**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**





**Form
      10-KSB**








x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      fiscal year ended **December
      31, 2006**





o
      TRANSITIONAL REPORT
      UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from______________________  to





Commission
      file number: 333-64122





**Blast
      Energy Services, Inc.**


(Name
      of
      small business issuer in its charter)





**California**
            **22-3755993****(State
                of incorporation)**
            **(I.R.S.
                Employer**
              **Identification
                No.)**








**14550
      Torrey Chase Blvd, Suite 330**


**Houston,
      Texas 77014**


(Address
      of principal executive offices)




**(281)
      453-2888**


(Telephone
      number)





Securities
      registered under Section 12(b) of the Exchange Act: None








Securities
      registered under Section 12(g) of the Exchange Act: None








Check
      whether issuer (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
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of the Form 10-KSB or any
      amendments to this Form 10-KSB. x





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





Issuer’s
      revenues for the most recent fiscal year: $3,243,487





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold on March 30, 2007 is $ 4,194,920.





The
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of December 31, 2006:





Common
      Stock: 67,609,904 shares, including 1,150,000 approved shares arising from
      the
      class action settlement, described below in greater detail.


No
      (1)
      annual report to security holders; (2) proxy or information statement; or (3)
      any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
      1933; are incorporated by reference into any part of this Form
      10-KSB.





Transitional
      Small Business Disclosure Format: o Yes 
      x No












**Table
      of Contents**




Page**PART
                  I**
              4**ITEM
                  1. DESCRIPTION OF BUSINESS**
              4FORWARD-LOOKING
                  STATEMENTS
              4BUSINESS
                  DEVELOPMENT
              4DESCRIPTION
                  OF BUSINESS
              6DOWN-HOLE
                  SOLUTIONS
              8***Major
                  Customer***
              9***Market***
              9***Competition***
              9SATELLITE
                  SERVICES
              9***Major
                  Customer***
              10***Market***
              11***Competition***
              11PATENTS
                  AND LICENSES
              11GOVERNMENTAL
                  REGULATIONS
              12**ITEM
                  2. DESCRIPTION OF PROPERTY**
              13**ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
              16**PART
                  II**
              17**ITEM
                  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
                  MATTERS**
              17**ITEM
                  6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION**
              20***Risk
                  factors***
              20**ITEM
                  7. FINANCIAL STATEMENTS**
              38**ITEM
                  8A. CONTROLS AND PROCEDURES**
              60**AUDIT
                  COMMITTEE REPORT**
              60**PART
                  III**
              61**ITEM
                  9. DIRECTORS AND EXECUTIVE OFFICERS**
              61**ITEM
                  10. EXECUTIVE COMPENSATION**
              64**ITEM
                  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
              70**ITEM
                  12. CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
              72**ITEM
                  14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES**
              79**SIGNATURES**
              80





3





**Item
      1. Description of Business**





**Forward-Looking
      Statements**





Certain
      statements concerning our plans and intentions included herein may constitute
      forward-looking statements, including, but not limited to, statements identified
      by the words “anticipate”, “believe”, “expect” and similar expressions and
      statements regarding our business strategy, plans, beliefs and objectives for
      future operations. Although management believes that the expectations reflected
      in these forward-looking statements are reasonable, we can give no assurance
      that such expectations will prove to have been correct. There are a number
      of
      factors that may affect our future results, including, but not limited to,
      (a) our ability to obtain additional funding for development and
      operations, (b) the continued availability of management to execute the
      business plan, (c) successful deployment and market acceptance of our
      products, and (d) the resolution of legal matters that may inhibit the
      execution of the business plan.





This
      annual report may contain both historical facts and forward-looking statements.
      Any forward-looking statements involve risks and uncertainties. Moreover, future
      revenue and margin trends cannot be reliably predicted.





**Important
      Investor********Information**





On
      January 19, 2007, Blast Energy Services, Inc. (“we,” “us,” the “Company,”
“Blast” and words of similar meaning) and its wholly owned subsidiary, Eagle
      Domestic Drilling Operations LLC, filed voluntary petitions with the US
      Bankruptcy Court for the Southern District of Texas - Houston Division, under
      Chapter 11 of Title 11 of the US Code in order that they may dispose of
      burdensome and uneconomical assets and reorganize their financial obligations
      and capital structure. Accordingly, we urge that caution be exercised with
      respect to existing and future investments in our equity securities.





**Business
      Development**





In
      September 2000, we were incorporated as Rocker & Spike Entertainment,
      Inc, a California corporation. Until December 31, 2000, our operations
      consisted of organizational matters and the search for an operating company
      with
      which to perform a merger or acquisition. Effective January 1, 2001, we
      purchased the assets and web domain of Accident Reconstruction Communications
      Network from its sole proprietor. Following that acquisition, we changed our
      name from Rocker & Spike Entertainment, Inc. to Reconstruction Data
      Group, Inc. At that time, we provided research, communication and marketing
      exposure to the accident reconstruction industry through our website and
      seminars.





In
      April
      2003, we entered into a merger agreement with Verdisys, Inc. (“Verdisys”).
      Verdisys was initially incorporated as TheAgZone Inc. in 1999 as a California
      corporation. Its purpose was to provide e-Commerce satellite services to
      agribusiness. They changed their name to Verdisys in 2001, and in 2003, with
      the
      acquisition of exclusive rights to a proprietary lateral drilling process
      throughout most of the US and Canada, they changed their market focus to
      concentrate on services to the oil and natural gas (“oil and gas”) industry.





The
      merger agreement with Verdisys called for us to be the surviving company. In
      connection with the merger, our name changed to Verdisys, Inc., our articles
      of
      incorporation and bylaws remained in effect, the officers and directors of
      Verdisys became our officers and directors, each share of Verdisys’ common stock
      was converted into one share of our common stock, our accident reconstruction
      assets were sold, and our business focus changed to the oil and gas industry.





Effective
      June 6, 2005, we formally changed our name to Blast Energy Services, Inc.
      (“Blast” or “Blast Energy”) from Verdisys, Inc., in part to reflect our focus on
      the energy service business. We have shifted our business strategy away from
      an
      agricultural related business toward energy services.





In
      August
      2006, we acquired Eagle Domestic Drilling Operations LLC (“Eagle”), a drilling
      contractor which at that time owned three land rigs, and had three more under
      construction. The acquisition of Eagle added a major new segment to our
      business, which we expect to represent our primary business operations in the
      near term. Throughout this Form 10-KSB, references to our operations include
      the
      operations of Eagle, unless otherwise stated or the context suggests
      otherwise.


4


As
      part
      of the financial consideration for the purchase of Eagle, we entered into a
      Securities Purchase Agreement (“SPA”) dated August 25, 2006 with Laurus Master
      Fund, Ltd. (“Laurus”) to finance $40.6 million of the total purchase price of
      Eagle. Under the SPA, we issued a Secured Term Note (“the Note”) dated August
      25, 2006 in the original principal amount of $40.6 million with a final maturity
      in three years, with interest at prime plus 2.5%, with a minimum rate of 9%,
      currently equal to 10.75% as of the filing of this report, payable quarterly
      to
      Laurus. The principal was to be repaid commencing April 1, 2007 at a rate of
      $800,000 per month for the first twelve months from that date, $900,000 per
      month for the subsequent twelve months and $1,000,000 per month until the Note
      matures. The remaining balance of the Note is to be paid at maturity with any
      associated interest.





The
      SPA
      required the additional payment in cash fees to Laurus of 3.5% of the total
      value of the investment of $40.6 million at closing. The SPA further required
      the issuance of Common Stock Purchase Warrants (“Warrants”) to purchase
      6,090,000 shares of our common stock at an exercise price of $1.44 per share,
      and an additional 6,090,000 shares of common stock at an exercise price of
      $0.01
      per share. The Warrants have a seven year term and we were required to file
      a
      registration statement to register the underlying shares within 60 days after
      closing and to obtain effectiveness with the SEC within 180 days after closing,
      which registration statement has since been filed and withdrawn, and which
      filing has since been abandoned by us. The Laurus financing was privately
      arranged through a broker who received a 2% commission in cash and warrants
      with
      a two year term to purchase 304,500 shares of our common stock at an exercise
      price of $0.01 per share.





In
      connection with our voluntary bankruptcy petition, described below, we ceased
      making payments under the Note as of December 31, 2006.





**Recent
      Events**





On
      January 19, 2007, Blast and Eagle, filed voluntary petitions with the US
      Bankruptcy Court for the Southern District of Texas - Houston Division (the
      “Court”) under Chapter 11 of Title 11 of the US Code in order that we may
      dispose of burdensome and uneconomical assets and reorganize our financial
      obligations and capital structure (Case Nos. 07-30424-H4-11 and 07-30426-H4-11,
      respectively). This action also stayed any existing lawsuits filed against
      us
      and Eagle, regardless of jurisdiction. Moving forward, we and Eagle will
      continue to operate our businesses as “debtors-in possession” under the
      jurisdiction of the Court and in accordance with the applicable provisions
      of
      the Bankruptcy Code and orders of the Court.




We
      had
      previously used assumptions in the August 2006 acquisition of Eagle that
      included high revenue and full utilization rate expectations based upon the
      five
      two-year term drilling contracts Eagle had in place at the time. The subsequent
      cancellation of these contracts by Hallwood Energy/Hallwood Petroleum and
      Quicksilver Resources in the fall of 2006 reduced our revenue expectations
      and
      consequently our ability to meet the scheduled payments on the Laurus’ Note.
      This cancellation was in violation of the terms of the drilling contracts and
      we
      and Eagle have subsequently filed suit for breach of those contracts.





In
      approximately January 2007, we received written notice from Laurus of various
      events of default under the SPA, Note and related agreements. Further
      discussions with Laurus resulted in the mutual decision that we should file
      for
      protection under the applicable bankruptcy law, as described above.
      Additionally, these discussions resulted in a consensual stipulation that will
      enable us to continue to use cash collateral during the course of the Chapter
      11
      case, subject to certain reservations and provisions for adequate protection
      of
      Laurus debts.





Additionally,
      we have reached an agreement with Laurus, which agreement has not been approved
      by the Bankruptcy Court, on the terms of an asset purchase agreement intended
      to
      offset the full amount of the $40.6 million senior Note, accrued interest and
      default penalties. Under the terms of this agreement, only the five land
      drilling rigs and associated spare parts will be sold to repay the Note, accrued
      interest and default penalties on the Note. The potential benefit of the
      customer litigation, the satellite communication business and the abrasive
      fluid
      jetting technology, described in greater detail below, will remain with us
      subsequent to the sale of the rigs. The asset purchase agreement and plan of
      reorganization are subject to the approval of the Court, which we believe will
      be heard by the court before the end of April 2007.


5


On
      April
      9, 2007, we entered into an amendment with David M. Adams, our current President
      and former Co-Chief Executive Officer, pursuant to which we amended the terms
      of
      Mr. Adam’s January 17, 2004 employment agreement. Pursuant to the amendment, Mr.
      Adams will serve as our President until June 30, 2007, will be compensated
      at
      the rate of $80,000 per year, instead of the $200,000 per year that he was
      previously scheduled to make, will work on Company matters at least 2 days
      per
      week, will lose any unvested stock options as of March 31, 2007, and will have
      an unsecured claim at June 20, 2007, for six months of severance pay, one month
      of vacation pay, one half month of 2006 pay for a total value of $125,000,
      as
      well as 9 months of COBRA payments for medical and dental benefits under his
      employment agreement. Such agreement is subject to approval of the Bankruptcy
      court.





On
      April
      1, 2007, subject to the approval of the Bankruptcy Court, we entered into a
      nine
      (9) month lease for office space for our corporate offices. Pursuant to the
      lease we agreed to lease approximately 2,000 square feet of office space in
      Houston, Texas at a cost of $2,000 per month, pursuant to a lease which expires
      on December 31, 2007. This lease substantially decreased the amount of rent
      we
      were paying pursuant to our previous lease agreement, which we believe will
      help
      us lower our overhead and meet our current expenses during the Bankruptcy
      proceeding.




Blast
        is
        currently in discussions to merge with another energy company that has oil
        and
        gas production as well as certain energy service technologies. Discussions
        are
        at an early stage and no assurances can be given that such a merger will
        be
        consummated or that the economic terms of such a merger would be favorable
        to
        Blast shareholders or creditors.





**Description
      of Business**





Our
      mission has been to provide quality services to the energy industry through
      our
      three divisions:


·
            contract
                land drilling services,


·
            down-hole
                solutions, such as our abrasive fluid jetting technology, and


·
            satellite
                communication services to remote locations.





Our
      strategy is to grow our businesses by maximizing our equipment capacity and
      controlling costs while analyzing potential acquisition and new technology
      opportunities in the energy service sector.





As
      a
      result of the recent acquisition of Eagle, we had hoped to establish a contract
      land drilling business. We currently own four US onshore drilling rigs with
      a
      fifth rig partially constructed and various spare parts. Substantially
      all of our rigs can operate in conventional crude oil and natural gas producing
      areas, where conventional and specialized drilling techniques are required
      to
      develop crude oil and natural gas resources efficiently. All of our drilling
      rigs are equipped to handle drilling for horizontal wells. Horizontal (or
      lateral) drilling is a specialized drilling technique intended to increase
      the
      exposure of the wellbore to the natural gas producing formation and increase
      drainage rates and production volumes. Moving forward, we hope to sell off
      all
      of these rigs and our partially constructed rig, as well as other various
      drilling equipment, pursuant to the asset purchase agreement with Laurus,
      described above, which we believe, if approved by the Bankruptcy Court, will
      satisfy our outstanding debts with Laurus. Assuming the asset purchase agreement
      is approved, we will cease all land drilling operations for the near future,
      although we may choose to have land drilling operations in the future,
      subsequent to the finalization of our reorganization plan.





Separate
      from the contract land drilling business, we have been striving to develop
      a
      commercially viable lateral drilling technology with the potential to penetrate
      through well casing and into reservoir formations to stimulate oil and gas
      production using abrasive fluid jetting (“AFJ”) and the principles gained from
      the non-abrasive process used in the Landers lateral drilling technology, which
      we obtained the patented rights to in April 2003, as described below under
      “Patents and Licenses.” After redesigning and improving the existing process and
      introducing AFJ technology, we now believe that we can deliver a valuable and
      cost effective production enhancement service to onshore oil and gas producers,
      particularly operators of marginal wells. We have recently completed the
      construction of a new generation specialty rig based upon modifications using
      existing coiled tubing technology as the primary platform. The capabilities
      of
      our new rig include: one-inch coiled tubing with a working depth capability
      of
      approximately 8,000 feet; a fluid pressure pumping system; an abrasive slurry
      system; and a computer-controlled system to guide and control the down-hole
      formation access tool for precise casing milling and jetting services. The
      AFJ
      rig was deployed during the fourth quarter of 2006 and has undergone
      developmental tests with the US Department of Energy Rocky Mountain Oilfield
      Testing Center, outside Casper, Wyoming.





Another
      of our business segments is providing satellite communication services to energy
      companies. This service allows such energy companies to remotely monitor and
      control well head, pipeline, drilling, and other oil and gas operations through
      low cost broadband data and voice services, transmitted from remote operations
      where terrestrial or cellular communication networks do not exist or are too
      costly to install.


6


Following
      the approval of our planned asset purchase agreement with Laurus, which we
      can
      give no assurances will be approved; we will sell substantially all of our
      contract land drilling operations and operate solely in the down-hole solutions
      and satellite communication services industries. As a result, although we
      operated in the contract land drilling industry in a limited basis during 2006,
      the description of our current business operations below focuses more on our
      planned operations moving forward. Additionally, in the future, our broader
      vision is to introduce additional early stage technologies to the energy
      services sector, all of which would fit our mission of helping energy companies
      produce oil and gas more economically.





**Energy
      Industry**





We
      operate in the energy services industry which services the broader upstream
      energy industry, where companies explore, develop, produce, transport, and
      market oil and gas. This industry is comprised of a diverse number of operators,
      ranging from very small independent contractors to the extremely large
      corporations. While the majority of oil and gas production is produced by very
      large international oil companies, there are also a large number of smaller
      independent companies who own and operate a large number of new and existing
      wells.





As
      a
      smaller firm with a specialized service, we intend to provide contract drilling,
      down-hole solutions and satellite communication services to both small and
      large
      operators in the energy industry. As we grow, we intend to cater to all segments
      of the industry in situations where the application of our services will add
      value to our customers.





Demand
      for our services depends on our ability to demonstrate improved economics,
      primarily to the oil and gas production sector we serve. We believe that oil
      and
      gas developers will use our contract drilling and abrasive jetting service
      where
      the use of such services costs those developers less than other available
      alternative services and/or when they perceive such use will be able to cost
      effectively increase their production and reserves. We also believe the use
      of
      our technology will be influenced by macro-economic factors driving oil and
      gas
      fundamentals.





We
      believe that producing companies will react to the combination of the increased
      demand and the limited supply of oil and gas in a manner that requires them
      to
      utilize all segments of our business. We believe that oil and gas producers
      have
      and will continue to have great economic incentives to recovering additional
      production and reserves from known reservoirs rather than pursuing a more risky
      exploration approach. Our abrasive jetting technology may permit producers
      to
      add value by potentially recovering a significant additional percentage of
      the
      oil and gas from a reservoir. We believe that a large potential market exists
      in
      North America for our contract drilling services (which we are currently in
      discussions to sell to Laurus, as described above) and our ongoing abrasive
      jetting stimulation methods.





Activity
      in the energy services industry tends to be cyclical with oil and gas prices.
      In
      addition to the currently positive industry fundamentals, we believe the
      following sector-specific trends enhance the growth potential of our business
      sectors:





•  While
      oil
      prices are unpredictable, they have remained and are projected to remain
      relatively high by historic terms for several years. Continuing high consumption
      and strong growth in Asian demand, limitations in delivery infrastructures
      and
      political unrest in major supplying countries are expected to be contributing
      factors.





•  Gas
      prices, while volatile, are projected to remain high for several years due
      to
      the combination of strong demand and major supply constraints The situation
      is
      serious enough that former Federal Reserve Bank Chairman Greenspan has expressed
      concern as to its effect as a constraint to US economic growth during his
      testimony before the Joint Economic Committee of Congress on May 21, 2003 and
      in
      updates since that time.





•  There
      is
      no substitution threat to oil and gas in the foreseeable future. In particular,
      any significant substitution by hydrogen or any other potential source is
      believed by management to be some decades away.


7


**Land
      Rig Drilling Services**





We
      entered into the land rig drilling services sector in August 2006 with the
      acquisition of Eagle which owned three drilling rigs and had at that time an
      additional three under construction (one of which has been completed, one of
      which we have not completed, and the other of which is still under construction
      as of the filing of this report). Eagle had limited drilling operations during
      the remainder of the third and fourth quarters of 2006, and has since ceased
      all
      drilling operations. Moving forward, we plan to sell all four of our currently
      operational rigs and our rig under construction to Laurus to satisfy the debts
      which Eagle owes Laurus pursuant to an asset purchase agreement, as described
      above. Assuming the asset purchase agreement is approved by the Bankruptcy
      court, of which there can be no assurance, Blast will continue to retain the
      right to sue two parties Hallwood Energy/Hallwood Petroleum and Quicksilver
      Resources, with whom Eagle had previously entered into agreements prior to
      our
      purchase of Eagle, which were subsequently breached, leading to our inability
      to
      meet our ongoing payments to Laurus, and forcing us to enter Chapter 11,
      Bankruptcy.





From
      August 2006 until December 2006 we performed limited land rig drilling
      activities, which totaled approximately $2,200,000 in revenue, 68% of our total
      revenues for the year ended December 31, 2006.





Drilling
      contracts





Contracts
      for drilling oil and gas wells are obtained either through competitive bidding
      or through direct negotiations with customers. Typical drilling contracts
      provide for compensation on a "daywork" or "footage" basis. Contract terms
      we
      offered generally depended on the complexity and risk of operations, the on
      site
      drilling conditions, the type of equipment used and the anticipated duration
      of
      the work to be performed. Our contracts generally provided for the drilling
      of a
      single well or a series of wells and permitted the customer to terminate on
      short notice.





*Daywork
      contracts.* These
      are the most common form of contract, typically using the International
      Association of Drilling Contractors (“IADC”) standard form of contract. Under
      these contracts, we provided a drilling rig with required personnel to the
      operator, who supervised the drilling of the well. We were then paid based
      on a
      fixed rate of compensation per day while the rig is utilized.





Rig
      Information





A
      land
      drilling rig consists of engines, a hoisting system, a rotating system, pumps
      and related equipment to circulate drilling fluid, blowout preventers and
      related equipment. Our rigs use diesel engines as their main power source.
      Power
      requirements for drilling jobs may vary considerably, but most land drilling
      rigs employ two or more engines to generate between 500 and 2,000 horsepower,
      depending on well depth and rig design.





There
      are
      numerous factors that differentiate land drilling rigs, including their power
      generation systems and their drilling depth capabilities. The actual drilling
      depth capability of a rig may be less than or more than its rated depth
      capability due to numerous factors, including the size, weight and amount of
      the
      drill pipe on the rig. The intended well depth and the drill site conditions
      determine the amount of drill pipe and other equipment needed to drill a well.
      Generally, land rigs operate with crews of four to six people.





**Down-** **Hole
      Solutions**





Our
      down-hole solutions division intends to provide casing milling, perforation,
      well stimulation and lateral drilling services to oil and gas producers. As
      a
      co-owner of intellectual property with Alberta Energy Partners (“Alberta”)
      formerly known as Alberta Energy Holding, Inc., we also have exclusive worldwide
      licensing rights for the application of Alberta’s patent pending Abrasive Fluid
      Jet (“AFJ”) cutting technique to cut through well casing and formation rock in
      oil and gas wells. AFJ is being added to, and we believe will enhance the
      existing principles of non-abrasive lateral jetting and completion techniques
      utilized by us and the industry as a whole. Applications of such abrasive
      cutting techniques are a proven feature in industries as diverse as munitions
      disposal in the military, offshore platform dismantlement in the salvage
      industry and cutting specialty glass and steel in the machining business. When
      we commercialize our technology, we would be among the first to commercially
      apply the proven abrasive jetting techniques to the energy producing
      business.


8


In
      2006
      we completed the construction of a new generation specialty rig based upon
      modifications using existing coiled tubing technology as the primary platform.
      The capabilities of our new rig include: one-inch coiled tubing with a working
      depth capability of 8,000 feet; a fluid pressure pumping system; an abrasive
      slurry system; and a computer-controlled system to guide and control the
      down-hole formation access tool for precise casing milling and jetting services.
      During November 2006, the Department of Energy operated Rocky Mountain Oilfield
      Testing Center (RMOTC), and Blast successfully tested the prototype rig at
      their
      location in Wyoming. While on location, down-hole video cameras verified the
      results of operations in the down-hole environment. In this case, the camera
      verified that Blast’s new technology was able to cut holes, slots and windows in
      the well casing and confirmed further penetration into the rock formations
      beyond the well casing. The testing team believes that this can be an innovative
      new oil and gas drilling technology that when commercialized should facilitate
      lower production costs and increased access to reserves. We will retain the
      rights to our AFJ technology and the current rig subsequent to our planned
      entry
      into the asset purchase agreement with Laurus described above. As of the date
      of
      this report, our AFJ rig is currently awaiting some minor repairs and we are
      waiting for additional funding to continue testing and developing such
      technology, which we can provide no assurances will be forthcoming.





***Major
      Customers***





We
      currently have no active customers for our AFJ rig, as the rig has not yet
      been
      proven commercially successful.





***Market***





It
      has
      become clear in recent years that while the demand of oil and gas in the US
      continues to grow, its ability to meet this demand from existing and new sources
      is rapidly declining. This accelerated decline will require producers to seek
      new extraction methods or technologies to exploit oil and gas production from
      existing fields and we anticipate that our abrasive jetting process will help
      satisfy the need for these new technologies. According to the Department of
      Energy, there have been 2.3 million wells drilled in the US since 1949.
“Historically, only some 30% of the total oil in a reservoir - the “original
      oil-in-place” - was recoverable. As pressure declines in the reservoir, the oil
      becomes costlier and costlier to produce until further production becomes
      uneconomic...recent advances now allow greater recovery from old
      reservoirs.”





***Competition***





Our
      AFJ
      business is expected to operate in a niche that lies between the more expensive
      and higher impact conventional horizontal drilling business and the much cheaper
      and lower impact casing milling and perforation businesses. We believe that
      our
      abrasive jetting service, once proven, can provide significant reservoir
      exposure, and therefore greater production potential, similar to horizontal
      drilling at a cost closer to that of a perforation service.





Conventional
      horizontal or directional drilling is slower and significantly more expensive
      to
      the extent that it is only being used if its much longer drilling radius was
      required as is necessary in offshore or environmentally sensitive areas.
      Companies offering this service include Halliburton, Baker Hughes, Schlumberger
      and other independent service companies. However, our competitors are better
      financed, equipped and resourced than us.




***Satellite
      Communications***





Our
      final
      business segment provides satellite communication services to oil and gas
      producers. Historically, it has been common practice for oil and gas companies
      to manually gather much of their data for energy management, and communicate
      using satellite phones or cellular service where available. This is not only
      expensive but also causes a significant time lag in the availability of critical
      management information. The Blast Satellite Private Network (“BSPN”) services
      utilize two-way satellite broadband to provide oil and gas companies with a
      wide
      variety of remote energy management communications and applications. Satellite’s
      capability to provide secure broadband to any remote location in the world
      gives
      it unique capabilities over terrestrial and cellular networks. Technology
      advancements now facilitate not only data, email and internet traffic but also
      Voice over Internet (“VoiP”) and video streaming. Bandwidth traffic capabilities
      of base station have also increased significantly allowing larger and faster
      file and data transfer capabilities to compete with terrestrial systems.
      Satellites capability to operate off stationary and mobile remote dishes with
      no
      supporting infrastructure has proven invaluable in both disaster recovery and
      remote or continuously moving commercial operations.





9


Our
      satellite services can be optimized to provide cost effective applications
      such
      as VoIP, Virtual Private Networking “VPN” and Real-time Supervisory Control and
      Data Acquisition Systems, commonly referred to as “SCADA”. SCADA permits oil and
      gas companies to dispense with a manual structure and move to a real-time,
      automated, energy management program. Utilizing SCADA, a service we currently
      offer, production levels can be optimized to meet the producer’s current market
      demands and commitments.








At
      present, we acquire modem hardware from ViaSat, iDirect Technologies and
      Spacenet and install this equipment on our customers’ onshore and offshore
      platforms. Space segment services are acquired from SES and Loral and hub
      services from Constellation, Isotropic Networks, Viasat and
      Spacenet.





We
      use
      satellite communications that are low cost and that ensure worldwide
      availability, even in geographic areas with a poor communications
      infrastructure. Our satellite services are based on industry standards to lower
      implementation costs and to simplify the integration into existing systems.
      Reliability and availability are critical considerations for SCADA. Satellite
      services are provided 24 hours a day, 7 days a week with 99.9% availability
      virtually anywhere in the world. Our satellite services offer fewer points
      of
      failure than comparable terrestrial services, provide uniform service levels,
      and are faster and more cost effective to deploy. Our satellite services are
      also very flexible and easily accommodate site additions, relocations, bandwidth
      expansion, and network reconfiguration.





Additionally,
      security, integrity, and reliability have been designed into our satellite
      services to ensure that information is neither corrupted nor compromised.
      Satellite communications are more secure than many normal telephone
      lines.





Major
      Customers





Our
      current satellite services customers include Apache Corporation, BP America
      Production Company, and General Electric Company, representing 18%, 20% and
      9%,
      respectively, of our satellite revenues for the year ended December 31, 2006..
      Contracts are usually for hardware, backhaul, and bandwidth. Virtually any
      oil
      and gas producer, of which there are thousands, is a potential customer for
      our
      satellite services.





10


***Market***





According
      to the Department of Energy there are more than two million oil and gas wells
      in
      existence in the US alone, many of which are located in remote or rural areas
      where communications and monitoring well status can be difficult and expensive.
      Such well locations could benefit from the economics of our real-time, high
      speed satellite connectivity services as compared to more conventional
      monitoring alternatives, such as, the time consuming and costly transportation
      of personnel to remote well locations, or the equipment and maintenance costs
      of
      laying land lines for real-time monitoring of remote well operations. Our focus
      is serving the needs of oil and gas producers worldwide to control their
      production effectively and to enhance customer satisfaction by providing
      worldwide real-time access to information. This market for satellite services
      is
      very competitive with increasing pressure on margins our larger competitors
      offer services at substantially discounted prices. We attempt to compete against
      such competitors by attempting to target niche markets and offering alternative
      solutions that solve customers’ complex communication problems at more cost
      effective rates. We utilize satellite, Wi-Fi and other wireless technology
      for
      the last mile of wellhead connectivity for these customers and focus almost
      exclusively on the oil and gas market.





***Competition***





The
      satellite communication industry is intensely competitive due to overcapacity,
      but we believe that competition is less severe in the oil and gas producing
      sector. Other satellite services providers in the oil and gas industry include,
      Stratus Global, Tachyon, Schlumberger and Caprock. Caprock, Schlumberger and
      Stratus are focused on the top 20% of the market, particularly international
      and
      offshore platforms, and Stratus Global is focused on the offshore market using
      a
      traditional wireless network. We believe our satellite services offer advantages
      over those services by:





•  Customizing
      the provided service to better meet the customer’s needs;


•  Offering
      superior speed;


•  Providing
      single vendor convenience; and


•  Offering
      lower up-front infrastructure and operating costs.




**Insurance**





Our
      oil
      and gas operations are subject to hazards inherent in the oil and gas industry,
      such as accidents, blowouts, explosions, implosions, fires and oil spills.
      These
      conditions can cause:





a)
            personal
                injury or loss of life


b)
            damage
                to or destruction of property, equipment and the environment


c)
            suspension
                of operations





In
      addition, claims for loss of oil and gas production and damage to formations
      can
      occur in the well service industry. Litigation arising from a catastrophic
      occurrence at a location where our equipment and services are being used may
      result in us being named as a defendant in lawsuits asserting large
      claims.





