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 December 31, 2009





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
February 12, 2010 there were 68,418,994 shares of Common Stock of the issuer
outstanding.









Freestone Resources, Inc.
              Consolidated Balance
      Sheets
              As of December 31, 2009 and June 30,
      2009







Assets(Unaudited)
            
            (Audited)December
      31, 2009
            
            June
      30, 2009Current
      Assets:Cash
            $
            3,048
            
            $
            4,815Accounts
      receivable
            
            4,559
            
            
            4,559Deposits
      and other assets
            
            25,944
            
            
            5,068Total
      Current Assets
            
            33,551
            
            
            14,442Fixed
      assets, net
            
            38,809
            
            
            33,052Other
      assets
            
            31,378
            
            
            1,000Investment
      in Bleeding Rock
            
            250,010
            
            
            -Licenses
            
            150,000
            
            
            -Intangible
      asset
            
            10,000
            
            
            -Goodwill
            
            1,254,149
            
            
            -1,695,537
            
            
            1,000Total
      Assets
            $
            1,767,897
            
            $
            48,494Liabilities
      and Stockholders' Equity (Deficit)Current
      Liabilities:Accounts payable and accrued expenses
            $
            270,895
            
            $
            24,431Accounts payable-related party
            
            171,307
            
            
            -Stock to be issued
            
            160,000
            
            
            -Note payable to bank
            
            -
            
            
            25,997Notes payable-related parties
            
            43,800
            
            
            25,000Line-of-credit
            
            14,908
            
            
            -Total Current Liabilities
            
            660,910
            
            
            75,428Long-term
      Liabilities:Asset
      retirement obligations
            
            41,123
            
            
            41,123Total Liabilities
            
            702,033
            
            
            116,551Stockholders'
      Equity (Deficit):Common
      stock, $.001 par value, 100,000,000 sharesauthorized, 66,718,994 and 35,115,260 shares issuedand outstanding, rspectively
            
            66,719
            
            
            35,115Additional
      paid in capital
            
            15,804,789
            
            
            14,572,244Accumulated
      deficit
            
            (14,805,644
            )
            
            (14,675,416
            )Stockholders' equity (deficit)
            
            1,065,864
            
            
            (68,057
            )Total Liabilities and Stockholders" Equity
      (Deficit)
            $
            1,767,897
            
            $
            48,494
















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


2


Freestone Resources, Inc.
                Consolidated Statements of
      Operations
                For the Three and Six Months Ended
      December 31, 2009 and 2008
                (unaudited)








Three
      Months
              Ended
              Dec
      31, 2009
            
            
            Three
      Months
              Ended
              Dec
      31, 2008
            
            
            Six
      Months
              Ended
              Dec
      31, 2009
            
            
            Six
      Months
              Ended
              Dec
      31, 2008Revenue:Oil
      and gas revenues resulting from research activities
            
            $
            5,703
            
            
            $
            33,030
            
            
            $
            27,195
            
            
            $
            69,292Total
      revenue resulting from research activities
            
            
            5,703
            
            
            
            33,030
            
            
            
            27,195
            
            
            
            69,262Operating
      expenses:Cost
      of revenue
            
            
            -
            
            
            
            940
            
            
            
            -
            
            
            
            5,499Lease
      operating costs
            
            
            2,528
            
            
            
            5,072
            
            
            
            5,221
            
            
            
            47,164Depreciation
      and depletion
            
            
            620
            
            
            
            6,943
            
            
            
            1,239
            
            
            
            13,885Impairment
      expense
            
            
            -
            
            
            
            -
            
            
            
            1,800
            
            
            
            -General
      and administrative
            
            
            125,927
            
            
            
            41,765
            
            
            
            152,235
            
            
            
            280,925Total
      operating expenses
            
            
            129,075
            
            
            
            54,720
            
            
            
            160,495
            
            
            
            347,473Operating
      loss
            
            
            (123,372
            )
            
            
            (21,690
            )
            
