UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2008







 ̈
            TRANSITION REPORT PURSUANT TO
      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.


(Exact
Name of Registrant as Specified in Its Charter)









Texas
              22-3755993(State
      or other jurisdiction of
                incorporation
      or organization)
              (IRS
      Employer
                Identification
      No.)




14550
Torrey Chase Blvd, Suite 330


Houston, Texas
77014


(Address
of Principal Executive Offices)




(281)
453-2888


(Registrant’s
Telephone Number,


Including
Area Code)





Securities
registered pursuant to Section 12(b) of the Act: None







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes   ̈   No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes   ̈   No  x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No   ̈







Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.x





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





Large accelerated
filer   ̈                                           Accelerated
filer    ̈


Non-accelerated filer   ̈                                           Smaller
reporting company  x





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





The
aggregate market value of the voting stock held by non-affiliates as of June 30,
2008, the last business day of the registrant’s second fiscal quarter was
approximately $14,277,276 based on the closing price reported on such date of
the registrant’s common stock.





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


YesxNo ̈





The
number of shares of the issuer’s common stock outstanding of each of the
issuer’s classes of equity as of March 31, 2009 is 61,817,404 including
1,150,000 approved but unissued shares arising from the class action settlement
from 2005 and 35,000 shares that are still outstanding as of the filing of this
report, but which shares the Issuer expects to cancel in the second quarter of
2009.





1




Table
of Contents







PagePART
      IItem
      1.     Business
                  3Item
      1A.  Risk Factors
                  14Item
      1B.  Unresolved Staff Comments
                  23Item
      2.     Properties
                  23Item
      3.     Legal Proceedings
                  23Item
      4.     Submission of Matters to a Vote of
      Security Holders
                  4PART
      IIItem
      5.     Market For Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                  25Item
      6      Selected Financial
    Data
                  27Item
      7.     Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                  27Item
      7A.  Quantitative and Qualitative Disclosure About Market
      Risk
                  32Item
      8.     Financial Statements and Supplementary
      Data
                  32Item
      9.     Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
                  32Item
      9A.   Controls and Procedures
                  33Item
      9B.   Other Information
                  33PART
      IIIItem
      10.    Directors, Executive Officers and Corporate
      Governance
                  34Item
      11.    Executive Compensation
                  37Item
      12.    Security Ownership of Certain Beneficial Owners
      and Management and Related  Stockholder Matters
                  43Item
      13.   Certain Relationships and Related Transactions, and
      Director Independence
                  44Item
      14.    Principal Accounting Fees and
      Services
                  46PART
      IVItem
      15.    Exhibits and Financial Statement
      Schedules
                  47SIGNATURES
                  48





2


FORWARD-LOOKING
STATEMENTS





ALL
STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE
THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR
FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE
GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.   REFERENCES IN
THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2008.  AS USED HEREIN, THE “COMPANY,” “BLAST,” “WE,” “US,” “OUR” AND
WORDS OF SIMILAR MEANING REFER TO BLAST ENERGY SERVICES, INC. AND ITS WHOLLY
OWNED SUBSIDIARY, EAGLE DOMESTIC DRILLING OPERATIONS LLC, UNLESS OTHERWISE
STATED.





PART
I





Item
1. Business.





Organizational
History





Blast was
originally incorporated in September 2000 as Rocker & Spike
Entertainment, Inc, a California corporation. On January 1, 2001, we
purchased the assets of Accident Reconstruction Communications Network and
changed our name to Reconstruction Data Group, Inc. In April 2003, we entered
into a merger agreement with Verdisys, Inc., which was initially incorporated as
TheAgZone Inc. in 1999 as a California corporation. Its purpose was to provide
e-Commerce satellite services to agribusiness. The merger agreement called for
us to be the surviving company. Our name was changed to Verdisys, Inc., our
articles of incorporation and bylaws remained in effect, 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 was changed to the oil
and gas industry. In June 2005, we changed our name to Blast Energy Services,
Inc. (“Blast”) to reflect our focus on the energy services
business.





In August
2006, we acquired Eagle Domestic Drilling Operations LLC (“Eagle”), a drilling
contractor which owned three completed land rigs and three more under
construction. The Eagle acquisition included five two-year term International
Association of Drilling Contractors (“IADC”) contracts with day rates of $18,500
per day and favorable cost sharing provisions. The assumptions used in the Eagle
acquisition include a steady and high revenue stream and full utilization rate
expectations based upon these five contracts. The subsequent cancellation of
these contracts by Hallwood Petroleum, LLC and Hallwood Energy, LP
(collectively, “Hallwood”) and Quicksilver Resources, Inc. (“Quicksilver”) in
the fall of 2006 severely impacted  our ability to service the note
incurred with the acquisition of the drilling rig business. We filed suit for
breach of those contracts.





3


In
January, 2007, Blast and Eagle, filed voluntary petitions with the U.S.
Bankruptcy Court for the Southern District of Texas – Houston Division (the
“Court”) under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that
we could dispose of burdensome and uneconomical assets and reorganize our
financial obligations and capital structure.  We operated 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.





In May
2007 we executed an agreement with our lender on the terms of an asset purchase
agreement intended to offset the full amount of the $40.6 million senior Note,
including accrued interest and default penalties.  Under the terms of
this agreement, only the five land drilling rigs and associated spare parts were
sold to repay the Note. As a result, the satellite communication business and
the applied fluid jetting technology remained with us subsequent to the sale of
the rigs.





In
February 2008, the Bankruptcy Court entered an order confirming our Second
Amended Plan of Reorganization (the “Plan”).  The overall impact of
the confirmed Plan was for Blast to emerge with unsecured creditors fully paid,
have no debt service scheduled for at least two years, and keep equity
shareholders’ interests intact.





Under the
terms of the Plan, Blast raised $4.0 million in cash proceeds from the sale of
convertible preferred securities to Clyde Berg and McAfee Capital, two parties
related to Blast’s largest shareholder, Berg McAfee Companies.  The
proceeds from the sale of the securities were used to pay 100% of the unsecured
creditor claims, all administrative claims, and all statutory priority claims,
for a total amount of approximately $2.4 million.  The remaining $1.6
million was used to execute an operational plan, including but not limited to,
reinvesting in the Satellite Services and Down-hole Solutions businesses and
pursue an emerging Digital Oilfield Services business.





Under the
terms of the Plan, Blast carried three secured obligations:





·
            A
      $2.1 million interest-free senior obligation with Laurus Master Fund,
      Ltd., (“Laurus”) secured by the assets of Blast and payable only by way of
      a 65% portion of the proceeds received in the customer litigation
      lawsuits, or from any asset sales that may occur in the
      future;





·
            A
      $125,000 note to McClain County, Oklahoma for property taxes, which was
      also to be paid from the receipt of litigation proceeds from Quicksilver;
      and





·
            A
      pre-existing secured $1.12 million note with Berg McAfee Companies, which
      was extended for an additional three years from the effective date of the
      Plan (February 27, 2008) at an  8% interest rate, and contains
      an option to be convertible into Company stock at the rate of one share of
      common stock for each $0.20 of the note
  outstanding.





The notes
to Laurus and McClain County were subsequently paid in full from the Hallwood
and Quicksilver lawsuit settlement proceeds in October 2008.





Debtor-in-Possession
(DIP) Loan





The
Bankruptcy court approved Blast’s ability to draw $0.8 million from McAfee
Capital and Clyde Berg to finance Blast on a temporary basis.  The
Plan allowed them to convert the outstanding balance of the DIP loan and
including accrued interest into Company common stock at the rate of one share
for each $0.20 of the outstanding balance.  The full conversion of the
DIP Loan took place in April 2008.





Preferred
Stock





In
January 2008, Blast sold the rights to an aggregate of 2,000,000 units, each
unit consisting of four shares of Series A Convertible Preferred Stock (the
“Preferred Stock”), and one three year warrant with an exercise price of $0.10
per share (the “Units”), for an aggregate of $4,000,000 or $2.00 per Unit, to
Clyde Berg and to McAfee Capital LLC.   The shares of common
stock issuable in connection with the exercise of the warrants and the
conversion of the Preferred Stock were granted piggy-back registration
rights.  The proceeds from the sale of the Units were used to satisfy
creditor claims of $2.4 million under the terms of the Plan and provide working
capital of $1.6 million.





4


Series A Convertible
Preferred Stock


The
8,000,000 shares of Series A Preferred Stock accrue dividends at the rate of 8%
per annum, in arrears for each month that the Preferred Stock is
outstanding.  Blast has the right to repay any or all of the accrued
dividends at any time by providing the holders of the Preferred Stock at least
five days written notice of their intent to repay such dividends.  In
the event Blast receives a “Cash Settlement,” defined as an aggregate total cash
settlement received by Blast, net of legal fees and expenses, in connection with
Blast’s litigation proceedings with Hallwood and Quicksilver in excess of $4
million, Blast is required to pay outstanding dividends within thirty days in
cash or stock at the holder’s option.  If the dividends are not paid
within thirty days of the date the Cash Settlement is received, a “Dividend
Default” occurs. As of December 31, 2008, the aggregate arrearages for the
6,000,000 preferred shares then outstanding were $202,521. Also included in the
arrearages per share calculation were additional dividends in arrearage of
$50,630 related to the 2,000,000 preferred shares that were redeemed in October
2008 (as described below). As of December 31, 2008, the aggregate per share
arrearages were $0.04 per share.





The
Preferred Stock and any accrued and unpaid dividends, have optional conversion
rights into shares of Blast’s common stock at a conversion price of $0.50 per
share. The Preferred Stock automatically converts if Blast’s common stock trades
for a period of more than twenty consecutive trading days at a price greater
than $3.00 per share and if the average trading volume of Blast’s common stock
exceeds 50,000 shares per day.





The
Preferred Stockholders have the right to vote the number of underlying common
shares of voting stock that the Preferred Stock is then convertible
into.  The Preferred Stock may be redeemed at the sole option of Blast
upon the receipt by Blast of a cash settlement from the litigation in excess of
$7.5 million, provided that the holders, at their sole option, may have six
months, after Blast’s election to redeem the Preferred Stock, starting from the
date of Blast’s notice of the receipt of the cash settlement to either accept
the redemption of the Preferred Stock or convert into shares of Blast’s common
stock.





On
October 16, 2008, Blast agreed to redeem 2,000,000 shares of Preferred Stock,
1,000,000 shares each held by Clyde Berg and McAfee Capital, LLC at the face
value of $0.50 per share, and paid $1,000,000 to redeem the Preferred Shares.
Blast cancelled the 1,000,000 Preferred Shares each held by Clyde Berg and
McAfee Capital, LLC.  As a result only 6,000,000 shares of Preferred
Stock remain outstanding as of the date of this filing.





Warrants


Blast
also issued warrants to the Preferred Stockholders to purchase up to 2,000,000
shares of common stock at an exercise price of $0.10 per share.  These
warrants have a three-year term. The relative fair value of the warrants
determined utilizing the Black-Scholes model was approximately $446,000 on the
date of sale.  The significant assumptions used in the valuation were:
the exercise price of $0.10; the market value of Blast’s common stock on the
date of issuance of $0.29; expected volatility of 131%; risk free interest rate
of 2.25%; and a term of three years.  Management has evaluated the
terms of the Convertible Preferred Stock and the issuance of warrants in
accordance with EITF 98-5 and EITF 00-27, and concluded that there is not a
beneficial conversion feature at the date of issuance.