We
      maintain insurance coverage that we believe to be customary in the industry
      against these types of hazards. However, we may not be able to maintain adequate
      insurance in the future at rates we consider reasonable. In addition, our
      insurance is subject to coverage limits and some policies exclude coverage
      for
      damages resulting from environmental contamination. The occurrence of a
      significant event or adverse claim in excess of the insurance coverage that
      we
      maintain or that is not covered by insurance could have a materially adverse
      effect on our financial condition and results of operations.





**Patents** **and Licenses**





Effective
      August 25, 2005, we entered into a definitive agreement to purchase from
      Alberta Energy Partners (“Alberta”) an interest in the AFJ technology that
      provides us the unrestricted right to use the technology and license the
      technology worldwide to others. We expect to utilize the technology as the
      foundation for our energy services business.


11


As
      part
      of the agreement, we issued Alberta 3,000,000 shares of restricted common stock,
      with registration rights, and warrants to purchase 750,000 shares of our common
      stock at an exercise price of $0.45 per share. The warrants have a three-year
      term and vest when we receive $225,000 in revenue from our initial rig utilizing
      the technology, which has not occurred to date. We also agreed to pay Alberta
      a
      royalty payment of $2,000 per well bore or 2% of the gross revenues received
      in
      connection with each well bore, whichever is greater, in connection with the
      licensing of the technology. The parties also agreed to share any revenues
      received by us from licensing the technology, with Alberta receiving 75% of
      licensing revenues until it receives $2,000,000, at which time its proportion
      of
      the licensing revenue shall decrease to 50%, thereafter. Our ownership interest
      in the technology is 50%. Either party has a right of first refusal on any
      new
      applications of the technology by the other party, or any sale of the other
      party’s interest in the technology. However, following our Chapter 11
      restructuring filing, Alberta Energy Partners filed suit to rescind the
      Technology Purchase Agreement, which we entered into in August 2005. We intend
      to vigorously defend our ownership rights to this technology. A hearing on
      this
      matter has not yet been scheduled by the Bankruptcy Court.





On
      April 24, 2003, we entered into an agreement to license the Landers
      Horizontal Drilling Process, based on US Patent Nos. 5,413,184, 5,853,056,
      and
      6,125,949, relating to certain oil and gas well production enhancement
      techniques and devices and related trade secrets with the inventor and holder
      of
      the patents and trade secrets, Carl Landers. The license gave us exclusive
      rights to apply the technology and the related trade secrets in all of the
      US
      (except for part of Colorado West of the Rockies, and Utah) and Canada.
      Mr. Landers also reserved the rights to certain applications in which he
      has a direct interest but may not compete with us. Any improvements to the
      technology remain the sole property of the licensor but are provided to us
      without additional licensing fees. The license terminates upon the expiration
      of
      the underlying patents, the earliest date being October 1,
      2013.





On
      March 8, 2005, we entered into an Assignment of License Agreement
      (“Assignment”) with Maxim TEP (“Maxim”). The President and CEO of Maxim is
      Daniel W. Williams, our former President and CEO. Under the assignment, we
      assigned to Maxim our rights in the license of the Landers Horizontal Drilling
      Process; all current and future negotiations for assignments, sublicenses or
      territorial royalty pertaining to the license and two lateral drilling rigs.
      As
      consideration, Maxim has paid $1,300,000 in principal payments and $500,000
      in
      penalties for extending the payment deadlines and released a $270,000 credit
      obligation we owed to Maxim. We will retain a non-exclusive sublicense interest
      in the Landers Horizontal Technology provided we pay all required royalties
      in
      utilizing the technology.





We
      believe the AFJ technology and related trade secrets are instrumental to our
      competitive edge in the oil and gas service industry. We are highly committed
      to
      protecting the technology. We cannot assure our investors that the scope of
      any
      protection we are able to secure for our license will be adequate to protect
      it,
      or that we will have the financial resources to engage in litigation against
      parties who may infringe on our exclusive license. We also can not provide
      our
      investors with any degree of assurance regarding the possible independent
      development by others of technology similar to that which we have licensed,
      thereby possibly diminishing our competitive edge.





**Governmental
      Regulation** **s**





Assuming
      we begin commercial drilling operations, we may be subject to various local,
      state and federal laws and regulations intended to protect the environment.
      Such
      laws may include among others:





·
            Comprehensive
                Environmental Response, Compensation and Liability
                Act;


·
            Oil
                Pollution Act of 1990;


·
            Oil
                Spill Prevention and Response Act;


·
            The
                Clean Air Act;


·
            The
                Federal Water Pollution Control Act; Louisiana Regulations;
                and


·
            Texas
                Railroad Commission Regulations.





These
      operations may involve the handling of non-hazardous oil-field wastes such
      as
      sediment, sand and water. Consequently, the environmental regulations applicable
      to our operations pertain to the storage, handling and disposal of oil-field
      wastes. State and federal laws make us responsible for the proper use and
      disposal of waste materials while we are conducting operations. As our
      operations are presently conducted, we do not believe we are currently required
      under applicable environmental laws to obtain permits to conduct our business.
      We believe we conduct our operations in compliance with all applicable
      environmental laws, however, there has been a trend toward more stringent
      regulation of oil and gas exploration and production in recent years and future
      modifications of the environmental laws could require us to obtain permits
      or
      could negatively impact our operations.


12





We
      depend
      on the demand for our products and services from oil and natural gas companies.
      This demand is affected by changing taxes, price controls and other laws
      relating to the oil and gas industry generally, including those specifically
      directed to oilfield operations. The adoption of laws curtailing exploration
      and
      development drilling for oil and natural gas in our areas of operation could
      also adversely affect our operations by limiting demand for our products and
      services. We cannot determine the extent to which our future operations and
      earnings may be affected by new legislation, new regulations or changes in
      existing legislation regulations or enforcement.





Our
      satellite services utilize products that are incorporated into wireless
      communications systems that must comply with various government regulations,
      including those of the Federal Communications Commission (FCC). In addition,
      we
      provide services to customers through the use of several satellite earth hub
      stations, which are licensed by the FCC. Regulatory changes, including changes
      in the allocation of available frequency spectrum and in the military standards
      and specifications that define the current satellite networking environment,
      could materially harm our business by (1) restricting development efforts
      by us and our customers, (2) making our current products less attractive or
      obsolete, or (3) increasing the opportunity for additional competition.
      Changes in, or our failure to comply with, applicable regulations could
      materially harm our business and impair the value of our common stock. In
      addition, the increasing demand for wireless communications has exerted pressure
      on regulatory bodies worldwide to adopt new standards for these products and
      services, generally following extensive investigation of and deliberation over
      competing technologies. The delays inherent in this government approval process
      have caused and may continue to cause our customers to cancel, postpone or
      reschedule their installation of communications systems. This, in turn, may
      have
      a material adverse effect on our sales of products to our
      customers.




Research
      and Development Activities





During
      2004, 2005, and during the second quarter of 2006, we incurred an insignificant
      amount of research and development costs as it relates to our abrasive jetting
      process. After the second quarter of 2006, we began testing the AFJ technology,
      and as such, we ceased booking such costs as research and development. We
      incurred no research and development costs in our satellite
      business.





Employees





As
      of
      December 31, 2006, we had a total of 42 full time employees; however, due to
      the
      pending sale of our land drilling rigs, we have since reduced the number of
      our
      employees to six (6), as all of the previous full-time rig crews have been
      terminated pending the current rig sale.





We
      also
      utilize independent contractors and consultants to assist us in conducting
      the
      drilling and abrasive jetting operations, installing the satellite equipment,
      and maintaining and supervising such services in order to complement our
      existing work force, as needed. Our agreements with these independent
      contractors and consultants are usually short-term. We are not a party to any
      collective bargaining agreement with any employees, and believe relations with
      our employees, independent contractors and consultants are good.





**Item
      2. Description of Property**





*Office
      Facilities*





On
      April
      1, 2007, subject to the approval of the Bankruptcy Court, we entered into a
      nine
      (9) month lease for office space for our corporate offices. Pursuant to the
      lease we agreed to lease approximately 2,000 square feet of office space in
      Houston, Texas for our principal executive office at a cost of $2,000 per month,
      pursuant to a lease which expires on December 31, 2007. This lease substantially
      decreased the amount of rent we were paying pursuant to our previous lease
      agreement, which we believe will help us lower our overhead and meet our current
      expenses during the Bankruptcy proceeding.





13


*Real
      Estate Lease*





Additionally,
      we currently lease approximately four acres of land in Goldsby, Oklahoma,
      pursuant to a three (3) year Real Property Lease, which expires on August 24,
      2009. Pursuant to the lease, we pay $7,500 per month, as well as certain
      ancillary expenses associated with the property leased. The property is
      essentially a clear parcel of fenced land, which we currently use to store
      our
      drilling rigs. If the proposed rig sale to Laurus is approved by the Bankruptcy
      Court, we may take steps to terminate the Real Estate lease in the future,
      which
      may cause the landlord to become an unsecured creditor.





*Equipment*





As
      of
      December 31, 2006, our primary equipment consisted of four operational medium
      depth mechanical drilling rigs and one drilling rig under construction. We
      also
      own one mobile AFJ coiled tubing unit, which is currently being stored in Fort
      Worth, Texas. We also maintain certain satellite communication equipment,
      computer equipment, and furniture at our principal executive
      office.





We
      believe that our facilities and equipment are in good operating condition and
      that they are adequate for their present use.








**Item
      3.** **Legal
      Proceedings** ****


Chapter 11
      Proceedings





On January
      19, 2007, Blast
      Energy Services, Inc. (“Blast”) and its wholly owned subsidiary, Eagle Domestic
      Drilling Operations LLC (“EDDO” and collectively, the “Debtors”), filed
      voluntary petitions with the US Bankruptcy Court for the Southern District
      of
      Texas - Houston Division under Chapter 11 of Title 11 of the US Code ,
      Cases
      Nos. 07-30424-H4-11 and 07-30426-H4-11, respectively (the “Bankruptcy
      Cases”). The Debtors continue to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
      accordance with the applicable provisions of the Bankruptcy Code and orders
      of
      the Bankruptcy Court.





As
      of the
      date of the Chapter 11 filing, then pending litigation against the Debtors
      was
      automatically stayed pursuant to 11 USC.§ 362. Absent termination or
      modification of the automatic stay by order of the Bankruptcy Court, litigants
      may not take any action to recover on pre-petition claims against the Debtors.
      These stayed lawsuits include: (i) a state court suit filed by Second Bridge
      LLC
      i n
      Cleveland County, Oklahoma (“Oklahoma State Court Suit”) claiming breach of
      contract under a consulting services agreement signed on August 25, 2006,
      asserting a personal property lien and claiming damages of $4.8 million; and
      (ii) a complaint in Franklin County, Arkansas filed by Chrisman Ready Mix
      claiming approximately $126,000 for drilling rig transportation expenses
      incurred on behalf of the Debtors. All such pre-petition claims will be resolved
      in the Bankruptcy Cases.





The
      Debtors are involved with additional disputes filed in the Bankruptcy Cases,
      which are classified as either adversary proceedings or contested matters,
      but
      which are separate and distinct from proofs of claim that have been or may
      be
      filed in the Bankruptcy Cases, which disputes include the
      following:





(a)
      the
      Debtors filed an adversary proceeding against Second Bridge LLC seeking to
      invalidate the personal property lien asserted by Second Bridge, to recover
      preferences and fraudulent transfers and to avoid the consulting services
      agreement as a fraudulent conveyance. Second Bridge filed a second suit in
      the
      form of an adversary proceeding essentially alleging the same claims asserted
      in
      the Oklahoma State Court Suit.   The Debtors intend to vigorously
      prosecute their claims for affirmative relief under the Bankruptcy Code and
      defend themselves in both of these proceedings;





(b)
      the
      Debtors have sued Saddle Creek Energy Development, a Texas joint venture in
      the
      Bankruptcy Court for non-payment of work performed under an IADC drilling
      contract for EDDO’s Rig #12 that provided for the drilling of three initial
      wells, and which was subsequently amended to provide for the drilling of an
      additional three wells as well as providing labor and materials to operate
      a rig
      not owned by EDDO and identified as “Saddle Creek’s Falcon Rig #1.” EDDO also
      filed liens on certain leases and on the Saddle Creek Falcon Rig #1, and has
      initiated a foreclosure action in the Bankruptcy Court. The monetary damages
      aspect of the case is scheduled for trial May 1, 2007, and the foreclosure
      proceedings are currently scheduled for trial December 1, 2007;


14




(c)
        Alberta Energy Partners filed pleadings in the nature of a contested matter
        asserting that Blast cannot retain its interests under that certain Technology
        Purchase Agreement entered into by Blast in August, 2005. Blast plans to
        vigorously defend against such action, and assert rights available to it
        under
        the Bankruptcy Code; and


(d)
      the
      Debtors have requested authority to sell the drilling rigs owned by EDDO to
      their senior secured lender Laurus Master Fund, Ltd. (“Laurus”) for a
      consideration equal to the outstanding debt obligations owed to Laurus. The
      Debtors’ efforts to complete this transaction have been objected to by various
      entities controlled by Rodney D. Thornton. The Debtors are actively pursuing
      their right to complete the sale in accordance with the Bankruptcy
      Code.





*Hallwood
      Energy/Hallwood Petroleum Lawsuit*





On
      September 1, 2006, Hallwood Petroleum, LLC and Hallwood Energy, LP
      (collectively, “Hallwood”) filed suit in the state district court of Tarrant
      County, Texas, against Eagle Domestic Drilling Operations, LLC (“EDDO”), a
      wholly owned subsidiary of the Company, and a separate company, Eagle Drilling,
      LLC. The lawsuit seeks to rescind two IADC two-year term day rate drilling
      contracts between Eagle Drilling and Hallwood, which had been assigned to EDDO
      by Eagle Drilling prior to Blast’s acquisition of the membership interests of
      EDDO.  Hallwood alleged Eagle Drilling and EDDO were in breach of the IADC
      contracts and it ceased performance under the contracts.  Hallwood has
      claimed that the rigs provided for use under the IADC contracts did not meet
      contract specifications and that the failure to meet such specifications are
      material breaches of the contracts.  In addition, Hallwood has demanded
      that the remaining balance of funds advanced under the contracts, in the amount
      of $1.65 million, be returned. The Hallwood suit pending in Tarrant County,
      Texas is currently stayed by operation of the automatic stay provided for in
      the
      US Bankruptcy Code as a result of the Chapter 11 filing of the Company and
      its
      subsidiary, EDDO. EDDO plans to vigorously contest the claims by Hallwood and,
      at the appropriate juncture, institute proceedings to prosecute causes of action
      against Hallwood for its damages arising out of what the Company considers
      are
      unjustified terminations of the two IADC contracts.





*Quicksilver
      Resources Lawsuit*





On
      October 13, 2006, Quicksilver Resources, Inc. (“Quicksilver”) filed suit in the
      state district court of Tarrant County, Texas against Eagle Domestic Drilling
      Operations, LLC (“EDDO”), a wholly owned subsidiary of the Company, and a
      separate company, Eagle Drilling, LLC. The lawsuit seeks to rescind three IADC
      two-year term day rate contracts between Eagle Drilling and Quicksilver, which
      had been assigned to EDDO by Eagle Drilling prior to Blast’s acquisition of the
      membership interests of EDDO.  The lawsuit includes further allegations of
      other material breaches of the contracts and negligent operation by EDDO and
      Eagle Drilling under the contracts. Quicksilver asserts that performance under
      one of the contracts was not timely and that mechanical problems of the rig
      provided under the contract caused delays in its drilling operations.
      Quicksilver repudiated the remaining two contracts prior to the time for
      performance set forth in each respective contract.  Although the lawsuit
      filed in Tarrant County was stayed by operation of the automatic stay provided
      for in the US Bankruptcy Code as a result of the Chapter 11 filing of the
      Company and its subsidiary, EDDO, Quicksilver has removed the lawsuit to the
      US
      Bankruptcy Court for the Northern District of Texas. EDDO has not yet been
      served with process in the lawsuit. EDDO, however, has filed a motion with
      US
      Bankruptcy Court for the Northern District of Texas seeking to have the lawsuit
      transferred to the US Bankruptcy Court for the Southern District of Texas where
      its petition for reorganization under Chapter 11 of the US Bankruptcy Code
      is
      presently pending. EDDO intends to vigorously defend itself in this proceeding
      and, at the appropriate juncture, institute proceedings to prosecute causes
      of
      action against Quicksilver for its damages arising out of what the Company
      considers are unjustified terminations of the three IADC contracts.





*Securities
      and Exchange Commission Investigation (Settled)*




On
      July
      24, 2006, the Securities and Exchange Commission filed a complaint in the US
      District Court for the Southern District of Texas against us, alleging that
      we
      and our former CEO, Daniel W. Williams, violated the anti-fraud provisions
      of
      the Securities Exchange Act of 1934 by making various misleading disclosures
      regarding the capabilities of our lateral drilling technology, the status and
      success of our drilling operations, and our revenues, and that our former CFO,
      Andrew G. Wilson, aided and abetted the violations. Also on July 28, 2006,
      the
      Commission entered a cease-and-desist order against our former director and
      current large shareholder Eric A. McAfee, finding that he caused us to make
      misleading disclosures regarding our expenses and revenues. The Commission
      also


15




commenced
      a civil money penalty action against Mr. McAfee in US District Court for the
      Southern District of Texas.




Each
      party independently entered into settlements with the Commission, on a neither
      admit-nor-deny basis, by which they consented to the entry of permanent
      injunctions by the US District Court, barring future violations of Section
      10(b)
      of the Exchange Act and Rule 10b-5 thereunder. Mr. Williams has also agreed
      to
      pay a civil money penalty of $125,000, and to be barred from serving as an
      officer or director of a public company. Mr. Wilson agreed to pay a penalty
      of
      $25,000, and to be barred from serving as the officer or director of a public
      company for five years. Mr. Wilson continues to serve the Company in the
      non-executive position of Vice President of Business Development. However,
      Mr.
      Williams has not been employed by us since December, 2003. Mr. McAfee consented,
      on a neither admit-nor-deny basis, to the entry of the Commission's
      cease-and-desist order, which found that he caused violations Section 10(b)
      of
      the Exchange Act and Rule 10b-5 thereunder. In the related penalty action filed
      in US District Court, Mr. McAfee also agreed to pay a civil money penalty of
      $25,000.




*Claims
      by Investor (Settled)*





As
      previously disclosed, in July 2004, Gryphon Master Fund, L.P. (“Gryphon”) filed
      suit in state district court in Dallas County, Texas against the Company
      alleging, among other things, breach of contract and securities fraud by the
      Company relating to an investment made by Gryphon. In February 2005, the Company
      entered into an Agreed Judgment and Order of Severance which settled all breach
      of contract claims relating to the delay by the Company in registering common
      stock issued by the Company to Gryphon in connection with the investment. The
      remaining claims were abated until September 30, 2005. On March 6, 2006, Gryphon
      made a settlement demand on the Company for $2.1 million, which it purported
      to
      represent the actual damages it had sustained. Blast filed a counterclaim in
      April 2006 for conversion and fraud by Gryphon for engaging in hedging
      transactions during its share holding period to enlarge the number of shares
      to
      which it was entitled in the event of price resets under the agreement between
      the parties.





On
      September 1, 2006, the Company made a cash payment of $550,000 to Gryphon in
      full settlement of the claims between the parties.  Under the terms of the
      settlement, we received an executed release of judgment from Gryphon and all
      claims have been dismissed.





*Class
      Action Lawsuit (Settled)* **




In
      March
      2005, we entered into an agreement, to settle the class action lawsuit brought
      by former shareholders in March 2004 in the US District Court for the Southern
      District. Under terms of the agreement, we agreed to issue to the class
      1,150,000 shares of common stock and pay up to $55,000 in legal and
      administrative fees for the plaintiffs, which has been fully paid,. The lawsuit
      alleged that we violated Sections 10(b) and 20(a) of the Securities Exchange
      Act
      of 1934, and Rule 10b-5 promulgated thereunder. We have been unable to ascertain
      the shareholder names who were due to be issued the 1,150,000 settlement shares
      to date, and as such have not issued those shares to date, but have reflected
      those shares as issued and outstanding in connection with the disclosure of
      our
      outstanding shares of common stock listed throughout this report.




*Concluding
      Statement*





Other
      than described above, we are not aware of any other threatened or pending legal
      proceedings. The foregoing is also true with respect to each officer, director
      and control shareholder as well as any entity owned by any officer, director
      and
      control shareholder, over the last five years. As part of its regular
      operations, we may become party to various pending or threatened claims,
      lawsuits and administrative proceedings seeking damages or other remedies
      concerning our commercial operations, products, employees and other matters.
      Although we can provide no assurance about the outcome of these or any other
      pending legal and administrative proceedings and the effect such outcomes may
      have on the company, except as described above, we believe that any ultimate
      liability resulting from the outcome of such proceedings, to the extent not
      otherwise provided for or covered by insurance, will not have a material adverse
      effect on our financial condition or results of operations.





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





No
      matter
      was submitted during the fourth quarter of the fiscal year covered by this
      report to a vote of security holders, through the solicitation of proxies or
      otherwise.


16


**Part
      II**





**Item
      5. Market for Common Equity and Related Stockholder
      Matters**





The
      common stock of Blast Energy Services, Inc., formerly known as Verdisys, Inc.,
      commenced trading on the OTC Bulletin Board on July 18, 2003 under the
      symbol “VDYS”. Effective June 6, 2005, in connection with our subsequent
      name change, our trading symbol for our common stock became “BESV”. The
      following table sets forth, for the periods indicated, the high and low bid
      prices of a share of our common stock as reported on the OTC Bulletin Board
      for
      the past two fiscal years. The quotations provided are for the over the counter
      market which reflect interdealer prices without retail mark-up, mark-down or
      commissions, and may not represent actual transactions.





**QUARTER
                ENDED**
            **HIGH**
            
            **LOW**December
                31, 2006
            $
                0.90
            
            $
                0.30September
                30, 2006
            $
                1.56
            
            $
                0.88June
                30, 2006
            $
                1.10
            
            $
                0.44March
                31, 2006
            $
                1.59
            
            $
                0.71December
                31, 2005
            $
                1.08
            
            $
                0.34September
                30, 2005
            $
                0.61
            
            $
                0.31June
                30, 2005
            $
                0.52
            
            $
                0.30March
                31, 2005
            $
                0.59
            
            $
                0.35





**Holders**





As
      of
      March 30, 2007, we had 67,609,904 shares of common stock issued and outstanding
      held by approximately 385 shareholders of record, which amount includes
      1,150,000 shares of common stock approved for issuance under the class action
      settlement, which shares have not been issued to date, as described in greater
      detail above under “Legal Proceedings.”





**Dividends**





We
      have
      never paid cash dividends. At present, we do not anticipate paying any dividends
      on our common stock in the foreseeable future and intend to devote any earnings
      to the development of our business.


17





**EQUITY
      COMPENSATION PLAN INFORMATION**





The
      following table provides information as of December 31, 2006 regarding
      compensation plans (including individual compensation arrangements) under which
      equity securities are authorized for issuance:





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities available for future issuance under equity compensation
                plans (excluding securities shown in first column)Equity
                compensation plans approved by shareholdersEquity
                compensation plans not approved by shareholders
            
            6,404,375
            
            $0.90
            
            1,595,625Total
            
            6,404,375
            
            $0.90
            
            1,595,625







**Recent
      Sales of Unregistered Securities**







The
      following table details shares of common stock issued under transactions under
      a
      private offering during the fourth quarter of 2006, which we believe to be
      exempt from registration under Regulation D promulgated under Section 4(2)
      of
      the Securities Act of 1933, as amended (the “Securities Act”). The sales of
      stock were to individuals or entities, each of whom was an accredited investor,
      as that term is defined in Rule 501 of Regulation D promulgated under Section
      4(2) of the Securities Act and had adequate access to information pertaining
      to
      us. Furthermore, no advertisements or general solicitation activities were
      made
      or undertaken by us and the securities were restricted pursuant to Rule 144
      of
      the Securities Act.





**August
                2006**
            
            **Shares**
            
            **Value**Glenn
                A. Foster
            
            1,856,250
            $
            1,856,250Richard
                Thornton
            
            1,196,250
            
            1,196,250Herman
                Livesay
            
            825,000
            
            825,000Thornton
                Business Security Trust
            
            12,622,500
            
            12,622,500





Offering
      Costs: None





Other
      Terms: Two year warrants to purchase 5,000,000 shares of our common stock at
      a
      price of $0.01 per share were issued in connection with the purchase of land
      rig
      drilling business. The proceeds will be allocated between the common stock
      and
      the warrants based on their respective relative fair values.





*Common
      Stock Issued Upon Exercise of Warrants*





**Date**
            
            **Shares
                Issued Upon Exercise**
            
            **Value**
            
            **Comment**Fourth
                Quarter 2006
            
            562,500
            
            $
                5,625
            
            Issued
                to a selling member of Eagle Domestic Drilling Operations, LLC in
                connection with land rig drilling business acquisition.304,500
            
            $
                3,054
            
            Issued
                to Equity Source Partners, as a commission in connection with providing
                senior debt relationship in the purchase of land rig drilling business20,000
            
            $
                2,000
            
            Issued
                to a former employee in 2003





18


Options




The
      following table summarizes option grants for the last two fiscal years:





**Date**
            **Number
                of Shares**
            **Exercise
                Price**
            **Market
                Price**
            **Vesting**
            **Term
                (years)**
            **Fair
                Value**
            **To
                Whom Issued**August
                2006
            1,500,000
            $
                1.30
            $
                1.30
            Quarterly
                over 3 years
            10
            $1,950,000
            Richard
                ThorntonMay
                2006
            96,000
            $
                0.61
            $
                0.61
            Monthly
                over 1 year
            10
            $
                58,560
            Non-employee
                directorsDec
                2005
            1,000,000
            $
                0.80
            $
                0.79
            Quarterly
                over 2.5 years
            10
            $
                800,000
            Officers170,000
            $
                0.80
            $
                0.79
            Quarterly
                over 3 years
            10
            $
                136,000
            EmployeesAug
                2005
            900,000
            $0.10
            $
                0.40
            Subject
                to terms of settlement agreement
            2
            $
                360,000
            Former
                OfficerAug
                2005
            140,000
            $
                0.40
            $
                0.40
            Quarterly
                over 3 years
            10
            $
                56,000
            EmployeesJune
                2005
            72,000
            $
                0.38
            $
                0.38
            Monthly
                over 1 year
            10
            $
                27,360
            Non-employee
                directorsMarch
                2005
            100,000
            $
                0.40
            $
                0.40
            Quarterly
                over 3 years
            10
            $
                39,990
            OfficersJan
                2005
            30,000
            $
                0.50
            $
                0.50
            Quarterly
                over 3 years
            10
            $
                14,996
            Officers





We
      recorded no expense for the intrinsic value associated with the options vesting
      in 2006 and 2005, respectively. The expense is included in selling,
      general & administrative expense on the statement of operations.




*Warrants*




The
      following table summarizes warrants granted for the last two fiscal
      years:





**Date**
            **Number
                of Shares**
            **Exercise
                Price**
            **Term
                (years)**
            **Other**August
                2006
            5,000,000
            $
                0.01
            2
            Issued
                to selling members of Eagle Domestic Drilling Operations, LLC in
                connection with land rig drilling business acquisition.6,090,000
            $
                1.44
            7
            Issued
                to Laurus Master Fund in connection with providing senior debt for
                purchase of land rig drilling business.6,090,000
            $
                0.01
            7
            Issued
                to Laurus Master Fund in connection with providing senior debt for
                purchase of land rig drilling business.304,500
            $0.01
            2
            Issued
                to Equity Source Partners as a commission in connection with providing
                senior debt relationship in the purchase of land rig drilling
                business.May
                2006
            300,000
            $
                0.55
            2
            Issued
                in connection with Private Placement.August
                2005
            750,000
            $
                0.45
            3
            Issued
                in connection with definitive agreement to purchase from Alberta
                an
                interest in the AFJ technology.April
                2005
            400,000
            $
                1.00
            2
            Issued
                in connection with stock sale.Jan
                & Feb 2005
            433,000
            $
                1.00
            2
            Issued
                in connection with Private Placement.Jan
                & Feb 2005
            15,800
            $
                1.00
            2
            Offering
                costs of Private Placement.Jan
                2005
            750,000
            $
                1.00
            3
            Issued
                in connection with Edge dispute settlement.







We
      claim
      an exemption from registration afforded by Section 4(2) of the Act since the
      foregoing grants did not involve a public offering, the recipients took the
      shares for investment and not resale and we took appropriate measures to
      restrict transfer. No underwriters or agents were involved in the foregoing
      grants and no underwriting discounts or commissions were paid by
      us.








19


**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation**





The
      following discussion should be read in conjunction with the Financial Statements
      and Notes thereto included in this report. All statements that are included
      in
      this Report, other than statements of historical fact, are forward-looking
      statements. You can identify forward-looking statements by words such as
“anticipate”, “believe”, “expect” and similar expressions and statements
      regarding our business strategy, plans and objectives for future operations.
      Although management believes that the expectations reflected in these
      forward-looking statements are reasonable, it can give no assurance that such
      expectations will prove to have been correct. The forward-looking statements
      in
      this filing involve known risks and uncertainties, which may cause our actual
      results in future periods to be materially different from any future performance
      suggested in this report. Such factors may include, but are not limited to,
      such
      risk factors as: changes in technology, reservoir or sub-surface conditions,
      the
      introduction of new services, commercial acceptance and viability of new
      services, fluctuations in customer demand and commitments, pricing and
      competition, reliance upon subcontractors, the ability of our customers to
      pay
      for our services, together with such other risk factors as may be included
      in
      this report.





**Risk
      factors**





You
      should carefully consider the following risk factors and other information
      in
      this annual report on Form 10-KSB before deciding to become a holder of our
      common stock. If any of the following risks actually occur, our business and
      financial results could be negatively affected to a significant
      extent.





