UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

For the quarterly period ended December 31, 2005

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

For the transition period from __________________ to ______________

Commission File Number 0-12214

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

            Nevada                                      23-2860734
(State or other  jurisdiction               (IRS Employer Identification Number)
     of  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 December 31,
2005: 40,988,498
Number of shares outstanding of the issuer's Series A preferred
stock as of December 31, 2005: 0
Number of shares outstanding of the issuer's Series B preferred stock as of
December 31, 2005: 185,000


<PAGE>


                                      INDEX


PART I      FINANCIAL INFORMATION                                          PAGE

ITEM 1      FINANCIAL STATEMENTS (Unaudited)...............................  3
            Consolidated Balance Sheets....................................  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.......................................  36

PART II     OTHER INFORMATION.............................................  39

ITEM 2      CHANGE IN SECURITIES..........................................  39

ITEM 3      HELLER DEBT...................................................  39

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

ITEM 5      OTHER INFORMATION.............................................  42

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

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


                                      -2-
<PAGE>


DALECO RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005--PREPARED BY MANAGEMENT
(UNAUDITED))
--------------------------------------------------------------------------------

                                                                       2005
 ASSETS
Current Assets
      Cash Accounts                                                $    956,843
      C/Ds                                                              728,475
      Accounts Receivable                                               485,245
       Prepaid Mineral Royalties S/T (note 5c)                             --
       Other Current Assets                                               3,864
                                                                   ------------
                  Total Current Assets                             $  2,174,427
                                                                   ------------
Other Assets
       Prepaid Mineral Royalties L/T  (note 5c)                    $    654,567
       Goodwill                                                         813,357
       Accumulated Amortization Goodwill                               (813,357)
            Net Goodwill                                                   --
       Debt Placement Costs                                             928,661
       Accumulated Amortization                                        (795,292)
             Net Debt Placement Costs                                   133,369
       Equity Placement Costs                                            28,750
       Accumulated Amortization Equity Costs                             (4,119)
             Net Equity Placement                                        24,631
       Securities Available for Future Sale (note 6)                    115,692
       Notes Receivable (Note 13c)                                      576,000
                       Total Other Assets                          $  1,504,259
                                                                   ------------
Fixed Assets
       Oil and Gas Properties (note 3)                             $ 12,646,097
       Accumulated DD&A                                              (8,661,130)
             Net Oil and Gas Property                                 3,984,967
       Mineral Properties (note 5)                                   12,609,100
       Accumulated DD&A                                                (450,000)
             Net Mineral Property                                    12,159,100
       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                                              (3,146,671)
             Net Tech./Patent Rights                                  3,560,329
       Property, Equipment, Furniture & Fixtures                        522,708
       Accum. Depr (P, E, P &  P)                                      (515,523)
             Net (P, E, P & P)                                            7,185
                                                                   ------------

             Total Fixed Assets                                    $ 19,711,581
                                                                   ------------
             Total Assets                                          $ 23,390,267
                                                                   ------------

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -3-
<PAGE>


DALECO RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005--PREPARED BY MANAGEMENT
(UNAUDITED))
--------------------------------------------------------------------------------

                                                                       2005
LIABILITIES
Current Liabilities
       Trade A/P                                                   $  1,081,600
       Notes Payable (note 7 and 8d )                                   150,435
       Note Due related Pty (note 8)                                     45,485
       EVTS Note (note 7(f))                                            156,000
       Loans--1st Regional (note 10 b)                                  100,000
       CAMI Note (note 7c)                                              514,881
       Sonata and Standard Energy  Financing (note 10a)                 161,587
       Accrued Interest Expense (notes 7(c) 8 and 10)                   433,744
       Accrued Dividend Expense (notes 11 and 14)                     1,825,336
       Accrued Expense Reimbursements (notes 8)                         105,977
       Accrued Salary Expense (note 8)                                  907,583
                                                                   ------------
                      Total Current Liabilities                    $  5,482,638
                                                                   ------------

Long Term Liabilities
      Long Term Debt - EV&T,  (notes  7(f))                        $    605,000
                      Total Long Term Liabilities                  $    605,000
                                                                   ------------
                      Total Liabilities                            $  6,087,638
                                                                   ------------
EQUITY
      Beginning Retained Earnings                                  $(25,088,546)
      Current Period Income/(loss)                                     (723,018)
      Other Comprehensive Income (Loss)                                 (43,321)
      Dividends Paid (Cash & Stock)                                        --
      Add. Paid in Capital (See Note 11)                             42,745,779
      Preferred Stock (note 11)                                           1,850
      Common Stock (note 11)                                            409,885

                      Total Equity                                 $ 17,302,629
                                                                   ------------
                      Total Liabilities and Equity                 $ 23,390,267
                                                                   ============


            SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -4-
<PAGE>


DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS
ENDED DECEMBER 31, 2005 AND 2004--PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

                                                            2005          2004
Revenue
 Oil and Gas Sales                                        $ 411,343   $ 294,740
 Net Profit Interest Receipts                                  --          --
 Royalty Receipts                                            19,236      11,124
Timber Sales                                                   --          --
 Mineral Sales                                                8,336      13,039
 Well Management                                             40,006      41,506
                                                          ---------   ---------
                     Total Operating Revenue              $ 478,921   $ 360,409
                                                          ---------   ---------

Expenses
Lease Operating Expenses--Oil and Gas                     $ 122,191   $ 191,236
Lease Operating Expenses--Timber                               --          --
Lease Operating Expenses--Minerals                            9,583      15,500
Net Profit Interest Expenses                                   --          --
Prod Tax                                                     33,646      22,831
DD&A (includes Depreciation)                                348,005     385,066
Third Party Distributions                                    27,636      10,308
General and Administrative Expenses                         202,392     162,729
Legal and Professional Expenses                              75,063      56,858
Shareholder Information                                       6,898       4,198
Amortization of Debt Costs (Note 10(a))                      31,164      24,914
Amortization of Equity Costs                                  2,470         225
                                                          ---------   ---------
                     Total Expenses                       $ 859,048   $ 873,865
                                                          =========   =========

Other Income (Expense)
       Interest Income                                         --          --
       Interest Expense                                     (31,491)    (38,489)
       Other Income (Expense)                              (311,400)     24,800
                     Total Other Income (Loss), Net       $(342,891)  $ (13,689)
                                                          =========   =========

Income (Loss) Before  Provision for Income                $(723,018)  $(527,145)
                                                          =========   =========
Provision for Income Tax                                       --          --
Net Income (loss), (see Note 10(a))                       $(723,018)  $(527,145)
                                                          =========   =========
Less Dividends (Property) (note 6)                           $-----      $-----
Net Income (Loss)  attributable  to Common Holders        $(723,018)  $(527,145)

Basic  /Fully  Diluted Net Income  (Loss)/
(based  on  weighted-average   outstanding
common  stock  of  40,396,601  in FY06 and
28,441,695 in 1st Qtr. FY05                               $    (.02)  $   (0.02)

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -5-
<PAGE>


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

                                                         2005         2004
Operating Activities
Net income / ( loss) for the year                        $(723,018)    (527,145)
Items not affecting working capital:

      Change  in  Depletion,  Depreciation,  and
      Amortization for period                              348,005      385,066
      Debt & Equity Placement Cost Amortization             33,634       25,139
      Gain  on  Exchange  of  PSNet  Shares  for                 0            0
      Ostara Shares
      Gain on Forgiveness of Debt (Note 10 (a))                  0            0
                                                         ---------    ---------
      Charge for issuance of Securities                    311,400            0
                                                         ---------    ---------
                     Sub Total :                         $ 693,039    $ 410,205


Items affecting working capital:
      (Increase)/Decrease in Other Assets                        0       (9,275)
                                                         ---------    ---------
      (Increase)/Decrease in Pre-paid Royalties                  0      (30,000)
                                                         ---------    ---------
      (Increase)/Decrease in Receivables                    84,076       32,260
                                                         ---------    ---------
      Increase/(Decrease) in Partnership
        Accrued Distributions                                    0            0
                                                         ---------    ---------
      Increase/(Decrease) in Payables                      271,802      107,288
                                                         ---------    ---------
      Increase/(Decrease) in other Accrued
        Expenses                                           (16,754)      74,214
                                                         ---------    ---------
      Gain/(Loss) on Sale of Properties                          0       15,160
                                                         ---------    ---------

                     Sub Total:                          $ 339,124    $ 186,647
                                                         ---------    ---------

Cash used by operating activities                        $ 309,145    $  72,707
Investing Activities
Sale of Fixed Assets Gain/(Loss)                         $       0    $   8,000
Leasing, Acquisition and Well Costs Incurred               (20,000)    (180,143)

Cash provided from/(used for) Investing                  $ (20,000)   $(172,143)
                                                         ---------    ---------
Activities

Financing Activities
Increase/(decrease) in Notes due Related                 $ (25,000)   $  30,300
Parties
Increase/(decrease) in Other Notes Due & Debt             (155,489)     (69,152)
Increase/(decrease) in Accrued Dividends                         0     (242,446)
Increase/(decrease) in Accrued Interest                        700      158,062
Dividends Paid                                                   0            0
Proceeds of Equity Issuance                                 25,000      199,627
Proceeds of Long Term Debt                                       0            0
                                                         ---------    ---------