Re-domicile
to Texas





Pursuant
to the Plan, Blast was re-domiciled in Texas. Blast created and filed a
certificate of formation for Blast Energy Services, Inc, a Texas corporation and
wholly-owned subsidiary of Blast, in March 2008.  Immediately upon the
formation of this subsidiary, Blast filed Articles of Merger in Texas and
California, whereby Blast merged with and into the Texas Corporation, which
became the surviving entity.  Blast adopted and replaced its articles
of incorporation and bylaws with those of the Texas Corporation to effect the
merger.





Litigation
Settlements





Hallwood Energy/Hallwood
Petroleum Lawsuit


In
April 2008, Eagle and Hallwood agreed to settle the litigation for
approximately $6.5 million. Under the terms of the settlement, Hallwood agreed
to pay $2.0 million in cash, issue $2.75 million in equity and irrevocably
forgave $1.65 million in deposits paid to Eagle.  The parties and
their affiliates were fully and mutually released from any and all claims
between them.  The terms of the settlement agreement was approved by
the board of directors of each company and was confirmed by the
Court.





Under the
terms of the settlement agreement Hallwood paid Eagle $0.5 million in July 2008
and $1.5 million in September 2008. Payments received from Hallwood were
distributed in October 2008.


5


On
February 11, 2009, Blast and Eagle entered into an amended settlement letter
with Hallwood that modified and finalized the terms of the parties April 3, 2008
settlement letter.  The amended settlement provided that the equity
component would be satisfied by the issuance to Blast of Class C Partnership
Interests in Hallwood Energy, equal to 7% of such Interests, having a face value
of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement
was approved by the board of directors of each company and was confirmed by the
Court.





On March
2, 2009, Hallwood Energy filed voluntary petitions with the U.S. Bankruptcy
Court for the Northern District of Texas under Chapter 11 of Title 11 of the
U.S. Bankruptcy Code in order that it could dispose of burdensome and
uneconomical assets and reorganize its financial obligations and capital
structure. This bankruptcy filing creates uncertainty on the future value of
this equity position in Hallwood, so we are recognizing a zero carrying value in
our financial statements relating to the Class C Interests in
Hallwood.





Quicksilver Resources
Lawsuit


In
September 2008, Blast and Eagle entered into a Compromise Settlement and Release
Agreement with Quicksilver in the Court to resolve the pending
litigation.  Blast and Quicksilver also agreed to release all the
claims against each other and certain related parties.





Quicksilver
agreed to the terms and conditions of the Settlement and agreed to pay Eagle a
total of $10 million (the “Settlement Fees”), as follows:





·
            $5
      million payable upon the parties’ entry into the
    settlement;


·
            $1million
      payable on or before the first anniversary date of the execution of the
      settlement;


·
            $2
      million payable on or before the second anniversary date of the execution
      of the settlement; and


·
            $2
      million payable on or before the third anniversary date of the execution
      of the settlement.





In the
event any Settlement Fees are not paid on their due date and Quicksilver’s
failure to pay is not cured within 10 days after written notice, then all of the
remaining payments immediately become due and payable. Quicksilver made the
first payment of $5 million to Eagle in October 2008.





Business
Operations





Our
mission is to substantially improve the economics of existing and evolving oil
and gas operations through the application of Blast licensed and owned
technologies. We are an emerging technology company in the energy sector and
strive to assist oil and gas companies in producing more economically. We seek
to provide quality services to the energy industry through our two
divisions:





·
            Satellite
      Communication services to remote oilfield locations,
  and


·
            Down-hole
      Solutions, such as our applied fluid jetting
  technology





Our
strategy is to grow our businesses by maximizing revenues from the
communications and down-hole segments and controlling costs while analyzing
potential acquisition and new technology opportunities in the energy service
sector. In the near term, we will also seek to maximize value from certain
non-recurring litigation proceeds receivables in 2009 and throughout 2010 and
2011.





Our
primary business is the provision of Applied Fluid Jetting (“AFJ”) services to
stimulate production and increase reservoir recoveries on behalf of oil and gas
operators primarily in North America. For the relatively low cost of our
service, operators can potentially multiply the revenues and profits from their
old fields.





Our
secondary business segment 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.





Conventional
drilling locations typically use a massive area of land for the rig, equipment
and support vehicles and badly scar the terrain. Blast’s AFJ service has a much
smaller environmental footprint, using about 5% of the area with no scarring or
damage of any kind to the land.


6


There are
relatively small volumes of cutting fluids generated with the AFJ process,
especially compared to conventional well drilling and the AFJ fluid is primarily
composed of simple water. Blast ensures that even small quantities of AFJ
cutting fluids are hauled away and processed for safe and legal disposal in
approved disposal sites.





Industry
Description





In recent
years, the increase in product prices has increased drilling activity for oil
and natural gas.  However, U.S. production volumes from traditional
sources continue to decline. We believe our AFJ stimulation process can help
offset this decline by increasing both initial flow volumes and ultimate
recoveries from new and existing wells.





We
operate in the energy services sector, 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 is produced by very large
international oil companies, there are a much larger number of smaller
independent companies who own and operate the vast majority of new and existing
wells.





As a
smaller firm with a specialized service, we provide satellite communication
services and down-hole solutions 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 we believe the application of our services will add value to
our customers.





Demand
for our services depends on our ability to demonstrate improved economics to the
sector we serve. We believe that oil and gas developers will use our AFJ 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 recover additional
production and reserves from known reservoirs rather than pursuing a more risky
exploration or infill approach. Our AFJ 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 very large potential market exists
in North America for our production 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 difficult to predict, we believe they will remain
      relatively high by historic terms for the next several years. Following
      the current recession, we expect a resumption of high consumption and
      strong growth in Asian demand, along with limitations in delivery
      infrastructure and political unrest in major supplying countries to be
      primary contributing factors.




·
            We
      believe gas prices, while volatile, will recover over the next several
      years due to the combination of strong market demand for clean fuels and
      major supply constraints in conventional areas.  However, the
      impact of new supplies from unconventional gas sources may have a
      dampening effect on price.




·
            We
      do not believe there is any major substitution threat to oil and gas in
      the foreseeable future. In particular, any significant substitution of
      fossil fuels by hydrogen or other potential energy sources is believed by
      management to be at least a decade
away.





Applied
Fluid Jetting Services





Over the
past several years, Blast has developed an exciting down-hole stimulation
service that management believes has the potential to dramatically increase
production volumes and reserves from existing or newly drilled wells at an
attractive price to the customer. Blast has patents pending for their AFJ
process.


7


The
theory behind AFJ is both simple and extremely bold- to maximize the reservoir
area contacted by the well bore, both vertically and horizontally--in order to
increase production rates and improve reservoir recovery rates. Recent
experience has moved the theory closer to commercial realization. Blast provides
a production stimulation service by entering existing or new well bores to
access the productive formations containing oil and natural gas. By jetting
laterally into the formations, more of the reservoir is exposed to the wellbore
and additional hydrocarbons are flowed to the surface.





In recent
months, Blast has successfully jetted up to 90 feet horizontally into targeted
oil zones from the 2,750 feet deep vertical well bore and we jetted 20 laterals
into multiple zones. In 2008, at a well depth of approximately 300 feet, the
Blast rig completed two separate 50 foot laterals in each of two gas wells
located near Abilene, Texas. Each lateral extension was positioned at 180
degrees from each other into the targeted producing sand. As a result, the
initial production of the first well increased five-fold and increased
twelve-fold on the second well.





It is
believed that this AFJ process will be successful in many types of sandstone and
limestone/carbonate formations. In addition, management believes that the AFJ
service may be successfully applied down to 9,000 feet of vertical well depth by
simply adding a longer coiled tubing string. Since the process is at an early
stage, management believes that laterals longer than 90 feet may be jetted with
the existing equipment.





While,
currently focused on open-hole completions, the Company also plans to offer
stimulation services on targeted zones behind pipe.  In this case,
milling operations will first be conducted by a work-over unit or as an addition
to the Blast rig configuration using abrasive cutting or some other
method.





Blast
intends to provide casing milling, perforation, well stimulation and lateral
drilling services to oil and gas producers to allow them to increase production
and reserve recovery from existing and newly drilled wells. Since late 2007, we
have developed the AFJ process to work on our current rig and filed patents
covering the technology in February 2009. Blast Rig #1 is currently available
for contract on behalf of third party customers and we are looking at either
building or refurbishing additional rigs to add to our fleet.





Blast
owns the patent pending covering the AFJ process and intends to defend it
vigorously from would-be infringers of the technology. One of the major features
that make the AFJ process attractive is the low barriers of entry required in
securing the production stimulation business. Independent operators face a
natural decline from their oil and gas wells and are willing to pay a modest
amount to stimulate that production and increase their revenues. Their
investment is demonstrated almost right away and can be returned very quickly
while Blast’s investment of approximately $1 million per Rig can also be paid
back in short order. The major service companies have focused their marketing
away from Blast’s niche.





Major
Customers




Management
believes we have successfully commercialized the AFJ technology. We currently
have several active customers for our AFJ rig, including Reliance Oil & Gas,
Pantera Energy and Resource Energy Technologies. Thus far our customers are
small private oil and gas companies with lease ownership interests in Texas and
Kentucky. Our sales and marketing team is very active in prospecting for new
customers, including a potential new client, which is a major public energy
company with operations in Kern County, California. We are also actively
pursuing joint ventures and alliances in this market niche.





Market


We
believe it has become clear in recent years that while the demand for oil and
gas in the U.S. continues to grow, our ability to meet this demand from existing
and new sources worldwide is rapidly declining. This accelerated decline will
require producers to seek new extraction methods or technologies to develop oil
and gas production from existing fields and we anticipate that our AFJ process
will help satisfy the need for these new technologies. According to the US
Energy Information Administration, approximately, 2.5 million wells have
been drilled in the U.S. 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.”





A key
issue facing most independent oil and gas producers is how to economically
increase their production volumes. Conventional approaches can involve some
fairly expensive undertakings such as in-fill drilling programs, horizontal
drilling, well stimulation and massive “frac” jobs.  While these
programs may apply to large fields with thick contiguous pay sands, there are
many fields with geological conditions or production characteristics where the
potential improvement may not support such high dollar
solutions.


8


The use
of the AFJ process in the existing energy business is very small but has the
potential for explosive growth. The vast majority of the approximate 2.5 million
wells drilled in the U.S. since 1949 are either shut-in or are producing far
below their productive capacity. Traditional energy stimulation techniques are
not cost effective for these wells due to high costs. Producers universally
agree that more revenue from each well makes good economic sense for them at
almost any price level of crude oil and natural gas in excess of marginal
operating cost.





Blast has
created a market opportunity by offering a unique service that can be priced as
low as $20,000 per day, which we believe will stimulate production in new or
existing wells by multiples of their current rates. The payback calculation for
the operator is exemplified in recent AFJ work performed by Blast for Reliance
Oil & Gas, whereby for a cost of $80,000 they more than doubled the volume
of oil capable of being produced in two wells in South Texas and were able to
pay back their investment in approximately 48 days at crude oil prices of $35
per barrel.





One
approach to pricing our service has been to offer the service for free but share
in the net revenues generated from the increase in production by applying the
service to certain wells. In one example, we agreed to 50% revenue sharing and
in another we agreed to 40% of revenue sharing. Offering the service on cash for
fees basis is expected to generate gross revenues of approximately $20-30,000
per day.





Conventional
and directional drilling is slower and significantly more expensive than our
service and only applies to high productivity wells as do the massive sand
fracturing jobs common in the market today. Blast is not competing in this
segment of the market place. The large energy service companies such as BJ
Services, Halliburton or Schlumberger cater to the high price end of the market
for the minority of wells that actually have high production potential. We
believe that this leaves over a million wells, that are not being serviced by
the larger companies in the industry. There are a few other small operators that
offer a service they claim to be similar to Blast, but they are universally
limited in both gaining access to the formation and having sufficient pressure
and volume flow to laterally jet effectively.