The
      business and the value of our common stock are subject to the following Risk
      Factors:





***We
      filed for reorganization under Chapter 11 of the Bankruptcy Code on January
      19,
      2007 and are subject to the risks and uncertainties associated with
      Chapter 11 proceedings.***




For
      the
      duration of our Chapter 11 proceedings, our operations, including our
      ability to execute our business plan, are subject to the risks and uncertainties
      associated with bankruptcy. Risks and uncertainties associated with our
      Chapter 11 proceedings include the following:




·
            our
                ability to prosecute, confirm and consummate our proposed Plan of
                Reorganization (the “Plan”);




·
            the
                actions and decisions of our creditors and other third parties who
                have
                interests in our Chapter 11 proceedings that may be inconsistent with
                our plans;




·
            our
                ability to obtain court approval with respect to motions in the
                Chapter 11 proceedings prosecuted from time to time;




·
            our
                ability to obtain and maintain normal terms with vendors and service
                providers;




·
            our
                ability to maintain contracts that are critical to our operations;
                and




·
            risks
                associated with third parties seeking and obtaining court approval
                to
                terminate or shorten the exclusivity period for us to confirm our
                proposed
                Plan, to appoint a Chapter 11 trustee or to convert such Bankruptcy
                to a
                Chapter 7 proceeding.




These
      risks and uncertainties could affect our business and operations in various
      ways. For example, negative events or publicity associated with our
      Chapter 11 proceedings could adversely affect our revenues and the
      relationship with our customers, as well as with vendors and employees, which
      in
      turn could adversely affect our operations and financial condition, particularly
      if the Chapter 11 proceedings are unexpectedly protracted. Also,
      transactions outside the ordinary course of business are subject to the prior
      approval of the Bankruptcy Court, which may limit our ability to respond timely
      to certain events or take advantage of certain opportunities.




Because
      of the risks and uncertainties associated with our Chapter 11 proceedings,
      the ultimate impact that events that occur during these proceedings will have
      on
      our business, financial condition and results of operations cannot be accurately
      predicted or quantified.


20








**GENERAL
      RISKS RELATING TO OUR COMPANY**








**Any
      interest that shareholders own in the Company or that they may acquire in the
      future, until such time as we complete our Chapter 11 Bankruptcy proceedings,
      may be decreased or diluted due to our final Chapter 11 reorganization and/or
      we
      may cease to trade our common stock in the future.**





We
      recently filed for Chapter 11 Bankruptcy protection, the result of which will
      likely be a corporate restructuring and/or reorganization. While we do not
      currently know and cannot predict the outcome of such restructuring or
      reorganization, it is likely that the interests of our current shareholders
      will
      be diluted by securities issued to our creditors, which dilution may be
      significant or our common stock may not be publicly traded in the future. As
      a
      result, current and potential investors should be aware that any interest they
      hold in the Company may decrease in value and/or be substantially diluted,
      or
      become worthless through the bankruptcy proceeding.





**We
      experienced substantial operating losses in 2006 and 2005, and do not currently
      have a sufficient amount of cash on hand or sources of available capital to
      meet
      our current liabilities and sustain our operations. It is uncertain when, if
      ever, we will have significant operating income or cash flow from operations
      sufficient to meet our current liabilities and/or sustain our
      operations.**





We
      suffered net losses since our inception, including net losses of $38,072,526
      and
      $2,862,231 for the years ended December 31, 2005 and 2006, respectively.
      These losses are the result of a sporadic revenue stream which has been
      inadequate to compensate for our operating and overhead costs as well as the
      impairment of our Landers license. As of December 31, 2006, our cash balance
      was
      approximately $1.6 million; however, as our current expenditures exceed our
      income, and because we are currently using our cash to fund our day to day
      operations and legal support for our Chapter 11 proceedings, our cash balance
      has been decreasing precipitously since December 31, 2006, and as a result,
      as
      of March 31, 2007, our cash balance was $389,000, and as of April 16, 2007,
      we
      had a cash balance of $220,000. In the near term, unless we are able to recover
      settlement monies for amounts owed under various breached customer contracts
      or
      recover insurance refunds in a timely manner or secure debtor in possession
      financing, we will be forced to liquidate the remaining assets and wind up
      the
      affairs of the company. Even assuming we are able to continue our business
      operations through our Chapter 11 Bankruptcy and are able to discharge a
      substantial amount of our debt, of which there can be no assurance, it is
      uncertain when, if ever, we will have significant operating income or cash
      flow
      from operations sufficient to sustain our operations. If cash needs exceed
      available resources, additional capital may not be available through public
      or
      private equity or debt financings. If we are unable to arrange new financing
      or
      generate sufficient revenue from new business arrangements, we will be unable
      to
      continue in our current form and will be forced to liquidate our remaining
      assets and wind up the affairs of the company, at which time any investment
      in
      the Company will be worthless.


21


If
      our
      asset purchase agreement with Laurus is not approved by the Bankruptcy Court,
      we
      will be subject to significant liquidated damages due to our failure to timely
      pay Laurus amounts due under the Laurus note.





We
      have
      reached an agreement with Laurus, which agreement has not been approved by
      the
      Bankruptcy Court, on the terms of an asset purchase agreement intended to offset
      the full amount of the $40.6 million senior Note, accrued interest and default
      penalties. Under the terms of this agreement, only the five land drilling rigs
      and associated spare parts will be sold to repay the Note, accrued interest
      and
      default penalties on the Note. The potential benefit of the customer litigation,
      the satellite communication business and the abrasive fluid jetting technology,
      described in greater detail below, will remain with us subsequent to the sale
      of
      the rigs. The asset purchase agreement and plan of reorganization are subject
      to
      the approval of the Court, which we believe will be heard by the Court before
      the end of April 2007. If the asset purchase agreement is not approved by the
      Bankruptcy Court, we will be responsible for repaying Laurus the entire amount
      of the $40.6 million senior Note, as well as accrued interest, default interest
      and liquidated damages, which amounts total more than our current cash on hand
      and likely more than our current assets. As a result, if the asset purchase
      agreement with Laurus is not approved by the Bankruptcy Court, we will likely
      be
      forced to abandon all of our business activities and sell substantially all
      of
      our assets in an attempt to repay Laurus. Additionally, if that were to happen,
      we would likely cease the public trading our common stock, and any investment
      in
      our securities would likely become worthless.








**We
      chose to enter Chapter 11 Bankruptcy, because we did not have sufficient funds
      to pay our ongoing liabilities, and even assuming that the majority of our
      debts
      are discharged through the bankruptcy proceedings, we will still need
      substantial additional capital to continue our business
      operations.**




While
      we
      currently expect to sell our drilling rigs to Laurus in consideration for Laurus
      releasing us from the terms of our $40.6 million note, we still have several
      other liabilities, which we do not currently have sufficient funds to pay.
      We
      believe that the majority of those debts may be discharged by the Bankruptcy
      Court; however, we currently only have a limited amount of cash on hand.
      Although we may eventually receive judgments from the breach of our drilling
      contracts by Hallwood Energy Petroleum and Quicksilver Resources, there can
      be
      no assurance that we will have sufficient funds to prosecute such claims and/or
      that any judgments will be recovered. As a result of our bankruptcy proceedings
      and our significant amount of current liabilities, we believe we will need
      to
      raise additional capital to continue our business operations. While we cannot
      currently estimate the total amount of additional funds we will need to raise,
      as we do not know which of our debts will be discharged through the bankruptcy
      proceedings, we anticipate the need for a substantial amount of additional
      funds
      to continue to test and refine our AFJ technology and to expand our satellite
      services. We do not currently have any additional commitments or identified
      sources of additional capital from third parties or from our officers, directors
      or majority shareholders. We can provide no assurance that additional financing
      will be available on favorable terms, if at all. If we are not able to raise
      the
      capital necessary to continue our business operations, we may be forced to
      abandon or curtail our business plan and/or suspend our business activities.
      If
      this were to happen, any investment in us could decline in value or become
      worthless.





**We
      have agreed to enter into an asset purchase agreement with Laurus, which if
      approved by the Bankruptcy Court, will result in us selling substantially all
      of
      our land drilling rigs and equipment to Laurus.**





If
      our
      asset purchase agreement with Laurus is approved by the Bankruptcy Court, we
      will sell all of our land drilling rigs to Laurus. As a result of such approval,
      our remaining operations will be the recovery of claims under certain law suits,
      our satellite communications business and our AFJ technology, which is still
      in
      the development stage. Consequently, our results of operations will be
      substantially dependent upon revenues generated through our satellite
      communications division, and if we were to lose any of our satellite clients,
      our revenues could be further impacted, and we could be forced to curtail or
      abandon our business operations, which could cause any investment in us to
      decline in value and/or become worthless.




**We
        may choose to seek a merger or acquisition partner or to become
        acquired as part of our restructuring Plan.**
 
 Because
        of the Company’s lack of cash and inability to meet its current liabilities, the
        Company may seek to merge with and/or acquire (or be acquired by) a third
        party
        company. While the Company has not entered into any agreements regarding
        a
        potential merger or acquisition in the future, in the event the Company does
        enter into a merger or acquisition transaction, the Company's majority
        shareholders will likely change and new shares of common stock will be issued
        resulting in dilution to current shareholders. Additionally, the Company's
        new
        majority shareholders will likely change the composition of the Company's
        Board
        of Directors and replace the Company's management. The new management will
        also
        likely change the Company's business focus. We can make no assurances that
        the
        Company's new management will be able to properly manage the direction of
        the
        Company or that any change in the Company's business focus will be successful.
        If the Company does close a merger and/or acquisition in the future, and
        the
        Company's new management fails to properly manage and direct the Company,
        the
        Company may be forced to scale back or abandon its operations, which will
        cause
        the value of the Company's common stock to decline. The Company will continue
        with its current business in the event a merger or acquisition is not
        completed.


**We
      are highly leveraged which limits our financial
      flexibility.**





In
      order
      to finance the acquisition of Eagle Domestic drilling Operations LLC, we entered
      into a $40.6 million senior note, which is secured by substantially all of
      our
      assets. The note bears interest at the rate of prime plus 2.5%, currently equal
      to 10.75% as of the filing of this report. This transaction makes the Company
      highly leveraged. In addition, the note has monthly interest payments and
      principal payments until the loan is repaid in full in three years, which
      interest payments we have not been making to date, because of our limited cash
      flows and because we are currently in Chapter 11 Bankruptcy.


22





Our
      senior note also contains various covenants that limit our ability to engage
      in
      specified types of transactions. These covenants limit our ability to, among
      other things:


·
            Incur
                additional indebtedness or issue certain types of
                securities;


·
            Pay
                dividends or make distributions of our capital
                stock;


·
            Make
                certain investments, including capital
                expenditures;


·
            Sell
                or merge certain assets;


·
            Create
                liens; and


·
            Consolidate,
                merge, sell or otherwise dispose of all or substantially all our
                assets.





If
      we are
      unable to meet our debt service requirements, satisfy our debt covenants or
      any
      other event were to occur which would cause an event of default under the note,
      we will be unable to continue in our current form and will be forced to
      restructure or seek creditor protection.





**We
      may be unable to raise the additional capital needed to fund our businesses,
      which would prevent us from continuing operations, even if substantially all
      of
      our debts are discharged through the Bankruptcy
      proceeding.**





Even
      if
      our debts are reduced or discharged through the Bankruptcy proceeding, we may
      need to raise additional funds through public or private debt or equity
      financing or other various means to fund our business after the completion
      of
      such bankruptcy proceedings. In such a case, adequate funds may not be available
      when needed or may not be available on favorable terms. If we need to raise
      additional funds in the future, by issuing equity securities, dilution to
      existing stockholders will result, and such securities may have rights,
      preferences and privileges senior to those of our common stock. We may be unable
      to raise additional funds by issuing debt securities due to our high leverage
      and due to restrictive covenants contained in our senior debt, assuming such
      senior debt is not fully discharged by the Bankruptcy Court, of which there
      can
      be no assurance, which may restrict our ability to expend or raise capital
      in
      the future. If funding is insufficient at any time in the future and we are
      unable to generate sufficient revenue from new business arrangements, we will
      be
      unable to continue in our current form and will be forced to restructure or
      seek
      creditor protection.





**We
      have historically had negative working capital, which will impair our ability
      to
      continue operations if we are unable to reverse this trend.**





We
      had
      negative working capital of $41,656,163 and $644,021 as of December 31,
      2006 and 2005, respectively. We have also discontinued certain payments to
      vendors due to our pending bankruptcy proceedings. As a result, our vendors
      may
      decide to stop providing services and/or materials until we are able to pay
      them
      according to their terms. Our vendors may decide to no longer offer credit
      to us
      and they may cease to assist us until we can make satisfactory payment
      arrangements. If we cannot raise capital, we will need our lenders to extend
      payment terms or accept stock in lieu of cash, which they may not be willing
      to
      do. If we are unable to discharge our debts through the bankruptcy proceedings,
      arrange new financing or convince our lenders to extend payment terms or accept
      stock in lieu of cash, we may be unable to continue our business
      operations.





23


**We
      have a limited operating history, just completed a major acquisition, and our
      business and marketing strategies planned are not yet proven, which makes it
      difficult to evaluate our business performance. An investor could lose some
      or
      all of his investment.**





We
      have
      been in existence for only a few years. We only recently completed a major
      acquisition of a drilling service contracting business and have no history
      with
      the business. Additionally, the two major customers which our drilling business
      had contracts with prior to the acquisition, terminated their agreements with
      us, and although we currently plan to sue such prior customers, there can be
      no
      assurance that any damages will be received. We have not yet been able to
      commercialize the capabilities of our abrasive jetting technology and are not
      conducting operations with the prior technology. Abrasive jetting has been
      successfully commercialized in several industries but is not yet proven in
      the
      energy drilling industry. Also, we have conducted satellite services to the
      oil
      and gas industry only since June 2002. We have no established basis to assure
      investors that our business or marketing strategies will be successful. Because
      we have a limited operating history, there is little historical financial data
      upon which an investor may evaluate our business performance. An investor must
      consider the risks, uncertainties, expenses and difficulties frequently
      encountered by companies in their early stages of development, particularly
      companies with limited capital in a rapidly evolving market. These risks and
      difficulties include our ability to meet our debt service and capital
      obligations, develop a commercial milling or jetting process with our abrasive
      jetting technology, attract and maintain a base of customers, provide customer
      support, personnel, and facilities to support our business, and respond
      effectively to competitive and technological developments, which difficulties
      have been further exacerbated by our Chapter 11 Bankruptcy. Our business
      strategy may not be successful or may not successfully address any of these
      risks or difficulties and we may not be able to generate future
      revenues.





**Significant
      amounts of our outstanding common shares are restricted from immediate resale
      but will be available for resale into the market in the near future, which
      could
      potentially cause the market price of our common stock to drop significantly,
      even if our business is doing well.**





As
      of
      March 30, 2007, we had 67,609,904 shares of common stock issued and outstanding
      held by approximately 385 shareholders of record, including 1,150,000 shares
      approved for issue under the class action settlement, described above. As
      restrictions on these outstanding shares end, the market price could drop
      significantly if the holders of these restricted shares sell them or are
      perceived by the market as intending to sell them in an excessive amount
      relative to the market demand for our shares. An excessive sale of our shares
      may result in a substantial decline in the price of our common stock, and limit
      our ability to raise capital, even if our business is doing well.





**We
      are subject to various contingent liabilities, which if we are required to
      pay
      could result in a material adverse effect on us.**





Our
      subsidiary Eagle Domestic Drilling Operations (“Eagle”) is a defendant in a
      lawsuit initiated by Hallwood Petroleum alleging breach of contract with a
      claim
      of money damages in excess of $1.65 million. If this matter is determined
      adversely against Eagle, this would have a material adverse effect on
      us.





**Two
      principal stockholders can influence the corporate and management policies
      of
      our company.**





Thornton
      Business Security Trust and Berg McAfee Companies with its affiliates,
      effectively control approximately 24% and 16% of our outstanding common stock,
      respectively. Therefore, the Thornton Trust and Berg McAfee Companies may have
      the ability to substantially influence all decisions made by us. Additionally,
      these two major shareholders’ control could have a negative impact on any future
      takeover attempts or other acquisition transactions. Furthermore, certain types
      of equity offerings require stockholder approval depending on the exchange
      on
      which shares of a company’s common stock are traded. Because our officers and
      Directors do not exercise majority voting control over us, our shareholders
      who
      are not officers and Directors of us may be able to obtain a sufficient number
      of votes to choose who serves as our Directors. Because of this, the current
      composition of our Board of Directors may change in the future, which could
      in
      turn have an effect on those individuals who currently serve in management
      positions with us. If that were to happen, our new management could affect
      a
      change in our business focus and/or curtail or abandon our business operations,
      which in turn could cause the value of our securities, if any, to
      decline.





24


**Our
      common stock is currently traded over the counter on the OTC Bulletin Board
      and
      is considered a “penny stock” resulting in potential illiquidity and high
      volatility in the market price of our common stock.**





The
      market price of our common stock is likely to be highly volatile, as is the
      stock market in general, as well as the capital stock of most small cap
      companies. Our common stock currently trades over the counter on the OTC
      Bulletin Board, where stocks typically suffer from lower liquidity. This may
      lead to depressed trading prices, greater price volatility and difficulty in
      buying or selling shares in large quantities. Currently, there is a limited
      trading market for our common stock If a fully developed public market for
      the
      common stock does not occur, our stock will continue to have reduced
      liquidity and our shareholders may have difficulty in selling our
      stock.





**If
      we are late in filing our Quarterly or Annual reports with the SEC, we may
      be
      de-listed from the Over-The-Counter Bulletin Board.**





Pursuant
      to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
      of periodic reports with the SEC, any OTCBB issuer which fails to file a
      periodic report (Form 10-QSB's or 10-KSB's) by the due date of such report
      (not
      withstanding any extension granted to the issuer by the filing of a Form
      12b-25), three (3) times during any twenty-four (24) month period is
      automatically de-listed from the OTCBB. Such removed issuer would not be
      re-eligible to be listed on the OTCBB for a period of one-year, during which
      time any subsequent late filing would reset the one-year period of de-listing.
      If we are late in our filings three times in any twenty-four (24) month period
      and are de-listed from the OTCBB, our securities may become worthless and we
      may
      be forced to curtail or abandon our business plan.





**Because
      our common stock is considered a “penny stock,” certain rules may impede the
      development of increased trading activity and could affect the liquidity for
      stockholders.**





Penny
      stocks generally are equity securities with a price of less than $5.00 per
      share
      other than securities registered on certain national securities exchanges or
      quoted on the NASDAQ stock market, subject to certain exceptions for companies
      which exceed certain minimum tangle net worth requirements.





Our
      common stock is subject to the SEC “penny stock rules.” The rules impose
      additional sales practice requirements on broker-dealers who sell penny stock
      securities to persons other than established customers and accredited investors.
      For transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of penny stock securities and have
      received the purchaser’s written consent to the transaction prior to the
      purchase. Additionally, for any transaction involving a penny stock, unless
      exempt, the “penny stock rules” require the delivery, prior to the transaction,
      of a disclosure schedule relating to the penny stock market. The broker-dealer
      also must disclose the commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. And,
      monthly statements must be sent disclosing recent price information on the
      limited market in penny stocks. These rules may restrict the ability of
      broker-dealers to sell our securities and may have the effect of reducing the
      level of trading activity of our common stock in the secondary market. In
      addition, the penny-stock rules could have an adverse effect on our ability
      to
      raise capital in the future from offerings of our common stock.





On
      July 7, 2005, the SEC approved amendments to the penny stock rules to
      ensure that investors continue to receive the protections of those rules. The
      amendments also provide that broker-dealers be required to enhance their
      disclosure schedule to investors who purchase penny stocks, and that those
      investors have an explicit “cooling-off period” to rescind the transaction.
      These amendments could place further constraints on broker-dealers’ ability to
      sell our securities.





**Our
      markets may be adversely affected by oil and gas industry conditions that are
      beyond our control.**





Oil
      and
      gas industry conditions are influenced by numerous factors over which we have
      no
      control, such as the supply of and demand for oil and gas, domestic and
      worldwide economic conditions, political instability in oil producing countries
      and merger and divestiture activity among oil and gas producers. Those
      conditions could reduce the level of drilling and work-over activity by oil
      and
      gas producers. A reduction in activity could increase competition among energy
      services business such as ours, making it more difficult for us to attract
      and
      maintain customers, or could adversely affect the price we could charge for
      our
      services and the utilization rate we may achieve.


25


Our
      operations are subject to hazards inherent in the energy service business,
      which
      are beyond our control. If those risks are not adequately insured or indemnified
      against, our results of operations could be adversely affected.





Our
      operations are subject to many hazards inherent in the land drilling business,
      including, but not limited to blow outs, damaged well bores, fires, explosions,
      equipment failures, poisonous gas emissions, loss of well control, loss of
      hole,
      damage or lost drill strings and damage or loss from inclement weather or other
      natural disasters.





These
      hazards are to some extent beyond our control and could cause, among other
      things, personal injury and death, serious damage or destruction of property
      and
      equipment, suspension of drilling operations, and substantial damage to the
      producing formations and surrounding environment.





Our
      insurance policies for public liability and property damage to others and injury
      or death to persons are in some cases subject to large deductibles and may
      not
      be sufficient to protect us against liability for all consequences of well
      disasters, personal injury, extensive fire damage or damage to the environment.
      We may not be able to maintain adequate insurance in the future at rates we
      consider reasonable, or particular types of coverage may not be available.
      The
      occurrence of events, including any of the above-mentioned risks and hazards,
      that are not fully insured against or the failure of a customer that has agreed
      to indemnify us against certain liabilities to meet its indemnification
      obligations could subject us to significant liability and could have a material
      adverse effect on our financial condition and results of
      operations.





**Our
      operations are subject to environmental, health and safety laws and regulations
      that may expose us to liabilities for noncompliance, which could adversely
      affect us.**





The
      US
      oil and natural gas industry is affected from time to time in varying degrees
      by
      political developments and federal, state and local environmental, health and
      safety laws and regulations applicable to our business. Our operations are
      vulnerable to certain risks arising from the numerous environmental health
      and
      safety laws and regulations. These laws and regulations may restrict the types,
      quantities and concentration of various substances that can be released into
      the
      environment in connection with drilling activities, require reporting of the
      storage, use or release of certain chemicals and hazardous substances, require
      removal or cleanup of contamination under certain circumstances, and impose
      substantial civil liabilities or criminal penalties for violations.
      Environmental laws and regulations may impose strict liability, rendering a
      company liable for environmental damage without regard to negligence or fault,
      and could expose us to liability for the conduct of, or conditions caused by,
      others, or for our acts that were in compliance with all applicable laws at
      the
      time such acts were performed. Moreover, there has been a trend in recent years
      toward stricter standards in environmental, health and safety legislation and
      regulation, which may continue.





We
      may
      incur material liability related to our operations under governmental
      regulations, including environmental, health and safety requirements. We cannot
      predict how existing laws and regulations may be interpreted by enforcement
      agencies or court rulings, whether additional laws and regulations will be
      adopted, or the effect such changes may have on our business, financial
      condition or results of operations. Because the requirements imposed by such
      laws and regulations are subject to change, we are unable to forecast the
      ultimate cost of compliance with such requirements. The modification of existing
      laws and regulations or the adoption of new laws or regulations curtailing
      exploratory or development drilling for oil and natural gas for economic,
      political, environmental or other reasons could have a material adverse effect
      on us by limiting drilling opportunities.





**Our
      success depends on key members of our management, the loss of whom could disrupt
      our business operations.**





We
      depend
      to a large extent on the services of some of our executive officers and
      directors. The loss of the services of John O’Keefe, David Adams or John
      MacDonald could disrupt our operations. We may not be able to retain our
      executive officers and may not be able to enforce the non-compete provisions
      in
      the employment agreements. We do not currently maintain key man insurance
      against loss of these individuals. Failure to retain key members of our
      management may have a material adverse effect on our continued operations.





**Compliance
      with Section 404 of the Sarbanes-Oxley Act will strain our limited financial
      and
      management resources, which will be negatively impacted by the significant
      amount of time and resources we are forced to spend on our Bankruptcy
      proceeding.**


26


We
      expect
      to begin complying with the requirements of Section 404 of the
      Sarbanes-Oxley Act (“Sarbanes”) as soon as we are required by the SEC to comply
      with such requirements, which compliance date is currently set to begin for
      our
      Form 10-KSB for the year ended 2007, which will require our auditor’s
      attestation report on management’s assessment and will require in the subsequent
      year, and annual management assessments of the effectiveness of our internal
      controls over financial reporting. Both the amount of time and resources we
      are
      able to commit to these Section 404 requirements will be negatively impacted
      by
      our pending Bankruptcy proceeding. As such, we may not be able to implement
      the
      required Section 404 procedures as of the deadlines set forth above. During
      the
      course of our testing we may identify deficiencies, which we may not be able
      to
      remediate in time to meet the deadline imposed. Effective internal controls
      are
      necessary for us to produce reliable financial reports and may be important
      to
      prevent financial fraud. If we cannot comply with Section 404, our stock
      price may decrease as investors lose confidence in the accuracy of our reported
      financial information. Compliance with Section 404 will likely require the
      Company to expend significant financial and management resources, which are
      extremely limited at this time and would therefore divert such resources from
      our day-to-day operations.





**We
      do not intend to pay cash dividends on our common stock in the foreseeable
      future, and therefore only appreciation of the price of our common stock will
      provide a return to our stockholders.**





We
      currently anticipate that we will retain all future earnings, if any, to finance
      the growth and development of our business. We do not intend to pay cash
      dividends in the foreseeable future. Any payment of cash dividends will depend
      upon our financial condition, capital requirements, earnings and other factors
      deemed relevant by our board of directors. In addition, the terms of our senior
      note prohibit us from paying dividends and making other distributions. As a
      result, only appreciation of the price of our common stock, which may not occur,
      will provide a return to our stockholders.





**RISKS
      RELATED TO OUR** **LAND
      RIG DRILLING SERVICES BUSINESS**




**Our
      land rig drilling services business, which we currently anticipate selling
      to
      Laurus, is substantially dependent upon, and affected by, the level of US
      onshore oil and natural gas exploration and development activity. If the level
      of that activity decreases, our business and results of operations could be
      adversely affected.** ****





Our
      business and operations are substantially dependent upon, and affected by,
      the
      level of US onshore oil and natural gas exploration and development activity.
      Such activity determines the demand for contract land drilling and related
      services. We have no control over the factors driving the level of US
      exploration and development activity. Those factors include, among others,
      the
      following:





·
            Market
                prices for oil and gas;


·
            Market
                expectations about the future path of oil and gas
                prices;


·
            The
                cost of producing and delivering oil and
                gas;


·
            Gas
                pipeline capacities;


·
            Government
                regulations and trade restrictions;


·
            Tax
                incentives or disincentives;


·
            Geopolitical
                and economic uncertainties;


·
            Production
                levels of OPEC and other major
                producers;


·
            Natural
                gas imports by pipeline or by LNG tankers;
                and


·
            Alternative
                energy sources and energy conservation
                measures.





Future
      levels of US natural gas exploration and development activity may not increase
      or be maintained. If the current level of such activity is not maintained or
      increased, demand for our contract drilling services may decrease and our
      business and the results of our operations could be adversely
      affected.





27


**RISKS
      RELATED TO OUR DOWN-HOLE SOLUTIONS BUSINESS**





**We
      currently have no active customers. If we are unable to attract more permanent
      and active customers, we will not be able to generate revenue.**





We
      currently have no active customers. We are in the process of testing and
      commercializing our AFJ technology. If the technology cannot be commercialized,
      we will not be able to generate revenue for our abrasive jetting services.
      Our
      new AFJ drill rig may not convert into customer orders or cash revenue. If
      we
      are unable to attract new customers and generate sufficient revenue or arrange
      new financing, we will be unable to continue in our current form and will be
      forced to restructure or seek creditor protection.





**Our
      business plan relies on the successful deployment of a new generation coiled
      tubing unit utilizing abrasive fluid jetting which has been unproven in the
      energy service industry.**





Our
      abrasive jetting service intends to provide casing milling, well stimulation
      and
      lateral drilling services to oil and gas producers. Applications of such
      abrasive cutting techniques are a proven feature in industries as diverse as
      munitions disposal in the military, offshore platform dismantlement in the
      salvage industry and cutting specialty glass and steel in the machining
      business. We are currently building and testing a custom drilling rig based
      on
      the abrasive jetting concept. Since we would be among the first to commercially
      apply the proven abrasive jetting techniques to the energy producing business,
      we cannot guarantee that our custom drilling rig design based on the abrasive
      jetting concept will be adequate, that the rig will be built correctly or
      timely, or that the abrasive jetting technology will stimulate additional oil
      and gas production. We may not achieve the designed results for the rig.
      Customers may not accept the services we offer. Any of these results would
      have
      a negative impact on the development of our abrasive jetting business.





**We
      may not be able to protect our abrasive jetting technology. Providers utilizing
      an infringing technology may compete with us, which may impair the development
      of our abrasive jetting business.**





The
      technology purchase agreement between us and Alberta allocates joint
      responsibility for maintaining the status of the patents underlying the
      technology with the US Patent and Trademark Office to Alberta. In the event
      that
      both parties had to assume these responsibilities, additional pressure on our
      financial resources would result. Competition from infringers of our technology
      may significantly impair the development of our abrasive jetting business.





**Our
      customers may not realize the expected benefits of enhanced production or lower
      costs from our abrasive jetting technology, which may impair market acceptance
      of our drilling services.**





Our
      abrasive jetting business will be heavily dependent upon our customers achieving
      enhanced production, or lower costs, from certain types of existing oil and
      gas
      wells. Many of the wells for which the abrasive jetting technology will be
      used
      on have been abandoned for some time due to low production volumes or other
      reasons. In some cases, we could experience difficulty in having the enhanced
      production reach the market due to the gathering field pipeline system’s
      disrepair resulting from the age of the fields, significant amounts of
      deterioration of the reservoirs in the abandoned wells or the reliability of
      the
      milling process. Our abrasive jetting technology may not achieve enhanced
      production from every well drilled, or, if enhanced production is achieved
      initially, it may not continue for the duration necessary to achieve payout
      or
      reach the market on a timely basis. The failure to screen adequately and achieve
      projected enhancements could result in making the application of the technology
      uneconomic for our customers. Failure to achieve an economic benefit for our
      customers in the provision of this service would significantly impair the
      development of our abrasive jetting business and limit our ability to achieve
      revenue from these operations.





