U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





(Mark One)



[ X ] QUARTERLYREPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30,
2011



OR



[    ]  TRANSITION
REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934



Commission File Number 000-28753







FREESTONE RESOURCES, INC.



(Exact name of small business issuer as specified
in its charter)





| | Nevada                                                         |  | 33-0880427                        | 
| | -------------------------------------------------------------- |  | --------------------------------- | 
| | (State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.) | 



Republic Center, Suite 1350

325 N. St. Paul Street Dallas, TX 75201

(Address of principal executive offices)



(214) 880-4870

(Issuer's telephone number)





(Former name, former address and former fiscal
year, if changed since last report)



Indicate by check mark whether the registrant
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes | X  | No | |



Indicate by check mark whether the Registrant
is a large accredited filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accredited filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act:





|Large Accredited Filer [  ] | Accelerated Filer [  ]        | 
|--------------------------- | ----------------------------- | 
|Non-Accredited Filer   [  ] | Smaller Reporting Company [X] | 



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes |   | No | X |



As of November 11, 2011 there were52,612,760shares of Common Stock of the issuer outstanding.









1









|Freestone Resources, Inc.
        (A Development Stage Company)
        Consolidated Balance Sheets
        As of September 30, 2011 and June 30, 2011
|------------------------------------------------------------------------------------------------------------------------------------------------------



|Assets                                                               |                            |             |   |                      
|-------------------------------------------------------------------- | -------------------------- | ----------- | - | ---------------------
|                                                                     |                            |             |   |                      
|                                                                     | (Unaudited)                |             |   | (Audited)            
|                                                                     | September 30,
        2011 |             |   | June 30,
        2011
|                                                                     |                            |             |   |                      
|Current Assets:                                                      |                            |             |   |                      
|Cash                                                                 | $                          | 30,329      |   |                      
|Accounts receivable                                                  |                            | -           |   |                      
|Deposits and other assets                                            |                            | -           |   |                      
|Total Current Assets                                                 |                            | 30,329      |   |                      
|                                                                     |                            |             |   |                      
|Oil and gas properties used for research and development             |                            | 26,000      |   |                      
|Fixed assets, net of accumulated depreciation of $20,284 and $15,032 |                            | 47,268      |   |                      
|Total fixed assets, net                                              |                            | 73,268      |   |                      
|                                                                     |                            |             |   |                      
|Other assets                                                         |                            | 3,087       |   |                      
|                                                                     |                            |             |   |                      
|Total Assets                                                         | $                          | 106,684     |   |                      
|                                                                     |                            |             |   |                      
|                                                                     |                            |             |   |                      
|Liabilities and Stockholders' Equity                                 |                            |             |   |                      
|                                                                     |                            |             |   |                      
|Current Liabilities:                                                 |                            |             |   |                      
|Accounts payable                                                     | $                          | 21,024      |   |                      
|Accounts payable-related party                                       |                            | -           |   |                      
|Accrued expenses                                                     |                            | 6,908       |   |                      
|Notes payable-related parties                                        |                            | 18,218      |   |                      
|Stock to be issued                                                   |                            | 15,000      |   |                      
|Total Current Liabilities                                            |                            | 61,150      |   |                      
|                                                                     |                            |             |   |                      
|Long-term Liabilities:                                               |                            |             |   |                      
|Asset retirement obligations                                         |                            | 24,917      |   |                      
|Total Liabilities                                                    |                            | 86,067      |   |                      
|                                                                     |                            |             |   |                      
|Stockholders' Equity (Deficit):                                      |                            |             |   |                      
|Common stock, $.001 par value, 100,000,000 shares                    |                            |             |   |                      
|authorized, 52,512,760 and 52,512,760 shares issued                  |                            |             |   |                      
|and outstanding, respectively                                        |                            | 52,513      |   |                      
|Additional paid in capital                                           |                            | 16,538,716  |   |                      
|Accumulated deficit                                                  |                            | (16,570,612 | ) |                      
|Stockholders' Equity (Deficit)                                       |                            | 20,617      |   |                      
|Total Liabilities and Stockholders’  Equity                          | $                          | 106,684     |   |                      



The accompanying notes are an integral part
of these consolidated financial statements.







