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

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

For the quarterly period ended 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.................................... 40

PART II           OTHER INFORMATION

ITEM 1            LEGAL PROCEEDINGS.......................................... 41

ITEM 2            CHANGE IN SECURITIES....................................... 41

ITEM 3            HELLER DEBT................................................ 42

ITEM 4            SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 44

ITEM 5            OTHER INFORMATION.......................................... 44

ITEM 6            Exhibits and Reports on Form 8-K........................... 45

SIGNATURES        ........................................................... 46


                                      -2-
<PAGE>


DALECO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET AS OF 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 OF 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
                                                         ------------   ------------   ------------   ------------
Revenue
<S>                                                      <C>            <C>            <C>            <C>
     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        697,008        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)  $ (1,206,537)  $ (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)  $ (1,595,120)  $ (1,503,619)
Provision for income taxes                                    (52,671)            --        (52,671)            --
Net Loss (note 10)                                       $   (497,272)  $   (465,179)  $ (1,647,791)  $ (1,503,619)
                                                         ============   ============   ============   ============

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

Net loss attributable to common shareholders             $   (497,272)  $   (465,179)  $ (1,647,791)  $ (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
                                                         -----------   -----------   -----------   -----------
Operating Activities
<S>                                                      <C>           <C>           <C>           <C>
Net Income/(loss) for the period                         $  (497,272)  $  (465,179)  $(1,647,791)  $(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                  (406,779)      274,051        74,982       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 June 30      9 Months  Ended June 30
                                                                ----------------------      -----------------------
                                                                      2006          2005          2006          2005
                                                              ------------  ------------  ------------  ------------
Supplemental Information

<S>                                                           <C>           <C>           <C>           <C>
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  $      -----  $      8,657  $    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)
================================================================================

<TABLE>
<CAPTION>
                                                                         2006
                                                            -------------------------------
Common Stock Outstanding
<S>                                                         <C>                <C>
Share                                                       41,097,698

                Beginning of Period
                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)
                                                                               ============
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -8-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED 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 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 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.

         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.


                                      -11-
<PAGE>


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

         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.)

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.


                                      -12-
<PAGE>


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

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 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                                     (550,000)
           depreciation                                                 -------
         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 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.


                                      -15-
<PAGE>


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

         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:
                  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.

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.


                                      -16-
<PAGE>


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

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 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 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 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);

                  (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))


                                      -20-
<PAGE>


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

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

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

         The 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:

                           (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.


                                      -21-
<PAGE>


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

         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.


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                        2,000,000
Options (Note 2)

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

Issued for the payments of                                  100,000
services (S-8) (Note 5)

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

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

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

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

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.


                                      -22-
<PAGE>


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

(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).

(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.


                                      -23-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED 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.

                                            Number of       Weighted Average
                                       Options / Warrants   Price per Share
                                       ------------------   ----------------
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
                                       ------------------   ----------------

(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.


                                      -24-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED 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.


                                      -25-
<PAGE>


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

         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:

                                                            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
                   Options       Exercise    Remaining     Options      Exercise
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

         (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.


                                      -26-
<PAGE>


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

(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)).

(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.)


                                      -27-
<PAGE>


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

(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).

         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.


                                      -28-
<PAGE>


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

         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.

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.


                                      -29-
<PAGE>


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

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.

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.


                                      -30-
<PAGE>


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

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.

         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.


                                      -31-
<PAGE>


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

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.


                                      -32-
<PAGE>

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

         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.

         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.


                                      -33-
<PAGE>


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

         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:


                                      -35-
<PAGE>


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.


                                      -36-
<PAGE>


Results of Operations:
---------------------

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

<TABLE>
<CAPTION>
                                                                        Three Months Ended 6/30
                                                                           2006          2005
                                                                       -----------   -----------
<S>                                                                    <C>           <C>
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
</TABLE>

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


              Production and Cost Information (Minerals):

<TABLE>
<CAPTION>
                                                                        Three Months Ended 6/30
                                                                           2006          2005
                                                                       -----------   -----------
<S>                                                                    <C>           <C>
Sales - tons                                                                     2            10

Cost* per ton                                                          $       660   $       926
</TABLE>


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


                                      -37-
<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.


                                      -38-
<PAGE>


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.

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.


                                      -39-
<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.


                                      -40-
<PAGE>


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


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") in the  principal  amount of
         $98,048.00. 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, as follows:

                  1. Payment of $75,000 on July 7, 2006; ,

                  2. Payment of $35,000 on or before September 5, 2006; and

                  3. Payment of $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.


                                      -41-
<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.


                                      -42-
<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.


                                      -43-
<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.


                                      -44-
<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.

         Attached hereto are Exhibits 31.1, 31.2, 32.1 and 32.2.


                                      -45-
<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 15, 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 15, 2006                         /s/ Gary J. Novinskie
                                        ----------------------------------------
                                        Gary J. Novinskie
                                        President and Chief Financial Officer


Date: August 15 , 2006                         /s/ Stephan V. Benediktson
                                        ----------------------------------------
                                        Stephan V. Benediktson
                                        Chief Executive Officer


                                      -46-