            
            (133,300
            )
            
            
            (278,211
            )Other
      income (expense):Gain
      on settlement of debt
            
            
            6,200
            
            
            
            -
            
            
            
            6,200Interest
      income (expense)
            
            
            (2,443
            )
            
            
            (1,194
            )
            
            
            (3,128
            )
            
            
            (4,185
            )Other
      income (expense)
            
            
            4,559
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      other income (expense)
            
            
            8,316
            
            
            
            (1,194
            )
            
            
            3,072
            
            
            
            (4,185
            )Net
      loss
            
            $
            (115,056
            )
            
            $
            (22,884
            )
            
            
            (130,228
            )
            
            $
            (282,396
            )Basic
      and diluted loss per share
            
            $
            0.00
            
            
            $
            0.00
            
            
            
            0.00
            
            
            $
            0.00Weighted
      average shares outstanding:Basic
      and diluted
            
            
            66,718,994
            
            
            
            52,180,260
            
            
            
            52,119,443
            
            
            
            52,168,548






















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


3


Freestone Resources, Inc.
                Consolidated Statement of
      Stockholders" Equity/(Deficit)
                For the Year Ended June 30, 2009 and
                the Six Months Ended December 31,
      2009
                (Unaudited)





Common
      Stock
            
            
            Additional
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Paid
      in Capital
            
            
            Deficit
            
            
            TotalBalance
      , June 30, 2008
            
            
            50,025,260
            
            
            $
            50,025
            
            
            $
            13,964,084
            
            
            $
            (13,734,880
            )
            
            $
            295,854Common
      stock issued for services
            
            
            10,955,000
            
            
            
            10,955
            
            
            
            512,295
            
            
            
            -
            
            
            
            523,250Common
      stock issued for note payable
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            68,000
            
            
            
            -
            
            
            
            70,000Common
      stock – cancelled
            
            
            (27,865,000
            )
            
            
            (27,865
            )
            
            
            27,865
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (957,161
            )
            
            
            (957,161
            )Balance,
      June 30, 2009
            
            
            35,115,260
            
            
            $
            35,115
            
            
            $
            14,572,244
            
            
            $
            (14,675,416
            )
            
            $
            (68,057
            )Common
      stock issued for acquisition of EOS
            
            
            31,603,734
            
            
            
            31,604
            
            
            
            1,232,545
            
            
            
            -
            
            
            
            1,264,149Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (130,228
            )
            
            
            (130,228
            )Balance,
      December 31, 2009
            
            
            66,718,994
            
            
            $
            66,719
            
            
            $
            15,804,789
            
            
            $
            (14,805,644
            )
            
            $
            1,065,864











































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





4





Freestone
      Resources, Inc.
              Consolidated
      Statements of Cash Flows
              For
      the Six Months Ended December 31, 2009 and 2008
              (Unaudited)





Six
      months ended December 31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (130,228
            )
            
            $
            (282,396
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            1,239
            
            
            
            13,885Shares
      issued for services
            
            
            -
            
            
            
            215,500Changes
      in operating assets and liabilities:Write-off
      in note receivable
            
            
            -
            
            
            
            16,468Change
      in account receivable
            
            
            -
            
            
            
            37,077Change
      in inventory of Petrozene
            
            
            -
            
            
            
            (90,771
            )Change
      in other assets
            
            
            (41,244
            )
            
            
            (11,300
            )Change
      in accounts payable  and accrued expenses
            
            
            (8,710
            )
            
            
            39,962Change
      in accounts payable - related party
            
            
            (3,713
            )
            
            
            95,914Change
      in line-of-credit
            
            
            (3,092
            )
            
            
            -Net
      cash provided by (used in) operating activities
            
            
            (185,748
            )
            
            
            34,339CASH
      FLOWS FROM INVESTING ACTIVITIES:Intangible
      assets acquired with subsidiary
            
            
            (10,000
            )Purchases
      of fixed assets
            
            
            (6,996
            )
            