2











|Freestone Resources, Inc.
        (A Development Stage Company)
        Consolidated Statements of Operations
        For the Three Months Ended September 30,
        2011 and 2010
        (unaudited)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|                                                             |  |           |            |              |  | Since         
|------------------------------------------------------------ |  | --------- | ---------- | ------------ |  | --------------
|                                                             |  |           |            |              |  | Reentering the
|                                                             |  | Three     |            |              |  | Development   
|                                                             |  | Months    |            | Three Months |  | Stage (July 1,
|                                                             |  | Ended     |            | Ended        |  | 2010 to       
|                                                             |  | September |            | September    |  | September 30  
|                                                             |  | 30, 2011  |            | 30, 2010     |  | 2011)         
|                                                             |  |           |            |              |  |               
|Oil and gas revenues resulting from research activities      |  | $         | 4,757      |              |  | $             
|Total revenue resulting from research activities             |  |           | 4,757      |              |  |               
|                                                             |  |           |            |              |  |               
|Operating expenses:                                          |  |           |            |              |  |               
|Lease operating costs                                        |  |           | 2,700      |              |  |               
|Depreciation                                                 |  |           | 5,252      |              |  |               
|Impairment expense                                           |  |           | —          |              |  |               
|General and administrative                                   |  |           | 75,301     |              |  |               
|Total operating expenses                                     |  |           | 83,253     |              |  |               
|                                                             |  |           |            |              |  |               
|Operating loss                                               |  |           | (78,496    | )            |  |               
|                                                             |  |           |            |              |  |               
|Other income (expense):                                      |  |           |            |              |  |               
|Interest income (expense)                                    |  |           | —          |              |  |               
|Other income related to the settlement of the EOS litigation |  |           | —          |              |  |               
|Revision to ARO estimate                                     |  |           | —          |              |  |               
|Gain on sale of asset                                        |  |           | —          |              |  |               
|Total other income (expense)                                 |  |           | —          |              |  |               
|                                                             |  |           |            |              |  |               
|Net income (loss)                                            |  | $         | (78,496    | )            |  | $             
|                                                             |  |           |            |              |  |               
|                                                             |  |           |            |              |  |               
|Basic and diluted loss per share                             |  | $         | 0.00       |              |  | $             
|                                                             |  |           |            |              |  |               
|Weighted average shares outstanding:                         |  |           |            |              |  |               
|Basic and diluted                                            |  |           | 52,512,760 |              |  |               
|                                                             |  |           |            |              |  |               





The accompanying notes are an integral part
of these consolidated financial statements.









3









|Freestone Resources, Inc.
        (A Development Stage Company)
        Consolidated Statement of Stockholders’
        Equity
        For the Period Since Reentering the Development
        Stage (July 1, 2010 to September 30, 2011)
        And the Three Months Ended September 30,
        2011
        (Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                                          |  |              |             |   |            |   |         |                 |  |   |            |   |  |       |            
|----------------------------------------- |  | ------------ | ----------- | - | ---------- | - | ------- | --------------- |  | - | ---------- | - |  | ----- | -----------
|                                          |  | Common Stock |             |   | Additional |   |         | Accumulated     |  |   |            |  
|                                          |  | Shares       |             |   | Amount     |   |         | Paid in Capital |  |   | Deficit    |   |  | Total |            
|Balance, June 30, 2010                    |  |              | 71,718,994  |   |            | $ | 71,719  |                 |  | $ | 16,299,789 |   |  | $     | (16,913,507
|                                          |  |              |             |   |            |   |         |                 |  |   |            |   |  |       |            
|Common stock issued for cash              |  |              | 3,712,500   |   |            |   | 3,713   |                 |  |   | 440,787    |   |  |       | -          
|Common stock issued for Demo equipment    |  |              | 100,000     |   |            |   | 100     |                 |  |   | 58,485     |   |  |       | -          
|Common stock issued for services          |  |              | 5,300,000   |   |            |   | 5,300   |                 |  |   | 948,700    |   |  |       | -          
|Common stock issued for warrants          |  |              | 500,000     |   |            |   | 500     |                 |  |   | 23,500     |   |  |       | -          
|Common stock returned for EOS acquisition |  |              | (28,818,734 | ) |            |   | (28,819 | )               |  |   | (1,232,545 | ) |  |       | -          
|Net loss                                  |  |              | -           |   |            |   | -       |                 |  |   | -          |   |  |       | 421,391    
|                                          |  |              |             |   |            |   |         |                 |  |   |            |   |  |       |            
|Balance, June 30, 2011                    |  |              | 52,512,760  |   |            | $ | 52,513  |                 |  | $ | 16,538,716 |   |  | $     | (16,492,116
|                                          |  |              |             |   |            |   |         |                 |  |   |            |   |  |       |            
|Net loss                                  |  |              |             |   |            |   |         |                 |  |   |            |   |  |       | (78,496    
|Balance, September 30, 2011               |  |              | 52,512,760  |   |            | $ | 52,513  |                 |  | $ | 16,538,716 |   |  | $     | (16,570,612
|                                          |  |              |             |   |            |   |         |                 |  |   |            |   |  |       |            













The accompanying notes are an integral part
of these consolidated financial statements.