Cash provided from financing activities                  $(154,789)   $  76,391


Net Increase/(Decrease) in cash for period               $ 134,356    $ (23,045)
                                                         =========    =========

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      -6-
<PAGE>


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

                                                              2005          2004

Increase/(Decrease) in Cash and Cash Equivalents        $  134,356   $  (23,045)

Cash and Cash Equivalents - Beginning of Period         $1,550,962   $  399,008

Cash and Cash Equivalents - End of Period Cash          $1,685,318   $  375,963


Supplemental Information:


Income Taxes paid                                       $        0   $        0


SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS

Conversion from convertible debt to common stock        $   25,000   $   34,800

Conversion  from  preferred  shares to long term        $        0   $        0
debt

Issuance of common stock for services performed         $  311,400   $   74,827

Dividends  paid on  preferred  stock with common        $        0   $        0
stock

Issuance of common stock under private placement        $        0   $   90,000


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      -7-
<PAGE>


DALECO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE PERIOD
ENDED DECEMBER 31, 2005- PREPARED BY MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

                                                                      2005
Common Stock Outstanding
         Shares
                 Beginning of Period                                 40,343,043
                 Issued                                                 645,455
                 Cancelled                                                    0
                                                                   ------------
                 End of Period                                       40,988,498
         Value at Par ($.01/Share)                                 $    409,885

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                                                0
           Cancelled                                                          0
           End of Period                                                185,000
   Value at Par ($.01/Share)                                       $      1,850
                                                                   ------------
   Preferred Value at Par ($.01/Share)                             $      1,850


Additional Paid in Capital
           Beginning of Period                                     $ 42,415,834
           Equity Issuance Other                                        329,945
           Excess of Redemption                                               0
                                                                   ------------
Amount
           End of Period                                           $ 42,745,779
                                                                   ------------

Accumulated Retained
Earnings/(Deficit)
           Beginning of Period                                     $(25,088,546)
           Income(Loss) for Period                                     (723,018)
     Other Comprehensive Income (Loss)                                  (43,321)
        Dividends (Property)                                                  0
                                                                   ------------
           End of Period                                           $(25,854,885)

Equity
           Beginning of Period                                     $ 17,732.568
           End of Period                                           $ 17,302,629
                                                                   ------------
           Change in Equity for Period                             $   (429,939)


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -8-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- 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. As of December 31, 2005,
the Company has reported a loss of $723,018. The ability of the Company to meet
its total liabilities of $6,087,638 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 for the operating,
mining and marketing of the Company's Calcium Carbonate and Sierra Kaolin(TM)
has substantially reduced the Company's need for present and future operating
capital.

      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 December 31, 2005, 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.

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


                                      -9-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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.

      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),


                                      -10-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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 $20,000,000 in 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 may 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. Timber Rights

      The Company recorded the acquisition of timber rights at cost. The Company
has completely written down the costs of the timber rights acquisition.

      g. Mineral Acquisition

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

                                      -11-

<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      h. 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 December 31, 2005,
the un-amortized debt issuance costs on the Company's books amounted to
$133,369.

      i. Cash and Cash Equivalents

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

      j. Fair Value of Financial Instruments

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

3.    Oil and Gas and Equipment

                                                                      12/31/2005
                                                                     -----------

Proven lease acreage costs                                           $ 5,448,142

Proven undeveloped lease acreage costs                                 1,745,810

Well costs                                                             5,452,145
                                                                     $12,646,097

Accumulated depletion, depreciation and amortization                   8,661,130

                                                                     $ 3,984,967
                                                                     -----------
(a)   Sale of Oil and Gas Properties

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


                                      -12-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

4.    Timber Rights

      As a result of the "in-country" economics for harvesting and ready access
to available raw timber supplies through inter-entity arrangements, the Company
has not renewed its concession rights.

5.    Mineral Properties

a.    Clean Age Minerals Incorporated. In September 2000, the Company acquired
      Clean Age Minerals Incorporated ("CAMI") by way of merger with the
      Company's wholly owned subsidiary; Strategic Minerals, Inc. CAMI has one
      subsidiary, CA Properties, Inc. ("CAP").

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

      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. (See Footnote 5.c below).

b.     Minerals and Equipment

                                                                     12/31/2005
                                                                   ------------
Proven undeveloped lease costs                                     $ 12,609,100
Mine development costs
Accumulated depletion and                                              (450,000)
   depreciation
                                                                   $ 12,159,100
                                                                   ------------

      (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 December 31,
      2005, the Company took a charge of $50,000 towards the annual amount. The
      Company


                                      -13-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      is utilizing a modified unit-of-production basis in determining its
      amortization rates for its mineral properties.

c.    Prepaid Royalties.
      The Company receives a credit in the nature of "prepaid royalties" for
      rents paid on the Marfa Zeolite Lease, Presidio County, Texas, and a
      portion of the New Mexico Oro Grande Limestone Lease in Cibola County, New
      Mexico. During Fiscal Year 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 Calcium
      Carbonate properties were operated initially by the Company and,
      commencing in February 2005 by TPA. The Company 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
      "ReNuGen" (trademark applied for) in the first quarter of 2004 and
      continued these in Fiscal Year 2005.