Competition


Blast is
in the energy services sector which has many other firms offering a wide range
of services to oil and gas producers.  We are not aware of any major
competitors to our specialized AFJ service.  The top energy services
firms are actively marketing high dollar solutions as described
above.





Satellite
Communications





Our
satellite business segment provides communication services to the energy sector.
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. The
capability of satellites 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.





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.





9








At
present, we acquire modem hardware from ViaSat Inc., iDirect Technologies and
Spacenet Inc. and install this equipment on our customers’ onshore and offshore
platforms. Space segment services are acquired from SES and Loral and hub
services from Isotropic Networks, Viasat and Spacenet, Inc.
(“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, based on our own estimates. We believe 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. We
believe that satellite communications are more secure than many normal telephone
lines.





Major
Customers


Our major
satellite services customers in 2008 included BP America, Apache Corporation and
Dow Chemical, representing 37%, 18% and 16%, respectively, of our satellite
revenues for the year ended December 31, 2008. Contracts are usually for
hardware, backhaul, and bandwidth. Virtually any oil and gas producer, of which
there are many thousands, is a potential customer for our satellite
services.





Market


According
to the U.S. Department of Energy more than 2.5 million oil and gas wells have
been drilled since 1949 in  the U.S. alone, many of which are located
in remote or rural areas where communications and monitoring well status can be
difficult and expensive.  These 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. Further, 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.


10


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. Schlumberger, Caprock and
Stratus Global are focused on the top 20% of the market, particularly
international and offshore platforms. Stratus Global is also focused on the
offshore market using a traditional wireless network. We believe our satellite
services offer advantages over these services by:




·
            Customizing
      the service to better meet the customer’s
needs;


·
            Offering
      superior speed;


·
            Providing
      single vendor convenience; and


·
            Offering
      lower up-front infrastructure and operating
  costs.





Digital
Oilfield Market





In
general, oil and gas producers have been early adopters of radio and non-IP
based networks to support monitoring and control of exploration and production
activities, pipelines, gas processing plants, and refineries. The lack of
communication infrastructure in the remote sites where producers operate has
made the industry early adopters of wireless networks and wireless sensor
networks (“WSN”).





We
continue to be excited about the large potential market of the Digital Oilfield
Services and are determining how we can best develop market opportunities for
our services. We are pursuing our first pilot tests and attempt to leverage the
current satellite service opportunities being afforded by discussions with third
parties in the Digital Oilfield Services market. We continue to be confident
that there is a strong market and that we can effectively expand the market in
the future to meet our objectives.  However, we can offer no
assurances that we will be successful.





Blast’s
experience in the interface between satellite communications and the energy
industry presents us with a unique opportunity to exploit this convergence of
technology and market need.  Recent announcements by Cisco Systems,
Inc. (“Cisco”) and Motorola, Inc. (“Motorola”) have promoted the capability of
converting two-way radio signals into digital IP or carrying digital IP across
radio networks. Cisco has also announced products to address interoperability
and collaboration between radio, telephone, IP phone, mobile phone and PC
clients as part of their strategy to tie remote radio networks into mainstream
enterprise communication networks. Blast believes these products and
technologies provide the basis for developing a suite of valuable products
suited to the oil and gas industry.  These are expected to allow
extensive radio-based SCADA and pipeline monitoring systems interoperability and
interaction with other networks and applications. These systems were originally
built by the producers themselves as “stand-alone” networks as no other
alternative infrastructure was available in the remote areas.





Digital Oilfield Business
Relationships


Many of
the initial wireless sensor-monitoring systems relied on satellite to backhaul
the data to the oil and gas producers’ operating centers. The largest network
equipment supplier is our partner Spacenet, a wholly owned subsidiary of Gilat
Satellite Networks Ltd. We have been working with Spacenet on proposals to
upgrade the satellite backhaul equipment of several pipeline companies. Spacenet
has also worked with Cisco to integrate its satellite modems with Cisco’s router
products. We are also working with vendors of sensor policy management software
and video surveillance equipment introduced to us by Cisco, allowing us to
provide more complete solutions to our customers. We intend to work with our
partners to exploit these opportunities in the energy sector, of which there can
be no assurance.





Intelligent Petro-Services
Module


In
September 2008 we successfully demonstrated its new remote sensing product that
it believes will dramatically improve the energy industry’s ability to remotely
monitor and control their worldwide assets on a real-time basis. Blast has
demonstrated the Intelligent Petro-Services Module (“IPSM”) to several potential
customers, including representatives from energy services companies and systems
integrators, resulting in requests for further demonstrations to decision makers
and introductions to a number of prospective high visibility
customers.





11


With the
convergence of several new technological breakthroughs, Blast can now provide an
integrated and intelligent solution whereby operators can remotely monitor and
control their wells, pipelines, or other assets on a real-time basis over any
standard IP network. Blast has achieved this solution in part by enhancing the
capabilities of a broad range of Cisco routers. Blast has integrated
cost-effective remote computing, new communication routers with proprietary
software, the conversion of multiple industry sensor protocols into one network
standard, radio wave over internet IP capability and policy rule engines. This
technology will allow customers to take immediate action to remedy a remote
event based on thresholds which they have specified.




Advantages
of the IPSM include:




·
            Providing
      the operator with an automated real-time remote response to multiple
      events occurring in the field, including the ability to immediately notify
      operations staff anywhere over the IP
network.




·
            Flexibility
      – the module can be cost-effectively installed on small field operations
      with just a few sensors or scaled up to handle large operations managing
      hundreds of different sensor types.




·
            Providing
      the operator with an improved interface between existing remote sensor
      networks and back-end applications through the IP network. These
      capabilities can seamlessly upgrade a producer’s existing network
      infrastructure by converting multiple industry sensor protocols into one
      network standard.




While
Blast is excited about the potential for the introduction of IPSM into the
marketplace, delays have been experienced due to a legal dispute between our
business partner providing software support, Sensuion Inc., and their previous
employer, Vialogy Inc. Blast has no way to predict the outcome of this dispute
or how long it will take to be resolved.





Other Business
Factors




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;
      and


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 the Company 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





In
February 2009, we filed a provisional patent (application number 61/152,885)
relating to the process and unique equipment related to our applied fluid
jetting process.  This filing preserves our exclusive use of this
proprietary process. Later this year we expect to submit the final patent
application.





In August
2005, we entered into a definitive agreement to purchase from Alberta Energy
Partners (“Alberta”) a 50% interest in the abrasive fluid jetting technology
that provides us the unrestricted right to use the technology and license the
technology worldwide to others. While we are not currently utilizing the
technology, there may be an opportunity in the future to use it to mill or
perforate well casing and supplement the products offered with our down-hole
solutions business.





12


We
believe the applied fluid and abrasive jetting technologies and related trade
secrets may be 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
technology will be adequate to protect such technology, or that we will have the
financial resources to engage in litigation against parties who may infringe
upon us or seek to rescind their agreements with us. We also cannot provide our
investors with any degree of assurance regarding the possible independent
development by others of technology similar to that which we have acquired,
thereby possibly diminishing our competitive edge.





Governmental
Regulations





Assuming
we begin commercial drilling operations, of which there can be no assurance, 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/or


·
            Texas
      Railroad Commission and other state
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.





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
2008, approximately $88,000 was spent on modifying the AFJ rig so that it could
be capable of returning to service and approximately $50,000 was spent on the
development of the IPSM demonstration unit that was used to introduce this new
product offering in our satellite services business. During 2007 we incurred an
insignificant amount of research and development costs relating to our AFJ and
satellite businesses.





13


Employees





As of
December 31, 2008, we had five full time employees and one part time employee.
We also utilize independent contractors and consultants to assist us with the
operation, repair and maintenance on the AFJ rig, 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
1A.  Risk Factors.





The
following factors affect our business and the industries in which we operate.
The risks and uncertainties described below are not the only ones we
face.  Additional risks and uncertainties may exist which are not
presently known or which may also have an adverse effect on our
business.  You should carefully consider these risk factors and other
information in this annual report on Form 10-K 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.





GENERAL
RISKS RELATING TO OUR COMPANY





It
is uncertain when we will have significant operating income or cash flow from
operations sufficient to sustain our operations.





As of
March 31, 2009, our cash balance was approximately $300,000. However, our base
business still consumes cash and we have to generate more revenues and/or
funding to avoid running out of cash.  If financing is available, it
may involve issuing securities senior to our common stock or equity financings,
which are dilutive to holders of our common stock.  In addition, in
the event we do not raise additional capital from conventional sources, such as
our existing investors or commercial banks, there is a likelihood that our
growth will be restricted and we may be forced to scale back or curtail our
business plan. If we are unable to raise the additional funding, the value of
our securities could become worthless and we may be forced to abandon our
business plan.





We
will need additional capital to conduct our operations and fund our business and
our ability to obtain the necessary funding is uncertain.





We may
need to raise additional funds through public or private debt or equity
financing or other various means to fund our business. 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, 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. If this were to happen, our results of operations
and the value of our securities could be adversely affected.





We
have a limited operating history and our business and marketing strategies
planned are not yet proven, which makes it difficult to evaluate our business
performance.





We have
not yet been able to commercialize the capabilities of our applied jetting
technology and are not conducting operations with the abrasive
technology.  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 AFJ
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. 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.


14


Significant
amounts of our outstanding shares of common stock 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, 2009, we had 66,817,404 shares of common stock issued and outstanding
held by approximately 349 shareholders of record, including the 1,150,000 shares
approved for issuance but remaining un-issued under the class action settlement
from 2005. Blast is waiting on plaintiff’s counsel to provide its transfer agent
with the approved distribution list of the members of the class.  Many
of our outstanding shares of our common stock are “restricted securities” within
the meaning of Rule 144 under the Securities Act of 1933, as
amended.  As restricted shares, these shares may be resold only
pursuant to an effective registration statement or under the requirements of
Rule 144 or other applicable exemptions from registration under the Act and as
required under applicable state securities laws.  A sale under Rule
144 or under any other exemption from the Act, if available, or pursuant to
registration of shares of common stock of present stockholders, may have a
depressive effect upon the price of our common stock in any market that may
develop. 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.  Furthermore, the sale of a significant
amount of securities into the market could cause the value of our securities to
decline in value.





One
principal stockholder can influence the corporate and management policies of our
company.





Berg
McAfee Companies with its affiliates (“BMC”), effectively control approximately
23% of our outstanding shares of common stock on March 31, 2009, or 35%
including common and preferred shares and warrants issued under the terms of the
Reorganization in April 2008. Therefore, BMC may have the ability to
substantially influence all decisions made by us. Additionally, BMC’s 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
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.





In
October 2008, Blast’s current board of director, John R. Block, was appointed to
the board of directors of AE Biofuels, Inc., a California-based vertically
integrated biofuels company.  The Chairman and CEO of AE Biofuels,
Inc. is Eric McAfee. Mr. McAfee is also the managing partner for McAfee Capital,
LLC and president of Berg McAfee Companies, LLC, both of which are significant
shareholders of Blast. Additionally, Michael L. Peterson, a current board member
is also a director of AE Biofuels, Inc..  The fact that certain of our
directors are also directors of entities affiliated with BMC could cause actual
or perceived conflicts of interest between us and BMC and could cause the value
for our securities to become devalued or worthless.





If
we are late in filing our Quarterly or Annual reports with the Securities and
Exchange Commission, 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 Securities and Exchange Commission (“SEC”), any
OTCBB issuer which fails to file a periodic report (Form 10-Q or 10-K) by the
due date of such report (not withstanding any extension granted to the issuer by
the filing of a Form 12b-25),  three times during any 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 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.