            
            (36,463
            )Net
      cash used in investing activities
            
            
            (16,996
            )
            
            
            (36,463
            )CASH
      FLOWS FROM FINANCING ACTIVITES:Payments
      on note payable
            
            
            (1,994
            )
            
            
            (2,062
            )Proceeds
      from note payable
            
            
            32,971
            
            
            
            13,279Proceeds
      from sale of common stock to be issued
            
            
            160,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            190,977
            
            
            
            11,217NET
      CHANGE IN CASH
            
            
            (1,767
            )
            
            
            9,093CASH
      AT BEGINNING OF PERIOD
            
            
            4,815
            
            
            
            13,548CASH
      AT END OF PERIOD
            
            $
            3,048
            
            
            $
            22,641Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            3,126
            
            
            $
            4,185Non-cash
      investing activities:Acquisition
      of oil and gas interests and fixed assets for stock
            
            $
            -
            
            
            $
            330,989Stock
      issued for purchase of subsidiary
            
            $
            1,264,149
            
            
            
            -Licenses
      assumed in acquisition of subsidiary
            
            $
            150,000
            
            
            
            -Intangible
      asset
            
            $
            10,000
            
            
            
            -Assumption
      of accounts payable and note payable in acquisition of
      subsidiary
            
            $
            400,000
            
            
            $
            181,412








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








5


Freestone
Resources, Inc.


Notes
to Consolidated Financial Statements


(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.





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 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.  This technology is marketed under the
name EncapSol (“EncapSol”).  EOS has engaged a fabricator to build a
prototype machine (the “Prototype”) designed to be used in conjunction with
EncapSol.  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.




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 and six
months ended December 31, 2009 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, 2009 Form 10-K.





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.





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 Minority Interest method.  Management believes that
all adjustments necessary for a fair presentation of the results of the six
months ended December 31, 2009 and 2008 have been made.







6






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."


·
            The
      Company owns 100% of EOS and has applied ASC 810 in consolidating the
      subsidiary.


·
            EOS
      owns 50% of BRC, as does an unrelated third party, Hidden Peak
      Group.  Although each party owns 50%, Hidden Peak Group maintains
      control of the three person management board with three representatives,
      and therefore, applying the requirements for consolidations under ASC 810,
      EOS has not consolidated BRC but shows its impact through the Minority
      Interest method.





FASB Accounting Standards
Codification:





In June
2009, the Financial Accounting Standards Board (“FASB”) issued new guidance
concerning the organization of authoritative guidance under U.S. Generally
Accepted Accounting Principles (“GAAP”). This new guidance created the FASB
Accounting Standards Codification (“Codification”).  The Codification
has become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. The Codification became effective for the Company
in its quarter ended December 31, 2009. As the Codification is not intended to
change or alter existing U.S. GAAP, it did not have any impact on the Company’s
consolidated financial statements. On its effective date, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative.





Reclassification:





Certain
prior year amounts have been reclassified in the consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows
to conform to current period presentation.  These reclassifications
were not material to the consolidated financial statements and had no effect on
net earnings reported for any period.





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 the
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.







7






Property and
Equipment:





Property
and equipment are stated at cost less accumulated depreciation.  Major
renewals and improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations.  Depreciation is computed by
applying the straight-line method over the estimated useful lives which are
generally five to seven years.





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.




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 $0 bad debt accrual at December 31,
2009 and June 30, 2009.





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
EncapSol.  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.





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”, (formerly
“SFAS” No. 144, 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.





Subsequent
Events





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes
general standards for accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued. The pronouncement requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, whether that date represents the date the financial statements were issued
or were available to be issued. SFAS 165 is effective with interim and annual
financial periods ending after June 15, 2009. Management is currently evaluating
the impact of the adoption of SFAS 165 but does not expect the adoption of SFAS
165 to impact the Company’s results of operations, financial position or cash
flows.