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


                                      -14-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      shareholders would be freely trading shares. The Registrant and PSNet
      agreed to extend the Closing Date until PSNet's registration statement
      became effective and it had the requisite number of freely trading PSNet
      Shares required for distribution to the Registrant's shareholders as of
      the Record Date (as that term is defined below). The Asset Purchase
      Agreement required PSNet to use its best efforts to have an effective date
      for its registration statement of on or before March 31, 2005. There was
      no market for the PSNet Shares at the time the Company entered into the
      Asset Purchase Agreement.

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


                                      -15-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      $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 December 31, 2005, the 950,000 shares of Ostara common stock
      held by the Company were carried at $115,692. Under an accounting rule,
      the warrants, even though priced higher than the market value of the stock
      into which they are convertible, also have a value.

7.    Notes Payable

a.    Kane Note: On or about August 15, 2005, the Company's obligation to the
      Kanes was fully satisfied. (See Note 14a). The Series A Preferred Shares
      owned by the Kanes was 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 December 31, 2005, all of the July 1998 Notes had
      been satisfied.

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") and
      Strategic Minerals, Inc. ("SMI") and the Company dated September 19, 2000,
      obligations of CAMI to certain officers, directors and third parties were
      to have been satisfied by SMI or the Company within one (1) year of the
      merger. 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 December 31, 2005, the total amount payable on these
      notes is $731,133 representing principal of $514,881 and accrued but
      unpaid interest of $216,252.

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
      three percent (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


                                      -16
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      shares of common stock. The exercise price of the Warrants is $0.44 per
      share. The warrants expire on August 31, 2006.

      As of December 31, 2005, $22,892 is owed to Mr. Lucas and is classified as
      short-term debt .

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 is a Director and served
      as the Interim Chief Executive Officer of the Company from May though July
      2005. Mr. Roche was appointed to the Board of Directors of the Company in
      July 2005. (See 8-k dated July 19, 2005). Each lender was given a Note for
      his loan by the Company. The Note matures on May 10, 2006 at an interest
      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. In September 2005, one of the lenders, Mr. Thomas R.
      Smith, was repaid his $10,000 loan.

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 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 $13,000,
      commencing on October 1, 2005, with the remainder due and payable on the
      August 1, 2008 ("Remainder Amount"). The Remainder Amount shall be paid:
      (1) one half in Daleco Common Stock, valued at fifty cents ($.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


                                      -17
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      December 31, 2005, the current portion of the EV&T Note is $156,000, and
      the long term portion is $605,000.


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 percent in the principal amount of $91,062. This principal amount has
      been satisfied as of December 31, 2005.

      (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 December 31, 2005 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 December 31, 2005.

      (4) Note dated June 17, 2002 bearing interest at the rate of 7% in the
      principal amount of $137,000. This principal amount has been satisfied as
      of December 31, 2005.

            As of December 31, 2005, the outstanding principal and accrued but
      unpaid interest on the obligations listed under numbers 1 through 4 to Mr.
      Amir amounted to $214,710, which includes $45,485 in principal and
      $169,225 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(b)).

      Prior to conversion of his Series A Preferred Stock into common stock, Mr.
      Amir was entitled to have received dividends in the amount of $59,338 of
      which $59,338 remains outstanding as of December 31, 2005 (See Note 7(a)
      and Note 14(a)).


                                      -18-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      As of December 31, 2005, the Company owed Mr. Amir $39,633 in
      un-reimbursed business expenses and $245,835 in accrued but unpaid salary.

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

      As of December 31, 2005, the Company was indebted to Mr. Amir in the
      aggregate amount of $584,516.

(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 December 31, 2005, the Martin Debt amounts to $191,259
      representing $134,811 in principal and $56,448 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
      December 31, 2005, the Company owed Mr. Martin $245,835 in salary and
      $27,051 in unpaid reimbursable business expenses. As of December 31, 2005,
      the Company was indebted to Mr. Martin in the aggregate amount of
      $464,145.


(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 December
      31, 2005, the Company owed Mr. Novinskie $36,414 in un-reimbursed expenses
      and $245,839 in salary and $25,000 in bonuses (as discussed previously).