15


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.





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. The
amendments 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.





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
frequently change the level of drilling and work-over activity by 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.





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 also 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.





16


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 U.S.
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. Specifically, the loss of the services of John O’Keefe, our Chief
Executive Officer or John MacDonald, our Chief Financial Officer, with whom we
currently have one year employment agreements with, as described below under
“Item 11. Executive Compensation,” could severely 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 their 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.





Because
of the inherent dangers involved in oil and gas exploration, there is a risk
that we may incur liability or damages as we conduct our business operations,
which could force us to expend a substantial amount of money in connection with
litigation and/or a settlement.





The oil
and natural gas business involves a variety of operating hazards and risks such
as well blowouts, pipe failures, casing collapse, explosions, uncontrollable
flows of oil, natural gas or well fluids, fires, formations with abnormal
pressures, pipeline ruptures or spills, pollution, releases of toxic gas and
other environmental hazards and risks. These hazards and risks could result in
substantial losses to us from, among other things, injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations. As a result,
substantial liabilities to third parties or governmental entities may be
incurred and/or we could be forced to expend substantial monies in connection
with litigation or settlements. In accordance with customary industry practices,
we maintain insurance against some, but not all, of such risks and losses. As
such, there can be no assurance that any insurance obtained by us will be
adequate to cover any losses or liabilities. We cannot predict the availability
of insurance or the availability of insurance at premium levels that justify our
purchase. The occurrence of a significant event not fully insured or indemnified
against, could materially and adversely affect our financial condition and
operations, which could lead to any investment in us becoming
worthless.


17


Compliance
with Section 404 of the Sarbanes-Oxley Act will strain our limited financial and
management resources.





We
anticipate incurring significant legal, accounting and other expenses in
connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for this Annual Report on Form 10-K, we were required to perform
system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act.  For fiscal year 2009, Section 404 will require us
to obtain a report from our independent registered public accounting firm
attesting to the assessment made by management.  Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we may need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge.  Moreover, if we are
not able to comply with the requirements of Section 404 in a timely manner, or
if we or our independent registered public accounting firm identifies
deficiencies in our internal controls over financial reporting that are deemed
to be material weaknesses, the market price of our stock could decline, and we
could be subject to sanctions or investigations by the SEC or other regulatory
authorities, which would require additional financial and management
resources.





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.





The
market price of our common stock historically has been volatile.





The
market price of our common stock historically has fluctuated significantly based
on, but not limited to, such factors as general stock market trends,
announcements of developments related to our business, actual or anticipated
variations in our operating results, our ability or inability to generate new
revenues, conditions and trends in the industries in which our customers are
engaged.





Our
common stock is traded on the OTCBB under the symbol “BESV.” In recent years,
the stock market in general has experienced extreme price fluctuations that have
oftentimes been unrelated to the operating performance of the affected
companies. Similarly, the market price of our common stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our common
stock.





18


We
currently have a sporadic, illiquid, volatile market for our common stock, and
the market for our common stock may remain sporadic, illiquid, and volatile in
the future.





We
currently have a highly sporadic, illiquid and volatile market for our common
stock, which market is anticipated to remain sporadic, illiquid and volatile in
the future and will likely be subject to wide fluctuations in response to
several factors, including, but not limited to:





(1)
            actual
      or anticipated variations in our results of operations;(2)
            our
      ability or inability to generate revenues;(3)
            the
      number of shares in our public float;(4)
            increased
      competition; and(5)
            conditions
      and trends in the market for oil and gas and down-hole
      services.





Furthermore,
because our common stock is traded on the Over The Counter Bulletin Board, our
stock price may be impacted by factors that are unrelated or disproportionate to
our operating performance. These market fluctuations, as well as general
economic, political and market conditions, such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of our
common stock. Due to the limited volume of our shares which trade, we believe
that our stock prices (bid, asked and closing prices) may not be related to the
actual value of the Company, and not reflect the actual value of our common
stock. Shareholders and potential investors in our common stock should exercise
caution before making an investment in the Company, and should not rely on the
publicly quoted or traded stock prices in determining our common stock value,
but should instead determine value of our common stock based on the information
contained in the Company's public reports, industry information, and those
business valuation methods commonly used to value private
companies.





RISKS
RELATED TO OUR DOWN-HOLE SOLUTIONS BUSINESS





We
currently have only a few active customers.  If we are unable to
attract more permanent customers, we will not be able to generate
revenue.





The
deployment of our AFJ rig may not result into a significant number of customer
orders or realized cash revenue. If we are unable to attract 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 applied fluid jetting, which has not been well established
in the energy service industry.





Our AFJ
service intends to provide well stimulation and lateral drilling services to oil
and gas producers. Since we are among the first to commercially apply the proven
applied jetting techniques to the energy producing business, we cannot guarantee
that our custom drilling rig design based on the AFJ concept will be adequate or
that the applied jetting technology will stimulate additional oil and gas
production. We may not achieve the designed results from application of the
technology. Customers may not accept the services we offer. Any of these results
could have a negative impact on the development of our business.





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





Our AFJ
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 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 AFJ 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 AFJ business and limit our ability
to achieve revenue from these operations.


19


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





Oil and
gas fields may be depleted and zones may not be capable of stimulation by our
applied 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.





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. While the large
energy service companies are not currently competing for production stimulation
business in the low productivity wells that we target, this may
change.  Failure to successfully compete within our industry would
significantly impair the development of our AFJ business and limit our ability
to generate sufficient revenue from these operations.





We
have no issued patents for our technology and although we have recently filed a
pending patent application, such patent application has not been approved to
date.  As a result, companies with products similar to ours may sue us
in the future claiming our activities infringe on their patent
rights.





While we
have recently filed a patent application for our AFJ technology, such patent has
not been approved or granted to date.  As such, we have no issued
patents or pending for our technology in the United States or any other
country.  In the event the patent application for our AFJ technology
is not granted, we will not be able to stop other companies from lawfully
practicing technology identical or similar to ours in the future. If we are sued
by another company claiming our activities infringe on their patent, and we are
not able to prove the prior use of such technology, we could be forced to
abandon our technology and/or expend substantial expenses in defending against
another company's claims. This could have a severely adverse affect on our
revenues and could cause any investment in the Company to decline in value
and/or become worthless.





RISKS
RELATED TO OUR SATELLITE COMMUNICATIONS BUSINESS





We
are in the early stages of defining a new intelligent-monitoring network-system
for oil and gas customers in remote locations.





Currently,
we are in the early stages of defining a new intelligent-monitoring
network-system for oil and gas customers in remote locations called
IPSM.  Such new technical developments and product offerings have not
been proven in the market place and may fail.  The failure of our
intelligent-monitoring network-system would adversely affect are ability to
generate revenues from this part of our business, which in turn would adversely
affect an investment in our Company.





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.





20


We
are dependent on only a few key 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, 2008, we generated approximately $400,000 in revenues
through our satellite business, of which approximately 70% of those revenues
came from only three customers. Specifically, our major satellite services
customers in 2008 included BP America, Apache and Dow Chemical, representing
37%, 18% and 16%, respectively, of our satellite revenues for the year ended
December 31, 2008. 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, which could lead to a postponement or loss in satellite
revenues.





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.





If
we are unable to attract or retain subscribers, our Satellite Communications
business would be materially 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.


21


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.





Our
current services may become obsolete due to the highly competitive and continued
advancement of the satellite industry. Larger service providers may provide
services at lower costs.





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.


22


Item
1B. Unresolved Staff Comments.




None.




Item
2. Properties.





Office
Facilities





We lease
approximately 2,000 square feet of office space at a cost of $2,000 per month
renewable on a month-to-month basis.





Equipment





As of
December 31, 2008, our primary equipment consisted of one mobile AFJ coiled
tubing unit, which is currently located at the Reliance Oil and Gas facility in
Luling, 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.





Emergence fromChapter 11
Proceedings





On
February 26, 2008, the Court entered an order confirming our Second Amended Plan
of Reorganization (the “Plan”).  This ruling allowed Blast to emerge
from Chapter 11 bankruptcy effective one day later. The overall impact of the
confirmed Plan was for Blast to emerge with unsecured claims fully paid, having
no debt service scheduled for at least two years, and to keep equity
shareholders’ interests intact.





Under the
terms of this Plan, Blast raised $4.0 million in cash proceeds from the sale of
convertible preferred securities to Clyde Berg and McAfee Capital, two parties
related to Blast’s largest shareholder, Berg McAfee Companies.  The
proceeds from the sale of the securities were used to pay 100% of the allowed
unsecured claims, all allowed unsecured administrative claims, and all statutory
priority claims, for a total amount of $2.4 million.  The sale of the
convertible preferred securities were issued after Blast successfully merged
with its wholly owned subsidiary, Blast Energy Services, Inc., a Texas
corporation, whereby Blast re-domiciled in Texas.





Hallwood Energy/Hallwood
Petroleum Lawsuit


In
April 2008, Eagle and Hallwood agreed to settle the litigation for
approximately $6.5 million. Under the terms of the settlement, Hallwood agreed
to pay $2.0 million in cash, issue $2.75 million in equity and irrevocably
forgave $1.65 million in deposits paid to Eagle.  The parties and
their affiliates were fully and mutually released from any and all claims
between them.  The terms of the settlement agreement were approved by
the board of directors of each company and was confirmed by the
Court.





Under the
terms of the settlement agreement Hallwood paid Eagle $0.5 million in July 2008
and $1.5 million in September 2008. Payments received from Hallwood were
distributed in October 2008.





On
February 11, 2009, Blast and Eagle entered into an amended settlement letter
with Hallwood that modified and finalized the terms of the parties April 3, 2008
settlement letter.  The amended settlement provided that the equity
component would be satisfied by the issuance to Blast of Class C Partnership
Interests in Hallwood Energy, equal to 7% of such Interests, having a face value
of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement
was approved by the board of directors of each company and was confirmed by the
Court.





On March
2, 2009, Hallwood Energy filed voluntary petitions with the U.S. Bankruptcy
Court for the Northern District of Texas under Chapter 11 of Title 11 of the
U.S. Bankruptcy Code in order that it could dispose of burdensome and
uneconomical assets and reorganize its financial obligations and capital
structure. This bankruptcy filing creates uncertainty on the future value of
this equity position in Hallwood, so we are recognizing a zero carrying value in
our financial statements relating to the Class C Interests in
Hallwood.





Quicksilver Resources
Lawsuit


In
September 2008, Blast and Eagle entered into a Compromise Settlement and Release
Agreement with Quicksilver in the Court to resolve the pending
litigation.  Blast and Quicksilver also agreed to release all the
claims against each other and certain related parties.


23


Quicksilver
agreed to the terms and conditions of the Settlement and agreed to pay Eagle a
total of $10 million (the “Settlement Fees”), as follows:





·
            $5
      million payable upon the parties’ entry into the
    settlement;


·
            $1million
      payable on or before the first anniversary date of the execution of the
      settlement;


·
            $2
      million payable on or before the second anniversary date of the execution
      of the settlement; and


·
            $2
      million payable on or before the third anniversary date of the execution
      of the settlement.





In the
event any Settlement Fees are not paid on their due date and Quicksilver’s
failure to pay is not cured within ten days after written notice, then all of
the remaining payments immediately become due and payable. Quicksilver made the
first payment of $5 million to Eagle in October 2008.





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 Blast, 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.





None.


24


Part
II





Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.





