(R) is effective
      for public companies at the beginning of the first fiscal year that begins
      after June 15, 2005.

      Transition methods available to public companies include either the
      modified prospective or modified retrospective adoption. The modified
      prospective transition method requires that compensation cost be
      recognized beginning on the effective date, or date of adoption if
      earlier, for all share-based payments granted after the date of adoption
      and for all unvested awards existing on the date of adoption. The modified
      retrospective transition method, which includes the requirements of the
      modified prospective transition method, additionally requires the
      restatement of prior period financial information based on amounts
      previously recognized under SFAS No. 123 for purposes of pro-forma
      disclosures. The Company will adopt SFAS No. 123(R) effective October 1,
      2006.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
      amendment of ARB No. 43, Chapter 4." SFAS 151 amends the guidance in ARB
      No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
      abnormal amounts of idle facility expense, freight, handling costs, and
      wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously
      stated that ". . . under some circumstances, items such as idle facility
      expense, excessive spoilage, double freight, and rehandling costs may be
      so abnormal as to require treatment as current period charges. . . ." SFAS
      151 requires that those items be recognized as current-period charges
      regardless of whether they meet the criterion of "so abnormal." In
      addition, SFAS 151 requires that allocation of fixed production overheads
      to the costs of conversion be based on the normal capacity of the
      production facilities.

      SFAS 151 is effective on January 1, 2006. Earlier application is permitted
      for inventory costs incurred beginning January 1, 2005. The provisions of
      SFAS 151 shall be applied prospectively. The adoption of SFAS 151 is not
      expected to have an impact on the Company's consolidated financial
      statements or disclosures.


                                      -34-

<PAGE>


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

      Forward Looking Statements

      This Quarterly Report on Form 10-QSB contains forwarding-looking
      statements, within the meaning of Section 27A of the Securities Act and
      Section 21E of the Exchange Act.

      We are including the following discussion to inform our existing and
      potential security holders generally of some of the risks and
      uncertainties that can affect us and to take advantage of the "safe
      harbor" protection for forward-looking statements afforded under Federal
      securities laws. From time to time, our management or persons acting on
      our behalf make forward-looking statements to inform existing and
      potential security holders about the Company. Forward-looking statements
      are generally accompanied by words such as "estimate," "project,"
      "predict," "believe," "expect," "anticipate," "plan," "good" or other
      words that convey the uncertainty of future events or outcomes. Except for
      statements of historical or present facts, all other statements contained
      in this report are forward-looking statements. The forward-looking
      statements may appear in a number of places and include statements with
      respect to, among other things: business objectives and strategic plans;
      operating strategies; acquisition strategies; drilling wells; oil and gas
      reserve estimates (including estimates of future net revenues associated
      with such reserves and the present volume of such future net revenues);
      estimates of future production of oil, natural gas and minerals; expected
      results or benefits associated with recent acquisitions; marketing of oil,
      gas and minerals; expected future revenues and earnings, and results of
      operations; future capital, development and exploration expenditures; our
      expectations regarding cash flow and future borrowings sufficient to fund
      ongoing operations and debt service, capital expenditures and working
      capital requirements; nonpayment of dividends; expectations regarding
      competition; impact of the adoption of new accounting standards and the
      Company's financial and accounting systems; and effectiveness of the
      Company's control over financial reporting.

      These statements by their very nature are subject to certain risks,
      uncertainties and assumptions and will be influenced by various factors.
      Should any of the assumptions underlying a forward-looking statement prove
      inaccurate, actual results could vary substantially.

      The factors described under "Risk Factors" in the Company's Annual Report
      on Form 10-KSB for the period ending September 30 of each year could cause
      actual results to differ materially from those expressed in
      forward-looking statements, including, without limitation, the following:

      o     volatility of the market price for both crude oil and natural gas;

      o     volatility of the market price for the Company's minerals;

      o     market capacity and demand for the Company's minerals;

      o     the timing, effects and success of the Company's acquisitions,
            exploration and development activities;

      o     the timing and marketability of production;

      o     effectiveness of management's strategies and decisions;

      o     competition;

      o     changes in the legal and/or regulatory environment and/or changes in
            accounting standards; policies and practices or related
            interpretations by auditors and/or regulatory agencies;

      o     climatic conditions; and

      o     unanticipated problems, issues or events.

      Many, if not all, of these factors are beyond the Company's control and
      are impossible to predict. These factors are not intended to represent an
      exhaustive list of the general or specific facts or factors that may
      affect the Company.