4









|Freestone Resources, Inc.
        (A Development Stage Company)
        Consolidated Statements of Cash Flows
        Three Months Ended September 30, 2011 and
        2010
        (Unaudited)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                          |  |  
|----------------------------------------------------------------------------------------- |  | -
|                                                                                          |  |  
|                                                                                          |  |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |  
|Net loss                                                                                  |  | $
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |  
|Depreciation and amortization                                                             |  |  
|Shares issued for demonstration equipment                                                 |  |  
|(Gain) on sale of investment asset                                                        |  |  
|Stock based compensation                                                                  |  |  
|Decrease in revision of ARO estimate                                                      |  |  
|Shares issued for warrants                                                                |  |  
|Changes in operating assets and liabilities:                                              |  |  
|Write-off in note receivable                                                              |  |  
|Change in account receivable                                                              |  |  
|Change in inventory of Petrozene                                                          |  |  
|Change in other assets                                                                    |  |  
|Change in accounts payable                                                                |  |  
|Change in accounts payable – related party                                                |  |  
|Change in accrued expenses                                                                |  |  
|Net cash provided used in operating activities                                            |  |  
|                                                                                          |  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |  
|Sale of investment asset                                                                  |  |  
|Purchases of fixed assets                                                                 |  |  
|Net cash used in investing activities                                                     |  |  
|                                                                                          |  |  
|CASH FLOWS FROM FINANCING ACTIVITES:                                                      |  |  
|Payments on note payable                                                                  |  |  
|Payments on note payables – related party                                                 |  |  
|Proceeds from sale of stock                                                               |  |  
|Stock returned upon settlement of litigation                                              |  |  
|Stock to be issued                                                                        |  |  
|Net cash provided by financing activities                                                 |  |  
|                                                                                          |  |  
|NET CHANGE IN CASH                                                                        |  |  
|CASH AT BEGINNING OF PERIOD                                                               |  |  
|CASH AT END OF PERIOD                                                                     |  | $
|Supplemental cash flow information:                                                       |  |  
|Cash paid for interest                                                                    |  | $
|Non-cash investing activities:                                                            |  |  
|Stock returned upon settlement of litigation                                              |  | $





The accompanying notes are an integral part
of these consolidated financial statements.









5









Freestone Resources, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)



NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES



Nature of Activities, History and Organization:



Freestone Resources, Inc. (“Freestone”
or the “Company”) is an oil and gas technology development company. The Company is located in Dallas, Texas and is
incorporated under the laws of the State of Nevada.



The Company’s primary business is the
development of new technologies that allow for the utilization of oil and gas resources in an environmentally responsible and cost
effective way, as well as the development of technologies that can be used in the environmental cleanup of oil-based contaminant
byproducts. In October 2011, the Company entered into a joint venture with MEA Solutions, LLC to deliver a total solution for water
resource management in the oilfield services sector. An integral component of the service includes owning and operating water recycling
systems. The joint venture, Freestone Water Solutions, LLC, will utilize specialized, proprietary technology designed to treat
and recycle flowback water (frac water that immediately flows back to the surface), as well as produced water for subsequent reuse
in the fracking process. It is anticipated that Freestone Water will not be consolidated in future reporting, as the Company will
own less than 50% of the joint venture and will not have control of the board of directors.