Market
Information and Holders





The
common stock of Blast Energy Services, Inc. commenced trading on the OTC
Bulletin Board July 18, 2003 under the symbol “VDYS”. Effective
June 6, 2005, we changed our name and the trading symbol became “BESV”. The
following table sets forth the high and low trading prices of a share of our
common stock as reported 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
                        
                        LOWDecember
      31, 2008
                        
                        $
      0.30
                        
                        $
      0.05September
      30, 2008
                        
                        $
      0.41
                        
                        $
      0.19June
      30, 2008
                        
                        $
      0.38
                        
                        $
      0.19March
      31, 2008
                        
                        $
      0.30
                        
                        $
      0.14December
      31, 2007
                        
                        $
      0.24
                        
                        $
      0.12September
      30, 2007
                        
                        $
      0.34
                        
                        $
      0.10June
      30, 2007
                        
                        $
      0.24
                        
                        $
      0.12March
      31, 2007
                        
                        $
      0.37
                        
                        $
      0.08





As of
March 30, 2009, we had 61,817,404 shares of common stock issued and outstanding
held by approximately 350 shareholders of record, which amount includes
1,150,000 shares of common stock approved for issuance under the 2005 class
action settlement, which shares have not been issued to date. It also includes
35,000 shares, that are still outstanding as of the filing of this report, but
which shares Blast expects to cancel in the second quarter of 2009.





Dividends





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





Common
Stock





Holders
of shares of common stock are entitled to one vote per share on each matter
submitted to a vote of shareholders. In the event of liquidation, holders of
common stock are entitled to share pro rata in the distribution of assets
remaining after payment of liabilities, if any. Holders of common stock have no
cumulative voting rights, and, accordingly, the holders of a majority of the
outstanding shares have the ability to elect all of the directors. Holders of
common stock have no preemptive or other rights to subscribe for shares. Holders
of common stock are entitled to such dividends as may be declared by the Board
out of funds legally available therefore. The outstanding shares of common stock
are validly issued, fully paid and non-assessable.





Series
A Convertible Preferred Stock





In
connection with the approval of the Plan, the Bankruptcy Court, and the Board of
Blast approved a change in domicile from California to Texas, which also
included the authorization of 20,000,000 shares of Preferred Stock, of which
8,000,000 shares were designated Series A Convertible Preferred Stock, of which
we have 6,000,000 shares outstanding at this time.





The
6,000,000 shares of Series A Preferred Stock accrue interest at the rate of 8%
per annum, in arrears for each month that the Preferred Stock is
outstanding.  Blast has the right to repay any or all of the accrued
dividends at any time by providing the holders of the Preferred Stock at least
five days written notice of its intention to repay such
dividends.


25


Additionally,
the Preferred Stock (and any accrued and unpaid dividends) has optional
conversion rights, which provide the holders of the Preferred Stock the right,
at any time, to convert the Preferred Stock into shares of Blast’s common stock
at a conversion price of $0.50 per share. In addition, the Preferred Stock
automatically converts at the same rate if Blast’s common stock trades for a
period of more than 20 consecutive trading days at a price greater than $3 per
share and the average trading volume of Blast’s common stock exceeds 50,000
shares per day.





The
Preferred Stock shareholders have the right to vote the number of shares of
voting common stock that the Preferred Stock is then convertible into. The
Preferred Stock may be redeemed at the sole option of Blast upon the receipt by
Blast of a net Cash Settlement from the pending Hallwood and Quicksilver
litigation in excess of $7.5 million provided that the holders, at their sole
option, may have six months from the date of Blast’s receipt of the Cash
Settlement to either accept the redemption of the Preferred Stock or convert
such Preferred Stock into shares of Blast’s common stock.





EQUITY
COMPENSATION PLAN INFORMATION





The
following table provides information as of December 31, 2008 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 those in first column)Equity
      compensation plans approved by the Plan
            
            850,000
            
            0.20
            
            3,150,000Equity
      compensation plans not approved by shareholders
            
            3,034,792
            
            $0.59
            
            4,865,208Total
            
            3,884,792
            
            $0.50
            
            8,015,208







Recent
Sales of Unregistered Securities







There
were no shares of common stock issued in 2008 from fund raising or private
placement offerings of securities.





In
January 2008, Blast sold the rights to an aggregate of 2,000,000 units each
consisting of four shares of Series A Convertible Preferred Stock and one three
year warrant with an exercise price of $0.10 per share (the “Units”), for an
aggregate of $4,000,000 or $2.00 per Unit, to Clyde Berg, an individual and to
McAfee Capital LLC, a limited liability company.  The shares of common
stock issuable in connection with the exercise of the warrants and in connection
with the conversion of the Preferred Stock were granted piggy-back registration
rights in connection with the sale of the Units. We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, for the
above issuance, since the issuance did not involve a public offering, the
recipient took the securities for investment and not resale and Blast took
appropriate measures to restrict transfer. No underwriters or agents were
involved in the issuance and no underwriting discounts or commissions were paid
by Blast.





As a
result of the settlement of the Quicksilver matter in September 2008, an
obligation for $191,000 owed to certain of Blast’s Board of Directors for
deferred compensation for the 2007 fiscal year and through September 30, 2008,
was converted into stock. The stock conversion was made at $0.20 per share and,
in October 2008, shares were issued to the following Board members in exchange
for the forgiveness of debt:





No.
      of sharesJack
      Block
                  182,500Roger
      (Pat) Herbert
                  340,000Jeffrey
      Pendergraft
                  287,500Michael
      Peterson
                  50,000Fred
      Ruiz (retired)
                  95,000





26


Blast
claims an exemption from registration afforded by Section 4(2) of the Securities
Act of 1933, as amended for the above issuances, since the foregoing did not
involve a public offering, the recipients took the securities for investment and
not resale and Blast took appropriate measures to restrict
transfer.





In May
2008, the Board of Directors approved the issuance of up to 300,000 shares of
Blast’s common stock to a consultant in consideration for market surveillance
and financial consulting services provided.  A total of 150,000 shares
were issued at that time and 37,500 shares were earned at the end of each
quarter for the one year period of the engagement. In March 2009, an additional
112,500 shares were issued under the terms of this engagement.  We
claim an exemption from registration afforded by Section 4(2) of the Act since
the foregoing issuance did not involve a public offering, the recipient 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
issuance and no underwriting discounts or commissions were paid by
us.





On or
around March 11, 2009, Laurus Master Fund, Ltd. (“Laurus”) affected a cashless
exercise of certain of its outstanding $0.01 warrants, and exercised 1,508,824
of such warrants for 1,350,000 shares of our restricted common stock (with
158,824 exercised shares being used in the cashless exercise to effectively
purchase such exercised shares).  We claim an exemption from
registration afforded by Section 4(2) of the Act since the foregoing issuance
did not involve a public offering, the recipient 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 issuance and no
underwriting discounts or commissions were paid by us.





Item
6. Selected Financial Data





Not
required.





Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





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, 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.





Overview





On
February 26, 2008, the U.S. Bankruptcy Court confirmed our Second Amended Plan
of Reorganization (the “Plan”).  This ruling allowed Blast to emerge
from Chapter 11 bankruptcy. The overall impact of the confirmed Plan was for
Blast to emerge with unsecured creditors fully paid, have no debt service
scheduled for at least two years, and to keep equity shareholders’ interests
intact.  Under the terms of the Plan, Blast raised $4.0 million in
cash proceeds from the sale of convertible preferred securities to Clyde Berg
and McAfee Capital, two parties related to Blast’s largest shareholder, Berg
McAfee Companies. The proceeds from the sale of the securities were used to pay
100% of the unsecured creditor claims, all administrative claims, and all
statutory priority claims, for a total amount of approximately $2.4
million.  The remaining $1.6 million was used to execute an
operational plan, including but not limited to, reinvesting in the Satellite
Services and Down-hole Solutions businesses.




Critical
Accounting Policies





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





27


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 at least quarterly.  Significant
individual accounts receivable balances and balances which have been outstanding
greater than 90 days are reviewed individually. Account balances, when
determined to be uncollectible, are charged against the allowance.





Equipment





Equipment,
including improvements 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 idle 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.





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
collectability is reasonably assured.  Revenue is derived from sales
of satellite hardware, satellite bandwidth, satellite service and AFJ
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 three to twelve month warranties for satellite
hardware.  We have a 30-day return policy.  Revenue from AFJ
services is recognized when the services are performed and collectability is
reasonably assured. If 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 generally accepted
accounting principles in the United States 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.





All
dollar amounts discussed in “Item 7” are rounded.  For exact dollar
amounts and additional information on our accounting policies, see the financial
statements and notes to the financial statements included in Part IV, Item 15 of
this Report.





28


Fiscal
Year ended December 31, 2008 Compared to the Fiscal Year Ended December 31,
2007





Satellite
Communications





Satellite
Communications’ revenues decreased by $22,000 to $396,000 for the year ended
December 31, 2008, compared to $418,000 for the year ended December 31, 2007.
Costs of services provided for Satellite Communications decreased by $41,000 to
$404,000 for the year ended December 31, 2008, compared to $445,000 for the year
ended December 31, 2007. The operating profit from Satellite Communications
increased by $19,000 to a loss of $8,000 for the year ended December 31, 2008,
compared to a loss of $27,000 for the year ended December 31, 2007. The margin
increase was the result of new business with Dow Pipeline and BP America as well
as a reduction in allocated overhead.





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, 2008,
$9,459 was reflected on the balance sheet as Satellite deferred
revenue.





Down-hole
Solutions





Down-hole
Solutions revenues increased to $36,000 for the year ended December 31, 2008,
compared to zero for the year ended December 31, 2007.  Cost of
services for Down-hole Solutions revenues increased $272,000 to $279,000 for the
year ended December 31, 2008, compared to $7,000 for the year ended December 31,
2007. The operating loss from Down-hole Solutions increased by $236,000, to a
loss of $243,000 for the year ended December 31, 2008, compared to a loss of
$7,000 for the year ended December 31, 2007. The increased operating loss in
2008 is primarily related to the costs of developing the Company’s patent
pending AFJ process.





Selling, General and
Administrative Expense





Selling,
general and administrative (“SG&A”) expense decreased by $2.3 million to
$1.9 million for the year ended December 31, 2008, compared to $4.2 million for
the year ended December 31, 2007.  The following table details the
major components of SG&A expense over the periods:





In
      thousands2008
                          
                          2007
                          
                          Increase/
                            (Decrease)Payroll
      and related costs
                          
                          $
                          541
                          
                          $
                          377
                          
                          $
                          164Option
      and warrant expense
                          
                          377
                          
                          1,254
                          
                          (877)Legal
      fees and settlements
                          
                          269
                          
                          1,940
                          
                          (1,671)External
      services
                          
                          440
                          
                          387
                          
                          53Insurance
                          
                          130
                          
                          152
                          
                          (22)Travel
      & entertainment
                          
                          56
                          
                          71
                          
                          (15)Office
      rent, Communications and Miscellaneous
                          
                          111
                          
                          17
                          
                          94$1,924
                          
                          $
      4,198
                          
                          $
      (2,274)





The main
reason for the decrease in SG&A expenses was a result of the $1.3 million
decrease in legal fees incurred while in bankruptcy.  Higher
payroll-related costs represents payments made in 2008 for deferred pay from
2007 and a change in allocations of overhead from operating cost centers. The
increase in miscellaneous expenses was due in part to increased marketing
related expenses in 2008.





Depreciation and
Amortization





Depreciation
and amortization expense decreased by $55,000 to $38,000 for the year ended
December 31, 2008 compared to $93,000 for the year ended December 31, 2007. This
reduction is primarily related to the impairment of intellectual property in
December 2007.