      Mr. Novinskie converted $10,000 of indebtedness into 71,942 shares of
      Common Stock as of December 3, 2002. The conversion was at the average of
      the closing bid and asking price for the Common Stock for the five trading
      days prior to the date of conversion. As of December 31, 2005, the Company
      was indebted to Mr. Novinskie in the aggregate amount of $307,253, This
      figure contains no accrued interest.


                                      -19-

<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

(d)   Due to Erlich. In 1996, 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 December
      31, 2005, an aggregate amount of $134,666 is due Mr. Erlich. This amount
      consists of $87,543 in principal and $47,123 in accrued interest.

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 ("Sonata Loan"). In
      consideration of Sonata's reduction of the Heller Loan from $5,154,783 to
      $655,000, Daleco agreed to:

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

            (2) grant Sonata or its nominee warrants for 250,000 shares of
      Daleco Common Stock at $.906 per share with an expiration date of December
      31, 2007 (see Note 11(b)); and 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 FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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

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

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

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

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


                                      -21-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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


      At December 31, 2005, the amount owed to Sonata under the above Loan
      Agreement is $161,587 which is classified as short-term debt.


       b. First Regional Bank Loan:

      In September 1998, the Company assumed a $100,000 loan with First Regional
      Bank when it acquired Haly Corporation. Interest is at 6.9% and the loan
      matures December 12, 2006. The loan is secured by the personal assets of
      Dov Amir an officer and Director of the Company.


                                      -22
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

11.   (a)   Capital Stock

                                                       NUMBER        NUMBER OF
                                         NUMBER       OF SERIES      SERIES B
                                       OF COMMON     A PREFERRED    PREFERRED
                                      SHARES, PAR    SHARES PAR     SHARES PAR
                                      VALUE $0.01    VALUE $0.01   VALUE $0.01
                                     PER SHARE (1)  PER SHARE (1)  PER SHARE (1)
                                     -------------  -------------  -------------

Balance as of December 31, 2004         28,693,043              0        185,000

Issued pursuant to the exercise of
  Options (Note 2)                       3,000,000

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

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

Issued for payment of
  financing fee (Note 3.a)                 250,000

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

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

Issued pursuant to Special Stock
  Award for Directors Services
  (Note 7)                                 600,000              0              0
                                     -------------  -------------  -------------

Ending Balance as of
  December 31, 2005                     40,988,498              0        185,000
                                     =============  =============  =============


(1)   The Articles of Incorporation of Daleco provide for authorized capital
      stock of 50,000,000 shares of common stock, par value $0.01 and 20,000,000
      shares of preferred stock, par value $0.01.

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

(3)   In Fiscal 2005, the Company had the following private placement of
      securities:

      (a) On May 10, 2005, the Company raised $50,000 for an interim payment on
      the Kane Debt. As additional consideration for the loans, the four persons
      were given a total of 250, 000 shares of stock. (See footnote 7(e)).


                                      -23-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      (b) 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 this 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 20,000 shares of common stock to William Smith in
      consideration and payment of his consulting activities pertaining to the
      development of the ReNuGen (trademark applied for) product. The Company
      issued 100,000 shares of common stock to Thomas R. Smith in consideration
      for 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, subject to
      Shareholder approval, for serving on a Special Committee of the Board of
      Directors to identify and recruit new management and independent directors
      for the Company.


                                      -24-

<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      (b) Options and Warrants: The Company granted the following options /
warrants to purchase common stock as of December 31, 2005.

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

Options / Warrants  Outstanding  -
  December 31, 2004                                        7,969,579  $      .53

Employee Stock Option
Granted(1)                                                   600,000
Expired                                                      500,000
Exercised(2)                                               3,000,000
Cancelled(3)                                                  50,000

Stockholder warrants
Granted(4)                                                 6,500,000
Expired(5)                                                    81,819
Exercised (6)                                                 45,455
Cancelled                                                          0

Options / Warrants  Outstanding-
  December 31, 2005                                       11,392,305  $     1.19



(1)   Under the terms of the Company's Non-Qualified Independent Director Stock
      Option Plan ("Plan"), a total of 600,000 options were granted to Mr. Roche
      (200,000), Mr. Pipkin (200,000) and Mr. Kelly (200,000). Under the terms
      of the Plan, the Options vest 50% after one-year's service on the Board of
      Directors and 25% on the second and third anniversaries of the director's
      service. Messrs. Roche and Kelly have advised the Company that they will
      not be standing for re-election. (See Company's Form 8-K dated January 27,
      2006.) As such, the Options granted to Messrs' Roche and Kelly will expire
      as of the Annual Meeting of the Company's Shareholders.

(2)   Options for 3,000,000 shares were exercised in 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, 2,381,300 were
      held by current


                                      -25-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      officers, a director and employees of the Company. A former director or
      those who had purchased options from an employee held the remaining
      648,700 options.