**Geological
      uncertainties may negatively impact the effectiveness of our abrasive jetting
      services.**





Oil
      and
      gas fields may be depleted and zones may not be capable of stimulation by our
      abrasive jetting technology due to geological uncertainties such as lack of
      reservoir drive or adequate well pressure. Such shortcomings may not be
      identifiable. The failure to avoid such shortcomings could have a material
      adverse effect on our results of operations and financial
      condition.





28


**Competition
      within the well service industry may adversely affect our ability to market
      our
      services.**





The
      well
      service industry is highly competitive and includes several large companies
      as
      well as other independent drilling companies that possess substantially greater
      financial and other resources than we do. These greater resources could allow
      those competitors to compete more effectively than we can. Additionally, the
      number of rigs available continues to exceed demand, resulting in active price
      competition. Moreover, many contracts are awarded on a bid basis, which further
      increases competition based on price. Failure to successfully compete within
      our
      industry would significantly impair the development of our abrasive jetting
      business and limit our ability to generate revenue from these operations.





**The
      energy service market is currently experiencing tight supply conditions and
      key
      equipment items are subject to long lead-times as well as cost
      escalation.**





We
      depend
      on the key equipment suppliers for our AFJ rigs to deliver in a timely manner
      and at a reasonable price, but lead-times in items, such as coiled tubing
      strings, have lengthened and prices have firmed with the current tightness
      in
      the energy service supply industry. If we are unable to source our key equipment
      in a reasonable period and at a reasonable price, our planned revenues and
      costs
      may suffer, which would have a material negative impact on our abrasive jetting
      business.





**RISKS
      RELATED TO OUR SATELLITE COMMUNICATIONS BUSINESS**





**Our
      satellite business is highly dependent upon a few key suppliers of satellite
      networking components, hardware, and technological services.**





Our
      satellite business is heavily dependent on agreements with Spacenet, ViaSat
      and
      other equipment and service providers. These strategic relationships provide
      key
      network technology, satellite data transport, hardware and software. Failure
      of
      Spacenet, ViaSat or other key relationships to meet our expectations or
      termination of a relationship with one of our key providers could adversely
      affect our ability to provide customers with our satellite services and could
      lead to a loss in revenues, which would adversely affect our results of
      operations and financial condition.




**We
      are dependant on only a small number of customers for the majority of our
      revenues from our satellite business, and if we were to lose such customers,
      our
      results of operations would be severely impacted.**





For
      the
      year ended December 31, 2006, we generated $1,036,000 in revenues through our
      satellite business, of which 52% of those revenues came from only 3 customers.
      If we were to lose any of those customers and were unable to find similarly
      sized customers to take their place, our results of operations and revenues
      could be severely impacted, and we could be forced to curtail or abandon our
      current business plan and/or business operations.








**We
      depend upon our vendors and their affiliates to provide services that we require
      to operate the network we use to provide services to our customers.**





We
      are
      not and do not plan to become a licensee of the Federal Communications
      Commission (“FCC”) and do not hold any authorization to operate satellite
      communications facilities. We depend upon licenses held by Spacenet and ViaSat
      and their subsidiaries for our satellite communications. If the licenses held
      by
      Spacenet and ViaSat are limited or revoked, if the FCC limits the number of
      its
      customer premises earth stations or if Spacenet or ViaSat fails to operate
      the
      earth stations providing service to us and our subscribers in a satisfactory
      manner, we may not be able to provide our customers with proper service, which
      could lead to a loss in revenues and could adversely affect our results of
      operations and financial condition.





**We
      rely on third-party independent contractors to install our customer premises
      equipment at new subscribers’ businesses and remote locations.**





We
      do not
      control the hiring, training, certification and monitoring of the employees
      of
      our third-party independent contractors. If growth of our new subscriber base
      outpaces growth of our installer base or if the installers fail to provide
      the
      quality of service that our customers expect, the introduction of our service
      could be delayed, and which could lead to a deferment or loss in satellite
      revenues.


29


The
      service we provide is entirely dependent on the functionality of satellites
      on
      which we lease transponders and on our computer and communications hardware
      and
      software.





Our
      ability to provide service is entirely dependent on the functionality of
      satellites on which we lease transponders. These satellites may experience
      failure, loss, damage or destruction from a variety of causes, including war,
      anti-satellite devices and collision with space debris. The ability to provide
      timely information and services depends also on the efficient and uninterrupted
      operation of our computer and communications hardware and software systems.
      These systems and operations are vulnerable to damage or interruption from
      human
      error, natural disasters, telecommunication failures, break-ins, sabotage,
      computer viruses, intentional acts of vandalism and similar events. Despite
      precautions, there is always the danger that human error or sabotage could
      substantially disrupt the system.





If
      any of
      these events occurs, we are likely to suffer a permanent loss of service;
      temporary gaps in service availability; or decreased quality of service. Any
      such failure in the service we provide could lead to a loss in revenues and
      could adversely affect our results of operations and financial condition.





**We
      may be unable to attract or retain subscribers. If we are unable to attract
      or
      retain subscribers, our Satellite Communications business will be
      harmed.**





Our
      success depends upon our ability to rapidly grow our subscriber base and retain
      our existing customers. Several factors may negatively impact this ability,
      including:





•  loss
      of
      our existing sales employees, resulting in our lack of access to potential
      subscribers;


•  failure
      to establish and maintain the Blast Energy Services brand through advertising
      and marketing, or erosion of our brand due to misjudgments in service offerings;


•  failure
      to develop or acquire technology for additional value added services that
      appeals to the evolving preferences of our subscribers;


•  failure
      to meet our expected minimum sales commitments to Spacenet and ViaSat; and


•  failure
      to provide the minimum transmission speeds and quality of service our customers
      expect.





In
      addition, our service may require customers to purchase our satellite system
      equipment and to pay our monthly subscriber fees. The price of the equipment
      and
      the subscription fees may be higher than the price of many dial-up, DSL and
      cable modem internet access services, where available. In some instances, we
      expect to subsidize our subscribers’ customer premises equipment to encourage
      the purchase of our service and to offset our higher relative costs but such
      subsidy may not be possible. Failure to attract or retain subscribers would
      affect our ability to generate satellite revenues.





**We
      may fail to manage any potential growth or expansion, negatively impacting
      our
      quality of service or overcapacity impacting profitability.**





If
      we
      fail to manage our potential rapid growth and expansion effectively or expand
      and allocate our resources efficiently, we may not be able to retain or grow
      our
      subscriber base. While we believe that the trend toward satellite broadband
      information services in the energy market will continue to develop, our future
      success is highly dependent on increased use of these services within the
      sector. The number of satellite broadband users willing to pay for online
      services and information may not continue to increase. If our assumptions
      regarding the usage patterns of our subscribers are wrong, our subscribers’
usage patterns change or the market for satellite broadband services fails
      to
      develop as expected, we will have either too little or too much satellite
      capacity, both of which could harm our business.





If
      we
      achieve the substantial subscriber growth that we anticipate, we will need
      to
      procure additional satellite capacity. If we are unable to procure this
      capacity, we may be unable to provide service to our subscribers or the quality
      of service we provide may not meet their expectations. Failure to manage any
      potential growth may have a material adverse effect on our business and our
      ability to generate satellite revenues.





30


**Our
      current services may become obsolete due to the highly competitive and continued
      advancement of the satellite industry. Larger service providers may provide
      services reduced pricing.**





Intense
      competition in the internet services market and inherent limitations in existing
      satellite technology may negatively affect the number of our subscribers.
      Competition in the market for consumer internet access services is intense,
      and
      we expect the level of competition to intensify in the future. We compete with
      providers of various high-speed communications technologies for local access
      connections such as cable modem and DSL. We also may face competition from
      traditional telephone companies, competitive local exchange carriers and
      wireless communication companies. As our competitors expand their operations
      to
      offer high speed internet services, we may no longer be the only high-speed
      service available in certain markets. We also expect additional competitors
      with
      satellite-based networks to begin operations soon. In particular, some satellite
      companies have announced that in the future they may offer high-speed internet
      service at the same price or at a lower price than we currently intend to offer
      and are offering our services. The
      market for internet services and satellite technology is characterized by rapid
      change, evolving industry standards and frequent introductions of new
      technological developments. These new standards and developments could make
      our
      existing or future services obsolete. Many
      of
      our current and potential competitors have longer operating histories, greater
      brand name recognition, larger subscriber bases and substantially greater
      financial, technical, marketing and other resources than we have. Therefore,
      they may be able to respond more quickly than we can respond to new or changing
      opportunities, technologies, standards or subscriber requirements. Our
      effort to keep pace with the introduction of new standards and technological
      developments and effectively compete with larger service providers could result
      in additional costs or the effort could prove difficult or impossible. The
      failure to keep pace with these changes and to continue to enhance and improve
      the responsiveness, functionality and features of our services could harm our
      ability to attract and retain users, which could lead to a loss of satellite
      revenues.





**We
      may be subject to significant liability for our products.**





If
      our
      products contain defects, we may be subject to significant liability claims
      from
      subscribers and other users of our products and incur significant unexpected
      expenses or lost revenues. Our satellite communications products are complex
      and
      may contain undetected errors or failures. We also have exposure to significant
      liability claims from our customers because our products are designed to provide
      critical communications services. Our product liability insurance and
      contractual limitations in our customer agreements may not cover all potential
      claims resulting from a defect in one or more of our products. Failure of our
      products to perform satisfactorily could cause
      us
      to lose revenue, as well as to experience delay in or loss of market acceptance
      and sales, products returns, diversion of research and development resources,
      injury to our reputation or increased service and warranty costs.








31


**Plan
      of Operations**





**Background**





In
      August
      2006, we acquired Eagle Domestic Drilling Operations LLC (“Eagle”), a drilling
      contractor which at that time owned three land rigs, and had three more under
      construction. The acquisition of Eagle added a major new segment to our
      business, which we expect to represent our primary business operations in the
      near term. Throughout this Form 10-KSB, references to our operations include
      the
      operations of Eagle, unless otherwise stated or the context suggests
      otherwise.





As
      part
      of the financial consideration for the purchase of Eagle, we entered into a
      Securities Purchase Agreement (“SPA”) dated August 25, 2006 with Laurus Master
      Fund, Ltd. (“Laurus”) to finance $40.6 million of the total purchase price of
      Eagle. Under the SPA, we issued a Secured Term Note (“the Note”) dated August
      25, 2006 in the original principal amount of $40.6 million with a final maturity
      in three years, with interest at prime plus 2.5%, with a minimum rate of 9%,
      currently equal to 10.75% as of the filing of this report, payable quarterly
      to
      Laurus. The principal was to be repaid commencing April 1, 2007 at a rate of
      $800,000 per month for the first twelve months from that date, $900,000 per
      month for the subsequent twelve months and $1,000,000 per month until the Note
      matures. The remaining balance of the Note is to be paid at maturity with any
      associated interest.





The
      SPA
      required the additional payment to Laurus of 3.5% of the total value of the
      investment of $40.6 million at closing. The SPA further required the issuance
      of
      Common Stock Purchase Warrants (“Warrants”) to purchase 6,090,000 shares of our
      common stock at an exercise price of $1.44 per share, and an additional
      6,090,000 shares of common stock at an exercise price of $0.01 per share. The
      Warrants have a seven year term and we were required to file a registration
      statement to register the underlying shares within 60 days after closing and
      to
      obtain effectiveness with the SEC within 180 days after closing, which
      registration has since been filed and withdrawn, and which filing has since
      been
      abandoned by us. The Laurus financing was privately arranged through a broker
      whose fees are payable in cash in the amount of 2% of the principal amount
      of
      the facility and warrants with a two year term to purchase 304,500 shares of
      our
      common stock at an exercise price of $0.01 per share.





In
      connection with our voluntary bankruptcy petition, described below, we ceased
      making payments under the Note as of December 2006





On
      January 19, 2007, we and Eagle, filed voluntary petitions with the US Bankruptcy
      Court for the Southern District of Texas - Houston Division (the “Court”) under
      Chapter 11 of Title 11 of the US Code in order that we may dispose of burdensome
      and uneconomical assets and reorganize our financial obligations and capital
      structure (Case Nos. 07-30424-H4-11 and 07-30426-H4-11, respectively). This
      action also stayed any existing lawsuits filed against us and Eagle, regardless
      of jurisdiction. Moving forward, we and Eagle will continue to operate our
      businesses as “debtors-in possession” under the jurisdiction of the Court and in
      accordance with the applicable provisions of the Bankruptcy Code and orders
      of
      the Court.




We
      had
      previously used assumptions in the August 2006 acquisition of Eagle that
      included high revenue and full utilization rate expectations based upon the
      five
      two-year term drilling contracts Eagle had in place at the time. The subsequent
      cancellation of these contracts by Hallwood Energy/Petroleum and Quicksilver
      Resources in the fall of 2006 reduced our revenue expectations and consequently
      our ability to meet the scheduled payments on the Laurus’ Note. This
      cancellation was in violation of the terms of the drilling contracts.





In
      approximately January 2007 we received written notice from Laurus of various
      events of default under the SPA, Note and related agreements. Further
      discussions with Laurus resulted in the mutual decision that we should file
      for
      protection under the applicable bankruptcy law, as described above.
      Additionally, these discussions resulted in a consensual stipulation that will
      enable us to continue to use cash collateral during the course of the Chapter
      11
      case, subject to certain reservations and provisions for adequate protection
      of
      Laurus debts.





32


Blast,
      Eagle and Laurus Master Fund (“Laurus”) have agreed in principle to sell five
      drilling rigs owned by Eagle. The sale will result in the full satisfaction
      of
      the debt obligations owed Laurus which include a principal amount of $40.6
      million plus accumulated interest and fees owed under a promissory note payable
      to Laurus by Eagle. The sale of the rigs will be considered at a hearing
      scheduled for April 30, 2007. Laurus has agreed to and has received approval
      to
      credit bid the amount of its senior debt under the authority of section 363
      of
      the US Bankruptcy Code. The rigs are being sold pursuant to the terms of a
      pre-negotiated Asset Purchase Agreement between Blast, Eagle and Laurus, the
      terms of which are incorporated in the pending motion to sell the rigs. The
      entire proposed transaction is subject to approval of the Bankruptcy Court,
      which we believe will be heard during the last week of April 2007.




For
      additional information regarding the Debtors’ Chapter 11 proceedings, see
      Note 1 of the Notes to the Consolidated Financial Statements.




Blast
      is
      currently in discussions to merge with another energy company that has oil
      and
      gas production as well as certain energy service technologies. Discussions
      are
      at an early stage and no assurances can be given that such a merger will be
      consummated or that the economic terms of such a merger would be favorable
      to
      Blast shareholders or creditors.





**Critical
      Accounting Policies**





The
      following is a discussion of our critical accounting policies pertaining to
      accounts receivable, equipment, license, revenue recognition and the use of
      estimates.





*Accounts
      Receivable*


Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest. The allowance for doubtful accounts represents our estimate of the
      amount of probable credit losses existing in our accounts receivable. We
      determine the allowance based on management’s estimate of likely losses based on
      a review of current open receivables and our historical write-off experience.
      We
      review the adequacy of our allowance for doubtful accounts quarterly.
      Significant individual accounts receivable balances and balances which have
      been
      outstanding greater than 90 days are reviewed individually for collectibility.
      Account balances, when determined to be uncollectible, are charged against
      the
      allowance.





*Equipment*


Equipment,
      including betterments which extend the useful life of the asset, is stated
      at
      cost. Maintenance and repairs are charged to expense when incurred. We provide
      for the depreciation of our equipment using the straight-line method over the
      estimated useful lives. Our method of depreciation does not change when
      equipment becomes idle; we continue to depreciate idled equipment on a
      straight-line basis. No provision for salvage value is considered in determining
      depreciation of our equipment. We review our assets for impairment when events
      or changes in circumstances indicate that the carrying values of certain assets
      either exceed their respective fair values or may not be recovered over their
      estimated remaining useful lives. Provisions for asset impairment are charged
      to
      income when estimated future cash flows, on an undiscounted basis, are less
      than
      the asset’s net book value. In the case of the asset impairment booked in 2006,
      the future value of the rig assets was based upon the value of the proposed
      rig
      sale described in Note 18.





*Intellectual
      Property*


Our
      AFJ
      Intellectual Property (“IP”), consisting of our 50% ownership interest in the
      AFJ technology jointly with Alberta, is stated at cost. We provide for
      amortization of our IP using the straight-line method over the estimated useful
      life of the technology. We review our carrying value of the IP for impairment
      on
      an annual basis or when events or changes in circumstances indicate that the
      carrying values may no longer be appropriate. We assess recoverability of the
      carrying value of the asset by estimating the future net cash flows expected
      to
      result from the asset, including eventual disposition. If the future net cash
      flows are less than the carrying value of the asset, an impairment loss is
      recorded equal to the difference between the asset’s carrying value and fair
      value. There were no impairment charges related to the intellectual property
      during the years ended December 31, 2006 and 2005.





33


*Revenue
      Recognition*


All
      revenue is recognized when persuasive evidence of an arrangement exists, the
      service or sale is complete, the price is fixed or determinable and
      collectibility is reasonably assured. Revenue is derived from sales of satellite
      hardware, satellite bandwidth, satellite service and lateral drilling services.
      Revenue from satellite hardware is recognized when the hardware is installed.
      Revenue from satellite bandwidth is recognized evenly over the term of the
      contract. Revenue from satellite service is recognized when the services are
      performed. We provide no warranty but sell commercially obtained 3 to 12 month
      warranties for satellite hardware. We have a 30 day return policy. Revenue
      for
      lateral drilling services is recognized when the services are performed and
      collectibility is reasonably assured and when collection is uncertain, revenue
      is recognized when cash is collected. In
      accordance with Emerging Issues Task Force Issue No. 00-14, we recognize
      reimbursements received from third parties for out-of-pocket expenses incurred
      as revenues and account for out-of-pocket expenses as direct costs.





*Use
      of Estimates*


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the US of America requires management to make certain
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets during the reporting period.
      Actual results could differ from such estimates.





Estimates
      are used by management in the following financial reporting areas:





·
            Allowance
                for doubtful accounts,


·
            Depreciation
                and amortization,


·
            Asset
                impairment,


·
            Income
                taxes and


·
            Stock
                option values





For
      additional information on our accounting policies, see Note 1 of Notes to
      Financial Statements included as part of Item 7 of this Report.





**Fiscal
      Year ended December 31, 2006 Compared to the Fiscal Year Ended December 31,
      2005**





*Drilling
      Services*


The
      business segment was acquired in August 2006 and had revenues of approximately
      $2.2 million and an operating loss of $1,009,000 for the year ended December
      31,
      2006. The operating loss was generated as a result of revenue shortfalls from
      early termination of the Hallwood and Quicksilver IADC drilling contracts.
      As a
      new business segment in 2006, there are no comparisons to results available
      from
      2005.





*Satellite
      Communications*


Satellite
      Communications’ revenues increased by $4,000 to $1,036,000 for the year ended
      December 31, 2006, compared to $1,132,000 for the year ended December 31, 2005.
      The operating margin from Satellite Communications decreased by $413,000 to
      a
      positive contribution of $54,000 for the year ended December 31, 2006, compared
      to a contribution of $467,000 for the year ended December 31, 2005. The margin
      declines were associated with the loss of several higher margin contracts in
      2006.





As
      hardware is sold, we recognize the revenue in the period it is delivered to
      the
      customer. We bill some of our bandwidth contracts in advance, but recognize
      revenue over the period benefited. At December 31, 2006, $51,000 was reflected
      in the balance sheet as deferred revenue relating to Satellite Communication
      Services.





*Down-hole
      Solutions*


Down-hole
      Solution revenues decreased by $13,000 to $14,000 for the year ended December
      31, 2006, compared to $27,000 for the year ended December 31, 2005. The
      operating margin from Down-hole Solutions decreased by $480,000, to a loss
      of
      $1,259,000 for the year ended December 31, 2006, compared to a loss of $779,000
      for the year ended December 31, 2005. This decease is primarily related to
      the
      additional costs of early deployment and testing our AFJ technology before
      we
      reached a point where we could generate significant revenue from our
      services.





34


*Selling,
      General and Administrative Expense*


Selling,
      general and administrative (“SG&A”) expense increased by $0.3 million to
      $3.2 million for the year ended December 31, 2006, compared to $2.8 million
      for
      the year ended December 31, 2005. The following table details the major
      components of SG&A expense over the periods:








In
                thousands2006
            
            2005
            
            Increase
              (Decrease)Payroll
                and related costs
            
            $
                400
            
            $
                627
            
            $(227)Option
                and warrant expense
            
            687
            
            100
            
            587Legal
                fees and settlements
            
            880
            
            1,336
            
            (456)External
                services
            
            637
            
            413
            
            224Insurance
            
            213
            
            183
            
            30Travel
                & entertainment
            
            132
            
            69
            
            63Office
                rent
            
            46
            
            31
            
            15Communications
            
            11
            
            15
            
            (4)Miscellaneous
            
            110
            
            73
            
            37$
                3,116
            
            $
                2,847
            
            $
                269





The
      reduction in Payroll related costs is primarily related to the absence of
      management bonuses in 2006. The increase in option and warrant expense can
      be
      primarily attributed to the issuance of warrants to the participants in the
      $15
      million private placement to selling members of Eagle, which we purchased in
      August 2006. Legal fees and settlement costs decreased primarily related to
      the
      absence of settlement costs in 2006 of a dispute concerning employment options
      with our previous CEO, which was settled in 2005. Our external services, travel
      and insurance costs have increased due to the fact we shifted from construction
      and development to deployment and testing in Down-hole Solutions during 2006.





*Depreciation
      and Amortization*


Depreciation
      and amortization expense increased by $598,000 to $717,000 for the year ended
      December 31, 2006 compared to $119,000 for the year ended December 31, 2005.
      The
      increase was due to the partial year depreciation of the in-service land
      drilling rigs acquired in August 2006.





*Asset
      Impairment Expense*


Following
      the cancellations of the two-year term contracts by our customers (see Note
      14)
      and our inability to replace these contracts with new customers, under the
      guidance of FAS 144, the Company has elected to impair the asset value of the
      land drilling rigs acquired in August 2006. These assets have been revalued
      at
      approximately $41 million based upon the proposed sale price of five drilling
      rigs described below. As a result, an asset impairment of approximately $18
      million was made against these assets as of December 31, 2006.





Blast,
      Eagle and Laurus Master Fund (“Laurus”) have agreed in principle to sell five
      drilling rigs owned by Eagle. The sale will result in the full satisfaction
      of
      the debt obligations owed Laurus that include a principal amount of $40.6
      million plus accumulated interest and fees owed under a promissory note payable
      to Laurus. The sale of the rigs will be considered at a hearing scheduled for
      April 30, 2007. Laurus has agreed to and has received approval to credit bid
      the
      amount of its senior debt under the authority of section 363 of the US
      Bankruptcy Code. The rigs are being sold pursuant to the terms of a
      pre-negotiated Asset Purchase Agreement between Blast, Eagle and Laurus, the
      terms of which are incorporated in the pending motion to sell the rigs. The
      entire proposed transaction is subject to approval of the Bankruptcy
      Court.





*Other
      Income*


Other
      Income decreased by $469,000 to $92,000 for the year ended December 31, 2006
      compared to $561,000 for the year ended December 31, 2005. We recognized
      $561,000 of other income in 2005 primarily from the receipt of late payment
      fees
      associated with the sale of the Landers license.





*Gain
      or Loss on Sale of Property*


In
      2006,
      there were no sales of equipment. In 2005, we had a net loss of $93,000 from
      the
      sale and or disposition of the non-abrasive drilling equipment in the normal
      course of business.





35


*Interest
      Expense*


Interest
      expense increased by $3,830,000 to $4,025,000 for the year ended December 31,
      2006 compared to $195,000 for the year ended December 31, 2005. The significant
      increase in interest expense was a result of incurring the $40.6 million Senior
      Debt financing incurred to acquire Eagle in August 2006.





*Note
      Discount Amortization*


The
      amortization of discount on the Laurus Note has been accelerated at December
      31,
      2006 as a result of the loan being placed in default when the January 2007
      interest payment was not made. The acceleration will revalue the Note to its
      face value of $40.6 million resulting in a $13 million charge against Net
      Loss.





*Net
      Loss*


The
      net
      loss for the year ended December 31, 2006 increased to $38.1 million from $2.9
      million for the year ended December 31, 2005. The $35.2 million increase in
      loss
      is primarily attributable to the impairment expense incurred in 2006 as well
      as
      the acceleration of Note discount amortization, increase in interest expense
      and
      SG&A costs, explained above. The tax benefit associated with our loss has
      been fully reserved as we have recurring net losses and it is more likely than
      not that tax benefits will not be realized.


.


**Liquidity
      and Capital Resources**





During
      our Chapter 11 proceedings, we have not yet entered into any agreements related
      to financing arrangements or settlements of pre-petition claims.





As
      of
      December 31, 2006, our cash balance was approximately $1.6 million compared
      to a
      cash balance of approximately $836,000 at December 31, 2005. The cash balances
      were impacted by the proceeds of the financing of the acquisition of Eagle
      Domestic drilling Operations LLC in August 2006. We continue to utilize cash
      to
      fund operations. We have used these proceeds to fund day to day operations
      and
      legal support for our Chapter 11 proceedings. As of March 31, 2007, our cash
      balance was $389,000 - a decline due to the absence of any meaningful land
      drilling rig revenues and continued operating and legal expenses. At April
      16,
      2007, we had a cash balance of $205,000. In the near term, unless we are able
      to
      recover settlement monies for amounts owed under various breached customer
      contracts or recover owed insurance premium refunds in a timely manner or secure
      debtor in possession financing, we will be forced to liquidate the remaining
      assets and wind up our affairs.





In
      addition to the 40.6 million senior secured debt to fund the Eagle rig
      acquisition in August 2006, we have a $1 million note with Berg McAfee secured
      on the abrasive jetting rig, a $42,500 note that is due on demand, and a
      $500,000 note due on June 30, 2007. Convertible notes with related parties
      in
      the amount of $200,000 matured on May 31, 2006 and were converted into common
      stock in June 2006.





We
      had
      negative net working capital of $41,656,163 and a total accumulated deficit
      of
      $68,001,384 as of December 31, 2006.





The
      Company is also subject to certain contingent liabilities relating to litigation
      matters, including the disputes with Hallwood Petroleum/Hallwood Energy
      (“Hallwood”), Quicksilver Resources (“Quicksilver”), Second Bridge LLC, Saddle
      Creek Energy and other matters before the Bankruptcy Court. An adverse
      determination in any of these matters could have a material adverse effect
      on
      the Company.




Blast
        is
        currently in discussions to merge with another energy company that has oil
        and
        gas production as well as certain energy service technologies. Discussions
        are
        at an early stage and no assurances can be given that such a merger will
        be
        consummated or that the economic terms of such a merger would be favorable
        to
        Blast shareholders or creditors.





**Cash
      Flows From Operating Activities**





We
      had
      net cash used in operating activities of approximately $3,646,000 for the year
      ended December 31, 2006, which was mainly due to $38,072,526 of net operating
      losses offset by $17,434,729 of asset impairment charge for the year ended
      December 31, 2006, as described above.





**Cash
      Flows from Investing Activities**





We
      spent
      $1,155,000 in 2006, primarily for the construction of two land drilling rigs
      acquired in August 2006. Capital expenditures for 2005 were $970,000, and
      primarily included the development and construction cost of the first AFJ mobile
      drilling unit.


36


We
      had
      total net cash used in investing activities of $48,533,000 for the year ended
      December 31, 2006, which was mainly due to the amounts spent on the construction
      of the land drilling rigs, $47,351,000 associated with the purchase of Eagle,
      and approximately $57,000 of investment in restricted cash.





**Cash
      Flows from Financing Activities**





We
      had
      $52,908,000 in net cash provided by financing activities for the year ended
      December 31, 2006, which was mainly due to $37,913,000 of proceeds from the
      sale
      of the promissory note to Laurus and $15,000,000 in proceeds from the sale
      of
      common stock and warrants in a private placement to the selling members of
      Eagle.





37








**Item
      7. Financial Statements**








**Index
      to Financial Statements**





PageReport
                of Independent Registered PublicAccounting
                Firm
            39Balance
                Sheet at December 31, 2006
            40Statements
                of OperationsYears
                ended December 31, 2006 and 2005
            41Statements
                of Stockholders’ DeficitYears
                ended December 31, 2006 and 2005
            42Statements
                of Cash FlowsYears
                ended December 31, 2006 and 2005
            44Notes
                to Financial Statements
            45-59







38





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors


Blast
      Energy Services, Inc. (Debtor and Debtor-in-Possession)


Houston,
      Texas











We
      have
      audited the accompanying consolidated balance sheets of Blast Energy Services,
      Inc. as of December 31, 2006 and 2005 and the related consolidated statements
      of
      operations, stockholders’ deficit and cash flows for the two then ended. These
      financial statements are the responsibility of Blast Energy’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (US). Those standards require that we plan and
      perform the audits to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Blast Energy Services, Inc. as
      of
      December 31, 2006 and 2005 and the results of its operations and its cash flows
      for each of the two years then ended in conformity with accounting principles
      generally accepted in the US of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      Blast Energy Services, Inc. (Debtor-in-Possession) will continue as a going
      concern. As discussed in Note 2 to the financial statements, Blast filed a
      voluntary petition for reorganization under Chapter 11 of the US Bankruptcy
      Code
      on January 19,2007, which raises substantial doubt about its ability to continue
      as a going concern. Management’s plans regarding those matters also are
      described in Note 2. The consolidated financial statements do not include any
      adjustments to reflect the possible future effects on the recoverability and
      classification of assets or the amounts and classification of liabilities that
      may result from the outcome of this uncertainty.