29


Asset Impairment
Expense





There
were no asset impairments in 2008. However, we recorded zero value for the
equity position we acquired from the lawsuit settlement with Hallwood Energy LP
as they have subsequently filed for Chapter 11 bankruptcy in early 2009 (as
described above).  In 2007, we fully impaired the value of
intellectual property of the abrasive jetting technology by writing off
$975,000, due to the uncertainty as to its value.





Interest
Expense





Interest
expense increased by $89,000 to $113,000 for the year ended December 31, 2008
compared to $24,000 for the year ended December 31, 2007. This increase is
primarily related to the 2008 accrual of interest on to the notes payable –
related party that had been suspended during bankruptcy proceedings in
2007.





Interest
Income





Interest
income increased by $19,000 to $22,000 for the year ended December 31, 2008
compared to $3,000 for the year ended December 31, 2007. This increase is
primarily related to interest earned from higher average cash balances provided
from the net proceeds of the lawsuit settlements with Hallwood and
Quicksilver.





Other
Income





Total
other income decreased by $212,000 to $20,000 for the year ended December 31,
2008 compared to total other expense of $232,000 for the year ended December 31,
2007.  The decrease was due to commissions earned on the sale of third
party oil and gas producing assets in 2007, which were not represented during
fiscal 2008.





Loss From Continuing
Operations





Loss from
continuing operations decreased by $2.8 million to $2.3 million for the year
ended December 31, 2008 compared to loss of $5.1 million for the year ended
December 31, 2007.  This decrease is primarily related to the
reduction in bankruptcy related legal fees as well as significant overhead
reductions.





Income From Discontinued
Operations





Income
from discontinued operations increased by $14.1 million to $9.3 million for the
year ended December 31, 2008 compared to a loss of $4.8 million for the year
ended December 31, 2007.  The increase is primarily due to the lack of
activity from discontinued operations, the debt forgiveness from the Hallwood
settlement and other income recognized from the lawsuit settlements with
Hallwood and Quicksilver during 2008, which was not present during the year
ended December 31, 2007.





Net
Income





Net
Income for the year ended December 31, 2008 increased $16.9 million to $7.0
million from a loss of $9.9 million for the year ended December 31,
2007.  This increase is primarily related to the other income and
income from discontinued operations recognized from the lawsuit settlements with
Hallwood and Quicksilver as well as significant overhead reductions following
our emergence from bankruptcy during 2008 versus 2007.





Liquidity
and Capital Resources





Blast had
total current assets of $1.6 million as of December 31, 2008, including a cash
balance of $732,000, compared to total current assets of $153,000 as of December
31, 2007, including a cash balance of $49,000. The main reason for the increase
in current assets was the remaining balance of cash received from the lawsuit
settlements with Hallwood and Quicksilver net of certain obligations and the
portion of the settlement proceeds receivable from Quicksilver due in September
2009.





Blast had
total assets as of December 31, 2008 of $5.7 million compared to total assets of
$1.2 million for the year ended December 31, 2007.  This increase in
total assets was mainly due to the increase in cash balance discussed above and
the long-term receivable created under the terms of the Quicksilver lawsuit
settlement.


30


Blast
also had total liabilities of $1.4 million as of December 31, 2008, consisting
of current liabilities of $259,000 compared to total liabilities of $8.6 million
as of December 31, 2007, consisting of current liabilities of $6.4
million.  The primary reason for the decrease in liabilities is the
payment or forgiveness of certain obligations as a result of the lawsuit
settlements with Hallwood and Quicksilver.





We had
positive net working capital of $1.3 million and total stockholders’ equity of
$4.3 million as of December 31, 2008 compared to negative working capital and
total stockholders deficit of $5.1 million as of December 31, 2007. These
changes were caused by the favorable legal settlements and significant overhead
reductions.





During
July 2008, Blast received a $500,000 cash payment under the terms of the
settlement agreement in the Hallwood lawsuit.





On or
about October 16, 2008, we paid off our $2.1 million Senior Lien with Laurus
Master Fund, Ltd., and the $125,000 Note with McClain County, Oklahoma,
described above, as a result of favorably settling certain lawsuits with former
customers.





Blast
also agreed to redeem 2,000,000 shares of Blast’s Series A Preferred Stock held
by Clyde Berg and McAfee Capital, LLC at the face value of $0.50 per share in
October 2008, and paid $1,000,000 to redeem the Preferred Shares.  The
Preferred Shares have a dividend rate of 8% per annum until paid or
converted.  Blast cancelled the 1,000,000 Preferred Shares each held
by Clyde Berg and McAfee Capital, LLC, and consequently only 6,000,000 Preferred
Shares remain outstanding as of the date of this filing.





An
obligation for $191,000 owed to certain members of Blast’s Board of Directors
for deferred compensation for the 2007 fiscal year and through September 30,
2008, was converted into shares of Blast’s common stock in October 2008. The
common stock conversion was at $0.20 per share and shares were issued to those
board members in exchange for the forgiveness of debt.





A secured
$1.12 million note with Berg McAfee Companies, LLC remains outstanding as of
December 31, 2008.  The note, which was extended for an additional
three years from the effective date of the Plan, February 27, 2008, bears
interest at eight-percent (8%) per annum, and contains an option to be
convertible into shars of the company’s common stock at the rate of one share of
common stock for each $0.20 of the note outstanding.





Cash Flows From Operating
Activities





We had
net cash used in operating activities of approximately $1.6 million for the year
ended December 31, 2008 which was mainly due to $2.3 million of loss from
continuing operations, offset by $0.9 million of changes in working capital,
which included a decrease in accounts payable of $1.4 million and a decrease in
accounts receivable of $1.3 million.





Cash Flows from Investing
Activities





We used
cash from investing activities of $147,000 for the year ended December 31, 2008
primarily related to capitalized improvements made to the AFJ rig as it prepared
to return to field operations.





Cash Flows from Financing
Activities





We had
net cash provided from investing activities of $2.5 million for the year ended
December 31, 2008 primarily related to the sale of $4 million in convertible
preferred securities, which was offset by the redemption of $1 million in
convertible preferred securities.





Blast
raised $4.0 million in cash proceeds from the sale of convertible preferred
securities to Clyde Berg and McAfee Capital, two parties related to Blast’s
largest shareholder, Berg McAfee Companies promptly after the approval of
Blast’s Plan.  The proceeds were used to pay 100% of the unsecured
creditor claims, all administrative claims, and all statutory priority claims,
for a total amount of approximately $2.4 million.





31


We have
no current commitment from our officers and directors or any of our shareholders
to supplement our operations or provide us with financing in the future. If we
are unable to increase revenues from operations, to raise additional capital
from conventional sources and/or additional sales of stock in the future, we may
be forced to curtail or cease our operations. Even if we are able to continue
our operations, the failure to obtain financing could have a substantial adverse
effect on our business and financial results.




In the
future, we may be required to seek additional capital by selling debt or equity
securities, selling assets, or otherwise be required to bring cash flows in
balance when we approach a condition of cash insufficiency. The sale of
additional equity or debt securities, if accomplished, may result in dilution to
our then shareholders. We provide no assurance that financing will be available
in amounts or on terms acceptable to us, or at all.





Item
7A.Quantitative and Qualitative
Disclosure About Market Risk.




Not
required.




Item
8. Financial Statements and Supplementary Data.




The
Financial Statements and supplementary data required by this item are included
in Part IV, Item 15 of this Form 10-K and are presented beginning
on page F-1.




Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.





Effective
February 27, 2008, the client auditor relationship between Blast and Malone
& Bailey, PC ("Malone") was terminated as Malone was dismissed by the
Company. Effective February 27, 2008, the Company engaged GBH CPAs, PC,
Certified Public Accountants ("GBH") as its principal independent public
accountant for the fiscal year ended December 31, 2007. The decision to change
accountants was recommended, approved and ratified by the Company's Board of
Directors effective February 27, 2008.





Malone's
report on the financial statements of the Company for the fiscal years ended
December 31, 2005 and December 31, 2006, and any later interim period, including
the interim period up to and including the date the relationship with Malone
ceased, did not contain any adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles
except for concerns about the Company's ability to continue as a going
concern.





In
connection with the audit of the Company's fiscal years ended December 31, 2005
and December 31, 2006, and any later interim period, including the interim
period up to and including the date the relationship with Malone ceased, there
were no disagreements between Malone and the Company on a matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Malone
would have caused Malone to make reference to the subject matter of the
disagreement in connection with its report on the Company's financial
statements.





There
were no reportable events as provided in Item 304(a)(v) of Regulation S-K during
the Company's fiscal years ended December 31, 2005 and December 31, 2006, and
any later interim period, including the interim period up to and including the
date the relationship with Malone ceased.





The
Company authorized Malone to respond fully to any inquiries of any new auditors
hired by the Company relating to their engagement as the Company's independent
accountant. The Company requested that Malone review the disclosure and Malone
has been given an opportunity to furnish the Company with a letter addressed to
the Commission containing any new information, clarification of the Company's
expression of its views, or the respect in which it does not agree with the
statements made by the Company. Such letter is incorporated by reference as an
exhibit to this Report.





The
Company did not previously consult with GBH regarding either (i) the application
of accounting principles to a specific completed or contemplated transaction;
(ii) the type of audit opinion that might be rendered on the Company's financial
statements; or (iii) a reportable event (as provided in Item 304(a)(v)(B) of
Regulation S-K) during the Company's fiscal years ended December 31, 2005 and
December 31, 2006, and any later interim period, including the interim period up
to and including the date the relationship with Malone ceased.


32


Item
9A. Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures




In
accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2008.




Management's
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).





Based on
our evaluation under the framework in Internal Control — Integrated
Framework issued by COSO, our management concluded that our internal
control over financial reporting was effective as of December 31, 2008, in
providing reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting
pursuant to temporary rules of the Securities and Exchange Commission that
permit the company to provide only management’s report in this years’ annual
report.





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.





Item
9B. Other Information.





In
October 2008, the Company amended its Bylaws to allow for the Company to issue
shares in electronic form to help facilitate the issuance of shares in
connection with the Company’s pending 2005 class action settlement.








33


Part
III





Item
10. Directors, Executive Officers and Corporate Governance.





Executive
Officers





Our
executive officers are elected by the board of directors and serve at the
discretion of the board.  Our executive officers are as
follows:





Name
                
                Age
                
                PositionJohn
      O’Keefe
                
                60
                
                CEOJohn
      MacDonald
                
                50
                
                CFO
      & Secretary





Biographical
information for our executive officers is set forth below:





John
O’Keefe was appointed Chief Executive Officer in March 2007. From May
2004 until March 2007, Mr. O’Keefe served as Co-Chief Executive Officer of the
Company.  From January 2004 through May 2004 he served as Executive
Vice President and from January 2004 until March 2007, Mr. O’Keefe served as
Chief Financial Officer.


From
September 1999 to October 2000, Mr. O’Keefe served as Vice President of
Investor Relations of Santa Fe Snyder, and from October 2000 to December 2003,
he served as Executive Vice President and Chief Financial Officer of Ivanhoe
Energy. He spent the majority of his career with Sun Oil Company and BP.
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.





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





Directors




All of
the current directors will serve until the next annual stockholders’ meeting or
until their successors have been duly elected and qualified. Our board of
directors are as follows:





Name
              
              Age
              
              PositionRoger
      P. (Pat) Herbert
              
              62
              
              Chairman
      of the Board, DirectorJohn
      R. Block
              
              74
              
              DirectorJoseph
      J. Penbera, Ph.D.
              