(3)   On May 16, 2005, options for 50,000 shares awarded under the Independent
      Director's Incentive Stock Option Plan to Mr. Pryor were cancelled upon
      his resignation as a director of the Company.

(4)   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 tranch 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.

(5)   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).)

(6)   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.

      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


                                      -26-
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DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

range from $0.53 per share to $1.08 per share. On September 18, 2005, 500,000
options awarded on September 18, 2000 expired. These options had an exercise
price of $.25.

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

                                                          2005           2004
                                                          ----           ----
Net income (loss) (as reported)                        $(732,018)     $(527,145)

Stock based employee
  compensation expense determined
  under fair value based method for
  all awards                                             (89,097)      (470,990)

Pro forma net income (loss)                            $(821,115)     $(998,135)
                                                       =========      =========

Basic and diluted loss per common share
      As reported                                      $   (0.02)     $   (0.02)
      Pro forma                                        $   (0.02)     $   (0.04)


      The fair value of the options granted during the quarter ended December
31, 2005 was estimated using the Black-Scholes option-pricing model with the
following assumptions: risk free interest rate between 3.19 and 5.85%, expected
life of five (5) years; and, expected volatility between 65.18% and 161.91%. The
weighted average fair value of the options granted during the quarter was
approximately $147,004.


                                      -27-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------


The following table summarizes information about stock options outstanding as of
December 31, 2005:

                           Weighted     Weighted                   Weighted
                           Average      Average                    Average
Exercise         Options   Exercise     Remaining     Options      Exercise
price        Outstanding   Price        Life (Years)  Exercisable  Price
--------------------------------------------------------------------------------
$0.43-$1.08  2,950,000     $0.73        2.59yrs       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.

(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 loaned the Company a total of $145,000 in July 1998.
(See Note 7b). The expiration date for these warrants was extended from November
20, 2003 to November 20, 2005 in Fiscal Year 2000. In October 2005, Mr. Amir
exercised his warrants. The warrants held by two holders of the July 1998 Notes
totaling 81,819 expired on November 20, 2005. (See Note 7(b)).

(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


                                      -28-
<PAGE>

DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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)).

On September 1, 2004, the Company granted to Herbert L. Lucas warrants for
20,000 shares of common stock with an exercise price of $.44 per share. The
warrants expire on August 31, 2006. The Warrants were given in consideration for
Mr. Lucas having made a loan of $40,000 to the Company's wholly owned
subsidiary, CA Properties, Inc. (See Note 7(d) above.)


(4)   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.

(5)   Smith Warrants

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

(6)   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
for their consultation and individual expertise in regard to product development
and application market identification with regard to the Company's potential
Sierra Kaolin(TM) and Zeolite products respectively.


                                      -29-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

 (7)  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) share 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 Common Stock issued under the Offering and upon the exercise of the Warrants
will be unregistered, will bear a restrictive legend and is subject to certain
piggyback registration rights and demand registration rights.

The proceeds of the Offering, $1,625,000 will be 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 40,396,601 for
the period ended December 31, 2005 (2004 - 28,441,695). For the periods ended
December 31, 2005 and 2004, 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") issued in the acquisition of
CAMI ("CAMI Preferred") 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.


                                      -30-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

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.

13.   Employment Contracts and Commitments

a.    In connection with the acquisition of Sustainable and under a Management
      Agreement dated April 17, 1995, the Company agreed to engage two key
      officers for a period of seven years ending April 17, 2002. The two key
      officers were entitled to a base salary of $75,000 plus additional
      incentive payments each based upon a percentage of net income of
      Sustainable. At the time of termination for any reason, the key officers
      are entitled to a severance payment equal to the total of the annual base
      salary plus additional annual incentive payments he is then receiving
      multiplied by the remaining years, or portions thereof, of the contract
      period. During fiscal 1997, the Company reached a settlement with one of
      the officers in the total amount of $60,000 to be paid at $5,000 per month
      through February 1998. The one remaining SFI employment contract expired
      in accordance with its terms on April 17, 2002 and was not renewed. The
      Company retains the services of the employee. As of June 30, 2002, Mr.
      Novinskie and Mr. Amir's employment contracts provided for bonuses of
      $50,000 each to be paid one-half in common stock and one-half in cash. The
      price of the stock to be issued was determined by taking the closing
      average of the bid and asked price for the Company's stock for the five
      (5) trading days preceding June 30, 2002. (See Note 13(b) below).