The Company acquired one hundred percent (100%)
of the issued and outstanding stock of Earth Oil Services, Inc., a Nevada corporation (“EOS”), in a stock based transaction
on September 24, 2009 (the “EOS Agreement”). The Company issued 31,603,734 shares of restricted common stock of the
Company in consideration for this transaction.  EOS owns certain exclusive, territorial, license agreements to a proprietary
technology that is a chemical solvent that can separate, extract and recycle hydrocarbon contaminants from ground soils, tar
sands, vessels and other materials.    EOS has engaged a fabricator to build a prototype machine (the “Prototype”)
designed to be used in conjunction with the solvent.  EOS is indebted to the fabricator for its development of the Prototype.  EOS
is now a wholly owned subsidiary of Freestone and all intercompany accounts have been eliminated in consolidation.   The
Company filed a lawsuit seeking to rescind the EOS Agreement.  On June 26, 2011 the Company entered into a Settlement
Agreement (the “Settlement Agreement”) with Enviro Serv, Shultz, David Feuerborn, an individual residing in Riverside
County, California, and Thomas Jennings, an individual residing in Orange County, California (collectively the “Parties”).  The
Settlement Agreement permanently and irrevocably effectuates a final and binding global settlement and release of the Parties regarding
the pending lawsuit between the Parties in the Northern District of Texas, Cause No. 3:10-CV-01349-O.  Furthermore, the
Settlement Agreement rescinds the Stock Purchase Agreement entered into by and between the Parties on September 24, 2009, and cancels
28,818,734 shares of Freestone’s common stock of the 31,603,734 shares of Freestone common stock that was originally issued
to Enviro Serv and Shultz, and returns said cancelled stock to the Company’s treasury.



Development Stage Company



The Company is a development-stage company
as defined in FASB Accounting Standards Codification (“ASC”) 915“Development Stage Enterprises”.  As
of July 1, 2010 the Company reentered the development stage entity because it is devoting substantially all of its efforts to raising
capital and establishing its business and principal operations, and no sales have been derived to date from its principal operations. 
The Company reentered the development stage due to management's decision to cease any operations of the oil separation technology
licensed by Earth Oil Services, Inc.  Instead, the Company began development of its own oil separation technology.  The
development of the aforesaid technology resulted in the need to raise additional capital for the construction and development of
a prototype Oil Recovery Unit.





Unaudited Interim Financial Statements:



The accompanying unaudited interim consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America and the rules of the Securities and Exchange Commission. These financial statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance
sheet, statement of operations, statement of stockholders’ equity and statement of cash flows for the periods presented in
accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States have
been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information
have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in
the Company’s Annual Report on Form 10-K. The results of operations for the three months ended September 30, 2011 are not
necessarily indicative of the results of operations for the full year or any other interim period.  The information included
in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and Financial Statements and notes thereto
included in the Company’s June 30, 2011 Form 10-K.





6









Significant Accounting Policies:



The Company’s management selects accounting
principles generally accepted in the United States of America and adopts methods for their application.  The application
of accounting principles requires the estimating, matching and timing of revenue and expense.  It is also necessary for
management to determine, measure and allocate resources and obligations within the financial process according to those principles.  The
accounting policies used conform to generally accepted accounting principles which have been consistently applied in the preparation
of these financial statements.



The financial statements and notes are representations
of the Company’s management which is responsible for their integrity and objectivity.  Management further acknowledges
that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting
control and preventing and detecting fraud.  The Company's system of internal  accounting control is designed
to assure, among other items, that  1) recorded  transactions  are valid;  2) valid  transactions  are
recorded;  and  3) transactions  are  recorded in the proper  period in a timely  manner
to produce financial  statements which present fairly the financial  condition,  results of operations  and
cash  flows of the  Company  for the  respective  periods  being presented.







7









Basis of Presentation



The Company prepares its financial statements
on the accrual basis of accounting.  All intercompany balances and transactions are eliminated.  Investments
in subsidiaries, where the Company has a controlling interest, are reported using the equity method.  For those businesses
that the Company does not have a controlling interest, they are accounted through the Noncontrolling Interest method.  Management
believes that all adjustments necessary for a fair presentation of the results of the three months ended September 30, 2011 and
2010 have been made.



The Company consolidates its subsidiaries in
accordance with ASC 810, “Business Combinations”, (formally SFAS 141R) and specifically ASC 810-10-15-8 which
states, "The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore,
as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another
entity is a condition pointing toward consolidation."



Use of Estimates:



The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain
reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.



Recently Issued Accounting Pronouncements:



The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.



Cash and Cash Equivalents:



Cash and cash equivalents includes cash in
banks with original maturities of three months or less and are stated at cost which approximates market value, which in the opinion
of management, are subject to an insignificant risk of loss in value.