              61
              
              DirectorJeffrey
      R. Pendergraft
              
              60
              
              DirectorMichael
      L. Peterson
              
              47
              
              Director





Biographical
information for our directors is set forth below:





Roger P. (Pat)
Herbert hasserved
as a Director of the Company since June 2005.  He has worked in the
energy services business for nearly 30 years. Mr. Herbert has served as CEO and
as a director of JDR Cable Systems (Holdings) Ltd. since July
2002.  From September 2000 to July 2002 he was Chairman and CEO
of GeoNet Energy Services, a company he founded. Prior to that time,
Mr. Herbert worked at International Energy Services, Baker Hughes and Smith
International.  Mr. Herbert currently serves on the board of
Scorpion Offshore, a publicly traded Norwegian energy services company, and also
serves as Chairman of the Audit Committee.  Mr. Herbert received his
MBA from Pepperdine University, his B.S.E. from California State
University-Northridge and is a registered professional engineer in the State of
Texas.





34


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, a position he has held 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 time, Mr. Block served as Secretary
of Agriculture for the US Department of Agriculture from 1981 to 1986. He
currently serves as a director of and Hormel Foods Corp. and AE BioFuels, a
company controlled by Eric McAfee. Mr. Block received his B.A. from the US
Military Academy.





Joseph J.
Penbera, Ph.D. co-founded our company and has served as a director since
its inception in April 1999. Since August 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 March 2005. Dr. Penbera was Senior Economist at Westamerica
Bank, Regency Bancorp and California Bank from January 1994 to January 2002.
Dr. Penbera is lead director and has served on the board of Gottschalks,
Inc., a publicly traded regional department store since October 1986. He also
has served on the board of directors of Rug Doctor, Inc., since October 1987 and
as chairman on the board for California-based, Intravenous Access Technology,
Inc., since September 2007. Dr. Penbera received his Ph.D. from American
University, his MPA from Bernard Baruch School and his B.A. from Rutgers
University.





Jeffrey R.
Pendergrafthas served as a director since June, 2006.  Hecurrently serves as
Chairman and Chief Executive Officer 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 time he served as staff counsel
for ARCO.  Mr. Pendergraft received his B.A. from Stanford University,
and his Juris Doctor from Stanford University School of Law.





Michael L.
Peterson, 47, joined the board as a director in May 2008. He is currently
Chairman and CEO of Solargen Energy Inc, a developer of large thin-film solar
farms, and managing partner of California-based, Pascal Management, a registered
Investment Advisor. In 2005, he co-founded and became a managing partner of
American International Partners, a venture investment fund based in Salt Lake
City. Prior to that time, he served for four years as a First Vice President at
Merrill Lynch. For a majority of his career, he was employed by Goldman Sachs
& Co. as a Vice President with the responsibility for a team of
professionals that advised and managed over $7 billion in assets. Mr. Peterson
received his MBA at the Marriott School of Management and a B.S. from Brigham
Young University. He is also a director of AE Biofuels, a company controlled by
Eric McAfee.





Certain
of our Directors are Directors of entities affiliated with BMC which could cause
actual or perceived conflicts of interest between us and BMC and could cause the
value for our securities to become devalued or worthless.





Committees
of the Board of Directors





We
currently have an audit committee, a compensation committee, and a nominating
and corporate governance committee.





Audit
Committee





The audit
committee of the Board currently consists of Dr. Penbera, Mr. Herbert,
Mr. Peterson and Mr. Block, each of whom are independent, non-employee
directors. The audit committee selects, on behalf of our board of directors, an
independent public accounting firm to audit our financial statements, discuss
with the independent auditors their independence, review and discuss the audited
financial statements with the independent auditors and management, and recommend
to our board of directors whether the audited financials should be included in
our Annual Reports to be filed with the SEC. The audit committee operates
pursuant to a written charter, which was adopted in 2003. During the last fiscal
year, the audit committee held three meetings.





35


All of
the members of the audit committee are non-employee directors who: (1) met
the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”); (2) did not
participate in the preparation of our financial statements or the financial
statements of Blast; and (3) are able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash flow
statement. The Board has determined that Dr. Penbera and qualifies as an
“audit committee financial expert” as defined by Item 407(d)(5)(ii) of
Regulation S-K of the Exchange Act. He receives compensation for board
service only and is not otherwise an affiliated person.





Compensation
Committee




The
compensation committee of the board consists of Mr. Block, Mr. Pendergraft,
and Mr. Peterson, each of whom are independent directors, as defined in
Rule 10A-3 of the Exchange Act. The compensation Committee reviews and approves
(1) the annual salaries and other compensation of our executive officers,
and (2) individual stock and stock option grants. The compensation
Committee also provides assistance and recommendations with respect to our
compensation policies and practices, and assists with the administration of our
compensation plans. The compensation committee operates pursuant to a written
charter, which was adopted in 2003.  During the last fiscal year the
compensation committee held two meetings.





Nominating and
Corporate Governance Committee




The
nominating and corporate governance committee of the board currently consists of
Mr. Herbert, Dr. Penbera, and Mr. Pendergraft, each of whom are
found by the board of directors to be an “independent director” pursuant to the
applicable rules and regulations promulgated by the SEC. The nominating and
corporate governance committee assists our board of directors in fulfilling its
responsibilities by: identifying and approving individuals qualified to serve as
members of our board of directors, selecting director nominees for our annual
meetings of shareholders, evaluating the performance of our board of directors,
and developing and recommending to our board of directors corporate governance
guidelines and oversight procedures with respect to corporate governance and
ethical conduct. This committee operates pursuant to a written charter adopted
in 2003. During the last fiscal year, the nominating and corporate governance
committee held two meetings.




Compensation Committee Interlocks and
Insider Participation




Our
compensation committee is comprised of Mr. Block, Mr. Pendergraft, and
Mr. Peterson. None of the committee members has ever been an employee of
Blast Energy Services, Inc. None of our executive officers serve as a member of
the board of directors or compensation committee of any entity that has any
executive officer serving as a member of our Board of Directors or compensation
committee.




Code
of Ethics for the CEO and CFO




In 2005,
in accordance with SEC rules, the then audit committee and the Board adopted a
Code of Ethics for the Company’s senior officers.  The Board believes
that these individuals must set an exemplary standard of conduct, particularly
in the areas of accounting, internal accounting control, auditing and
finance.  This code sets forth ethical standards to which the
designated officers must adhere and other aspects of accounting, auditing and
financial compliance.  The Code of Ethics is available on our website
at www.blastenergyservices.com.





Section 16(a)
Beneficial Ownership Reporting Compliance




As Blast
does not have securities registered pursuant to Section 12(b) or Section 12(g)
of the Securities Act of 1934, as amended (the “Exchange Act”), Blast’s
officers, Directors and significant shareholders are not subject to reporting
and disclosure requirements of Section 16(a) of the Exchange Act.




Audit Committee
Report




The Audit
Committee of the Board currently consists of Dr. Penbera, Mr. Herbert,
Mr. Block and Mr. Peterson all of which are independent, non-employee
directors.





36


The Audit
Committee operates under a written charter adopted by the Board, which is
evaluated annually. The charter of the Audit Committee is available on the
Company’s website at www.blastenergyservices.com under the same heading as
the Code of Ethics.  The Audit Committee selects, evaluates and, where
deemed appropriate, replaces the Company’s independent auditors.  The
Audit Committee also pre-approves all audit services, engagement fees and terms,
and all permitted non-audit engagements.





Management
is responsible for the Company’s internal controls and the financial reporting
process.  The Company’s independent auditors are responsible for
performing an independent audit of the Company’s consolidated financial
statements in accordance with auditing standards generally accepted in the
United States of America and issuing a report on the Company’s consolidated
financial statements.  The Audit Committee’s responsibility is to
monitor and oversee these processes.





In this
context, the Audit Committee has reviewed the Company’s audited financial
statements for fiscal 2008 and has met and held discussions with management and
GBH CPAs, PC, the Company’s independent auditors.  Management
represented to the Audit Committee that the Company’s consolidated financial
statements for fiscal 2008 were prepared in accordance with accounting
principles generally accepted in the United States of America, and the Audit
Committee discussed the consolidated financial statements with the independent
auditors. The Audit Committee also discussed with GBH CPAs, PC matters required
to be discussed by Statement on Auditing Standards No. 61 (Communications with
Audit Committees).





GBH CPAs,
PC also provided to the Audit Committee the written disclosure required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), and the Audit Committee discussed with GBH CPAs, PC the accounting
firm’s independence.





Based
upon the Audit Committee’s discussion with management and GBH CPAs, PC, and the
Audit Committee’s review of the representation of management and the report of
GBH CPAs, PC to the Audit Committee, the Audit Committee recommended to the
Board of Directors that the audited consolidated financial statements be
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, filed with the SEC.





Submitted
by the Audit Committee of the Board of Blast Energy Services, Inc.





Joseph J.
Penbera, PhD., Roger P. (Pat) Herbert, Michael L. Peterson, and
John R. Block





Item
11. Executive Compensation.





Compensation
Discussion and Analysis





Objectives
of Our Executive Compensation Program




The
compensation committee of our Board (the “Compensation Committee”) administers
our executive compensation program. The Compensation Committee is composed
entirely of independent directors.




The
general philosophy of our executive compensation program is to align executive
compensation with the Company’s business objectives and the long-term interests
of our stockholders. To that end, the Compensation Committee believes executive
compensation packages provided by the Company to its executives, including the
named executive officers, should include both cash and stock-based compensation
that reward performance as measured against established goals. In addition, the
Company strives to provide compensation that is competitive with other energy
services companies and that will allow us to attract, motivate, and retain
qualified executives with superior talent and abilities.




Our
executive compensation is designed to reward achievement of the Company’s
corporate goals. In 2008, our corporate goals included, but were not limited
to:  (i) emerging from bankruptcy with existing equity holders in
place; (ii) negotiating favorable settlements to the customer lawsuits;
(iii) growing the Company’s satellite business ; (iv) developing a
commercially viable AFJ and IPSM business; and (v) obtaining additional
financing as needed. This focus allows us to reward our executives for their
roles in creating value for our stockholders. In 2009, our corporate goals will
be primarily focused on growing the Company’s AFJ and satellite
businesses.







37


The
Role of the Compensation Committee




The
Compensation Committee has the primary authority to determine the Company’s
compensation philosophy and to establish compensation for the Company’s
executive officers. The Compensation Committee oversees the Company’s
compensation and benefit plans and policies; administers the Company’s stock
option plans; reviews the compensation components provided to Blast’s officers,
employees, and consultants; grants options to purchase common stock to Blast’s
officers, employees, and consultants; and reviews and makes recommendations to
the Board regarding all forms of compensation to be provided to the members of
the Board.




The
Compensation Committee generally sets the initial compensation of each
executive. The Compensation Committee annually reviews and in some cases adjusts
compensation for executives. Although, the CEO provides recommendations to the
Compensation Committee regarding the compensation of the other executive
officers, the Compensation Committee has full authority over all compensation
matters relating to executive officers.




Elements
of Executive Compensation




Although
the Compensation Committee has not adopted any formal guidelines for allocating
total compensation between equity compensation and cash compensation, it strives
to maintain a strong link between executive incentives and the creation of
stockholder value. Therefore, the Company emphasizes incentive compensation in
the form of stock options or warrants rather than base salary.




Executive
compensation consists of the following elements:





Base
Salary.Base salaries for our executives are generally
established based on the scope of their responsibilities, taking into account
competitive market compensation paid by other companies for similar positions
and recognizing the Company’s ability to pay. Prior to making its
recommendations and determinations, the Compensation Committee reviews each
executive’s:




•
              historical
      pay levels;•
              past
      performance; and•
              expected
      future contributions.