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


                                      -35-

<PAGE>

Results of Operations:

Quarter ended June 30, 2006, compared to quarter ending June 30, 2005:

                             Three Months Ended 6/30
                             -----------------------
                                2006         2005
                             ---------     ---------

Net Income (Loss)            $(497,272)    $(465,179)

Revenues                     $ 540,155     $ 401,977

Production and Cost Information (Oil and Gas Production):

                             Three Months Ended 6/30
                             -----------------------
                                2006         2005
                             ---------     ---------
Production

  Oil (Bbl)                     2,925        3,681
  Gas (Mcf)                    33,188       24,249

Average price

  Oil (per barrel)            $ 62.38      $ 49.52
  Gas (per Mcf)               $  9.05      $  6.43

LOE* and Production Tax

  Cost per Mcfe               $  4.94      $  4.21

----------
Bbl = Barrels of oil
Mcf = One Thousand cubic feet of gas
Mcfe = One Thousand cubic feet of gas equivalent

Production and Cost Information (Minerals):

                             Three Months Ended 6/30
                             -----------------------
                                2006         2005
                             ---------     ---------
Sales - tons                      2             10

Cost* per ton                  $660           $926

      * Cost of production includes all direct costs incurred in the respective
      segments during the period to include evaluation and production
      enhancement costs.


                                      -36-

<PAGE>

      Depreciation, Depletion and Amortization: Oil and Gas

      Depreciation, depletion and amortization expenses were $162,917 for the
      three (3) months ended June 30, 2006, as compared to $150,000 for the year
      earlier period.

      Depreciation, Depletion and Amortization: Minerals

      Depreciation, depletion and amortization expenses were $194,563 for the
      three months ended June 30, 2006, as compared to $195,135 for the year
      earlier period.

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

      These expenses increased 34% to $318,761 for the three months ended June
      30, 2006, as compared to $237,347 for the three month period ended June
      30, 2005. The increase is primarily attributed to the Company's increased
      staff and increased professional fees related to potential acquisitions,
      resource development and regulatory compliance.

      Interest Expense and Financing Costs:

      Interest expense and financing costs decreased 9% to $54,822 for the three
      months ended June 30, 2006, as compared to $60,568 for the three month
      period ended June 30, 2005. This decrease is the result of the Company's
      satisfaction of the July 1998 Note (see Footnote 7(b) to the Company's
      Financial Statements), the satisfaction of the Kane Debt (see Footnote
      14(A) to the Company's Financial Statements) and the satisfaction of the
      Sonata Loan (see Footnote 10(a) to the Company's Financial Statements).

      Liquidity and Capital Resources:

      Liquidity is a measure of a Company's ability to access cash. The Company
      has historically addressed its long-term liquidity requirements through
      the issuance of equity securities, through cash provided by operating
      activities and through borrowings or debt financing for certain
      activities.

      During the three months ended June 30, 2006, the Company's cash used for
      operating activities was $452,201.

      The prices the Company receives for its oil and gas and the level of
      production have a significant impact on the Company's cash flows. The
      Company is unable to predict, with any degree of certainty the prices the
      Company will receive for its future oil and gas production and the success
      of the Company's exploration, exploitation and production activities.
      Increases in the sales of the Company's minerals, which to date have been
      mined, will also affect cash flow.


                                      -37-

<PAGE>

      At present, the Company does not have in place a credit facility or other
      line of credit upon which it may draw. As operating activities increase,
      the Company will evaluate the need for such a credit facility. For desired
      acquisitions or project enhancements, the Company must seek project
      specific financing. With the expiration of the Sonata Loan, none of the
      Company's properties is encumbered.

      Acquisition and Growth:

      As announced in the Company's Form 8-K dated May 25, 2006, the Company
      entered into an agreement to acquire approximately 190 producing wells,
      two drilling rigs and well servicing equipment and other assets in
      Southeastern Ohio. This acquisition is subject to the Company's completion
      of satisfactory due diligence, which process is presently ongoing. The
      Company believes that the revenue associated with this acquisition will
      have a positive impact on the Company's cash flow. An increase in the
      Company's net operating cash flow will allow for the continued development
      of existing reserves, enhancement and recompletion of existing wells and
      the drilling of new wells.

      The efforts of the Company and TPA to evaluate the Sierra Kaolin(TM)
      deposit have progressed during the current fiscal year. The confirmation
      core evaluation program was completed and third party consultants have
      been engaged to provide certified reserve estimates. This work is expected
      to be completed early in the fourth fiscal quarter. The Company also
      initiated efforts to provide similar reserve certifications for its Texas
      zeolite deposit.

      Off Balance Sheet Arrangements:

      The Company has no "off balance sheet arrangements" and does not
      anticipate entering into any such arrangements in the foreseeable future.

      Historical Cash Flow:

      The Company's cash flow used for operating activities was $452,201 for the
      three months ended June 30, 2006, as compared to cash provided of $208,619
      for the three month period ended June 30, 2005. These funds were deployed
      in efforts to enhance the commercial viability of the Company's existing
      resource assets, to identify potential expansion opportunities and to
      retire obligations associated with the Company's assets.