MALONE
      & BAILEY, PC





www.malone-bailey.com





Houston,
      Texas





April
      16,
      2007


39





BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


CONSOLIDATED
      BALANCE SHEETS


As
      of
      December 31, 2006 and 2005








**December
                31, 2006**
            
            **December
                31, 2005****Assets**Current
                AssetsCash
            
            $
            1,534,603
            
            $
            835,978Restricted
                cash
            
            
            56,631
            
            
            -Accounts
                receivable, net
            
            
            177,737
            
            
            156,437Deferred
                consulting fees
            
            
            1,800,000
            
            
            -Other
                assets
            
            
            829,379
            
            
            231,413Current
                Assets
            
            
            4,398,350
            
            
            1,223,828Deferred
                consulting fees, less current portion
            
            
            3,000,000
            
            
            -Intellectual
                property, net
            
            
            1,058,571
            
            
            1,142,143Equipment,
                net
            
            
            42,208,020
            
            
            977,269Deferred
                financing costs
            
            
            1,264,801
            
            
            -Total
                Assets
            
            $
            51,929,742
            
            $
            3,343,240**Liabilities
                and Stockholders’ Equity (Deficit)**Current
                LiabilitiesAccounts
                payable
            
            $
            729,549
            
            $
            622,396Accounts
                payable - related parties
            
            
            -
            
            
            -Accrued
                expenses
            
            
            847,426
            
            
            533,842Other
                Current Liabilities
            
            
            56,631
            
            
            -Deferred
                revenue
            
            
            6,780
            
            
            131,425Advances-related
                parties
            
            
            1,000,000
            
            
            -Notes
                payable-related parties
            
            
            -
            
            
            185,186Notes
                payable-other
            
            
            1,014,127
            
            
            395,000Senior
                Debt
            
            
            40,600,000
            
            
            -Current
                portion of long term payable
            
            
            1,800,000
            
            
            -Total
                Current Liabilities
            
            
            46,054,513
            
            
            1,867,849Long
                Term LiabilitiesAdvances-related
                parties
            
            
            -
            
            
            1,000,000Note
                payable-other
            
            
            -
            
            
            500,000Deferred
                revenue, less current portion
            
            
            1,692,750
            
            
            6,780Long
                term payable
            
            
            3,000,000
            
            
            -Total
                Liabilities
            
            
            50,747,263
            
            
            3,374,629Commitments
                and Contingencies
            
            
            -
            
            
            -Stockholders’
                Equity (Deficit):Common
                stock, $.001 par value, 100,000,000 shares authorized, 69,116,253
                and
                29,855,409 shares outstanding, respectively
            
            
            67,610
            
            
            42,060Additional
                paid in capital
            
            
            69,116,253
            
            
            29,855,409Accumulated
                deficit
            
            
            (68,001,384
            )
            
            (29,928,858
            )Total
                Stockholders’ Equity (Deficit)
            
            
            1,182,479
            
            
            (31,389
            )Total
                Liabilities and Stockholders’ Equity (Deficit)
            
            $
            51,929,742
            
            $
            3,343,240








See
      notes
      to the consolidated financial statements


40


BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Years
      Ended December 31, 2006 and 2005








**2006**
            
            **2005**Revenue:Drilling
                Services
            
            $
            2,193,625
            
            $
            -Satellite
                Communications
            
            
            1,035,712
            
            
            1,131,967Down-hole
                Solutions
            
            
            14,150
            
            
            27,491Total
                Revenue
            
            
            3,243,487
            
            
            1,159,458Cost
                of Services Provided:Drilling
                Services
            
            
            2,589,660
            
            
            -Satellite
                Communications
            
            
            937,918
            
            
            824,505Down-hole
                Solutions
            
            
            1,093,506
            
            
            493,209Total
                Cost of Services Provided
            
            
            4,621,084
            
            
            1,317,714Depreciation
                and amortization
            
            
            717,002
            
            
            119,306Gross
                Deficit
            
            
            (2,094,599
            )
            
            (277,562
            )Operating
                Expenses:Selling,
                general and administrative
            
            
            3,165,776
            
            
            2,847,212Bad
                debts
            
            
            251,270
            
            
            10,000Asset
                Impairment - drilling rigs
            
            
            17,434,729
            
            
            -Total
                Expense
            
            
            20,851,775
            
            
            2,857,212Other
                (Income) Expense:Other
                (Income)
            
            
            (91,804
            )
            
            (560,912
            )Interest
                expense
            
            
            4,024,970
            
            
            195,121Accelerated
                amortization of note discount
            
            
            10,954,053
            
            
            -Loss
                on extinguishment of debt
            
            
            262,000
            
            
            -Gain
                loss on sale of equipment
            
            
            -
            
            
            93,247Interest
                income
            
            
            (23,067
            )
            
            1Total
                other (income) expense
            
            
            15,126,152
            
            
            (272,543
            )Net
                Loss
            
            $
            (38,072,526
            )
            $
            (2,862,231
            )Basic
                and diluted loss per share
            
            $
            (0.74
            )
            $
            (0.08
            )Weighted
                average shares outstanding
            
            
            51,526,500
            
            
            37,480,228











See
      notes
      to the consolidated financial statements








41


BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICIT


Years
      Ended December 31, 2006 and 2005








**Preferred
                Stock**
            
            **Common
                Stock****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**Balances
                at December 31, 2004
            
            
            
            
            
            
            
            
            33,443,691
            
            $
            33,444Shares
                issued for:Cash,
                net of fundraising costs
            
            
            
            
            
            
            
            
            900,000
            
            
            900Services
            
            
            
            
            
            
            
            
            673,903
            
            
            674Technology
                acquisition
            
            
            
            
            
            
            
            
            3,000,000
            
            
            3,000Cash
                exercise of warrants and options
            
            
            
            
            
            
            
            
            675,000
            
            
            675Prior
                fundraising agreement
            
            
            
            
            
            
            
            
            448,800
            
            
            449Notes
                payable, accrued interest and salaries
            
            
            
            
            
            
            
            
            1,185,750
            
            
            1,185Lawsuit
                settlements
            
            
            
            
            
            
            
            
            1,733,333
            
            
            1,733Option
                expenseNet
                lossBalances
                at December 31, 2005
            
            
            -
            
            
            -
            
            
            42,060,477
            
            $
            42,060Shares
                issued for:Cash,
                net of fundraising costs
            
            
            
            
            
            
            
            
            900,000
            
            
            900Services
            
            
            
            
            
            
            
            
            720,208
            
            
            720Land
                Drilling Rig acquisition
            
            
            
            
            
            
            
            
            17,400,000
            
            
            17,400Cash
                exercise of warrants and options
            
            
            
            
            
            
            
            
            5,805,707
            
            
            5,806Notes
                payable, accrued interest and salaries
            
            
            
            
            
            
            
            
            663,698
            
            
            664Reinstatement
            
            
            
            
            
            
            
            
            59,814
            
            
            60Option
                expenseWarrant
                expenseNet
                lossBalances
                at December 31, 2006
            
            
            -
            
            
            -
            
            
            67,609,904
            
            $
            67,610








See
      notes
      to the consolidated financial statements


42


BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICIT


Years
      Ended December 31, 2006 and 2005











**Paid-In
                Capital**
            
            **Retained
                Deficit**
            
            **Totals**Balances
                at December 31, 2004
            
            
            26,000,119
            
            $
            (27,066,627
            )
            $
            (1,033,064
            )Shares
                issued for:Cash,
                net of fundraising costs
            
            
            539,100
            
            
            
            
            
            540,000Services
            
            
            309,385
            
            
            
            
            
            310,059Technology
                acquisition
            
            
            1,167,000
            
            
            
            
            
            1,170,000Cash
                exercise of warrants and options
            
            
            74,725
            
            
            
            
            
            75,400Prior
                fundraising agreement
            
            
            216,051
            
            
            
            
            
            216,500Notes
                payable, accrued interest and salaries
            
            
            468,593
            
            
            
            
            
            469,778Lawsuit
                settlements
            
            
            711,767
            
            
            
            
            
            713,500Option
                expense
            
            
            100,000
            
            
            
            
            
            100,000Warrant
                expense
            
            
            268,669
            
            
            
            
            
            268,669Net
                loss
            
            
            
            
            
            (2,862,231
            )
            
            (2,862,231
            )Balances
                at December 31, 2005
            
            
            29,855,409
            
            $
            (29,928,858
            )
            $
            (31,389
            )Shares
                issued for:Cash,
                net of fundraising costs
            
            
            422,100
            
            
            
            
            
            423,000Services
            
            
            663,280
            
            
            
            
            
            664,000Land
                Drilling Rig acquisition
            
            
            18,102,600
            
            
            
            
            
            18,120,000Cash
                exercise of warrants and options
            
            
            220,241
            
            
            
            
            
            226,047Notes
                payable, accrued interest and salaries
            
            
            829,002
            
            
            
            
            
            829,666Reinstatement
            
            
            (60
            )
            
            
            
            
            -Option
                expense
            
            
            736,846
            
            
            
            
            
            736,846Warrant
                expense
            
            
            18,286,835
            
            
            
            
            
            18,286,835Net
                loss
            
            
            
            
            
            (38,072,526
            )
            
            (38,072,526
            )Balances
                at December 31, 2006
            
            
            69,116,253
            
            $
            (68,001,384
            )
            $
            1,182,479








See
      notes
      to the consolidated financial statements







43


BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Years
      Ended December 31, 2006 and 2005





**2006**
            
            **2005****Cash
                Flows From Operating Activities**Net
                loss
            
            $
            (38,072,526
            )
            $
            (2,862,231
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Stock
                issued for services or litigation
            
            
            664,000
            
            
            1,193,133Option
                and warrant expense
            
            
            736,846
            
            
            368,669Accelerated
                amortization of note discount
            
            
            12,991,181
            
            
            117,630Amortization
                of deferred financing costs
            
            
            233,505
            
            
            -Depreciation
                and amortization
            
            
            717,002
            
            
            119,306Loss
                on extinguishment of debt
            
            
            262,000
            
            
            -Loss
                on sale of property
            
            
            -
            
            
            93,247Asset
                impairment charge
            
            
            17,434,729
            
            
            -Note
                issued for settlement
            
            
            -
            
            
            500,000Bad
                debts
            
            
            251,270
            
            
            -Changes
                in:Accounts
                receivable
            
            
            (272,570
            )
            
            1,327,289Other
                current assets
            
            
            524,643
            
            
            (187,337
            )Accounts
                payable
            
            
            609,903
            
            
            (91,130
            )Accrued
                expenses
            
            
            361,250
            
            
            (670,002
            )Deferred
                revenue
            
            
            (87,275
            )
            
            (198,399
            )Customer
                deposit
            
            
            -
            
            
            (276,850
            )Net
                Cash Used In Operating Activities
            
            
            (3,646,042
            )
            
            (566,675
            )**Cash
                Flows From Investing Activities**Purchase
                of equipment
            
            
            (1,155,389
            )
            
            (970,298
            )Purchase
                of Eagle, net of $1,648,600 cash received
            
            
            (47,351,400
            )
            
            -Investment
                in restricted cash
            
            
            (26,631
            )
            
            -Proceeds
                from sale of equipment
            
            
            -
            
            
            255,734Net
                Cash Used in Investing Activities
            
            
            (48,533,420
            )
            
            (714,564
            )**Cash
                Flows From Financing Activities**Proceeds
                from sales of common stock, net of placement costs
            
            
            423,000
            
            
            779,900Proceeds
                from exercise of options and warrants
            
            
            226,047
            
            
            75,400Proceeds
                from advances by related parties
            
            
            -
            
            
            1,000,000Net
                Proceeds from Senior Debt
            
            
            37,912,521
            
            
            -Payments
                on notes payable
            
            
            (653,481
            )
            
            (5,000
            )Proceeds
                from purchase of Eagle private placement
            
            
            15,000,000
            
            
            -Net
                Cash Provided By Financing Activities
            
            
            52,908,087
            
            
            1,850,300Net
                change in cash
            
            
            728,625
            
            
            569,061Cash
                at beginning of year
            
            
            835,978
            
            
            266,917Cash
                at end of year
            
            $
            1,564,603
            
            $
            835,978Cash
                paid during the year for:Interest
            
            $
            1,064,071
            
            $
            83,311Income
                taxes
              See
                notes to the consolidated financial statements
            
            
            -
            
            
            -


44


BLAST
      ENERGY SERVICES, INC.


(DEBTOR
      AND DEBTOR-IN-POSSESSION)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**NOTE
      1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION**





Restructuring. Our
      Consolidated Financial Statements have been prepared on a going concern basis
      in
      accordance with accounting principles generally accepted in the United States
      of
      America (“GAAP”), including the provisions of AICPA’ Statement of Position 90-7,
“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”
(“SOP 90-7”). This contemplates the realization of assets and satisfaction of
      liabilities in the ordinary course of business. Accordingly, our Consolidated
      Financial Statements do not include any adjustments relating to the
      recoverability of assets and classification of liabilities that might be
      necessary should we be unable to continue as a going concern.




Due
      to
      our Chapter 11 proceedings, the realization of assets and satisfaction of
      liabilities, without substantial adjustments and/or changes in ownership, are
      subject to uncertainty.  Accordingly, there is substantial doubt about
      the current financial reporting entity’s ability to continue as a going concern.
      Upon emergence from bankruptcy, we expect to adopt fresh start reporting in
      accordance with SOP 90-7 which will result in our becoming a new entity for
      financial reporting purposes.  The adoption of fresh start reporting
      may have a material impact on the consolidated financial statements of the
      new financial reporting entity.




The
      accompanying Consolidated Financial Statements do not reflect or provide for
      the
      consequences of the Chapter 11 proceedings. In particular, the financial
      statements do not show (1) as to assets, their realizable value on a liquidation
      basis or their availability to satisfy liabilities; (2) as to pre-petition
      liabilities, the amounts that may be allowed for claims or contingencies, or
      their status and priority; (3) as to shareowners’ equity accounts, the effect of
      any changes that may be made in our capitalization; or (4) as to operations,
      the
      effect of any changes that may be made in our business.





Blast’s
      consolidated financial statements include the accounts of Blast and it’s wholly
      and majority owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





Management
      Estimates .
      The
      preparation of financial statements in conformity with GAAP requires management
      to make estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenues and expenses, as well as certain financial statement
      disclosures. While management believes that the estimates and assumptions used
      in the preparation of the financial statements are appropriate, actual results
      could differ from these estimates.





Fair
      Value of Financial Instruments. SFAS
      107, *"Disclosures
      About Fair Value of Financial Instruments,"* requires
      disclosure of fair value information about financial instruments when it is
      practicable to estimate that value. The carrying amount of the Company's cash,
      accounts receivables, accounts payables, and accrued expenses approximates
      their
      estimated fair values due to the short-term maturities of those financial
      instruments. The fair value of related party transactions is not determinable
      due to their related party nature.





Cash
      Equivalents .
      Blast
      considers all highly liquid investments with original maturities of three months
      or less are considered cash equivalents.





Revenue
      Recognition .
      All
      revenue is recognized when persuasive evidence of an arrangement exists, the
      service or sale is complete, the price is fixed or determinable and
      collectibility is reasonably assured. Revenue is derived from sales of satellite
      hardware, satellite bandwidth, satellite service and lateral drilling services.
      Revenue from satellite hardware is recognized when the hardware is installed.
      Revenue from satellite bandwidth is recognized evenly over the term of the
      contract. Revenue from satellite service is recognized when the services are
      performed. Blast provides no warranty but sells commercially obtained 3 to
      12
      month warranties for satellite hardware. Blast has a 30 day return policy.
      Revenue for lateral drilling services is recognized when the services are
      performed and collectibility is reasonably assured and when collection is
      uncertain, revenue is recognized when cash is collected.





Allowance
      for Doubtful Accounts .
      Bad
      debt expense is recognized based on management’s estimate of likely losses per
      year, based on past experience and an estimate of current year uncollectible
      amounts.





45


Credit
      Risk Blast
      does not require collateral from its customers with respect to accounts
      receivable but performs periodic credit evaluations of such customer’s financial
      conditions. Blast determines any required allowance by considering a number
      of
      factors including lengths of time accounts receivable are past due and Blast’s
      previous loss history. Blast provides reserves for accounts receivable when
      they
      become uncollectible, and payments subsequently received on such receivables
      are
      credited to the allowance for doubtful accounts. As of December 31, 2006 and
      December 31, 2005, Blast has determined that an allowance for doubtful accounts
      of $251,270 and $0, is required.





Equipment .
      Equipment is stated at cost less accumulated depreciation and amortization.
      Maintenance and repairs are charged to expense as incurred. Renewals and
      betterments which extend the life or improve existing equipment are capitalized.
      Upon disposition or retirement of equipment, the cost and related accumulated
      depreciation are removed and any resulting gain or loss is reflected in
      operations. Depreciation is provided using the straight-line method over the
      estimated useful lives of the assets, which are three to twenty
      years.





Impairment
      of Long-Lived Assets .
      Blast
      reviews the carrying value of its long-lived assets annually or whenever events
      or changes in circumstances indicate that the historical cost-carrying value
      of
      an asset may no longer be appropriate. Blast assesses recoverability of the
      carrying value of the asset by estimating the future net cash flows expected
      to
      result from the asset, including eventual disposition. If the future net cash
      flows are less than the carrying value of the asset, an impairment loss is
      recorded equal to the difference between the asset’s carrying value and fair
      value. In the case of the asset impairment recorded in 2006, the future value
      of
      the rig assets was based upon the value of the proposed rig sale described
      in
      Note 19. Blast recorded an impairment of $17,434,729 related to drilling rigs
      purchased as part of the Eagle Domestic Drilling Operations, LLC
      acquisition.





Stock
      Options and Warrants .
      Effective January 1, 2006, Blast began recording compensation expense associated
      with stock options and other forms of equity compensation is accordance with
      Statement of Financial Accounting Standards (“SFAS”) No.123R, *Share−Based
      Payment* ,
      as
      interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006,
      Blast had accounted for stock options according to the provisions of APB Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations, and therefore no related compensation expense was
      recorded for awards granted with no intrinsic value. Blast adopted the modified
      prospective transition method provided for under SFAS No.123R, and,
      consequently, has not retroactively adjusted results from prior
      periods.





During
      the 12 months ended December 31, 2006, Blast granted 1,596,000 share options
      at
      exercise prices ranging from $ 0.61 to$1.30 per share for services rendered
      at
      the options fair value totaling $2,233,560. Of this amount, $345,555 was
      recorded as compensation expense and $1,888,005 was deferred to recognize over
      the future periods in which the services are being performed. Variables used
      in
      the Black−Scholes option−pricing model included: (1) 4.8 to 5.25% risk−free
      discount rate, (2) expected option life is the actual remaining life of the
      options as of each period end., (3) expected volatility from 475% to 490%,
      and
      (4) zero expected dividends.





Prior
      to
      2006, compensation was recorded for stock−based compensation grants only to the
      extent that the market price of the common stock on the measurement date
      exceeded the exercise price. The fair value of options granted during 2005
      was
      $932,164.Variables used in the Black−Scholes option−pricing model included: (1)
      2.0% risk−free discount rate, (2) expected option life is the actual remaining
      life of the options as of each period end., (3) expected volatility is 69 to
      153%, and (4) zero expected dividends.





Had
      Blast
      recorded compensation expense during 2005 for stock−based compensation grants to
      employees based on their estimated fair value at their grant date, the net
      loss
      and net loss per share would have been as follows:








2005Net
                loss as reported
            
            $
                (2,862,231)Add:
                intrinsic value of stock-based compensation
            
            -Less:
                stock based compensation determinedunder
                fair value-based method
            
            (354,290)Pro
                forma net loss
            
            $
                (3,216,521)Basic
                and diluted net loss per common share:As
                reported
            
            $
                (.08)Pro
                forma
            
            (.09)





46





Income
      Taxes .
      Blast
      utilizes the asset and liability method in accounting for income taxes. Under
      this method, deferred tax assets and liabilities are recognized for operating
      loss and tax credit carryforwards and for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the year in which those temporary differences are expected
      to
      be recovered or settled. The effect on deferred tax assets and liabilities
      of a
      change in tax rates is recognized in the results of operations in the period
      that includes the enactment date. A valuation allowance is recorded to reduce
      the carrying amounts of deferred tax assets unless it is more likely than not
      that the value of such assets will be realized.





Earnings
      Per Share .
      Basic
      earnings per share equals net earnings divided by weighted average shares
      outstanding during the year. Diluted earnings per share include the impact
      on
      dilution from all contingently issuable shares, including options, warrants
      and
      convertible securities. The common stock equivalents from contingent shares
      are
      determined by the treasury stock method. Blast has incurred net losses for
      the
      years ended December 31, 2006 and 2005 and has, therefore, basic and diluted
      earnings per share are the same as all potential common equivalent shares would
      be anti-dilutive.





Recently
      Issued Accounting Pronouncements .
      Blast
      does not expect the adoption of recently issued accounting pronouncements to
      have a significant impact on its results of operations, financial position
      or
      cash flow.





Reclassifications . ** Certain
      amounts in the financial statements of the prior year have been reclassified
      to
      conform to the presentation of the current year for comparative
      purposes.





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, Blast incurred a net loss of $38.1
      million for the year ended December 31, 2006, has an accumulated deficit of
      $56.8 million and a working capital deficit of $41.7 million as of December
      31,
      2006 and has several significant future financial obligations. These conditions
      raise substantial doubt as to Blast’s ability to continue as a going concern.
      The financial statements do not include any adjustments that might be necessary
      if Blast is unable to continue as a going concern.





The
      accompanying Consolidated Financial Statements do not reflect or provide for
      the
      consequences of our Chapter 11 proceedings. In particular, the financial
      statements do not show (1) as to assets, their realizable value on a liquidation
      basis or their availability to satisfy liabilities; (2) as to pre−petition
      liabilities, the amounts that may be allowed for claims or contingencies, or
      their status and priority; (3) as to shareowners' equity accounts, the effect
      of
      any changes that may be made in our capitalization; and (4) as to operations,
      the effect of any changes that may be made to our business.





**NOTE
      3 - EQUIPMENT**





Equipment
      consisted of the following at December 31, 2006:





Description
            
            Life
            
            2006
            2005Land
                Drilling Rigs - In Service
            
            20
                years
            
            $
                23,506,146
            $
                -Land
                Drilling Rigs - In Progress
            
            20
                years
            
            18,076,016
            -AFJ
                Rig
            
            12
                years
            
            1,071,658
            944,355Computer
                equipment
            
            3
                years
            
            29,998
            31,246Automobile
            
            4
                years
            
            170,990
            19,300Service
                Trailer
            
            5
                years
            
            4,784
            4,78442,859,592
            999,685Less:
                accumulated depreciation
            
            
            
            (651,572)
            (22,416)$
                42,208,020
            $
                977,269





In
      August
      2006, the Company significantly increased its equipment with the purchase of
      the
      Eagle land drilling rig business. Depreciation expense totaled $651,572 and
      $91,449 in 2006 and 2005, respectively.





47


**NOTE
      4 - INTELLECTUAL PROPERTY (“IP”)**





On
      August
      25, 2005, Blast entered into a purchase agreement with Alberta Energy Holdings
      Inc. (“Alberta”) to purchase a one-half interest in Alberta’s Abrasive Fluid Jet
      (“AFJ”) cutting technology. The purchase agreement replaces in its entirety an
      October 2004 licensing agreement between Blast and Alberta. Blast issued to
      Alberta 3,000,000 restricted shares of its common stock and 750,000 warrants
      exercisable at $.45 per share for the purchase of Blast common shares. The
      warrants are exercisable at such time as a minimum of $225,000 in revenue has
      been received by operation of Blast Rig # 1, and expire three years from date
      of
      issuance. The fair value of the award will be measured and recognized at which
      time Blast achieves the $225,000 revenue mark. In addition, one half of Blast’s
      50% share of the revenue stream from licensing of the technology shall be paid
      to Alberta, in addition to Alberta’s own one-half, until Alberta has received $2
      million. Thereafter, Blast and Alberta will share licensing


revenue
      equally. Royalties are payable to Alberta at the rate of $2,000 per well or
      2%
      of gross revenues received, whichever is greater, for each well bore in which
      Blast uses the technology. The agreement shall remain in effect for the
      commercial life of the technology.





At
      December 31, 2006 the total cost of the Intellectual Property was $1,170,000
      with $111,429 of accumulated amortization. The IP, composed of the 50% ownership
      in the Alberta technology, is being amortized on a straight-line method over
      the
      life of the patent, which is 14 years.





**NOTE
      5 - ACCRUED EXPENSES**





Accrued
      expenses at December 31, 2006 and 2005 consisted of the following:





Description
            
            2006
            2005Accrued
                payroll
            
            $
                55,505
            $221,951Director
                fees
            
            169,000
            135,500Interest
            
            504,413
            61,332Other
            
            118,508
            115,059$
                847,426
            $533,842





**NOTE
      6 - DEFERRED REVENUE**





Blast
      bills some of its satellite bandwidth contracts in advance over periods ranging
      from 3 to 36 months. Blast recognizes revenue evenly over the contract term.
      Deferred revenue related to satellite services totaled $50,930 and $138,205
      at
      December 31, 2006 and 2005, of which $6,780 is expected be recognized in the
      next twelve months.





Eagle
      Domestic Drilling Operations, LLC prior to the acquisition by Blast received
      a
      $1,648,000 prepayment by a customer for future long term services. These
      services may not be performed by Blast and it is possible that this revenue
      will
      not be recognized.





**NOTE
      7 - ADVANCES - RELATED PARTIES**





During
      2005, under the agreement to develop its initial abrasive jetting rig with
      Berg
      McAfee Companies, funded primarily by Eric McAfee and Clyde Berg, each of whom
      are considered significant holders of Blast, $1 million rig funding was
      received. These loans bear interest at rates ranging from 5% to 8% and accrued
      interest has not been paid. The loan matured on March 31, 2007 and was not
      paid
      subject to the Chapter 11 proceedings.





**NOTE
      8 - RELATED PARTY TRANSACTIONS**





As
      part
      of the acquisition of Eagle Domestic Drilling Operations LLC, (see note 20)
      the
      selling members agreed to purchase 15 million Blast common shares at $1.00
      per
      share and 5 million two-year warrants with an exercise price of $0.01 per share
      with registration rights. The largest component of the private placement was
      purchased by the Thornton Business Security Trust, a trust whose beneficiaries
      are Rodney D. Thornton and his spouse. Thornton Business Security Trust
      beneficially owns 16,447,500 shares of our common stock and has become our
      largest shareholder.





48


Blast
      has
      also entered into a consulting contract with Second Bridge LLC, (“Second
      Bridge”) a privately held Oklahoma limited liability company for the completion
      of Rig# 17, a sixth rig (“Rig# 17 Contract”). The Rig# 17 Contract calls for the
      utilization of existing parts purchased as part of the acquisition, the payment
      of an estimated $2.4 million to vendors for parts and labor, and the delivery
      of
      900,000 shares of Blast common stock. As part of the Rig# 17 Contract, Second
      Bridge agreed to grant Blast a right of first refusal on any drilling rigs
      built
      by Second Bridge for a period of two years. Blast has also entered into a
      consulting contract with Second Bridge for a period of three years at $150,000
      per month to provide such services as are agreed to between the parties,
      including operational, construction, and business development advisory services.
      Second Bridge is a manager managed LLC and its managers include Richard D.
      Thornton and Rodney Thornton. Rodney Thornton, through an affiliated entity,
      Thornton Business Security Trust, is the beneficial holder of 12,622,500 shares
      of Blast. Richard D. Thornton is an employee of Blast. As of December 31, 2006,
      the principal balance owed to Second Bridge is $4,800,000.





Lastly,
      Blast entered into two lease agreements with Adkins Hill Properties LLC, also
      controlled by Rodney D. Thornton, to use the Adkins Fabrication yard at a rate
      of $7,500 per month for three years plus an additional six month lease for
      temporary space also at $7,500 per month.





**NOTE
      9 - NOTES PAYABLE**





In
      January 2006, Blast issued 13,783 shares of common stock in lieu of cash for
      the
      payment of 4 th quarter,
      2005 interest on Convertible Promissory Notes at $0.80 per share (the average
      five-day closing price at year end).





In
      January 2006, holders of four Convertible Promissory Note Agreements dated
      July
      23, 2004 totaling $350,000 converted their Note principal amounts which were
      due
      on December 31, 2005, into shares of Company stock in lieu of cash payment.
      The
      original conversion terms including warrants, but excluding 8% interest, would
      equate to a $1.00 per share investment value. However, since the average market
      prices of the Company stock was trading below $1.00 at time of conversion,
      a
      premium in the number of shares converted was added in order to lower the value
      of the holder’s investment to $0.60 per share. Accordingly, 408,333 shares of
      common stock were issued in the conversion of these notes, including 233,333
      common shares for the conversion premium.





In
      June
      2006, related parties Eric McAfee and Clyde Berg, equal holders of two
      Convertible Promissory Note Agreements dated October 26, 2004 totaling $200,000,
      converted their Note principal amounts which were due on May 31, 2006, into
      shares of Company stock in lieu of cash payment. The original conversion terms
      including warrants, but excluding 8% interest, would equate to a $1.00 per
      share
      investment value. The conversion includes a premium in the number of shares
      converted in order to lower the value of the holder’s investment to $0.60 per
      share. However, since the average market prices of the Company stock was trading
      below $1.00 at time of conversion, a premium in the number of shares converted
      was added in order to lower the value of the holder’s investment to $.60 per
      share. Accordingly, 333,430 shares of common stock were issued in the conversion
      of these notes, including 133,430 common shares for the conversion premium.
      Additionally in June 2006, Blast issued 6,666 shares of common stock in lieu
      of
      cash for the payment of 1 st and
      2 nd quarter
      2006 interest on these Convertible Promissory Notes.





As
      a
      result of the two conversions, a loss on the extinguishment of debt of $262,000
      has been recorded as a component of interest expense.