8





Note
2 – Fixed Assets





Fixed
assets at December 31, 2009 and June 30, 2009 are as follows:


December
      31,
              2009
            
            
            June
      30,
              2009Computers
      & office furniture - net of accumulated depreciation
            
            $
            8,967
            
            
            $
            8,967Oil
      and gas research and development equipment
            
            
            32,996
            
            
            
            26,000Gross
      fixed assets
            
            
            41,963
            
            
            
            34,967Less:
      Accumulated depreciation
            
            
            (3,154
            )
            
            
            (1,915
            )Total
      equipment and other fixed assets, net of accumulated
depreciation
            
            $
            38,809
            
            
            $
            33,052





Depreciation
and depletion expense was $620 for the quarter ended December 31, 2009 and
$6,943 for the quarter ended December 21, 2008.  Depreciation expense
for the six months ended December 31, 2009 was $1,239 and $13,885 for the six
months ended December 31, 2008.  The Company added $6,996 of assets
during the six months ended December 31, 2009.








Note
3 – Note Payable





On
October 27, 2008, the Company’s wholly owned subsidiary, Freestone Technologies,
LLC, was issued an equipment loan by Third Coast Bank in the amount of
$37,352.  The terms of the loan include a minimum interest rate of two
points over the current bank index (prime rate) or 7.0%, a maturity date of
October 27, 2009, and twelve monthly payments of $3,234.  The
collateral for the loan includes the equipment purchased from the proceeds of
the loan. On October 27, 2009 this loan was paid-in-full.  At December
31, 2009 and June 30, 2009 the balance owed was $0 and $12,823
respectively.





On April
4, 2009, the Company was issued a Line of Credit from Third Coast Bank in the
amount of $18,000.  The terms of this note include a market-rate
interest rate (4.0% at June 30, 2009), a maturity date of October 4, 2009 and
monthly installment payments of no less than sixty-five dollars per
month.  On October 27, 2009, this note was renewed. The terms of this
note include a market-rate interest rate (4.0%), a maturity date of April 28,
2010 and monthly installment payments of no less than sixty-five dollars per
month.  At December 31, 2009 and June 30, 2009 the balance owed was
$14,908 and $18,000 respectively.








Note
4 – Note Payable (Related Party)





During
the year ended June 30, 2008, the Company assumed certain debt in conjunction
with the issuance of the 30,000,000 shares of common stock to various
individuals affiliated to a now former CEO, Lloyd Lane (Lane), including a
mortgage note for approximately $54,000 secured by the building the Company
received as part of the same transaction. The building had a cost basis of
$62,500. During the year ended June 30, 2009, Lane advanced $110,771 to the
Company on a non-interest bearing unsecured basis.  Also, later during
the year ended June 30, 2009, the building and the related note payable and
Petrozene inventory was transferred back to Lane in exchange for the
cancellation of 27,865,000 shares of common stock previously issued to
him.  At December 31, 2009 and June 30, 2009 the balance owed was $0
and $0 respectively.





On
December 11, 2008, the Company received a loan advanced from Donna Doran in the
amount of $50,000.  The advance was non-interest bearing, unsecured
and payable in thirty-six installments beginning January 1, 2009.  On
April 21, 2009, the advance was converted to 2,000,000 restricted shares of
common stock and the Company recognized a $20,000 loss on the extinguishment of
debt.  At December 31, 2009 and June 30, 2009 the balance owed was $0
and $0 respectively.





On May
26, 2009 the Company received a loan from Mike Doran (Doran), CEO, 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.   During the year ended June 30, 2009, the Company
received an advance from Mr. Doran of $20,000 which was repaid during the
year.  At December 31, 2009 and June 30, 2009 the balance owed was
$18,800 and $25,000 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 December 31, 2009 the balance owed was
$25,000.