                                      -38-

<PAGE>

      The Company's net cash decreased by $607,241 for the three month period
      ended June 30, 2006, as compared to an increase of $242,775 for the three
      month period ended June 30, 2005.

      Other sources of Income:

      In September 2005, the Company completed a private placement of equity
      consisting of one share of common stock at $.25 per share and warrants for
      two shares of stock, one at $1.00 per share and the second at $2.00 per
      share. This private placement raised approximately $1.6 Million for the
      Company and resulted in 6,500,000 shares being issued. The Company has
      been utilizing the proceeds of this private placement to retire certain
      obligations and to fund its general and administrative costs that were not
      covered by revenues from the production and sale of oil and gas and
      minerals.

      The Company intends to seek equity and/or debt financing to fund further
      acquisitions and continued development of its operations and assets.

Item 3 - CONTROLS AND PROCEDURES

      EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Chief Executive
      Officer and Chief Financial Officer, after evaluating the effectiveness of
      the Company's disclosure controls and procedures (as defined in Exchange
      Act Rule 13a-15(e)) and 15d-15(e) as of the end of the period June 30
      2006, have concluded that its disclosure controls and procedures are
      effective to reasonably ensure that material information required to be
      disclosed by the company in the reports that are filed or submitted under
      the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified by Securities and Exchange Commissions' Rules
      and Forms and that such information is accumulated and communicated to our
      Management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure.

      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
      changes made during our most recently completed fiscal quarter in our
      internal control over financial reporting that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.

      The Chief Executive Officer and Chief Financial Officer confirm that the
      review of the Controls and Procedures was conducted at 30 June 2006.


                                      -39-

<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      On May 2, 2006, the Louis Erlich and Lydia O. Erlich Revocable Living
      Trust ("Erlich") filed an action to force payment of a Note from the
      Company dated February 1, 2000 ("Note"). The Note had no stated maturity
      date and earned interest at a rate of 9% per annum. Previously Mr. Erlich
      had commenced an action to force payment of the Note in February 2004,
      which action was dismissed. By Settlement Agreement, dated July 12, 2006,
      the Company agreed to settle the lawsuit and satisfy its obligation to
      Erlich under the Note, including all accrued and unpaid interest, by the
      payment of $75,000 on July 7, 2006, and payments of $35,000 on July 7,
      2006, and payments of $435,000 on or before September 5, 2006, and $35,283
      on or before September 5, 2006, and $35,283 on or before December 5, 2006.

      The Company believed it was in its best interest to satisfy the obligation
      at this time rather than spend time and resources defending the lawsuit.

Item 2. Change in Securities

      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.


                                      -40-

<PAGE>

Item 3. Heller Debt

      a. 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.


                                      -41-

<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(b) 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 Seconded Amended Loan
      Agreement are collectively referred to as the "Sonata Loan Agreement").

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


                                      -42-

<PAGE>

      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.

      On June 8, 2006, the Sonata Loan was satisfied in full.

      b. As of June 30. 2006, the Company and certain of its subsidiaries were
      in default of certain debt obligations (See Notes 7 and 8 above). The
      holders of these instruments are working with the Company to achieve the
      ultimate extinguishment of the obligations.

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

      None.

Item 5. Other Information

      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 refiling of the Company's
      2003 audited statements was necessitated by the Company's prior auditor's
      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 it's the Company's stock actively trades on the
      OTCBB market.


                                      -43-

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

      The Registrant incorporates by reference the following reports on Form
      8-K:

      Form 8-K filed May 25, 2006 announcing the Company's entering into a
      Purchase and Sale Agreement for the acquisition of certain Assets subject
      to the Company's satisfactory due diligence. A copy of the Purchase and
      Sale Agreement was attached as Exhibit 10.45.

      The Registrant incorporates by reference its Exhibit List as attached to
      its Form 10-KSB dated January 13, 2006,as modified through the date
      hereof.


                                      -44-

<PAGE>

                                   SIGNATURES

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


                                     DALECO RESOURCES CORPORATION


Dated: August 14, 2006               By: /s/ Gary J. Novinskie
                                         ---------------------------------------
                                         Gary J. Novinskie, President

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


                                     DALECO RESOURCES CORPORATION


Date: August 14, 2006                    /s/ Gary J. Novinskie
                                         ---------------------------------------
                                         Gary J. Novinskie
                                         President and Chief Financial Officer


Date: August 14, 2006                    /s/ Stephan V. Benediktson
                                         ---------------------------------------
                                         Stephan V. Benediktson
                                         Chief Executive Officer


                                      -45-