49


On
      August
      25, 2006, as part of the financial consideration for the purchase of Eagle
      Domestic Drilling Operations (“Eagle”), Blast entered into a Securities Purchase
      Agreement (“SPA”) with Laurus to finance $40.6 million of the total purchase
      price. Under the SPA Blast issued a Secured Term Note (“the Note”) dated August
      25, 2006 in the original principal amount of $40.6 million with a final maturity
      in three years, with interest at prime plus 2.5%, with a minimum rate of 9%,
      payable monthly. The principal is to be repaid commencing April 1 st ,
      2007 at
      a rate of $800,000 per month for the first twelve months from that date,
      $900,000 per month for the subsequent twelve months and $1 million per month
      until the Note matures. The remaining balance of the Note is to be paid at
      maturity with any associated interest. Terms of the note provide that Blast
      can
      elect to repay the note at any time during the first twelve months at 110%
      of
      principal plus accrued interest, during the second twelve months at 105% of
      principal plus accrued interest and during the final twelve months at 100%
      of
      principal plus accrued interest. The SPA required the additional fee payment
      to
      Laurus of 3.5% of the total value of the investment of $40.6 million at closing.
      The SPA further required the issuance of Common Stock Purchase Warrants
      (“Warrants”) to purchase 6,090,000 shares of common stock of Blast at an
      exercise price of $1.44 per share, and an additional 6,090,000 shares of common
      stock at an exercise price of $0.01 per share. The Warrants have a seven year
      term and require Blast to file a registration statement to register the
      underlying shares within 60 days after closing and to obtain effectiveness
      with
      the SEC within 180 days after closing. Blast and Eagle have pledged their assets
      to Laurus in consideration for the investment, including the assets acquired
      in
      conjunction with the purchase. In addition, under the SPA, Blast agreed to
      restrictions on any dividends or distributions on its capital stock, agreed
      to
      not issue any short-term preferred stock, and agreed to not incur any
      indebtedness outside of the indebtedness to Laurus, other than for certain
      amounts of trade debt and certain outstanding indebtedness. Blast analyzed
      these
      instruments for derivative accounting consideration under SFAS 133 and EITF
      00-19 and determined that derivative accounting is not applicable.





As
      a
      result of defaults on the SPA agreement in early 2007 Blast has classified
      the
      debt as current and has accelerated the amortization of the remaining discount
      of $10,954,053 to reflect the note at its stated $40.6 million face value.
      Blast
      also recorded $2,037,128 of amortized discount during the year ended December
      31, 2006 prior to removal of the remaining discount.





Notes
      payable at December 31, 2006 consisted of the following:


2006
            2005Laurus
                note payable, prime + 2.5% (classified as current)
            $
                40,600,000
            $
                -Second
                Bridge consulting contract
            4,800,000
            -Steinberger
                settlement
            500,000
            -Note
                payable, Imperial Credit, 8.95%
            471,627
            -Convertible
                related party promissory notes, 8% maturing on May 31,
                2006
            -
            185,186Convertible
                promissory notes, 8%, maturing on December 31, 2005
            -
            350,000Note
                payable, individual, 10%, due on demand
            42,500
            45,000Total
            $
                46,414,127
            $
                580,186








**NOTE
      10 - INCOME TAXES**





During
      2006 and 2005, Blast incurred net losses and, therefore, had no tax liability.
      The net deferred tax asset generated by the loss carry-forward has been fully
      reserved. The cumulative net operating loss carry-forward is approximately
      $22,500,000 and $16,500,000 at December 31, 2006 and 2005, respectively, and
      will expire in the years 2019 through 2026.





At
      December 31, 2006 and 2005, the deferred tax assets consisted of the
      following:





Deferred
                tax assets
            2006
            2005Net
                operating losses
            $
                7,880,300
            $
                5,880,000Less:
                valuation allowance
            (7,880,300)
            (5,880,000)Net
                deferred tax asset
            $
                0
            $
                0





The
      change in the valuation allowance for the years ended December 31, 2006 and
      2005
      totaled $2,000,300 and $420,000, respectively.





50


**NOTE
      11 - COMMON STOCK**





In
      June
      2005, Blast shareholders approved the increase in the number of authorized
      common shares from 50 million to 100 million.


During
        2005, Blast issued 8,616,786 shares of common stock as follows:
 ·
              900,000
                  shares issued in a private placement offering for total proceeds
                  of
                  $540,000.
 ·
              673,903
                  shares issued in payment of legal and consulting services valued
                  at
                  $286,659.
 ·
              3,000,000
                  shares issued in connection with a technology acquisition valued
                  at
                  $1,170,000.
 ·
              675,000
                  shares issued as a result of cash exercise of warrants and options
                  valued
                  at $75,400.
 ·
              448,800
                  shares issued pursuant to a prior period fundraising agreement
                  valued at
                  $239,900.
 ·
              1,185,750
                  shares issued in repayment of notes payable, accrued interest and
                  salaries
                  valued at $469,778.
 ·
              1,733,333
                  shares issued as a result of lawsuit settlements valued at
                  $713,500.
 .
 During
        2006, Blast issued 25,549,427 shares of common stock as follows:
 ·
              900,000
                  shares issued in a private placement offering for total proceeds
                  of
                  $423,000.
 ·
              720,208shares
                  issued in payment for consulting services valued at
                  $664,000.
 ·
              17,400,000
                  shares issued in connection with acquisition of Eagle valued at
                  $18,120,000.
 ·
              5,805,707
                  shares issued as a result of cash exercise of warrants and options
                  valued
                  at $226,047.
 ·
              663,698
                  shares issued in repayment of notes payable and accrued interest
                  valued at
                  $829,666.
 ·
              59,814
                  shares were reinstated with no value
                  assigned.




**NOTE
      12 - STOCK OPTIONS AND WARRANTS**


Options


During
        2005, Blast issued 2,412,000 options as follows:
 ·
              270,000
                  ten-year options, vesting quarterly over 36 months, issued to employees
                  at
                  market prices of $0.38 to $0.50. 80,000 of these options were subsequently
                  cancelled upon the termination of
                  employment.
 ·
              72,000
                  ten-year options, vesting over 12 months, issued to non-employee
                  directors
                  at an exercise of $0.38.
 ·
              900,000
                  options, vesting at grant date at an exercise price of $0.10, relating
                  to
                  a settlement agreement were reinstated, of which only 300,000 may
                  be
                  exercised in the first year.
 ·
              1,170,000
                  ten-year options issued to employees at market price of $0.80.
                  1,000,000
                  vest quarterly over 30 months and 170,000 vest quarterly over 36
                  months.
 
 During
        2006, Blast issued 1,596,000 options as follows:
 ·
              96,000
                  ten-year options, vesting over 12 months, issued to non-employee
                  directors
                  at market price of $0.61.
 ·
              1,500,000
                  ten-year options, vesting quarterly over 36 months, issued to an
                  employee
                  at market price of $1.30.
 
 Warrants
 
 Blast
        issues warrants to non-employees from time to time. The board of directors
        has
        discretion as to the terms under which the warrants are issued. All warrants
        vest immediately unless specifically noted in warrant agreements.
 
 During
        2005, Blast issued warrants to purchase 2,348,800 shares of common stock
        as
        follows:
 ·
              848,800warrants,
                  with an exercise price of $1.00 and a two-year term, were issued
                  in
                  connection with the raise of funds in private placement offerings
                  that
                  raised $830,000. The warrants were recorded as part of the offering
                  costs
                  of the private placement.
 ·
              750,000warrants,
                  with an exercise price of $1.00 and a three-year term, were issued
                  in
                  connection with the settlement of a legal dispute. The fair value
                  was
                  expensed in 2005.
 ·
              750,000warrants,
                  with an exercise price of $0.45 and a three-year term, were issued
                  as part
                  of a licensing agreement. The fair value was expensed in
                  2005.


51


During
        2006, Blast issued warrants to purchase 17,962,671 shares of common stock
        as
        follows:
 
 ·
              6,090,000
                  warrants, with an exercise price of $0.01 and a seven year term,
                  were
                  issued in connection with the Laurus note payable totaling $40,600,000.
                  The notes have been discounted for the relative fair value of the
                  warrants.
 ·
              6,090,000warrants,
                  with an exercise price of $1.44 and a seven year term, were issued
                  in
                  connection with the Laurus note payable totaling $40,600,000. The
                  notes
                  have been discounted for the relative fair value of the
                  warrants.
 ·
              450,000
                  warrants, with an exercise price of $0.55 and a two-year term,
                  were issued
                  in connection with the raise of funds in a private placement offering
                  that
                  raised $450,000. The warrants were recorded as part of the offering
                  costs
                  of the private placement.
 ·
              304,500
                  warrants, with an exercise price of $0.01 and a two-year term,
                  were issued
                  to the broker in connection with Laurus note payable totaling $40,600,000.
                  The fair value of the warrants have been added to the deferred
                  financing
                  costs.
 ·
              5,000,000
                  warrants, with an exercise price of $0.01 and a two-year term,
                  were issued
                  to members of Eagle in connection with the acquisition of Eagle.
                  The fair
                  value of the warrants was considered as part of the purchase price
                  of
                  Eagle.





Summary
      information regarding options and warrants is as follows:





Options
            
            Weighted
                Average Share Price
            
            Warrants
            
            Weighted
                Average Share PriceOutstanding
                atDecember
                31, 2004
            
            
            2,413,680
            
            $
            1.67
            
            
            3,794,219
            
            $
            0.49Year
                ended December 31, 2005:Granted
              Exercised
            
            
            1,512,000
              -
            
            
            0.71
            
            
            2,348,800
              (675,000
            )
            
            0.48Reinstated
            
            
            900,000
            
            
            0.56
            
            
            -
            
            
            0.10Forfeited
            
            
            (386,888
            )
            
            0.12
            
            
            (1,647,833
            )
            
            0.18Outstanding
                atDecember
                31, 2005
            
            
            4,438,792
            
            
            1.36
            
            
            3,820,186
            
            
            0.90Year
                ended December 31, 2006:Granted
            
            
            1,596,000
            
            
            1.26
            
            
            17,962,671
            
            
            0.51Exercised
            
            
            -
            
            
            -
            
            
            (5,805,707
            )
            
            0.09Reinstated
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            (835,515
            )
            
            0.92Outstanding
                atDecember
                31, 2006
            
            
            6,034,792
            
            $
            0.89
            
            
            15,141,635
            
            $
            0.74








52


Options
      outstanding and exercisable as of December 31, 2006:


-
                -
                Outstanding - -Exercise
                Price
            
            Number
                of Shares
            
            Weighted
                Average Remaining life
            
            Exercisable
                Number of Shares$
                0.10
            
            1,854,792
            
            7
                years
            
            1,854,7924.28
            
            310,000
            
            7
                years
            
            310,0002.20
            
            72,000
            
            7
                years
            
            72,0001.30
            
            1,500,000
            
            10
                years
            
            212,5000.38
            
            72,000
            
            8
                years
            
            72,0000.40
            
            190,000
            
            9
                years
            
            190,0000.61
            
            96,000
            
            9
                years
            
            61,3600.80
            
            1,170,000
            
            9
                years
            
            1,170,0000.90
            
            770,000
            
            8
                years
            
            385,0016,034,792
            
            
            
            4,327,653





Warrants
      outstanding and exercisable as of December 31, 2006:


-
                -
                Outstanding - -Exercise
                Price
            
            Number
                of Shares
            
            Weighted
                Average Remaining life
            
            Exercisable
                Number of Shares$
                0.01 - 0.50
            
            7,340,000
            
            5.6
                years
            
            7,340,0000.55
            
            450,000
            
            1.4
                years
            
            450,0001.00
            
            1,168,800
            
            0.7
                years
            
            1,168,8001.44
            
            6,090,000
            
            6.7
                years
            
            6,090,0002.00
            
            9,501
            
            1.7
                years
            
            9,5016.00
            
            83,334
            
            1.8
                years
            
            83,33415,141,635
            
            
            
            15,141,635





**NOTE
      13 - CONCENTRATIONS & CREDIT RISKS**





One
      customer accounted for 32% and 25% of total revenues in 2006 and 2005,
      respectively. There were no related party revenues in 2006 and 2005,
      respectively





Blast
      at
      times has cash in banks in excess of Federal Deposit Insurance Corporation
      (“FDIC”) insurance limits. At December 31, 2006, Blast had approximately $1.5
      million in cash in banks in excess of FDIC insurance limits.





Blast
      performs ongoing credit evaluations of its customers’ financial condition and
      does not generally require collateral from them.





**NOTE
      14 - COMMITMENTS & CONTINGENCIES**





Under
      the
      terms of the Landers lateral drilling license, Blast is obligated to pay a
      royalty of $500 for every well in which that technology is utilized. The Landers
      license expires upon the expiration of the underlying patents, the earliest
      date
      being October 2013.





Three
      of
      Blast’s employees are under employment agreements. One agreement was entered
      into June 2003 and provides for a base salary of $150,000 in year one, $180,000
      in year two and $210,000 in year three. This agreement has been amended to
      provide a base of $175,000. The other agreements have a one year term but
      provide for one year renewals. One of the agreements is for a minimum base
      salary of $185,000, while the other agreement provides for a $20,000 escalation
      for two years from the original base salary of $175,000 in 2004. These
      agreements have been amended to provide a base of $200,000.





53


In
      November 2004, Blast entered into a worldwide licensing agreement with Alberta.
      The licensing agreement was replaced in its entirety in August 2005 when Alberta
      sold up to 50% of its interest in the AFJ technology. In return, Blast agreed
      to
      award 3 million shares of Blast stock to Alberta and to fix the price of the
      1
      million previously awarded warrants. Blast also agreed to pay a royalty to
      Alberta based on the greater of 2% of gross revenues or $2,000 per well. The
      agreement awarded Blast 20% ownership, which would accrete to 50% based upon
      license revenue sharing provisions. (See Note 4)





On
      August
      25, 2005, Blast amended its AFJ Construction Agreement, under which Alberta
      will
      engineer, design, source and build the AFJ Rig, to provide for a lump-sum price
      of $900,000 rather than the earlier price of $850,000. Under the agreement
      the
      first $100,000 of budget overruns will be borne by Alberta, with additional
      overruns being the responsibility of Blast. As of December 31, 2006, Blast
      had
      expended $944,355 towards the rig under construction and anticipates the total
      cost to approximate $1.2 million.





**NOTE
      15 - LITIGATION**





Chapter 11
      Proceedings





On January
      19, 2007, Blast
      Energy Services, Inc. (“Blast”) and its wholly owned subsidiary, Eagle Domestic
      Drilling Operations LLC (“EDDO” and collectively, the “Debtors”), filed
      voluntary petitions with the US Bankruptcy Court for the Southern District
      of
      Texas - Houston Division under Chapter 11 of Title 11 of the US Code ,
      Cases
      Nos. 07-30424-H4-11 and 07-30426-H4-11, respectively (the “Bankruptcy
      Cases”). The Debtors continue to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
      accordance with the applicable provisions of the Bankruptcy Code and orders
      of
      the Bankruptcy Court.





As
      of the
      date of the Chapter 11 filing, then pending litigation against the Debtors
      was
      automatically stayed pursuant to 11 USC.§ 362. Absent termination or
      modification of the automatic stay by order of the Bankruptcy Court, litigants
      may not take any action to recover on pre-petition claims against the Debtors.
      These stayed lawsuits include: (i) a state court suit filed by Second Bridge
      LLC
      i n
      Cleveland County, Oklahoma (“Oklahoma State Court Suit”) claiming breach of
      contract under a consulting services agreement signed on August 25, 2006,
      asserting a personal property lien and claiming damages of $4.8 million; and
      (ii) a complaint in Franklin County, Arkansas filed by Chrisman Ready Mix
      claiming approximately $126,000 for drilling rig transportation expenses
      incurred on behalf of the Debtors. All such pre-petition claims will be resolved
      in the Bankruptcy Cases.





The
      Debtors are involved with additional disputes filed in the Bankruptcy Cases,
      which are classified as either adversary proceedings or contested matters,
      but
      which are separate and distinct from proofs of claim that have been or may
      be
      filed in the Bankruptcy Cases:





(a)
      the
      Debtors filed an adversary proceeding against Second Bridge LLC seeking to
      invalidate the personal property lien asserted by Second Bridge, to recover
      preferences and fraudulent transfers and to avoid the consulting services
      agreement as a fraudulent conveyance. Second Bridge filed a second suit in
      the
      form of an adversary proceeding essentially alleging the same claims asserted
      in
      the Oklahoma State Court Suit.   The Debtors intend to vigorously
      prosecute their claims for affirmative relief under the Bankruptcy Code and
      defend themselves in both of these proceedings.





(b)
      the
      Debtors have sued Saddle Creek Energy Development, a Texas joint venture in
      the
      Bankruptcy Court for non-payment of work performed under an IADC drilling
      contract for EDDO’s Rig #12 that provided for the drilling of three initial
      wells, and which was subsequently amended to provide for the drilling of an
      additional three wells as well as providing labor and materials to operate
      a rig
      not owned by EDDO and identified as “Saddle Creek’s Falcon Rig #1.” EDDO also
      filed liens on certain leases and on the Saddle Creek Falcon Rig #1, and has
      initiated a foreclosure action in the Bankruptcy Court. The monetary damages
      aspect of the case is scheduled for trial May 1, 2007, and the foreclosure
      proceedings are currently scheduled for trial December 1, 2007.





(c)
      Alberta Energy Partners filed pleadings in the nature of a contested matter
      asserting that Blast cannot retain its interests under that certain Technology
      Purchase Agreement entered into by Blast in August, 2005. Blast plans to
      vigorously defend against such action, and assert rights available to it under
      the Bankruptcy Code.


54





(d)
      the
      Debtors have requested authority to sell the drilling rigs owned by EDDO to
      their senior secured lender Laurus Master Fund, Ltd. (“Laurus”) for a
      consideration equal to the outstanding debt obligations owed to Laurus. The
      Debtors’ efforts to complete this transaction have been objected to by various
      entities controlled by Rodney D. Thornton. The Debtors are actively pursuing
      their right to complete the sale in accordance with the Bankruptcy
      Code.





*Hallwood
      Energy/Hallwood Petroleum Lawsuit*





On
      September 1, 2006, Hallwood Petroleum, LLC and Hallwood Energy, LP
      (collectively, “Hallwood”) filed suit in the state district court of Tarrant
      County, Texas, against Eagle Domestic Drilling Operations, LLC (“EDDO”), a
      wholly owned subsidiary of the Company, and a separate company, Eagle Drilling,
      LLC. The lawsuit seeks to rescind two IADC two-year term day rate drilling
      contracts between Eagle Drilling and Hallwood, which had been assigned to EDDO
      by Eagle Drilling prior to Blast’s acquisition of the membership interests of
      EDDO.  Hallwood alleged Eagle Drilling and EDDO were in breach of the IADC
      contracts and it ceased performance under the contracts.  Hallwood has
      claimed that the rigs provided for use under the IADC contracts did not meet
      contract specifications and that the failure to meet such specifications are
      material breaches of the contracts.  In addition, Hallwood has demanded
      that the remaining balance of funds advanced under the contracts, in the amount
      of $1.65 million, be returned. The Hallwood suit pending in Tarrant County,
      Texas is currently stayed by operation of the automatic stay provided for in
      the
      US Bankruptcy Code as a result of the Chapter 11 filing of the Company and
      its
      subsidiary, EDDO. EDDO plans to vigorously contest the claims by Hallwood and,
      at the appropriate juncture, institute proceedings to prosecute causes of action
      against Hallwood for its damages arising out of what the Company considers
      are
      unjustified terminations of the two IADC contracts. EDDO and Hallwood have
      discussed potential settlements to this litigation; however, there can be no
      assurance that any settlement will be reached, or that it will be on favorable
      terms to EDDO.




*Quicksilver
      Resources Lawsuit*





On
      October 13, 2006, Quicksilver Resources, Inc. (“Quicksilver”) filed suit in the
      state district court of Tarrant County, Texas against Eagle Domestic Drilling
      Operations, LLC (“EDDO”), a wholly owned subsidiary of the Company, and a
      separate company, Eagle Drilling, LLC. The lawsuit seeks to rescind three IADC
      two-year term day rate contracts between Eagle Drilling and Quicksilver, which
      had been assigned to EDDO by Eagle Drilling prior to Blast’s acquisition of the
      membership interests of EDDO.  The lawsuit includes further allegations of
      other material breaches of the contracts and negligent operation by EDDO and
      Eagle Drilling under the contracts. Quicksilver asserts that performance under
      one of the contracts was not timely and that mechanical problems of the rig
      provided under the contract caused delays in its drilling operations.
      Quicksilver repudiated the remaining two contracts prior to the time for
      performance set forth in each respective contract.  Although the lawsuit
      filed in Tarrant County was stayed by operation of the automatic stay provided
      for in the US Bankruptcy Code as a result of the Chapter 11 filing of the
      Company and its subsidiary, EDDO, Quicksilver has removed the lawsuit to the
      US
      Bankruptcy Court for the Northern District of Texas. EDDO has not yet been
      served with process in the lawsuit. EDDO, however, has filed a motion with
      US
      Bankruptcy Court for the Northern District of Texas seeking to have the lawsuit
      transferred to the US Bankruptcy Court for the Southern District of Texas where
      its petition for reorganization under Chapter 11 of the US Bankruptcy Code
      is
      presently pending. EDDO intends to vigorously defend itself in this proceeding
      and, at the appropriate juncture, institute proceedings to prosecute causes
      of
      action against Quicksilver for its damages arising out of what the Company
      considers are unjustified terminations of the three IADC contracts.





*General*


Other
      than the aforementioned legal matters, Blast is not aware of any other pending
      or threatened legal proceedings. The foregoing is also true with respect to
      each
      officer, director and control shareholder as well as any entity owned by any
      officer, director and control shareholder, over the last five
      years.





As
      part
      of its regular operations, Blast may become party to various pending or
      threatened claims, lawsuits and administrative proceedings seeking damages
      or
      other remedies concerning its’ commercial operations, products, employees and
      other matters. Although Blast can give no assurance about the outcome of these
      or any other pending legal and administrative proceedings and the effect such
      outcomes may have on the company, except as described above, Blast believes
      that
      any ultimate liability resulting from the outcome of such proceedings, to the
      extent not otherwise provided for or covered by insurance, will not have a
      material adverse effect on Blast‘s financial condition or results of
      operations.


55





**NOTE
      16 - NON-CASH TRANSACTIONS FOR CASH FLOW STATEMENTS**





2006
            
            2005Conversion
                of notes payable and accrued interest to common stock
            
            $
                567,666
            
            $
                251,888Issuance
                of stock for acquisition of Eagle
            
            1,950,000
            
            -Issuance
                of stock for construction advice re Rig # 17
            
            1,170,000
            
            -Warrants
                granted for acquisition of Eagle
            
            18,286,835
            
            -Advances/escrow
                used to pay for fixed assets
            
            502,750
            
            -Deferred
                consulting for long term debt
            
            5,400,000
            
            -Prepaid
                insurance for short-term debt
            
            1,122,608
            
            -Stock
                issued for equipment
            
            20,000
            
            -Accelerated
                amortization of note discount
            
            10,959,053
            
            -Stock
                issued for purchase of AFJ technology
            
            -
            
            1,170,000Exchange
                of equipment for customer deposit
            
            -
            
            175,000Exchange
                of equipment for accounts payable
            
            -
            
            3,883Conversion
                of accounts payable to common stock
            
            -
            
            24,916Discount
                on notes payable
            
            -
            
            224,960





**NOTE
      17 - BUSINESS SEGMENTS**





Blast
      has
      three reportable segments: (1) Drilling Services (2) Satellite Communications
      and (3) Down-hole Solutions. A reportable segment is a business unit that has
      a
      distinct type of business based upon the type and nature of services and
      products offered.





Blast
      evaluates performance and allocates resources based on profit or loss from
      operations before other income or expense and income taxes. The accounting
      policies of the reportable segments are the same as those described in the
      summary of significant accounting policies. The table below reports certain
      financial information by reportable segment:





For
                the Years Ended December 31,2006
            
            2005Revenues
                from external customersDrilling
                Services
            
            $
                2,193,625
            
            $
                -Satellite
                Communication
            
            1,035,712
            
            1,131,967Down-hole
                Solutions
            
            14,150
            
            27,491$3,243,487
            
            $
                1,159,458Operating
                loss1Drilling
                Services
            
            $
                (1,009,437)
            
            $
                -Satellite
                Communication
            
            54,026
            
            467,142Down-hole
                Solutions
            
            (1,259,350)
            
            (778,665)Corporate
            
            (3,296,884)
            
            (2,823,381)$
                (5,511,645)
            
            $
                (3,134,904)1
                -
                Operating loss is total operating revenue less operating expenses,
                selling
                general & administrative expenses, depreciation and amortization, bad
                debts, impairment expense and does not include other income and expense
                or
                income taxes.





56


Blast
      assets at December 31, 2006 and 2005 were as follows:





For
                the Years Ended December 31,2006
            
            2005Drilling
                Services
            
            $48,002,124
            
            $
                -Satellite
                Communications
            
            170,323
            
            180,582Down-hole
                Solutions
            
            2,168,025
            
            2,136,802Corporate
            
            1,589,270
            
            1,025,856$
                51,929,742
            
            $
                3,343,240








All
      of
      Blast‘s long-term assets are attributable to North America.





The
      following table sets forth financial information with respect to Blast’s
      revenues by geographic area:





2006
            
            2005United
                States
            
            $
                3,042,915
            
            $
                978,582Africa
            
            200,572
            
            180,876$
                3,243,487
            
            $
                1,159,458








**NOTE
      18 - SUBSEQUENT EVENTS**





Chapter 11
      Proceedings


On January
      19, 2007, Blast
      Energy Services, Inc. and its wholly owned subsidiary, Eagle Domestic Drilling
      Operations LLC (collectively, the “Debtors”), filed voluntary petitions with the
      US Bankruptcy Court for the Southern District of Texas - Houston Division under
      Chapter 11 of Title 11 of the US Code ,
      Cases
      Nos. 07-30424-H4-11 and 07-30426-H4-11, respectively. The Debtors continue
      to operate their business as “debtors-in-possession” under the jurisdiction of
      the Bankruptcy Court and in accordance with the applicable provisions of the
      Bankruptcy Code and orders of the Bankruptcy Court. As of the date of the
      Chapter 11 filing, then pending litigation against the Debtors was generally
      stayed, and absent further order of the Bankruptcy Court, most parties may
      not
      take any action to recover on pre-petition claims against the
      Debtors.





**NOTE
      19 - RESTRUCTURING**





Blast,
      Eagle and Laurus Master Fund (“Laurus”) have agreed in principle to sell five
      drilling rigs owned by Eagle. The sale will result in the full satisfaction
      of
      the debt obligations owed Laurus that include a principal amount of $40.6
      million plus accumulated interest and fees. The sale of the rigs will be
      considered at a hearing scheduled for April 30, 2007. Laurus has agreed to
      and
      has received approval to credit bid the amount of its senior debt under the
      authority of section 363 of the US Bankruptcy Code. The rigs are being sold
      pursuant to the terms of a pre-negotiated Asset Purchase Agreement between
      the
      Blast, Eagle and Laurus, the terms of which are incorporated in the pending
      motion to sell the rigs. The entire proposed transaction is subject to approval
      of the Bankruptcy Court.


As
      a
      result of this proposed restructuring and in accordance with FASB statement
      number 144, Blast has considered the carrying value of the five rigs proposed
      to
      be exchanged to Laurus. Blast believes that best indicator of the actual fair
      value of the rigs is the amount the rigs can be purchased or exchanged for.
      At
      December 31,2006 Blast determined that a impairment of $17,434,729 and has
      been
      reflected in the statement of operations and the carrying value of the five
      rigs
      has been adjusted to equal the principal balance on the Laurus note plus accrued
      interest.





57


**NOTE
      20 − ACQUISITION OF EAGLE**





On
      August
      25, 2006, Blast acquired Eagle Domestic Drilling Operations, LLC. Eagle owns
      drilling equipment for the extraction of oil and gas. The purchase price was
      $50
      million and 1.5 million shares of Blast common stock. The acquisition of Eagle
      was financed through senior debt of $40,600,000 and a private placement of
      15
      million shares of Blast common stock at a price of $1.00 per share. The lender
      of the senior debt received warrants to purchase 6,090,000 shares of common
      stock at an exercise price of $1.44 per share and an additional 6,090,000 shares
      of common stock at an exercise price of $0.01. These warrants have a seven−year
      term. The broker received warrants to purchase 304,500 shares of common stock
      at
      an exercise price of $0.01 with a two−year term. In connection with


the
      private placement, Blast issued warrants to purchase 5,000,000 shares of common
      stock at an exercise price of $0.01 with a two−year term. Blast issued 900,000
      shares to Second Bridge LLC for consulting services to complete construction
      of
      a sixth drilling rig. The acquisition was recorded using the purchase method
      of
      accounting in accordance with SFAS No. 141, Business Combination. $1,000,000
      of
      the purchase price has been retained by Blast contingent upon the costs incurred
      while completing the construction of rigs #14 & #15.





The
      following table summarizes the preliminary fair values assigned to the assets
      acquired and the liabilities assumed at the date of acquisition:





Current
                assets
            $
                5,561,121Property
                and equipment, net
            59,619,641Other
                assets, net
            1,498,306Total
                assets
            66,679,068Less:Total
                liabilities
            (2,648,600)Total
                purchase price
            $
                64,030,468





The
      following unaudited pro forma information assumes the acquisition of Eagle
      occurred as of January 1, 2006. No pro forma information is presented for 2005
      as Eagle had no operations then. The pro forma results are not necessarily
      indicative of what actually would have occurred had the acquisition been in
      effect for the period presented.