b.    On November 16, 2001, the Company entered into a Stock Purchase Agreement
      with SCOA ("SCOA SPA"). As a condition to the closing of the SCOA SPA,
      SCOA required that the Company enter into Key Man Employment Contracts
      ("Key Man Contracts") with Messrs. Robert E. Martin, Gary J. Novinskie and
      Dov Amir. The Key Man Contracts are for an initial three (3) year term.
      The Key Man Contracts provide for acceleration of the vesting of incentive
      options should the Key Man be terminated prior to the expiration of the
      term of the Key Man Contracts. Each of Messrs Novinskie and Amir are
      granted options for 500,000 shares of Company Common Stock while Mr.
      Martin was granted options for 1,000,000 shares of Common Stock. There are
      like provisions for the acceleration of the salary due each employee over
      the life of the Contract. (See Note 11a.) The Key Man Contract also
      provided for a bonus to Messrs. Novinskie and Amir of $50,000 to be paid
      one-half in cash and one-half in stock. (See


                                      -31-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      Note 13(a) above). Mr. Novinskie's cash bonus has not been paid. Mr.
      Amir's bonus was debited against an advance given to Mr. Amir in the third
      quarter. (See Note 8.) Under Mr. Martin's Key Man Contract, he was granted
      a salary of $50,000 for the six month period April 1, 2002 through
      September 30, 2002 ($8,333 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.

c.    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 were 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 contract. 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 one year and earn interest at the prime rate of interest
      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.

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 due to its lack of liquidity. Also named in the suit
      were Messrs. Dov Amir (a current officer and director of the


                                      -32-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

      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 shall have until
      August 1, 2001 in which to redeem the remaining 8,000 shares for $400,000
      plus accrued interest through the date of settlement at a rate of ten
      percent (10%) per annum. The Kanes have been granting the Company an
      extension of the August 1, 2001 date on a month-to-month basis. On
      December 7, 2001, the Company paid the Kanes $90,000 representing all
      accrued and unpaid dividends on the Series A Preferred Stock through
      December 31, 2001. The Company has paid all dividends due and payable to
      the Kanes for periods through the fiscal quarter ending March 31, 2003.
      Payments for the quarters ending June 30, 2003 and September 30, 2003, in
      the amount of $30,000, are still outstanding. The Company satisfied its
      obligation to the Kanes by payment of $643,819.32. This amount satisfied
      the outstanding principal, interest and fees. As a result of the
      satisfaction of this judgment, the 8,000 shares of Series A Preferred
      Stock held by the Kanes was returned to and cancelled on the books of the
      Company.

      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 dismissed the Complaint without prejudice, but
      reserved the right to re-file his complaint should the loan not be
      satisfied by January 1, 2005. The Company believes the complaint to be
      without merit. However, should the funds be available to satisfy Mr.
      Erlich's loan as well as other obligations of the Company, the Company
      intends to satisfy all of its indebtedness in full.

15.   Acquisitions/Mergers

      The Company conducted no acquisitions or mergers during Fiscal Year 2005.


                                      -33-
<PAGE>


DALECO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENDED DECEMBER 31, 2005- PREPARED BY
MANAGEMENT (UNAUDITED)
--------------------------------------------------------------------------------

16.       Accounting Standards

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

      Effective July 1, 2003, Daleco adopted the Statement as required, for its
mandatory redeemable Series A, 10% Cumulative Convertible Preferred Stock,
stated value $50.00 and par value $.01, in line with the satisfaction of its
$400,000 obligation to Mr. Kane, as mentioned under Note 14(b). As a result,
Long-term Debt (see Note 10 (c) above) included the preferred securities which
had been previously included as part of the Shareholders' Equity.

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


                                      -34-

<PAGE>


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

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

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

      During the quarter ended December 31, 2005, the Company's primary source
      (98%) of revenues continued to be its oil and natural gas production
      operations. These types of operations are influenced by a variety of
      factors which are beyond the control of management, such as the
      variability of the demand for and the pricing of crude oil and natural gas
      within the Company's operating areas as well as the demand and pricing,
      both domestically or internationally, for the Company's timber and
      industrial minerals. The segment's performance as measured by operating
      cash flows improved by roughly $164,000 from the prior year period as a
      result of the continuation of favorable oil and gas prices, sustained
      levels of production and more normal cost levels.


                                      -35-
<PAGE>


      During the quarter, efforts continued to complete the analytical phase of
      the Sierra Kaolin(TM) deposit coring program. Results to date are
      consistent with historical data available on the property. The Company
      believes that the information to be obtained from this effort is a
      critical component to its plans to commercialize this resource. The
      Company has also continued to market its Calcium Carbonate for use as
      ground cover under the trade name, Oro Grande Gold(TM) (trademark applied
      for) , and has continued its efforts to test market its crushed stone as
      road bases and for use in coal fired power plants.