Revenue Recognition:



The Company recognizes revenue from the sale of products in accordance
with ASC 605-15 “Revenue Recognition”, (formerly Securities and Exchange Commission Staff Accounting Bulletin No. 104,
"Revenue Recognition in Financial Statements" ("SAB 104")).  Revenue will be recognized only
when all of the following criteria have been met:



1. Persuasive evidence of an arrangement exists;

2. Ownership and all risks of loss have been transferred to buyer,
which is generally upon shipment;

3. The price is fixed and determinable; and

4. Collectability is reasonably assured.



Revenue is recorded net any of sales taxes charged to customers.



Income Taxes:



The Company has adopted ASC 740-10 “Income Taxes”
(formerly SFAS No. 109),  which requires the use of the liability method in the computation of income tax expense and
the current and deferred income taxes payable.



Equipment:



Equipment is carried at the cost of acquisition
or construction and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance are
expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency
of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on
dispositions of equipment are reflected in operations. Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, which are 3 to 30 years.  Oil and gas properties were purchased primarily
for product testing and are depreciated over their estimated useful lives of 3 years but not reduced below estimated salvage value.



Earnings per Share:



Basic earnings (loss) per share are computed
by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings
(loss) per share include the effects of any outstanding options, warrants and other potentially dilutive securities.  For
the periods presented, there were no potentially dilutive securities outstanding, therefore basic earnings per share equals diluted
earnings per share.





8









Fair Value Measurements:



ASC Topic 820, “Fair Value Measurements
and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and requires certain disclosures about fair value measurements.  In general, fair value of financial instruments
are based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is
based upon internally developed models that primarily use, as inputs, observable market based parameters.  Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include
amounts to reflect counterparty credit quality and the Corporation’s credit worthiness, among other things, as well
as unobservable parameters.  Any such valuation adjustments are applied consistently over time.



Accounts Receivable:



Accounts Receivable are carried at their face
amount, less an allowance for doubtful accounts.  On a periodic basis, the Company evaluates accounts receivable and
establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions,
based on a history of write offs and collections.  The Company’s policy is generally not to charge interest on
trade receivables after the invoice becomes past due.  A receivable is considered past due if payments have not been
received within agreed upon invoice terms.   Write offs are recorded at a time when a customer receivable is deemed
uncollectible.  The Company had no bad debt accruals at September 30, 2011 and June 30, 2011.



Oil and Gas Properties:



Freestone is actively purchasing marginal oil and gas properties
and leasing properties that will be used in the further research and development of its oil enhancement technologies.  This
research focuses on the types of formations that will benefit the most from the use of the solvent, as well as the various applications
from production and storage to end cycle refinement.



Impairment of Long Lived Assets



The Company evaluates, on a periodic basis,
long-lived assets to be held and used for impairment in accordance with the reporting requirements of ASC 360-10, “Accounting
for the Impairment or Disposal of Long-Lived Assets”. The evaluation is based on certain impairment indicators, such
as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as
well as other external market conditions or factors that may be present. If these impairment indicators are present or other factors
exist that indicate that the carrying amount of the asset may not be recoverable, then an estimate of the discounted value of expected
future operating cash flows is used to determine whether the asset is recoverable and the amount of any impairment is measured
as the difference between the carrying amount of the asset and its estimated fair value. The fair value is estimated using valuation
techniques such as market prices for similar assets or discounted future operating cash flows.







9









Asset Retirement Obligation:



The Company records the fair value of a liability
for asset retirement obligations (“ARO”) in the period in which an obligation is incurred and records a corresponding
increase in the carrying amount of the related long-lived asset. For Freestone Resources, asset retirement obligations primarily
relate to the abandonment of oil and gas properties. The present value of the estimated asset retirement cost is capitalized as
part of the carrying amount of oil and gas properties. The settlement date fair value is discounted at Freestone Resource’s
credit adjusted risk-free rate in determining the abandonment liability. The abandonment liability is accreted with the passage
of time to its expected settlement fair value. Revisions to such estimates are recorded as adjustments to ARO and capitalized asset
retirement costs and are charged to operations in the period in which they become known. At the time the abandonment cost is incurred,
Freestone Resources is required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO.



The amounts recognized for ARO are based upon
numerous estimates and assumptions, including future abandonment costs, future recoverable quantities of oil and gas, future inflation
rates, and the credit adjusted risk free interest rate.