9










Note
5 – Income Taxes





The
Company has adopted ASC 740-10 (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 (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 six months ended December 31, 2009 the Company had a net loss of $130,228,
increasing the deferred tax $44,067 asset at the statutory tax rate of
34%.  Deferred tax assets at December 31, 2009 and June 30, 2009
consisted of the following:







Dec
      31, 2009
            
            
            Jun
      30, 2009Net Operating
      Loss Carryforward
            
            $
            571,234
            
            
            $
            522,009Less:
      Valuation Allowance
            
            
            (571,234
            )
            
            
            (522,009
            )Net Deferred
      Tax Asset
            
            $
            0
            
            
            $
            0








The net
deferred tax asset generated by the loss carryforward has been fully
reserved.  The cumulative net operating loss carry-forward is
approximately $1,680,000 at December 31, 2009 and $1,535,000 at June 30, 2009,
and will expire in the years 2019 through 2029.





The
realization of deferred tax benefits is contingent upon future earnings and is
fully reserved at December 31, 2009 and June 30, 2009.








Note
6 – Equity Transactions


On
September 24, 2009 Freestone issued 31,603,734 shares of common stock valued at
$1,264,149 to Earth Oil Services, Inc., a Nevada Corporation, in consideration
for one hundred percent (100%) of the issued and outstanding common stock in
Earth Oil Services, Inc.






EOS Summary of Net Assets as of September 24,
      2009
  AssetsInvestment in
      Bleeding Rock, LLC
                
                $
                250,010Intangible
      assets
                
                
                10,000Licenses
                
                
                150,000Total
      Assets
                
                
                410,010LiabilitiesAccounts
      payable
                
                
                250,000Accounts
      payable – Related Party
                
                
                150,010Total
      Liabilities
                
                
                400,010Net Assets
                
                $
                10,000


The
transaction generated goodwill of $1,254,149.  This amount has been
capitalized and is segregated on our balance sheet.








Note
7 – 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 will also be used to test Freestone’s new chemical solvent,
EncapSol.  The assets and liabilities of the Subsidiary are included
in the consolidated financial statements of Freestone.








10








Note
8 – Going Concern





As
reflected in the accompanying consolidated financial statements, Freestone
incurred operating losses, and has a negative working capital position as of
December 31, 2009.  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.








Note
9 – Recent Accounting Pronouncements





In 2009,
the FASB issued the following guidance:





FASB ASC 860-10-05: 
"Accounting for Transfers of Financial Assets—(Prior authoritative literature:
FASB Statement No. 166 -- an amendment of FASB Statement No. 140"), which
will be effective for the first annual or quarterly period after November 15,
2009.





FASB ASC 810-10-05: "Accounting for
Transfers of Financial Assets,(Prior authoritative literature:  FASB
Statement No. 167 “Amendments to FASB Interpretation No. 46(R)”,.which
is for the first annual or quarterly period after November 15,
2009.





FASB ASC 825: “Interim Disclosures
about Fair Value of Financial Instruments (Prior authoritative literature: FSP
No. FAS 107-1 and APB 28-1).





FASB ASC
320-10-65-4:  “Recognition and Presentation of Other-Than-Temporary
Impairments”, (Prior authoritative literature: FSP No. FAS 115-2 and FAS
124-2).





FASB ASC
820-10-65-4:   “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”(Prior
authoritative literature FSP
No. FAS 157-4).





Management
has reviewed these new standards and believes that they will have no material
impact on the financial statements of the Company.








Note
10 – Subsequent Events





In 2009,
the FASB issued the following guidance:





In
January 2010 the Company issued 1,700,000 shares of stock for cash received
($170,000).  Of this stock issued, 1,600,000 shares were recorded as a
liability as Stock to be
Issued on the December 31, 2009 balance sheet as the cash had been
received prior to the quarter-end but the shares had yet been
issued.

















11







Note
11 – Proforma Financial Statements





On
September 24, 2009 the Company acquired one hundred percent (100%) of the issued
and outstanding stock of Earth Oil Services, Inc., a Nevada corporation (“EOS”),
in a non-cash transaction.  The following proforma Statement of
Operations represents the Company as if EOS had been acquired and consolidated
as of the beginning of our fiscal year, July 1, 2009.  EOS was formed
on August 21, 2009, and therefore proforma statements for December 31, 2008 and
June 30, 2009 are not required.