58


**PRO
      FORMA STATEMENTS OF OPERATIONS**


**Twelve
      Months Ended December 31, 2006**


**(Unaudited)**





Blast
            
            Eagle
            
            Pro
                Forma
              Adjustments
            
            
            
            Pro
                FormaTotal
                Revenue
            
            $
            3,243,487
            
            
            5,351,913
            
            
            
            
            
            
            
            
            8,595,400Total
                Cost of Services Provided
            
            
            5,338,086
            
            
            3,162,920
            
            
            1,028,424
            (a)
            
            
            
            
            9,529,430Gross
                Margin (Deficit)
            
            
            (2,094,599
            )
            
            2,188,993
            
            
            (1,028,424
            )
            
            
            
            
            (934,030
            )Operating
                Expenses:S,
                G &A
            
            
            3,165,776
            
            
            
            
            
            1,593,200
            (b)
            
            
            
            
            4,758,976Bad
                debts
            
            
            251,270
            
            
            
            
            
            
            
            
            
            
            
            251,270Asset
                Impairment - drilling rigs
            
            
            17,434,729
            
            
            
            
            
            
            
            
            
            
            
            17,434,729Operating
                Loss
            
            
            (22,946,374
            )
            
            2,188,993
            
            
            (2,621,624
            )
            
            
            
            
            (23,379,005
            )Other
                (Income) Expense:Other
                (income)
            
            
            (91,804
            )
            
            
            
            
            
            
            
            
            
            
            (91,804
            )Interest
                expense (net)
            
            
            4,001,903
            
            
            
            
            
            2,849,048
            (c)
            
            
            
            
            9.986,9383,135,987
            (d)Accelerated
                amortization on note discount
            
            
            10,954,053
            
            
            -
            
            
            -
            
            
            
            
            
            10,954,053Loss
                on extinguishment of debt
            
            
            262,000
            
            
            -
            
            
            -
            
            
            
            
            
            262,000Total
                other (income)/expense
            
            
            15,126,152
            
            
            -
            
            
            5,985,035
            
            
            
            
            
            21,111,187Net
                income/(Loss)
            
            $
            (38,072,526
            )
            
            2,188,993
            
            
            (8,606,659
            )
            
            
            
            
            (44,490,192
            )Basic
                and diluted net loss per share
            
            $
            (0.74
            )
            
            N/A
            
            
            N/A
            
            
            
            
            $
            (0.71
            )Weighted
                average shares outstanding
            
            
            51,526,500
            
            
            N/A
            
            
            15,041,758
            
            
            
            
            
            62,776,911











**Pro
      Forma Adjustments**





(a)
            Record
                increase in depreciation on equipment placed into service in 2006


(b)
            Record
                additional administrative expenses including the Second Bridge consulting
                services fee and the addition of Richard D. Thornton as VP Drilling
                Operations.


(c)
            Record
                interest expense on the senior debt


(d)
            Record
                the amortization of legal expense, brokerage commissions, lenders
                fees and
                warrants issued in the transaction.




59


**Item
      8. Changes In / Disagreements with Accountants on Accounting and Financial
      Disclosure**





None.








**Item
      8a. Controls and Procedures**







The
      Company’s chief executive has evaluated the Company’s disclosure controls and
      procedures as of December 31, 2006, and has concluded that they were not
      effective to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Securities Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms. This conclusion is based upon the number and
      magnitude of the year end adjusting entries and additional financial reporting
      disclosures identified by our independent accountants.


There
      have been no changes in internal control over financial reporting that occurred
      during the last fiscal quarter that have materially affected, or are reasonably
      likely to materially affect our internal controls over financial
      reporting.





The
      Audit
      Committee, along with management, has reinforced internal controls and has
      implemented stringent policies regarding business engagements and
      activities.   These policies and procedures cover the areas of
      approval and authority limits, segregation of duties, internal audit procedures,
      revenue recognition, contractual commitments, documentation and customer
      acceptance, and staggered levels of internal checks and balances. 
Operating documents, such as the “Blast Energy Accounting Operations Manual,”
“Employee Handbook” and “Approval Authorities” have been revised and adopted to
      describe such policies and train personnel.  Since an earnings restatement
      in November 2003, the Committee has increased the frequency of its meetings
      and
      has directly reviewed and approved internal policies and procedures.  They
      have also been directly involved in recruiting key personnel, namely a new
      Chief
      Financial Officer, a new Controller and meeting with our auditors..





**Audit
      Committee Report**





The
      Audit
      Committee has reviewed and discussed the audited financial statements with
      management. The Audit Committee has received the written disclosures and the
      letter from the independent accountants required by ISB Standard No. 1, as
      may
      be modified or supplemented, and has discussed with the independent accountant
      their independence.  Based on the review and discussions conducted by the
      Audit Committee, they have recommended to the Board of Directors that the
      audited financial statements be included in our Annual Report on Form 10-KSB
      for
      the fiscal year ended December 31, 2006 for filing with the SEC.





Scott
      W.
      Johnson - Chairman


Joseph
      J.
      Penbera, PhD


John
      R.
      Block


O.
      James
      Woodward III








60


**Part
      III**





**Item
      9. Directors and Executive Officers**





The
      names
      of our directors and executive officers as of the filing of this report, and
      certain additional information with respect to each of them are set forth below.
      The dates set forth under “Year First Became Director” below indicate the year
      in which our directors first became a director of us or our predecessor in
      interest, Verdisys, Inc.





**Name**
            **Age**
            **Current
                Position**
            **Year
                First Became Director**David
                M. Adams
            55
            President
            N/AJohn
                O’Keefe
            57
            CEO
            N/AJohn
                MacDonald
            48
            CFO
                & Corp. Secretary
            N/AJohn
                R. Block
            72
            Director1
            2000Roger
                P. (Pat) Herbert
            60
            Director
            2005Scott
                W. Johnson
            55
            Director1
            2006Joseph
                J. Penbera, Ph.D.
            60
            Director1
            1999Jeffrey
                R. Pendergraft
            59
            Director
            2006Frederick
                R. Ruiz
            63
            Director
            1999O.
                James Woodward, III
            71
            Chairman
                of the Board1
            1999




1
      -
      Member of Audit Committee





Statements
      below pertaining to the time at which an individual became one of our directors,
      executive officers or founders refers to the time at which the respective
      individual achieved his respective status with us, or our predecessor in
      interest, Verdisys, Inc.





***John
      O’Keefe,*** has
      served as our Executive Vice President from January 2004 through May 2004,
      at
      which time he became our Co-Chief Executive Officer, which position he held
      until March 2007, when he became our sole Chief Executive Officer. From January
      2004, until March 2007, Mr. O’Keefe served as our Chief Financial Officer. From
      1999 to 2000, Mr. O’Keefe served as Vice President of Investor Relations of
      Santa Fe Snyder, and from 2000 to 2003, he served as Executive Vice President
      and CFO of Ivanhoe Energy. Mr. O’Keefe has a B.A. in Business from the
      University of Portsmouth, is a Chartered Accountant and graduated from the
      Program for Management Development (PMD) from the Harvard Graduate School of
      Business in 1985 under sponsorship of Sun Oil Company.





***David
      M. Adams,*** has
      served as our President and Chief Operating Officer since January 2004, and
      served as Co-Chief Executive Officer of us from May 2004, until March 2007.
      From
      1989 to 2000, Mr. Adams served as General Manager of Baker Hughes, E&P
      Solutions, and from 2001 to 2004; he served as President and General Manager
      of
      Subsea Mudlift Drilling Co., LLC, a subsidiary of Hydril Co., LP. Mr. Adams
      has a degree in petroleum engineering from the University of Texas and is a
      registered Professional Engineer.





***John
      MacDonald*** ,
      has
      served as our Chief Financial Officer since March 2007. From March 2005 until
      March of 2007, Mr. MacDonald served as Vice President of Investor Relations
      and
      Corporate Secretary. He retains the title of Corporate Secretary. From January
      2004 until March 2005, Mr. MacDonald served as an Investor Relations consultant.
      Prior to that Mr. MacDonald was Vice President of Investor Relations for Ivanhoe
      Energy from June 2001
      until December 2003. He has also held investor relations and financial analysis
      positions with EEX Corporation and Oryx Energy from 1980 to 2001. Mr. MacDonald
      received his MBA from Southern Methodist University in 1994 and his B.A. from
      Oklahoma State University in 1980.


61


***John
      R. Block,*** has
      served as a director since May 2000. He currently serves as Senior Legislative
      Advisor to Olsson, Frank and Weeda, P.C., an organization that represents the
      food industry, and has since January 2005. From January 2002 until January
      2005,
      he served as Executive Vice President at the Food Marketing Institute. From
      February 1986 until January 2002, Mr. Block served as President of Food
      Distributors International. Prior to that, Mr. Block served as Secretary of
      Agriculture for the US Department of Agriculture from 1981 to 1986. He currently
      serves as a director of John Deere and Co. and Hormel Foods Corp. Mr. Block
      received his B.A. from the US Military Academy.





***Scott
      W. Johnson*** *,* has
      served as a director since June 2006. He has over twenty five years of
      investment banking experience in the energy industry - spanning public and
      private financings; debt, equity, hybrid and structured securities; corporate
      restructurings; and acquisitions, divestitures and stock mergers. He is
      currently co-founder and managing director of Houston-based GasRock Capital,
      LLC, an energy industry investment firm. He co-founded and became a Managing
      Director of Weisser, Johnson & Co in 1991, where he still serves as Managing
      Director and prior to that he served first as an Associate and later as Vice
      President for Goldman, Sachs & Co. Johnson received his M.B.A. from Stanford
      University and his AB from Harvard College.





***Roger
      P. (Pat) Herbert,*** was
      elected to the Board at the 2005 Annual Meeting held June 6, 2005. He has
      worked in the energy services business for nearly 30 years. He is currently
      serving as a Director and CEO for JDR Cable Systems (Holdings) Ltd - a position
      he has held since 2002. Prior to that, he was the Chairman and CEO of
      GeoNet Energy Services, a company he founded in 2000. Prior to 2000
      Mr. Herbert had worked with International Energy Services, Baker Hughes and
      Smith International. Herbert received his M.B.A. from Pepperdine University,
      his
      B.S.E. from California State University-Northridge and is a registered
      professional engineer in the State of Texas.





***Joseph
      J. Penbera, Ph.D.,*** co-founded our company and has served as a director since its inception in
      April
      1999. Since 1985, he has been a Professor of Business at California State
      University, Fresno, where he previously served as Dean of the Craig School
      of
      Business, and was appointed a Senior Fulbright Scholar in 2005. Dr. Penbera
      was Senior Economist at Westamerica Bank, Regency Bancorp and California Bank
      from 1999 to 2002. Dr. Penbera has served on the boards of Gottschalks,
      Inc., a publicly traded regional department store since October 1986 and on
      the
      board of directors of Rug Doctor, Inc., since October 1987. Dr. Penbera
      received his Ph.D. from American University, his M.P.A. from Bernard Baruch
      School and his B.A. from Rutgers University.





***Jeffrey
      R. Pendergraft,*** has
      served as a director since June, 2006. He ** currently
      serves as Chairman and CEO of HNNG Development, a company focused on
      commercialization of low BTU natural gas, and has served in those positions
      since November 2004. In addition, he is the founder and principal of the Wind
      Rose Group, an energy investment and advisory firm, which he has served as
      Chairman of since January 2001. His broad background includes private
      investments, financings, mergers and acquisitions. He has been recognized for
      achievements in change management, corporate governance, finance, and legal
      affairs. Prior to forming Wind Rose in 2001, he was EVP and Chief Administrative
      Officer at Lyondell Chemical and prior to that he served as staff counsel for
      ARCO. Mr. Pendergraft received his Bachelor of Arts from Stanford University,
      and his Juris Doctor from Stanford University School of Law.





***Frederick
      R. Ruiz,*** has
      served as a director since the inception of Verdisys, Inc., in April 1999.
      He
      co-founded Ruiz Food Products, Inc., a privately held frozen food company in
      1964 and has served as Chairman of the Board since 1998. Mr. Ruiz currently
      serves as a director of McClatchy Newspapers, Inc. and Gottschalks, Inc., each
      of which are publicly traded, the California Chamber of Commerce and the
      Hispanic College Fund. During 2004, Mr. Ruiz was named to the California
      University System Board of Regents.





62


***O.
      James Woodward III,*** has
      served as a director since the inception of Verdisys, Inc., in April 1999 and
      was elected Chairman of the Board in May 2004. From 1992 to 1999,
      Mr. Woodward was an attorney in private practice in Fresno, California.
      From 1995 to 2000, he was Chairman of MJ Construction Co., a Fresno, California
      based construction company, and from 2001 to 2003, he served as a consultant
      in
      Fresno, California. Mr. Woodward has been in private practice as an
      attorney since 2003 and is currently Of Counsel with Baker, Manock and Jensen.
      He currently serves on the board of Gottschalks, Inc. Mr. Woodward received
      his Bahchelors degree from the University of California at Berkeley, his M.B.A.
      from Stanford Graduate School of Business and his J.D. from the University
      of
      California, Berkeley Law School. Mr. Woodward is member of the State Bar of
      California and of the Fresno County Bar Association.





All
      directors will serve in such capacity until the next annual meeting of our
      shareholders and until their successors have been elected and qualified. The
      officers serve at the discretion of our directors. There are no familial
      relationships among the our officers and directors, nor are there any
      arrangements or understanding between any of our directors or officers or any
      other person pursuant to which any officer or director was or is to be selected
      as an officer or director.





We
      have
      group life, health, hospitalization, medical reimbursement or relocation plans
      in effect. Further, we have a 401(k) savings plan in effect and agreements
      which
      provide compensation in the event of termination of employment or change in
      control of us.





No
      non-compete or non-disclosure agreements exist between our management and any
      prior or current employer. All key personnel are employees or under contracts
      with us.





Our
      directors are aware of no petitions or receivership actions having been filed
      or
      court appointed as to our business activities, officers, directors, or key
      personnel, other than those described above under “Legal
      Proceedings.”





We
      have
      not, nor anticipate making loans to any of our officers, directors, key
      personnel, 10% stockholders, relatives thereof, or controllable
      entities.





None
      of
      our officers, directors, key personnel, or 10% stockholders has guaranteed
      or
      co-signed any bank debt, obligation, or any other indebtedness pertaining to
      us.





**Audit
      Committee**





Our
      Board
      of Directors has established an Audit Committee. The Audit Committee meets
      with
      management and our independent auditors to determine the adequacy of internal
      controls and other financial reporting matters. In addition, the committee
      provides an avenue for communication between the independent auditors, financial
      management and the Board. Our Board of Directors have determined that for the
      purpose of and pursuant to the instructions of item 401(e) of regulation S-B
      titled Audit Committee Financial Expert, Scott W. Johnson possesses the
      attributes of an audit committee financial expert. Mr. Johnson is one of our
      Board members and is the Chairman of the Audit Committee. Mr. Johnson is
      independent as defined by item 401(e)(ii) of regulation S-B. He receives
      compensation for board service only and is not otherwise an affiliated
      person.





63


**Code
      of Ethics**





We
      have
      adopted a code of ethics that applies to our senior officers such as the
      principal executive officer, principal financial officer, principal accounting
      officer and persons performing similar functions. A code of ethics relates
      to
      written standards that are reasonably designed to deter wrongdoing and to
      promote:





•
            Honest
                and ethical conduct, including the ethical handling of actual or
                apparent
                conflicts of interest between personal and professional
                relationships;





•
            Full,
                fair, accurate, timely and understandable disclosure in reports and
                documents that are filed with, or submitted to, the SEC and in other
                public communications made by an
                issuer;





•
            Compliance
                with applicable governmental laws, rules and
                regulations;





•
            The
                prompt internal reporting of violations of the code to an appropriate
                person or persons identified by the code; and





•
            Accountability
                for adherence to the code.





Our
      code
      of ethics was filed as Exhibit 14.1 of our Form 10-KSB for the year ended
      December 31, 2003. Our code of ethics is posted on our website at
      www.blastenergyservices.com. We will provide to any person without charge,
      upon
      written request to our corporate secretary at our principal executive office,
      a
      copy of our code of ethics.





**Item
      10. Executive Compensation**





*Compensation
      of Executive Officers*





Other
      than Mr. Adams, Mr. O’Keefe and Mr. MacDonald, we have no other person
      that is a named executive officer of the Company.





*Compensation
      Summary*


The
      following table provides certain summary information concerning compensation
      for
      the last three fiscal years earned by or paid to our CEOs and each of our other
      executive officers who had compensation in excess of $100,000 during the last
      fiscal year (collectively the “Named Executive Officers”).





64


**SUMMARY
      COMPENSATION TABLE**





**Annual
                Compensation**
            **Award(s)**
            **Payouts****Position**
            **Year**
            **Salary**
              **($)**
            **Bonus**
              **($)**
            **Other
                Annual Compensation**
              **($)**
            **Restricted
                Stock Award(s)**
              **($)**
            **Securities
                Underlying Options/SARs**
              **($)
                (14)**
            **LTIP
                Payouts**
              **($)**
            **All
                Other Compensation**
              **($)**
            **Total
                Compensation**
              **($)****David
                M. Adams**
            2006
            200,000(1)
            84,000(5)
            0
            0
            0
            0
            0
            284,000President
            2005
            200,000(2)
            70,000(4)
            0
            0
            0
            0
            0
            270,0002004
            181,146(3)
            50,000
            0
            0
            0
            0
            0
            231,146**John
                O’Keefe**
            2006
            200,000(1)
            84,000(5)
            0
            0
            0
            0
            0
            284,000CEO
            2005
            200,000(2)
            70,000(4)
            0
            0
            0
            0
            0
            270,0002004
            172,500(3)
            40,000
            0
            0
            0
            0
            0
            212,500**John
                MacDonald**
            2006
            105,000(1)
            25,000(5)
            0
            0
            0
            0
            0
            130,000CFO(6)
            2005
            79,167
            10,500(4)
            0
            0
            0
            0
            0
            89,6672004
            0
            0
            0
            0
            0
            0
            0
            0**John
                R. Block**
            2006
            0
            0
            18,500(7)
            0
            7,320
            0
            0
            25,820Director31,320**Roger
                P. (Pat) Herbert**
            2006
            0
            0
            24,000(8)
            0
            7,320
            0
            0Director**Scott
                W. Johnson**
            2006
            0
            0
            14,500(9)
            0
            7,320
            0
            0
            21,820Director**Joseph
                J. Penbera,****Ph.
                D.**
            2006
            0
            0
            40,500(10)
            0
            7,320
            0
            0
            47,820Director**Jeffrey
                R. Pendergraft**
            2006
            0
            0
            11,000(11)
            0
            7,320
            0
            0
            18,320Director**Frederick
                R. Ruiz**
            2006
            0
            0
            20,000(12)
            0
            7,320
            0
            0
            27,320Director**O.
                James Woodward, III**
            2006
            0
            0
            66,500(13)
            0
            14,640
            0
            0
            81,140Chairman





During
      the periods indicated, perquisites for each individual named in the Summary
      Compensation Table aggregated less than 10% of the total annual salary and
      bonus
      reported for such individual in the Summary Compensation Table. Accordingly,
      no
      such amounts are included in the Summary Compensation Table.





(1)
      Includes $8,333 deferred each by Mr. O’Keefe and Mr. Adams and $1,750 by Mr.
      MacDonald into 2007.


(2)
      Includes $15,000 deferred each by Mr. O’Keefe and Mr. Adams into
      2006.


(3)
      Includes $30,833 and $29,167 for Mr. Adams and Mr. O’Keefe, respectively,
      deferred from 2004 and paid in 2005 in shares of common stock with a value
      of
      $0.50 per share.


(4)
      Paid
      in shares of common stock valued at $0.35 per share.


(5)
      Paid
      in shares of common stock valued at $0.80 per share


(6)
      Mr.
      MacDonald began serving as our Chief Financial Officer in March 2007; however,
      he was previously employed by us for the year ended December 31, 2006,. His
      salary for 2006 and his partial year salary since being hired in March 2005
      is
      reported above.


(7)
      The
      entire amount of Mr. Block’s salary for the year ended December 31, 2006, was
      accrued.


(8)
      The
      entire amount of Mr. Herbert’s salary for the year ended December 31, 2006, was
      accrued.


(9)
      The
      entire amount of Mr. Johnson’s salary for the year ended December 31, 2006, was
      accrued.


65


(10)
      The
      entire amount of Dr. Penbera’s salary for the year ended December 31, 2006, was
      accrued.


(11)
      The
      entire amount of Mr. Pendergraft’s salary for the year ended December 31, 2006,
      was accrued.


(12)
      The
      entire amount of Mr. Ruiz’s salary for the year ended December 31, 2006, was
      accrued.


(13)
      All
      but $34,000 of Mr. Woodward’s salary for the year ended December 31, 2006, was
      accrued.


(14)
In
      May
      2006 the Members of the Board were awarded 12,000 ten-year options (24,000
      for
      the Chairman) with an exercise price of $0.61, vesting monthly over one
      year.





**Option
      Grants**





No
      options were issued to Named Executive Officers in 2006.








**AGGREGATED
      OPTION EXERCISES IN 2006**


**AND
      OPTION VALUES AT DECEMBER 31, 2006**





**Name**
              **Shares
                  Acquired on Exercise**
              **Value
                  Realized**
              **Number
                  of Securities Underlying Unexercised Options Held at December 31,
                  2006**
              **Value
                  of Unexercised In The Money Options Held at December 31,
                  2006****Exercisable**
              **Unexercisable**
              **Exercisable**
              **Unexercisable**David
                  M. Adams
              None
              -
              740,000
              160,000
              $
                  0
              $
                  0John
                  O’Keefe
              None
              -
              740,000
              160,000
              $
                  0
              $
                  0John
                  MacDonald
              None
              -
              100,000
              50,000
              $
                  0
              $
                  0





Note:


Value
      of
      Unexercised In-The-Money Options Held at December 31, 2006 computed based
      on the difference between aggregate fair market value and aggregate exercise
      price. The fair market value of our common stock on December 31, 2006 was
      $0.30, based on the closing price on the OTC Bulletin Board.





**Employment
      Agreements**





*David
      M. Adams*





In
      January 2004, we entered into an employment agreement with David Adams. The
      term
      of the agreement is for one year, and it may be renewed at the pleasure of
      both
      parties. Pursuant to the agreement, Mr. Adams serves as our President and
      COO in exchange for a base salary of $185,000 per year. This base salary has
      since been amended to $200,000 per year. Mr. Adams also received an option
      to purchase 150,000 shares of common stock to vest quarterly over the initial
      term of the employment agreement. Mr. Adams also received a signing bonus
      in the amount of $50,000 on the effective date of the employment agreement,
      and
      is entitled to participate in our annual incentive compensation program with
      a
      potential bonus being up to fifty percent of his base salary. Effective March
      31, 2007, Mr. Adams agreed to modify his Employment Agreement for three months,
      remain as President of the Company, and reduce his base salary to $80,000 in
      consideration for a reduction of his time spent at the Company to two days
      per
      week. The amendment to Mr. Adam’s employment agreement is described in greater
      detail below under “Certain Relationships and Related
      Transactions.”





*John
      O’Keefe*





In
      January 2004, we entered into an employment agreement with John O’Keefe. The
      term of the agreement is for one year, and it may be renewed at the pleasure
      of
      both parties. Pursuant to the agreement, Mr. O’Keefe serves in the position
      of Executive Vice President and CFO (until March 2007, when he resigned as
      CFO
      of the Company) in exchange for a base annual salary of $175,000 for the first
      twelve months of his employment, $195,000 for the second year of employment
      and
      $215,000 for the third year of employment. This base salary has since been
      amended to $200,000 per year. Mr. O’Keefe also received an option to
      purchase 80,000 shares of common stock to vest quarterly over the initial term
      of the employment agreement. Mr., O’Keefe received a one time payment of $40,000
      as a sign-on bonus entitled to participate in our annual compensation program
      with a potential bonus being up to fifty percent of his base salary. Effective
      March 31, 2007 Mr. O’Keefe assumed the title of CEO.





66


*John
      MacDonald*





Effective
      March 31, 2007, Mr. MacDonald assumed the title of Executive Vice President
      and
      CFO. He also retains the title of Corporate Secretary. No Employment Agreement
      has yet been entered into between Mr. MacDonald and the Company. He currently
      receives an annual salary of $105,000, which remains unchanged from 2006.





**COMPENSATION
      DISCUSSION AND ANALYSIS**





**Director
      Compensation**





We
      pay
      members of our Board of Directors fees for attendance at Board and other
      committee meetings in the form of cash compensation or similar remuneration,
      and
      reimburse them for any out-of-pocket expenses incurred in connection with our
      business. Currently, each independent director earns compensation of $1,000
      per
      month with an additional $1,000 per month for chairing a committee with the
      exception of the audit committee chair who receives an additional $2,000 per
      month and the Chairman of the Board who receives an additional $3,000 per month.
      Meeting fees are earned at a rate of $1,000 per day for regularly scheduled
      Board meetings and $500 per day for committee meetings. To date, with the
      exception of the Chairman’s fees, all compensation amounts for 2006 remain
      deferred and amounts prior to 2006 have been paid in common stock in lieu of
      cash. Additionally, the Chairman receives options to purchase 24,000 shares
      of
      our common stock per year and all other independent directors receive options
      to
      purchase 12,000 shares per year.





The
      Board
      of Directors reserves the right in the future to award the members of the Board
      of Directors additional cash or stock based consideration for their services
      to
      the Company, which awards, if granted shall be in the sole determination of
      the
      Board of Directors.





**Executive
      Compensation Philosophy**





Our
      Compensation Committee, consisting of Mr. Herbert, the chair of the Committee,
      Mr. Ruiz and Mr. Block, all Directors of the Company, determine the compensation
      paid to our executives and Directors. Our executive compensation program is
      designed to attract and retain talented executives to meet our short-term and
      long-term business objectives. In doing so, we attempt to align our executives’
interests with the interests of our shareholders by providing an adequate
      compensation package to such executives. This compensation package includes
      a
      base salary, which we believe is competitive with other companies of our
      relative size. In addition we also, from time-to-time, award incentive bonuses
      which are linked to our performance, as well as to the individual executive
      officer’s performance. Our executive compensation packages may also include
      long-term, stock based compensation to certain executives which is intended
      to
      align the performance of our executives with our long-term business strategies.
      The Compensation Committee reserves the right to grant such options in the
      future, if the Committee in its sole determination believes such grants would
      be
      in the best interests of the Company.





**Base
      Salary**





The
      base
      salary of our executive officers, are provided in their employment agreements,
      in the case of Mr. O’Keefe and Mr. Adams, and by the Compensation Committee in
      the case of Mr. MacDonald. The base salaries were established by evaluating
      the
      range of responsibilities of their positions, as well as the anticipated impact
      such individuals could have in meeting our strategic objectives. Base salaries
      are adjusted to reflect the varying levels of position responsibilities and
      individual executive performance.





**Incentive
      Bonus**





The
      Compensation Committee reserves the right to provide our executives incentive
      bonuses, which bonuses the Committee may grant in its sole discretion, if the
      Committee believes such bonuses are in the Company’s best interest, after
      analyzing our current business objectives and growth, if any, and the amount
      of
      revenue we are able to generate each month, which revenue is a direct result
      of
      the actions and ability of those executives.





**Long-term,
      Stock Based Compensation**





In
      order
      to attract, retain and motivate executive talent necessary to support the
      Company’s long-term business strategy we may award certain executives with
      long-term, stock based compensation in the future, in the sole discretion of
      our
      Board of Directors, which we do not currently have any immediate plans to
      award.


67





**Criteria
      for Compensation Levels**





The
      Company has always sought to attract and retain qualified executives and
      employees able to positively contribute to the success of the Company for the
      benefit of its various stakeholders, the most important of which is its
      shareholders, but also including its customers, its employees, and the
      communities in which the Company operates.





The
      Compensation Committee (in establishing compensation levels for the Chief
      Executive Officer, President and Chief Financial Officer) considers many
      factors, including, but not limited to, the individual’s abilities and executed
      performance that results in: the advancement of corporate goals of the Company,
      execution of the Company’s business strategies, contributions to positive
      financial results, and contributions to the development of the management team
      and other employees. An officer must demonstrate his or her ability to deliver
      results in his or her areas of responsibility, which can include, among other
      things: business development with new and existing customers, development of
      new
      products, efficient management of operations and systems, implementation of
      appropriate changes and improvements to operations and systems, personnel
      management, financial management, and strategic decision making. In determining
      compensation levels, the Compensation Committee also considers: competitiveness
      of compensation packages relative to other comparable companies, and the
      experience level of each particular individual.





Compensation
      levels for executive officers are generally reviewed upon the expiration of
      such
      executive’s employment agreement (if any), or annually, but may be reviewed more
      often as deemed appropriate.




**Compensation
      Philosophy and Strategy**





In
      addition to the “Criteria for Compensation Levels” set forth above, the Company
      has a “Compensation Philosophy” for all employees of the Company (set forth
      below), and a “Compensation Strategy for Key Management Personnel” (set forth
      below), a substantial portion of which also applies to all employees of the
      Company.





**Compensation
      Philosophy**





The
      Company’s compensation philosophy is as follows:




•
            
            The
                Company believes that compensation is an integral component of its
                overall
                business and human resource strategies. The Company’s compensation plans
                will strive to promote the hiring and retention of personnel necessary
                to
                execute the Company’s business strategies and achieve its business
                objectives.





•
            
            The
                Company’s compensation plans will be strategy-focused, competitive, and
                recognize and reward individual and group contributions and results.
                The
                Company’s compensation plans will strive to promote an alignment of the
                interests of employees with the interests of the shareholders by
                having a
                portion of compensation based on financial results and actions that
                will
                generate future shareholder value.




•
            
            In
                order to reward financial performance over time, the Company’s
                compensation programs generally will consist of: base compensation,
                and
                may also consist of short-term variable incentives and long-term
                variable
                incentives, as appropriate.




•
            
            The
                Company’s compensation plans will be administered consistently and fairly
                to promote equal opportunities for the Company’s employees.







68


**Compensation
      Strategy for Key Management Personnel**




The
      Company’s compensation strategy for its key management personnel is as follows:




•
            
            Total
                compensation will include base salary and short-term and long-term
                variable incentives based on annual performance, and long-term variable
                incentives, in each case, where appropriate.




•
            
            Compensation
                will be comparable to general and industry-specific compensation
                practices.