NOTE 2 – FIXED ASSETS



Fixed assets at September 30, 2011 and June
30, 2011  are as follows:

|                                                    |  | September 30,
        2011 |         |   | June 30, 2011 |  
|--------------------------------------------------- |  | -------------------------- | ------- | - | ------------- | -
|Computers & office furniture                        |  | $                          | 67,552  |   |               | $
|Oil and gas research and development equipment      |  |                            | 26,000  |   |               |  
|Total fixed assets                                  |  |                            | 93,552  |   |               |  
|Less: Accumulated depreciation                      |  |                            | (20,284 | ) |               |  
|Total fixed assets, net of accumulated depreciation |  | $                          | 73,268  |   |               | $



Depreciation expense was $5,252 for the quarter
ended September 30, 2011 and $371 for the quarter ended September 30, 2010.





NOTE 3 – NOTES PAYABLE - RELATED PARTIES



On May 26, 2009, the Company received a loan
from Mike Doran (“Doran”), the Company’s CEO at that time, in the amount of $25,000.  A note payable
was formally prepared by the Company but never executed by Doran.  The terms of the loan included an interest rate of
three and a half percent, and the payment of twelve monthly installments beginning on October 31, 2009.  On July 8, 2009,
an amended and restated promissory note with similar terms was executed to replace the original note payable, at which time the
Company recorded a $6,200 gain on extinguishment of debt.   During the year ended June 30, 2009, the Company received
an advance from Doran of $20,000 which was repaid during the year.    As of September 30, 2011 and June 30,
2011 the balance owed to Mr. Doran was $3,218 and $6,461 respectively.



On July 9, 2009, the Company received an advance
from James Carter, a shareholder, in the amount of $25,000.  There are no terms on the advance and no interest is paid.  At
September 30, 2011 and June 30 2011 the balance owed was $15,000.

10









NOTE 4 – INCOME TAXES



The Company has adopted ASC 740-10, “Income Taxes”,
which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes
payable (deferred tax liability) or benefit (deferred tax asset).   Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.



During the three months ended September 30, 2011 the Company had
a net loss of $78,496, increasing the deferred tax asset approximately $26,688 at the statutory tax rate of 34%.  Deferred
tax assets at September 30, 2011 and June 30, 2011 consisted of the following:



Deferred tax asset related to:



|                                         |  | September 30, |            |   | June 30, |  
|---------------------------------------- |  | ------------- | ---------- | - | -------- | -
|                                         |  | 2011          |            |   | 2011     |  
|Prior Year                               |  | $             | 1,139,687  |   |          | $
|Tax Benefit (Expense) for Current Period |  |               | 26,688     |   |          |  
|Net Operating Loss Carryforward          |  | $             | 1,166,375  |   |          | $
|Less: Valuation Allowance                |  |               | (1,166,375 | ) |          |  
|Net Deferred Tax Asset                   |  | $             | 0          |   |          | $





The net deferred tax asset generated by the loss carryforward has
been fully reserved and will expire in the years 2019 through 2030. The realization of deferred tax benefits is contingent upon
future earnings and is fully reserved at September 30, 2011 and June 30, 2011.





NOTE 5 – ASSET RETIREMENT OBLIGATION



The Company’s asset retirement obligation
(“ARO”) primarily represents the estimated present value of the amount Freestone Resources will incur to plug, abandon
and remediate sits producing properties at the end of their productive lives, in accordance with applicable state laws. Freestone
Resources determines the ARO on its oil and gas properties by calculating the present value of estimated cash flows related to
the liability. At September 30, 2011, the liability for ARO was $24,917, all of which is considered long term. The asset retirement
obligations are recorded as current or non-current liabilities based on the estimated timing of the anticipated cash flows. During
2011, the Company has not recognized accretion expense, as the properties were written down to salvage value as of June 30, 2009.





11









NOTE 7 – COMMITMENTS AND CONTINGENCIES



The Company leases office space under a non-cancelable
operating lease that expires in July 2014.  The lease requires fixed escalations and payment of electricity costs.  Rent
expense, included in general and administrative expenses, totaled approximately $6,913 and $4,169 for the three months ended September
30, 2011 and 2010 respectively.





NOTE 8 – EQUITY TRANSACTIONS



The Company is authorized
to issue 100,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights.  At September
30, 2011 and June 30, 2011, there were52,512,760and52,512,760,
respectively, common shares outstanding.



In June 2011, the Company issued a warrant
to purchase 500,000 shares of common stock to Hydrex Technologies, (“Hydrex”)  in conjunction with the issuance
of a License Agreement to Hydrex.    The warrants were exercised on June 9, 2011 for $24,000, which, per the
agreement, was 20% of the closing price on the last trading day prior to the exercise.     The Company
has a similar warrant agreement with Hydrex, in which the warrant is only granted and exercisable upon the completion of commercial-scale
Oil Recovery Units within a stated period of time.