Freestone Resources, Inc.
                Consolidated Statements of
      Operations
                PROFORMA
                (Unaudited)






Six
      Months EndedDecember30,
      2009Revenue:Oil
      and gas resulting from research activities
            
            $
            27,195Total
      revenue resulting from research activities
            
            
            27,195Operating
      expenses:Cost
      of revenue
            
            
            -Lease
      operating costs
            
            
            5,221Depreciation
      and depletion
            
            
            1,239Impairment
      expense
            
            
            1,800Engineering
      expense
            
            
            250,000General
      and administrative
            
            
            152,235Total
      operating expenses
            
            
            410,495Operating  income
      (loss)
            
            
            (383,300
            )Other
      income (expense):Interest
      (expense)
            
            
            (3,128
            )Gain
      on settlement of debt
            
            
            6,200Total
      other income (expense)
            
            
            3,072Net
      income (loss)
            
            $
            (380,228
            )Basic
      and diluted income (loss) per share
            
            $
            (0.01
            )Weighted
      average shares outstanding:Basic
      and diluted
            
            
            52,119,443











12


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 is currently developing its
keystone product, EncapSol.





Acquisition of Earth Oil
Services, Inc.:





The
Company acquired one hundred percent (100%) of the issued and outstanding stock
of Earth Oil Services, Inc., a Nevada corporation (“EOS”), in a non-cash
transaction on September 24, 2009. 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.  This technology is marketed under the
name EncapSol (“EncapSol”).  EOS has engaged a fabricator to build a
prototype machine (the “Prototype”) designed to be used in conjunction with
EncapSol.  EOS is indebted to the fabricator for its development of
the Prototype.  EOS is now a wholly owned subsidiary of
Freestone.





Assets
of EOS





EOS holds
certain assets that include exclusive territorial license agreements for the use
of EncapSol, and 50% ownership of Bleeding Rock, LLC, a Utah corporation
(“Bleeding Rock”). Bleeding Rock owns 20,600,000 shares of Green River
Resources, Corp., an Alberta Canada corporation. The last Green River Resources,
Inc. (“Green River”) stock transaction was for stock options to employees of
Green River (“Green River Options”). The aforesaid Green River Options were
optioned for $0.35 per share. Thus, the total ownership of Green River Shares
owned by Bleeding Rock is valuated at $ 7,210,000. EOS owns 50% (valued at
$3,605,000) of Bleeding Rock, and is entitled to 47% of the profits from EOS’
50% ownership of Bleeding Rock. The recorded value on EOS’s audited balance
sheet of the investment is $250,010.





Liabilities
of EOS





EOS has
certain liabilities that include $150,000 in license fees owed to Environmental
Services and Support, Inc., a non-related third party California corporation
(“ESSI”), an invoice in the amount of $250,000 from SRS Engineering Corporation,
a California corporation that built the fourth generation EncapSol Recovery
Technology.  The Company is responsible for the payment of $250,000 to
the manufacturers of the fourth generation EncapSol Recovery Technology and the
payment of $150,000 license fee to ESSI, totaling $400,000.





Basis
of Presentation





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."


·
            The
      Company owns 100% of EOS and has applied ASC 810 in consolidating the
      subsidiary.


·
            EOS
      owns 50% of BRC, as does an unrelated third party, Hidden Peak
      Group.  Although each party owns 50%, Hidden Peak Group maintains
      control of the three person management board with three representatives,
      and therefore, applying the requirements for consolidations under ASC 810,
      EOS has not consolidated BRC but shows its impact through the Minority
      Interest method.














13







Results
of Operations





Three
and six months Ended December 31, 2009 compared to three and six months Ended
December 31, 2008





Revenue- Our revenue for the
three months December 31, 2009 was $5,073, compared to $33,030 for the same
period in 2008. Revenue decreased in the second quarter due to reduced oil and
gas sales.  Our revenue for the six months December 31, 2009 was
$27,195, compared to $69,292 for the same period in 2008. This decrease is due
to reduced oil and gas sales.