      The Company continues to pilot market its ReNuGen (trademark applied for)
      product for use within the waste treatment industry. Additional testing is
      being conducted by third parties on the efficacy of utilizing the
      Company's zeolite in a variety of agricultural and environmental roles.

      All of the negotiations, testing and agreements are the result of lengthy
      negotiations which are necessary to break traditional barriers to
      accepting new and/or innovative products. The Company believes that these
      efforts result is expanded demand for ReNuGen(trademark applied for), its
      Sierra Kaolin(TM) and its Oro Grande Gold(trademark applied for) stone
      products.

      For the three-month period ended December 31, 2005, total operating
      revenues increased by $118,512 (33%) while direct operating expenses
      declined by $46,819 (19%) as compared with the same quarter last year. The
      decline in direct operating expense is associated with lower required
      levels of well repair activity in the Company's oil and natural gas
      segment and the use of existing supplies of extracted minerals to support
      its marketing efforts in the current quarter. For the period, the Company
      recorded a loss of $723,018 as compared to a loss of $527,145 for the
      prior fiscal year's first quarter. Roughly 96% of the current quarter's
      loss is directly attributable to non-cash charges recorded by the Company
      during the period.

Item 3 -    Controls and Procedures

            Sarbanes-Oxley Act

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

      The SOA is applicable to all publicly traded reporting companies no matter
how small or large. The SOA provides for additional controls such as the chief
executive officer's certificate regarding the accuracy of the Company's
financial statements and


                                      -36-
<PAGE>



providing for a criminal penalty for making a false statement to the
certification by an executive officer that the financial statements do not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements, in light of the circumstances under which the
statement were made, not misleading with respect to the period covered by the
annual report. The certification also requires that the executive officer of the
company certify that the financial statements and other materials presented in
the annual report fairly present all material respects the financial condition,
results of operations and cash flows of the Company as of and for the periods
covered by the annual report. This requirement exceeds the previous requirement
that the financial statements merely be presented in accordance with generally
accepted accounting principles.

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

      The SOA requires that a "Disclosure Committee" be established. This
committee considers the materiality of information and determines disclosure
obligations on a timely basis. This committee is the Company's "watchman" for
public disclosures. The Company has designated the Board of Directors as the
Committee. The Company has eight employees, and four independent directors. All
parties are intricately involved in the decision making processes at the Company
and no disclosure or decision not to disclose information is made without the
input of inside management, counsel and the Board of Directors.

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

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

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


                                      -37-
<PAGE>


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


                                      -38-
<PAGE>


PART II.    OTHER INFORMATION
            -----------------

Item 1.     None

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.

Item 3      Heller Debt.

            In August 1997, the Company entered into an arrangement with Heller
      Financial, Inc. ("Heller") whereby Heller agreed to provide the Company
      with up to $15,000,000 to rework existing horizontal wells, re-complete
      its vertical wells as horizontal wells, and develop additional acreage.
      Under the terms of the agreement, all of the properties of Westlands were
      transferred to a newly formed limited partnership, Tri-Coastal Energy,
      L.P., the general partner of which is Tri-


                                      -39-
<PAGE>


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

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

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

            Sonata is an independent, privately held company that is not
      affiliated with the Company in any fashion. The Company has done other
      financings (see Note 10(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:


                                      -40-
<PAGE>


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

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

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

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

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

            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;


                                      -41-
<PAGE>


            (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.



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 refilling of the Company's 2003 audited
statements was necessitated by the Company's prior auditor not being qualified
under the PCAOB (as required by the Sarbanes-Oxley Act of 2002) at the time of
the issuance of the Company's financial statements in January 2004. (See the
Company's Form 8-K's dated September 14, 2004, and December 2, 2004.) The
Company has subsequently filed all required financial statements and has taken
and continues to take steps to return its securities to the OTCBB market. The
Company has never received official written notice from any party as to the
formal removal of its securities from the OTCBB and only learned of this move
from securities traders.

ITEM 6      Exhibits and Reports on Form 8-K

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

            1. Form 8-K dated December 6, 2005 announcing filing of amended
10-QSB for the periods ended March 31, 2005 and June 30, 2005 at SEC's request.

            2. Firm Amendment to Form 8-K that was filed December 6, 2005 dated
December 16, 2005.

            3. Form 8-K dated December 16, 2005 announcing amendment of exhibits
to June 30, 2005 10-QSB.

            The Registrant incorporates by reference its Exhibit List as
attached to its Form 10-KSB dated January 13, 2005.


                                      -42-
<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:  February 14, 2006           By:  /s/ Gary J. Novinskie
                                         --------------------------------------
                                         Gary J. Novinskie, President


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

                          DALECO RESOURCES CORPORATION


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


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


                                      -43-