On September 29, 2011 the Company sold 100,000
shares to a stockholder at $0.15 per share. The shares had not been issued as of September 30, 2011, and are recorded as $15,000
of “stock to be issued” on the Company’ September 30, 2011 balance sheet.



NOTE 9 – FREESTONE TECHNOLOGIES, LLC



On October 24, 2008.  Freestone established
Freestone Technologies, LLC (the “Subsidiary”) in the state of Texas.  The Subsidiary is wholly owned by
Freestone and has certain assets and liabilities relating to the purchase of oil wells.  These wells were purchased as
additional test wells for Petrozene and research and development for subsequent technologies.  The assets and liabilities
of the Subsidiary are included in the consolidated financial statements of Freestone.





NOTE 10 – GOING CONCERN



As reflected in the accompanying consolidated
financial statements, Freestone incurred operating losses, and has a negative working capital position as of September 30, 2011.  The
above factors raise substantial doubt about Freestone's ability to continue as a going concern.  Freestone's continued
existence is dependent on its ability to obtain additional equity and/or debt financing to fund its operations.  Freestone
plans to raise additional financing and to increase sales volume.  There is no assurance that Freestone will obtain additional
financing or achieve profitable operations or cash inflows.  The consolidated financial statements do not include any
adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities
that might be necessary as a result of this uncertainty.





12







NOTE 11 – FAIR VALUE MEASUREMENTS



Cash, accounts receivable, accounts payable
and other accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair
values because of the relatively short maturity of those instruments.



Accounting Standards Codification (“ASC”)
Topic 820, “Fair Value Measurements and Disclosures” (formally SFAS No. 157), establishes a framework for
measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy under ASC 820 are described as follows:





| | Level 1 - Inputs to the valuation methodology
    are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | Level 2 - Inputs to the valuation methodology
    include:                                                                
| | --------------------------------------------------------------------------------------------------------------------------
| | • quoted prices for similar assets or liabilities in
    active markets;                                                  
| | • quoted prices for identical or similar assets or liabilities
    in inactive markets;                                   
| | • inputs other than quoted prices that are observable
    for the asset or liability;                                     
| | • inputs that are derived principally from
    or corroborated by observble market data by correlation or other
    means.



| | If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |                                                                                                                                                               | 
| | Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.                                                 | 



The asset or liability’s fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.



Asset retirement obligations are recorded based
on the present value of the estimated cost to retire the oil and gas properties and are depleted over the useful life of the asset.
The settlement date fair value is discounted at the Company’s credit adjusted risk-free rate in determining the abandonment
liability.



The preceding method described may produce
a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although
the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement
at the reporting date. The following table sets forth by level, within the fair value hierarchy, the Company’s liabilities
at fair value as of September 30, 2011:



|Liabilities at Fair Value as of September 30, 2011
|--------------------------------------------------



|                             |  | Level 1 |   |  | Level 2 |   |   | Level 3 |  |   | Total  | 
|---------------------------- |  | ------- | - |  | ------- | - | - | ------- |  | - | ------ | 
|Asset retirement obligations |  | $       | - |  |         | $ | - |         |  | $ | 24,917 | 
|                             |  |         |   |  |         |   |   |         |  |   |        | 







NOTE 12 – SUBSEQUENT EVENTS



In October 2011, the Company entered into a
joint venture with MEA Solutions, LLC to deliver a total solution for water resource management in the oilfield services sector.
An integral component of the service includes owning and operating water recycling systems. The joint venture, Freestone Water
Solutions, LLC, (“Freestone Water”) will utilize specialized, proprietary technology designed to treat and recycle
flowback water (frac water that immediately flows back to the surface), as well as produced water for subsequent reuse in the fracking
process. It is anticipated that Freestone Water will not be consolidated in future reporting as it will own less than 50% of the
joint venture and will not control the board of directors.



On October 28, 2011, the Company raised $15,000 by selling 166,667
shares of common stock for $.09 a share.



13





ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS





This report contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company’s actual results could differ materially from those set forth on the forward looking statements as
a result of the risks set forth in the Company’s filings with the Securities and Exchange Commission, general economic conditions,
and changes in the assumptions used in making such forward looking statements.