Lease Operating Expense-
Lease operating expense for the three months ended December 31, 2009 was $2,528
compared to $5,072 for the same period in 2008. Lease operating expenses for the
six months ended December 31, 2009 was $5,221 compared to $47,164 for the same
period in 2008.  Lease operating expense decreased for three and six
months ended due to cost associated with wells acquired on November 1,
2007.





Operating Expense- Total
operating expenses for the three months ended December 31, 2009 were $620 of
depreciation and depletion expense and $125,927 of general and administrative
expenses respectively, compared to $6,943 depreciation and depletion expense and
$41,765 of general and administrative expenses for the same period in
2008.  Total operating expenses for the six months ended December 31,
2009 were $1,239 of depreciation and depletion expense and $152,235 of general
and administrative expenses respectively, compared to $13,885 depreciation and
depletion expense and $280,925 of general and administrative expenses for the
same period in 2008.  The increased costs in the three months ended
December 31, 2009 were related to the acquisition of EOS that was completed in
September, 2009.  The decrease in costs in the six month period ended
December 31, 2009 were due to lower oil production in the field thus reducing
our variable administrative costs.





Net Income (Loss)- Net loss
for the three months ended December 31, 2009 was $(115,056) compared to net loss
of $(22,884) for the same period in 2008.  Net loss for the six months
ended December 31, 2009 was $(130,228) compared to net loss of $(282,396) for
the same period in 2008.  The increase in loss in the three month
period ended December 31, 2009 is mainly related to the increased administrative
expenses mentioned above.  The decrease in loss in the six month
period ended December 31, 2009 is due to the reduced administrative costs
mentioned above as well as the impact of debt forgiveness of
$6,200.  A former office of the Company loaned $25,000 and was repaid
$18,800 and forgave the remaining $6,200.





Liquidity
and Capital Resources





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





During
the six months ended December 31, 2009, our cash and cash equivalent decreased
to $3,048 from $4,815 at June 30, 2009.





Net cash
used by the Company was ($1,767) for the six months ended December 31, 2009
compared to cash provided of $9,093 for the same period in
2008.   We continue to explore working capital options and in the
short-term rely on our line-of-credit and advances/loans from
shareholders.





Employees





As of
December 31, 2009, 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, 2009, which raises substantial doubt about our ability
to continue as a going concern.




ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.








14







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 June 30, 2009.  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 June 30, 2009, our Chief
Executive and Chief Financial Officer as of June 30, 2009 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.


































15


PART
II





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





Item
      2   - Unregistered Sales of Equity Securities and use
      of Proceeds.





During
the three months ended September 30, 2009, Freestone issued 31,603,734
restricted shares of common stock valued at $1,264,149 to Larry Shultz and
Environmental Services and Support, Inc. Larry Shultz and Environmental Services
and Support, Inc. agreed to acquire the shares for investment purposes only and
not for resale. The certificates representing the shares carry a legend that the
shares may not be sold or transferred without compliance with the registration
requirements of the Securities Act of 1933, as amended (the “Act”) or in
reliance upon an applicable exemption there from. In connection with the issue
of these shares, the Company relied upon the private offering exemption found in
section 4(2) of the Act.





Item 5 - Other
Information





On August
12, 2009, the Company agreed to accept the resignation of the following officers
and directors:




Michael
      Doran
            Chief
      Executive Officer and Director





On August
12, 2009, the Company appointed the following officers and
directors:


Clayton
      Carter
              Chief
      Executive OfficerDon
      Edwards
              Director





Item 6 - Exhibits and
Reports on Form 8-K





(a)  During
the three months ended December 31, 2009 the Company filed one Form
8-K.


·
            December 7, 2009: Filing the
      audited financial statements of
EOS





(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:
February 11, 2010





16