•
            
            Generally,
                base compensation, and targeted short and long-term variable compensation,
                if any, will be established within the range of compensation of similarly
                situated companies. The Company’s organization size and complexity will be
                taken into account, and therefore similarly situated companies includes
                companies of similar size and complexity whether or not such companies
                are
                in the Company’s industry or not.




•
            
            When
                determining compensation for officers and managers, the Company takes
                into
                account the employee’s knowledge and experience, including industry
                specific knowledge and experience, to the extent such knowledge and
                experience contributes to the Company’s ability to achieve its business
                objectives.




•
            
            The
                Company reserves the right to adjust annual base salaries of employees
                if
                individual performance is at or above pre-established performance
                expectations.








69


**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management**





The
      following table presents certain information regarding the beneficial ownership
      of our common stock as of March 30, 2007, by (i) each person who is known
      by us to own beneficially more than 5% of the outstanding shares of our common
      stock, (ii) each of our directors, (iii) our Named Executive Officers,
      and (iv) all directors and executive officers as a group. Each of the
      persons listed in the table has sole voting and investment power with respect
      to
      the shares listed.





Common
      Stock




**Name
                  and Address of Beneficial Owner**
              **Amount
                  and Nature of Beneficial Owner**
              **Percentage
                  of Class (1)**Thornton
                  Business Security Trust
                9037
                  Opus Drive
                Las
                  Vegas, Nevada 89117
              16,447,500
              24.3%Laurus
                  Master Fund
                825
                  Third Avenue, 14thFloor
                New
                  York, New York 10022
              12,180,000(3)
              15.3%Berg
                  McAfee Companies LLC (2)
                100600
                  N. De Anza Blvd., #250
                Cupertino,
                  California 95014
              9,483,386
              14.0%Alberta
                  Energy Partners (16)
                43
                  Brookgreen Circle North
                Montgomery,
                  Texas 77356
              3,810,000(4)
              5.6%Eric
                  A. McAfee
                100600
                  N. De Anza Blvd., #250
                Cupertino,
                  California 95014
              10,696,535(5)
              15.8%John
                  O’Keefe
                CEO
              1,183,334(7)
              1.7%David
                  M. Adams
                President
              1,143,766(6)
              1.7%John
                  A. MacDonald
                CFO
              171,450(17)
              *John
                  R. Block
                Director
              274,250(8)
              *Roger
                  P. (Pat) Herbert
                Director
              36,500(9)
              *Scott
                  W. Johnson
                Director
              162,000(10)
              *Joseph
                  J. Penbera
                Director
              1,157,452(11)
              1.7%Frederick
                  R. Ruiz
                Director
              546,132(12)
              *Jeffrey
                  R. Pendergraft
                Director
              17,000(13)
              *


70





O.
                James Woodward III
              Chairman
            288,875(14)
            *Total
                Shares of 5% or more Beneficial Ownership
            41,920,936(15)
            62.0%Total
                Shares of Officers and Directors as a group
            4,980,759
            7.4%




*
      Less
      than 1%





*Notes:*





*(1)*
            *Each
                beneficial owner’s percentage ownership is based upon 67,609,904 shares of
                common stock outstanding as of March 30, 2007, and assumes the exercise
                or
                conversion of**all**options, warrants and other convertible securities held by such person
                and
                that are exercisable or convertible within 60 days after March 30,
                2007.*





*(2)*
            *Berg
                McAfee Companies is controlled by Clyde Berg and Eric McAfee.
                Eric McAfee is our former
                Vice-Chairman.*





*(3)*
            *Shares
                issuable upon exercise of Warrants held by Laurus, of which 6,090,000
                Warrants are exercisable at an exercise price of $1.44 per share
                and
                6,090,000 Warrants are exercisable at an exercise price of $0.001
                per
                share.**.**Under
                the terms of the Warrants, Laurus is prohibited from exercising the
                Warrants in an amount which would cause it and its affiliates to
                beneficially own more than 4.99% of the common stock of Blast. This
                provision may be waived by Laurus with 61 days prior written notice
                to
                Blast and becomes null and void following notice of an Event of Default
                under the Note issued to Laurus, which Event of Default has previously
                occurred to date, and as such, the ownership limitation no longer
                applied
                to Laurus.*





*(4)*
            *Includes
                1,000,000 shares issuable upon the exercise of warrants held by Alberta.*





*(5)*
            *Includes
                90,000 shares held by members of Mr. McAfee’s household, which Mr. McAfee
                is deemed to beneficially own. Also includes the 9,483,386 shares
                of
                common stock which are held by Berg McAfee Companies LLC, which Mr.
                McAfee
                is deemed to beneficially own.*





*(6)*
            *Includes
                740,000 shares issuable upon exercise of options held by Mr. Adams.*





*(7)*
            *Includes
                740,000 shares issuable upon exercise of options held by Mr. O’Keefe. Also
                includes 105,000 shares of common stock held by O’Keefe Capital Partners,
                LP, which is controlled by Mr. O’Keefe, and 338,334 shares of common stock
                held by O’Keefe Management LLC, which is controlled by Mr. O’Keefe, which
                shares Mr. O’Keefe is deemed to beneficially
                own.*





*(8)*
            *Includes
                106,000 shares issuable upon exercise of options held by Mr. Block.*





*(9)*
            *Includes
                24,000 shares issuable upon exercise of options held by Mr. Herbert.*





*(10)*
            *Includes
                12,000 shares issuable upon exercise of options held by Mr. Johnson.*





*(11)*
            *Includes
                106,000 shares issuable upon exercise of option held by Mr. Penbera.
                Also
                includes 20,000 shares of common stock held by members of Mr. Penbera’s
                household, which shares Mr. Penbera is deemed to beneficially own.*





*(12)*
            *Includes
                106,000 shares issuable upon exercise of options held by Mr. Ruiz.
                Also
                includes 21,048 shares of common stock held by members of Mr. Ruiz’s
                household, which shares Mr. Ruiz is deemed to beneficially own.*





*(13)*
            *Includes
                12,000 shares issuable upon exercise of options held by Mr.
                Pendergraft.*





*(14)*
            *Includes
                142,000 shares issuable upon exercise of options held by Mr.
                Woodward.*


71





*(15)*
            *Includes
                shares beneficially owned by Berg McAfee Companies LLC, Eric McAfee
                (except those shares which are owned by Berg McAfee Companies LLC,
                which
                are already included in the shares beneficially owned by Mr. McAfee),
                Laurus Master Fund, Ltd., and Alberta Energy
                Partners.*





*(16)*
            *Alberta
                Energy Partners is controlled by Mark McAfee and Mark Alley, who
                have
                investment decision and voting powers. Neither Mark McAfee nor Alberta
                Energy Partners are related to or affiliated with Eric McAfee or
                the Berg
                McAfee Companies.*




*(17)*
                *Includes
                    100,000 shares issuable upon exercise of options held by Mr.
                    MacDonald.*


**Holders**





As
      of
      March 30, 2007, we had 67,609,904 shares of common stock issued and outstanding
      held by approximately 385 shareholders of record, including 1,150,000 approved
      shares arising from the class action settlement, described above under “Legal
      Proceedings.”





**Item
      12. Certain Relationships and Related Transactions**





*Thornton
      related entities*





As
      part
      of the acquisition of Eagle Domestic Drilling Operations LLC, the selling
      members agreed to purchase 15 million Blast common shares at $1.00 per share
      and
      5 million two year warrants with an exercise price of $0.01 per share with
      registration rights. The largest component of the private placement was
      purchased by the Thornton Business Security Trust, a trust whose beneficiaries
      are Rodney D. Thornton and his spouse. Thornton Business Security Trust
      beneficially owns 16,447,500 shares of our common stock and has become our
      largest shareholder. We also entered into a three year Consulting Agreement
      for
      transition and strategic services with Second Bridge LLC, an entity controlled
      by Rodney D. Thornton, at a rate of $150,000 per month, which amount we ceased
      paying as of December 2006





We
      also
      entered into a short term Consulting Agreement with Second Bridge LLC to advise
      in the construction of Rig 17 in exchange for 900,000 common shares of Blast.
      Lastly, we entered into two lease agreements with Adkins Hill Properties LLC,
      also controlled by Rodney D. Thornton, to use the Adkins Fabrication yard at
      a
      rate of $7,500 per month for three years, as described above under “Description
      of Property,” and an additional six month lease for temporary space also at
      $7,500 per month, which has since expired.





*Berg
      McAfee Companies*





In
      December 2005, a commission fee (5% cash) was earned for a private placement
      brokered by Chadbourn Securities. Eric McAfee, partner in Berg McAfee Companies,
      and a significant shareholder of the Company holds an interest in Chadbourn
      Securities.





On
      July 15, 2005, Blast entered into an agreement to develop its initial
      abrasive jetting rig with Berg McAfee Companies, LLC (“BMC”), a major
      shareholder. The arrangement involves two loans for a total of $1 million to
      fund the completion of the initial rig and sharing in the expected rig revenues
      for a ten-year period. Under the terms of the loan agreement with BMC, cash
      revenues will be shared on the basis of allocating 90 percent to Blast and
      10
      percent to BMC for a ten-year period following repayment. After ten years,
      Blast
      will receive all of the revenue from the rig. The loan, secured by the rig,
      has
      a senior and subordinated structure, carries an average interest rate of 7.4
      %,
      and is due June 30, 2006. BMC also has the option to fund an additional three
      rigs under these commercial terms. In February 2006, BMC mutually agreed to
      extend the Maturity Date of the AFJ Rig Loans from September 2006 to March
      31,
      2007. No additional consideration was paid by the Company to BMC for the
      extension. BMC will be entitled to receive the additional interest which accrues
      during the extended loan period.





In
      December 2004, Berg McAfee purchased 400,000 shares of our common stock at
      a
      price of $0.50 per share in a private transaction valued at $200,000 with two
      year warrants attached to purchase 400,000 shares of our common stock at a
      price
      of $1.00 per share. The proceeds from that transaction were used for general
      corporate purposes.





72


In
      October 2004, Berg McAfee loaned us $100,000 under the terms of a convertible
      promissory note bearing interest at 8% and maturing May 31, 2006. In
      connection with the note, we issued warrants to purchase 50,000 shares of common
      stock at $2.00 per share during the term of the note to Berg McAfee. In May
      2006, Berg McAfee agreed to convert their note principal amount due on May
      31,
      2006 into shares of Company stock in lieu of cash payment. The original
      conversion terms including warrants, but excluding 8% interest, would equate
      to
      a $1.00 per share investment value. The conversion included a premium in the
      number of shares converted in order to lower the value of the holder’s
      investment to $.60 per share, which is the same price offered to note holders
      who converted their notes in December 2005. Blast issued 50,000 shares of common
      stock related to the conversion of the $100,000 note at a conversion price
      of
      $2.00 per share and 66,667 shares of common stock related to the premium on
      the
      conversion.





*Eric
      McAfee*





On
      January 19, 2005, we entered into a settlement agreement and mutual release
      with Eric McAfee, Edge Capital Group, Inc. (“Edge”) and certain entities
      affiliated with Robert Frazier, Sr. As part of the settlement, Mr. McAfee
      paid us $625,000 and gave us 300,000 shares of Natural Gas Systems, Inc. (“NGS”)
      common stock in exchange for 500,000 shares of our common stock. The 300,000
      shares of NGS common stock was collateral for a $375,000 required payment to
      us.
      That payment was made in April 2005, and the NGS shares were subsequently
      released back to Mr. McAfee. The $625,000 in cash was then distributed to Edge
      along with 750,000 shares of our common stock. At the closing of the settlement
      agreement, the parties executed a mutual release and dismissed all pending
      claims and litigation between them.





In
      October 2004, Mr. McAfee loaned us $100,000 under the terms of a
      convertible promissory note bearing interest at 8% and maturing May 31,
      2006. In connection with the note, we issued warrants to purchase 50,000 shares
      of common stock at $2.00 per share during the term of the note to
      Mr. McAfee. In May 2006, Eric McAfee agreed to convert their note principal
      amount due on May 31, 2006 into shares of Company stock in lieu of cash payment.
      The original conversion terms including warrants, but excluding 8% interest,
      would equate to a $1.00 per share investment value. The conversion includes
      a
      premium in the number of shares converted in order to lower the value of the
      holder’s investment to $.60 per share, which is the same price offered to note
      holders who converted their notes in December 2005. Blast issued 50,000 shares
      of common stock related to the conversion of the $100,000 note at a conversion
      price of $2.00 per share and 66,667 shares of common stock related to the
      premium on the conversion.





We
      had a
      consulting agreement with Mr. McAfee for $10,000 per month through
      April 30, 2005, with $120,000 due during 2004 and $40,000 in 2005. This
      agreement was cancelled upon the resignation of Mr. McAfee as a director, and
      as
      a result, we no longer owe Mr. McAfee any of the previous amounts which he
      was
      due pursuant to the consulting agreement.





*Richard
      D. Thornton*





On
      August
      25, 2006 Blast hired Richard D. Thornton, a selling member of Eagle Domestic
      Drilling Operations and a participant in the private placement described above,
      as Vice President of Operations and entered into an Employment Agreement with
      him whereby he received a salary of $150,000 per year and 1.5 million Blast
      stock options which vest quarterly over three years and have an exercise price
      of $1.30 per share with a ten year term. Mr. Thornton resigned on January 14,
      2007.








*Directors
      and Officers*





In
      May
      2006, we granted options to purchase 12,000 shares of our common stock to each
      of the following directors: John A. Block, Scott W. Johnson, Robert P. Herbert,
      Joseph J. Penbera, Jeffery Pendergraft and Frederick R. Ruiz. We also granted
      options to purchase 24,000 shares of our common stock to O. James Woodward
      III,
      Chairman of the Board. The options have a ten-year term and are exercisable
      at
      $0.61 per share, the market price at the date of grant. The options vest
      quarterly over 12 months.





In
      August
      2006, we issued 1.5 million options of our common stock to Richard Thornton
      under the terms of his employment contract. The options have a ten year term
      and
      are exercisable at $1.30 per share, the market price at the date of grant.
      The
      options vest quarterly over three years. These options were unexercised and
      expired 30 days following his resignation in January 2007.


73








In
      June
      2005, we granted options to purchase 12,000 shares of our common stock to the
      following directors: John A. Block, Robert P. Herbert, Joseph J. Penbera and
      Frederick R. Ruiz. We also granted options to purchase 24,000 shares of our
      common stock to O. James Woodward III, Chairman of the Board. The options have
      a
      ten-year term and are exercisable at $0.38 per share, the market price at the
      date of grant. The options vest quarterly over 12 months.





In
      March
      2005, the Board of Directors awarded to certain employees and officers a total
      of 560,000 shares of company stock as a bonus payment in lieu of cash for 2004
      performance. These shares were issued in September 2005.





On
      April
      9, 2007, we entered into an amendment with David M. Adams, our current President
      and former Co-Chief Executive Officer, pursuant to which we amended the terms
      of
      Mr. Adam’s January 17, 2004 employment agreement. Pursuant to the amendment, Mr.
      Adams will serve as our President until June 30, 2007, will be compensated
      at
      the rate of $80,000 per year, instead of the $200,000 per year that he was
      previously scheduled to make, will work on Company matters at least 2 days
      per
      week, will lose any unvested stock options as of March 31, 2007, and will have
      an unsecured claim at June 20, 2007, for six months of severance pay, one month
      of vacation pay, one half month of 2006 pay for a total value of $125,000,
      as
      well as 9 months of COBRA payments for medical and dental benefits under his
      employment agreement.








**Item
      13. Exhibits and Reports on Form 10-KSB**





***(a)
      Exhibits***


Index
      of Exhibits





Blast
      Energy, Inc. includes by reference, unless otherwise indicated, the following
      exhibits:





**Number**
            
            **Description**2.1
            
            Agreement
                and Plan of Reorganization, dated April 24, 2003, as amended June
                30,
                2003;
              Filed
                July 18, 2003 with the SEC, Report on Form 8-K3.1
            
            Restated
                Articles of Incorporation dated July 15, 2003
              Filed
                June 29, 2004 with the SEC, Form SB-23.2
            
            Bylaws,
                as amended September 25, 2003
              Filed
                June 29, 2004 with the SEC, Form SB-24.1
            
            Form
                of Subscription Agreement
              Filed
                August 11, 2004 with the SEC, Form 10-QSB4.2
            
            Form
                of Warrant Agreement
              Filed
                August 11, 2004 with the SEC, Form 10-QSB4.3
            
            Form
                of Promissory Note
              Filed
                August 11, 2004 with the SEC, Form 10-QSB4.4
            
            Form
                of Convertible Promissory Note
              Filed
                August 11, 2004 with the SEC, Form 10-QSB4.5
            
            Form
                of Registration Rights Agreement
              Filed
                August 11, 2004 with the SEC, Form 10-QSB4.6
            
            $800,000
                Secured Promissory Note dated July 15, 2005 by and among Blast Energy
                Services, Inc. and Berg McAfee Companies, LLC
              Filed
                July 26, 2005 with the SEC, Form 8-K


74





4.7
            
            $200,000
                Secured Subordinated Promissory Note dated July 15, 2005 by and among
                Blast Energy Services, Inc. and Berg McAfee Companies, LLC
              Filed
                July 26, 2005 with the SEC, Form 8-K10.1
            
            Employment
                Agreement - John O’Keefe, dated January 6, 2004
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.2
            
            Employment
                Agreement - David Adams, dated December 31, 2003
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.3
            
            Advisor
                Agreement - Dr. Ron Robinson, amended December 11, 2003
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.4
            
            Employment
                Agreement - Andrew Wilson, dated June 2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.5
            
            Amendment
                to License Agreement - Carl W. Landers, dated September 4,
                2003;
              Filed
                October 6, 2003 with the SEC, Report on Form 8-K10.6
            
            Second
                Amendment to License Agreement - Carl W. Landers, dated February
                28,
                2004;
              Filed
                February 28, 2004 with the SEC, Report on Form
                8-K





10.7
            
            Technology
                Report, “Landers Technology”, dated October 13, 2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.8
            
            Subscription
                Agreement, Gryphon Master Fund, L.P., dated October 23, 2003 and
                Registration Rights Agreement dated October 24, 2003
              Filed
                October 27, 2003 with the SEC, Report on Form 8-K10.9
            
            Form
                of Registration Rights Agreement, re: Private Placement Offering
                July/August 2003
              Filed
                December 3, 2003 with the SEC, Form 10-QSB, as amended10.10
            
            Alternative
                Form of Registration Rights Agreement, re: Offering July/August
                2003
              Filed
                December 3, 2003 with the SEC, Form 10-QSB, as amended10.11
            
            Placement
                Agency Agreement, Stonegate Securities, Inc., dated August 26,
                2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.12
            
            Independent
                Contractor Agreement, Terronne Petroleum Corporation, dated August
                1,
                2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.13
            
            Master
                Services Contract, Esperada Energy Partners, L.L.C., dated March
                2004
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.14
            
            Services
                Contract, Maxim Energy, Inc., dated March 2004
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.15
            
            Services
                Contract, Natural Gas Systems, dated January 2004
              Filed
                April 15, 2004 with the SEC, Form 10-KSB10.16
            
            Contract
                - Natural Gas Systems, “Delhi Field”, dated September 22,
                2003;
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.17
            
            Services
                Contract, Amvest Osage, Inc.; dated January 2004
              Filed
                April 15, 2004 with the SEC, Form 10-KSB


75





10.18
            
            Acknowledge
                of amounts owed at September 30, 2003
              re.
                Edge Capital Group contract dated June 16, 2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.19
            
            Contract
                - Edge Capital Group, “Franklin Field”, dated September 27,
                2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.20
            
            Contract
                - Edge Capital Group, “Monroe Field”, dated June 16, 2003
              Filed
                August 20, 2003 with the SEC, Form 10-QSB, as amended10.21
            
            Addendum
                to Contract, Edge Capital Group, “Monroe Field”, dated November 19,
                2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.22
            
            Contract
                - Noble Energy, re: Satellite Services, dated September 17,
                2003
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.23
            
            Contract
                - Apache Corp., re: Satellite Services, dated September 11,
                2002
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.24
            
            Contract
                - Energy 2000 NGC, “Monroe Field”, dated April 30, 2000
              Filed
                August 20, 2003 with the SEC, Form 10-QSB, as amended10.25
            
            Blast
                Energy, Inc. 2003 Stock Option Plan;
              Filed
                November 20, 2003 with the SEC, Form 10-QSB, as
                amended





10.26
            
            Master
                Service Contract - BlueRidge Gas Partners, LLC - June 23,
                2004
              Filed
                August 11, 2004 with the SEC, Form 10-QSB10.27
            
            Master
                Service Contract - VJI Natural Resources, LLC - July 20, 2004
              Filed
                August 11, 2004 with the SEC, Form 10-QSB10.28
            
            Contract/Order
                - US Department of Energy dated June 4, 2004 and Letter of Intent,
                Radial
                Drilling Optimization Services dated April 14, 2004
              Filed
                August 11, 2004 with the SEC, Form 10-QSB10.29
            
            License
                Agreement - Carl W. Landers, dated April 24, 2003;
              Filed
                October 6, 2003 with the SEC, Report on Form 8-K10.30
            
            License
                Agreement between Alberta Energy Holdings, Inc. and Verdisys, Inc.
                for
                Abrasive Fluid Jet Technology, dated October 27, 2004
              Filed
                November 15, 2004 with the SEC, Form 10-QSB10.31
            
            Agreement
                between Verdisys, Berg McAfee Companies, Energy 2000 NGC, and Eric
                McAfee
              Filed
                November 15, 2004 with the SEC, Form 10-QSB10.32
            
            Settlement
                Agreement and Mutual Release dated January 19, 2005 by and among
                Verdisys,
                Inc., Eric McAfee, Edge Capital Group, Inc. and certain entities
                affiliated with Robert Frazier, Sr.
              Filed
                February 4, 2005 with the SEC, Form 8-K10.33
            
            Assignment
                of License Agreement dated March 8, 2005 by and among Verdisys, Inc.
                and
                Maxim TEP, Inc.
              Filed
                March 14, 2005 with the SEC, Form 8-K10.34
            
            License
                Agreement dated March 15, 2005, by and among Edge Capital Group,
                Inc. or
                its assignee and Verdisys, Inc.
              Filed
                May 5, 2005 with the SEC, Form 10-QSB


76





10.35
            
            Abrasive
                Fluid Jet Rig Construction Agreement dated March 17, 2005, by and
                among
                Verdisys, Inc. and Alberta Energy Holding, Inc.
              Filed
                May 5, 2005 with the SEC, Form 10-QSB10.36
            
            Drilling
                Rig Development and Management Agreement dated April 12, 2005, by
                and
                between Verdisys, Inc. and Advanced Drilling Services, LLC
              Filed
                May 5, 2005 with the SEC, Form 10-QSB10.37
            
            Service
                Proposal Apache Corporation and Verdisys, Inc. dated May 16,
                2005
              Filed
                August 11, 2005 with the SEC, Form 10-QSB10.38
            
            First
                Amendment to the Assignment of License Agreement dated July 18, 2005
                by
                and among Blast Energy Services, Inc. and Maxim TEP, Inc.
              Filed
                July 26, 2005 with the SEC, Form 8-K10.39
            
            Second
                Amendment to the Assignment of License Agreement dated July 21, 2005
                by
                and among Blast Energy Services, Inc. and Maxim TEP, Inc.
              Filed
                July 26, 2005 with the SEC, Form 8-K10.40
            
            Third
                Amendment to the Assignment of License Agreement dated July 25, 2005
                by
                and among Blast Energy Services, Inc. and Maxim TEP, Inc.
              Filed
                July 26, 2005 with the SEC, Form
                8-K





10.41
            
            Fourth
                Amendment to the Assignment of License Agreement dated July 29, 2005
                by
                and among Blast Energy Services, Inc. and Maxim TEP, Inc.
              Filed
                August 12, 2005 with the SEC, Form 10--QSB10.42
            
            Fifth
                Amendment to the Assignment of License Agreement dated August 5,
                2005 by
                and among Blast Energy Services, Inc. an Maxim TEP, Inc.
              Filed
                August 12, 2005 with the SEC, Form 10-QSB10.43
            
            Letter
                of Intent dated August 5, 2005 by and between Blast Energy Services,
                Inc.
                and RadTech North America
              Filed
                August 12, 2005 with the SEC, Form 10-QSB10.44
            
            Abrasive
                Fluid Jet Technology Purchase Agreement among Blast Energy Services,
                Inc.
                and Alberta Energy Holding, Inc.
              Filed
                August 31, 2005 with the SEC, Form 8-K10.45
            
            Amendment
                #1 to the Construction Agreement among Blast Energy Services, Inc.
                and
                Alberta Energy Holding, Inc.
              Filed
                August 31, 2005 with the SEC, Form 8-K10.46
            
            Amendments
                Six through Ten to the Assignment of License Agreement dated August
                and
                September 205 by and among Blast Energy Services, Inc. and Maxim
                TEP,
                Inc.
              Filed
                September 29. 2005 with the SEC, Registration Statement on Form
                SB-2.10.47
            
            Amendment
                eleven to the Assignment of License Agreement dated September 28,
                2005 and
                Demand letters dated October 13thand 18thby
                and among Blast Energy Services, Inc. and Maxim TEP, Inc.
              Filed
                November 14, 2005 with the SEC, Form 10-QSB10.48
            
            Amended
                Technology Purchase Agreement with Alberta Energy Partners dated
                August
                31, 2005. Filed March 27, 2006 with the SEC, Form 8K*10.49
            
            April
                9, 2007, Amendment to Employment Agreement with David M.
                Adams*21.1
            
            Subsidiaries


77





*31.1
            
            Certification
                of Principal Executive Officer pursuant to Section 302*31.2
            
            Certification
                of Principal Accounting Officer pursuant to Section 302*32.1
            
            Certification
                of Principal Executive Officer pursuant to Section 1350*32.2
            
            Certification
                of Principal Accounting Officer pursuant to Section
                1350





*
            Filed
                herewith





***(b)
      Reports on Form 8-K***




During
      the quarter ended December 31, 2006, we filed the following report on Form
      8-K:





November
      3, 2006 - To
      report
      that Quicksilver has filed a lawsuit in district court in Fort Worth, Texas
      against Eagle Domestic Drilling Operations LLC (as described in greater detail
      above).




Subsequent
      to the quarter ended December 31, 2006, we filed the following reports on Form
      8-K:




January
      5, 2007 -  To
      report
      that, due to the cancellation of our two land drilling contracts, and the
      resulting lack of revenue, Eagle Domestic Drilling Operations LLC had forced
      to
      suspend interest payments on the Laurus note, which triggered an event of
      default under such note.




January
      8, 2007 -  To
      report
      that we received written notice of various events of default from
      Laurus.




January
      22, 2007 -  To
      report
      that Blast Energy Services, Inc. and Eagle Domestic Drilling Operations LLC
      had
      voluntarily filed for Chapter 11 Bankruptcy.







78




**Item
      14. Principal Accountants Fees and Services**


**Audit
      Fees**





The
      following table presents fees for professional audit services performed by
      Malone & Bailey, PC for the audit of our annual financial statements for the
      fiscal years ended December 31, 2006 and 2005 and fees billed for other services
      rendered by it during those periods.





2006
            
            2005Audit
                fees
            $
                65,630
            
            $
                53,535Other
                non-audit fees
            14,610
            
            -Tax
                related fees
            3,400
            
            -Total
            $
                83,640
            
            $
                53,535





**Audit
      Related Fees**





Audit-Related
      Fees consist of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of the Company’s
      consolidated financial statements and are not reported under Audit
      fees.





**Tax
      Fees**





Tax
      Fees
      consists of fees billed for professional services for tax compliance, tax advice
      and tax planning. The services include assistance regarding federal and state
      tax compliance, tax audit defense, customs and duties, and mergers and
      acquisitions.





**Other
      Fees**





All
      Other
      Fees consist of fees billed for products and services provided by the principal
      accountants, other than those services described above.





Our
      Audit
      Committee Charter requires the prior approval of all audit and non−audit
      services provided by our independent auditors, subject to certain *de
      minimus* exceptions
      which are approved by the Audit Committee prior to the completion of the audit.
      Prior to the creation of the Audit Committee, our Board of Directors served
      the
      role of our audit committee and approved the engagement of our independent
      auditors to render audit and non−audit services before they were ** engaged.
      All of the services for which fees are listed above were pre−approved by our
      Board of Directors.








79


**Signatures**


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





**Blast
                Energy Services, Inc.**(Registrant)By:
            /s/
                John O’KeefeJohn
                O’Keefe
              Chief
                Executive Officer
              Principal
                Executive Officer/s/
                John MacDonaldJohn
                MacDonald
              Chief
                Financial Officer, Principal
              Accounting
                Officer and SecretaryDate:
            April
                17, 2007








In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





By:
            /s/
                John O’Keefe
            
            By:
            /s/
                John A. MacDonaldJohn
                O’Keefe
              Chief
                Executive Officer
              Principal
                Executive Officer
            
            
            John
                A. MacDonald
              Chief
                Financial Officer
              Principal
                Accounting Officer, and
              SecretaryDate:
            April
                17, 2007
            
            Date:
            April
                17, 2007By:
            /s/
                John R. Block
            
            By:
            /s/
                Joseph J. Penbera, Ph.D.John
                R. Block
              Director
            
            
            Joseph
                J. Penbera, Ph.D.
              DirectorDate:
            April
                17, 2007
            
            Date:
            April
                17, 2007By:
            /s/
                Roger P. Herbert
            
            By:
            /s/
                Frederick R. RuizRoger
                P. Herbert
              Director
            
            
            Frederick
                R. Ruiz
              DirectorDate:
            April
                17, 2007
            
            Date:
            April
                17, 2007By:
            /s/
                O. James Woodward III
            
            
            /s/
                Scott JohnsonO.
                James Woodward III
              Director
            
            
            Scott
                Johnson
              DirectorDate:
            April
                17, 2007
            
            Date:
            April
                17, 2007By:
            /s/
                Jeffrey R. PendergraftJeffrey
                R. Pendergraft
              DirectorDate:
            April
                17, 2007