General



On August 22, 2007, the Company changed its
name to Freestone Resources, Inc. in anticipation of going into the oil and gas technology development business.  Since
that time Freestone began developing and acquiring rights to chemical solvents that can increase the production in oil and gas
wells, decrease the viscosity of heavy oil, and extract hydrocarbons from various forms of matter.  The Company has developed
an Oil Recovery Unit (“ORU”) that it has successfully licensed to Hydrex in order to chemically remove oil from oil
sands and oil contaminated soils.



In October 2011, the Company entered into a joint venture with MEA
Solutions, LLC to deliver a total solution for water resource management in the oilfield services sector. An integral component
of the service includes owning and operating water recycling systems. The joint venture, Freestone Water Solutions, LLC, will utilize
specialized, proprietary technology designed to treat and recycle flowback water (frac water that immediately flows back to the
surface), as well as produced water for subsequent reuse in the fracking process.



14









Results of Operations



Three and three months Ended September 30, 2011 compared to three
and three months Ended September 30, 2010



Revenue- Our revenue for the three
months September 30, 2011 was $4,757, compared to $9,173 for the same period in 2010. Revenue decreased in the second quarter due
to reduced oil and gas revenue as there was less in-field research and development activity.



Lease Operating Expense- Lease operating
expense for the three months ended September 30, 2011 was $2,700 compared to $10,024 for the same period in 2010. The reduction
in lease operating expenses is reflected in the reduced sales & that in the three months ended September 30, 2010 well testing
was completed in Seguin, TX.



Operating Expense- Total operating
expenses for the three months ended September 30, 2011 were $5,252 of depreciation expense and $75,301 of general and administrative
expenses respectively, compared to $371 depreciation expense and $105,459 of general and administrative expenses for the same period
in 2010.  The reduced costs in the three months ended September 30, 2011 were related to a consultants fee of $10,000
incurred in 2010, legal fees $9,000 (the lawsuit that was filed in July, 2010), audit and accounting fees of $5,000 (completed
a two-year audit at June 30, 2010), other professional fees of $6,000 and general expenses of $5,000.



Net Income (Loss)- Net loss for the
three months ended September 30, 2011 was $78,496 compared to net loss of $107,256 for the same period in 2010.  The
decrease in loss in the three month period ended September 30, 2011 is mainly related to the reduced administrative expenses mentioned
above.



Liquidity and Capital Resources



We have little cash reserves and liquidity to the extent we receive
it from operations.



Net cash used of the Company was $62,686 for
the three months ended September 30, 2011 compared to cash provided of $17,271 for the same period in 2010.   We
continue to explore working capital options and in the short-term rely on our line-of-credit and advances/loans from shareholders.
During the three months ended September 30, 2010, our cash and cash equivalent increased to $45,333 from $28,062 at June 30, 2010
due to sales of common stock.





Employees



As of September 30, 2011, Freestone had two employees.



Need for Additional Financing



No commitments to provide additional funds
have been made by management or other stockholders.  Our independent auditors included a going concern explanatory paragraph
in their report included in our annual report on Form 10-K for the year ended June 30, 2011, which raises substantial
doubt about our ability to continue as a going concern.





ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



Not applicable.







15









ITEM 4T: CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



We carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of September 30, 2011.  This evaluation was accomplished under the supervision and with the participation of our chief
executive officer /principal executive officer, and chief financial officer/principal financial officer who concluded that our
disclosure controls and procedures are effective.



Based upon an evaluation conducted for the
period ended September 30, 2011, our Chief Executive and Chief Financial Officer as of September 30, 2011 and as of the date of
this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material
weakness of our internal controls:



●	Lack of sufficient accounting
staff which results in a lack of segregation of duties necessary for a good system of internal control and financial statement
presentation.





Changes in Internal Controls over Financial Reporting



We have not yet made any changes in our internal controls over financial
reporting that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.





















16







PART II



Items No. 1, 3, 4, 5 - Not Applicable.





Item 6 - Exhibits and Reports on Form 8-K



(a)  During the three months ended September 30, 2011
the Company filed no Form 8-Ks.







(b)   Exhibits



Exhibit Number



|31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.                            
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                   
|31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     |                                                                                                                                                                                   
|32.1 | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
|     |                                                                                                                                                                                   





SIGNATURES



In accordance with the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



FREESTONE RESOURCES, INC.



By /s/ Clayton Carter



Clayton Carter, CEO



Date: November 14, 2011







17