The
Compensation Committee does not use any particular indices or formulae to arrive
at each executive’s recommended pay level.





Incentive Bonus.The Compensation Committee reserves the right to provide our executives
incentive bonuses, which the Committee may grant in its sole discretion, if they
believe are in Blast’s best interest, after analyzing our current business
objectives and growth, if any, and the amount of revenue generated as a direct
result of the actions and abilities of those executives.




Equity
Awards.We also use long-term incentives in the form of stock
options or warrants. Employees and executive officers generally receive stock
option grants at the commencement of employment and periodically receive
additional stock option grants, typically on an annual basis. Additionally, in
connection with the approval of the Plan, the Bankruptcy Court approved a pool
of 4 million five-year warrants with a $0.20 exercise price for the Board to
award. To date, 850,000 of such warrants have been awarded. We believe that
equity awards are instrumental in aligning the long-term interests of the
Company’s employees and executive officers with those of the stockholders
because such individuals realize gains only if the stock price increases. Equity
awards also help to balance the overall executive compensation program, with
base salary providing short-term compensation and equity participation rewarding
executives for long-term increases in stockholder value.




Options
are generally granted through our 2003 Employee Stock Option Plan that
authorizes us to grant options to purchase shares of common stock to our
employees and directors. The Compensation Committee reviews and approves stock
option awards to executive officers in amounts that are based upon a review and
assessment of:




•
            competitive
      compensation data;•
            individual
      performance;•
            each
      executive’s existing long-term incentives; and•
            retention
      considerations.




38


Periodic
stock option grants are made at the discretion of the Compensation Committee to
eligible employees and, in appropriate circumstances, the Compensation Committee
considers the recommendations of members of management, such as the CEO. Stock
options are granted with an exercise price equal to the fair market value of our
common stock on the day of grant and typically vest ratably over a three year
period. In 2008, no stock options were awarded to executive
officers.




Compensation
Committee Report




The
Compensation Committee of the Board is composed of three independent directors
as defined under the Marketplace Rules of The Nasdaq Stock Market Inc.
(“Nasdaq”). The Compensation Committee operates under a written charter adopted
by the Board. The members of the Compensation Committee are John Block, Jeffrey
R. Pendergraft, and Michael L. Peterson.  We believe that each member
of the Compensation Committee meets the director independence requirements set
forth in the applicable Securities and Exchange Commission (“Commission”) rules
and Nasdaq Rules.




The
Compensation Committee administers Blast’s 2003 Employee Stock Option Plan;
reviews compensation components to be provided to Blast’s  officers,
employees, and consultants; grants options to purchase common stock and
restricted stock to Blast’s  officers, employees, and consultants; and
reviews and makes recommendations to the Board regarding all forms of
compensation to be provided to the members of the Board. The Compensation
Committee believes it has fulfilled its responsibilities under its charter for
the fiscal year ended December 31, 2008.




The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) for the fiscal year ended December 31,
2008 with management. Based upon this review and discussion, the Compensation
Committee recommended to the Board that the Compensation Discussion and Analysis
be included in Blast’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.




Submitted
by the Compensation Committee of the Board of Blast Energy Services,
Inc.





John
Block, Jeffrey R. Pendergraft, and Michael L. Peterson








Summary
Compensation Table




The
following tables set forth certain information regarding our CEO and each of our
most highly-compensated executive officers whose total annual salary and bonus
for the fiscal years ending December 31, 2008 and 2007 exceeded
$100,000








Name
      and Principal Position
                              
                              Year
                              
                              Salary
      ($)
                              
                              Option
      & Warrant  Awards ($)1
                              
                              All
      Other Compensation ($)2
                              
                              Total
      ($)John
      O’Keefe
                              
                              2008
                              
                              208,3333
                              
                              121,372
                              
                              -
                              
                              329,705CEO
      and President
                              
                              2007
                              
                              200,000
                              
                              -
                              
                              -
                              
                              200,000John
      MacDonald
                              
                              2008
                              
                              185,5004
                              
                              43,964
                              
                              -
                              
                              229,464CFO
      and Secretary
                              
                              2007
                              
                              105,000
                              
                              -
                              
                              -
                              
                              105,000Andrew
      Wilson
                              
                              2008
                              
                              182,2925
                              
                              60,776
                              
                              -
                              
                              243,068VP
      Bus. Development
                              
                              2007
                              
                              175,000
                              
                              -
                              
                              -
                              
                              175,000David
      Adams
                              
                              2008
                              
                              -
                              
                              -
                              
                              -
                              
                              -Former
      President
                              
                              2007
                              
                              70,000
                              
                              -
                              
                              130,000
                              
                              200,000





No
executive officer received any bonus, stock awards, non-equity incentive plan
compensation, or non-qualified deferred compensation earnings during the periods
presented above.  The table above excludes perquisites and other
personal benefits, or property, in the event the aggregate amount of such
compensation is less than $10,000.


______________________


39


(1)
      Reflects the amount recognized for financial statement reporting purposes
      for the year ended December 31, 2008 in accordance with FAS 123(R)
      (but disregarding forfeiture estimates related to service-based vesting
      conditions) and, accordingly, includes amounts from options granted prior
      to 2007. See the information appearing under the heading entitled “Stock
      Options and Warrants” in Note 15 to our consolidated financial statements
      in Part IVof this Annual Report.




(2)
      Represents accrued severance pay related to the terms of Mr. Adam’s
      employment contract following his resignation on June 30, 2007 and paid
      upon the confirmation of the Plan of Reorganization on February 27,
      2008.




(3)
      Includes $8,333 of deferred pay from 2006 paid to Mr. O’Keefe upon the
      confirmation of the Plan of Reorganization on February 27,
      2008.




(4)
      Includes the $35,500 in deferred pay from 2007 following promotion to CFO
      in April 2007 paid upon the confirmation of the Plan of Reorganization on
      February 27, 2008.




(5)
      Includes $7,292 of deferred pay from 2006 paid to Mr. Wilson upon the
      confirmation of the Plan of Reorganization on February 27,
      2008.





Executive
Employment Agreements




John
O’Keefe is employed by us pursuant to an Employment Agreement entered into upon
the confirmation of the Plan of Reorganization on February 27, 2008. Mr. O’Keefe
is employed as CEO and President of the Company at an annual salary of
$200,000.  The term of the agreement is for one year and is
automatically renewed unless cancelled by the Board. The contract may be
cancelled by either party with a 60-day written notice. Should the contract be
cancelled by the Company, he is entitled to severance pay equal to six months
pay. Mr. O’Keefe is also entitled to participate in our annual compensation
program with a potential bonus up to 50% of his base. Effective March 31, 2007
Mr. O’Keefe assumed the title of CEO and President. Prior to that date he had
been the Company’s co-CEO and CFO since January 2004.





John
MacDonald is employed by us pursuant to an Employment Agreement entered into
upon the confirmation of the Plan of Reorganization on February 27,
2008.  Mr. MacDonald is employed as Executive Vice President and
CFO of the Company at an annual salary of $150,000.  he term of the
agreement is for one year and is automatically renewed unless cancelled by the
Board. The contract may be cancelled by either party with a 60-day written
notice. Should the contract be cancelled by the Company, he is entitled to
severance pay equal to six months pay. Mr. MacDonald is also entitled to
participate in our annual compensation program with a potential bonus up to 50%
of his base. Mr. MacDonald had been the Company’s CFO since April 2007 and
retained his duties  as Vice President of Investor Relations and
Corporate Secretary since March 2004.




Andrew
Wilson is employed by us pursuant to an Employment Agreement entered into upon
the confirmation of the Plan of Reorganization on February 27,
2008.  Mr. Wilson is employed as Vice President - Business
Development of the Company at an annual salary of $175,000.  The term
of the agreement is for one year and is automatically renewed unless cancelled
by the Board. The contract may be cancelled by either party with a 60-day
written notice. Should the contract be cancelled by the Company, Mr. Wilson is
entitled to severance pay equal to six months pay. Mr. Wilson is also entitled
to participate in our annual compensation program with a potential bonus up to
50% of his base.





Grants
of Plan Based Awards in 2008




The
following table presents each grant of warrants established under the Plan of
Reorganization to the individuals named in the summary compensation table
above.





Name
              
              Grant
      Date
              
              Securities
      Underlying Warrants(1)
              
              Exercise
      Price of Warrant  Awards
              
              Grant
      Date Fair Value of WarrantsJohn
      O’Keefe
              
              05/15/08
              
              400,000
              
              $
      0.20
              
              $
      63,912John
      MacDonald
              
              05/15/08
              
              200,000
              
              $
      0.20
              
              $
      31,956Andrew
      Wilson
              
              05/15/08
              
              200,000
              
              $
      0.20
              
              $
      31,956


______________________


(1)
            Vests
      immediately on date of grant.





Each of
the options in the foregoing table was granted under the Company’s 2003 Employee
Stock Option Plan. Warrants were granted under the terms established by the
Second Amended Plan of Reorganization (the “Plan”).


40


Outstanding
Equity Awards at Fiscal Year-End





Warrant
      and Option Awards*Name
                      
                      Securities
      Underlying Unexercised Equity Awards (#) Exercisable
                      
                      Securities
      Underlying Unexercised Equity Awards (#) Unexercisable
                      
                      Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                        (#)
                      
                      Option
      Exercise Price ($)
                      
                      Option
      Expiration DateJohn
      O’Keefe
                      
                      400,000(1)
                      
                      -
                      
                      -
                      
                      $
      0.20
                      
                      05/15/1380,000
                      
                      -
                      
                      -
                      
                      $
      4.28
                      
                      01/21/14420,000
                      
                      -
                      
                      -
                      
                      $
      0.90
                      
                      07/29/14400,000
                      
                      -
                      
                      -
                      
                      $
      0.80
                      
                      12/31/15John
      MacDonald
                      
                      200,000(1)
                      
                      -
                      
                      -
                      
                      $
      0.20
                      
                      05/15/13100,000
                      
                      -
                      
                      -
                      
                      $
      0.40
                      
                      03/14/1550,000
                      
                      -
                      
                      -
                      
                      $
      0.80
                      
                      12/31/15Andrew
      Wilson
                      
                      10,000
                      
                      -
                      
                      -
                      
                      $
      0.10
                      
                      03/01/13744,792
                      
                      -
                      
                      -
                      
                      $
      0.10
                      
                      04/15/13200,000(1)
                      
                      -
                      
                      -
                      
                      $
      0.20
                      
                      05/15/13200,000
                      
                      -
                      
                      -
                      
                      $
      0.80
                      
                      12/31/15


(1)
Warrants.  All other equity awards represent Options.


*None of
the Company’s officers or Directors held any outstanding Non-vested Stock Awards
as of December 31, 2008.





Director
Compensation




The
following table presents summary information for the year ended
December 31, 2008 regarding the compensation of the non-employee members of
our board. Mr. Peterson was appointed to the board in May, 2008.





Fees
      Earned or Paid in Cash ($)(1)
                
                Fees
      Earned or Paid in Stock ($)(2)
                
                Other
      Compensation ($)(3)
                
                Option
      Awards ($)(4)
                
                Total
                  ($)John
      R. Block
                
                -
                
                55,000
                
                10,500
                
                34,035
                
                99,535Roger
      P. (Pat) Herbert
                
                -
                
                92,000
                
                15,000
                
                34,035
                
                141,035Scott
      J. Johnson(5)
                
                47,000
                
                14,500
                
                -
                
                -
                
                61,500Joseph
      J. Penbera, PhD
                
                47,000
                
                40,500
                
                12,000
                
                34,035
                
                133,535Jeffrey
      R. Pendergraft
                
                -
                
                68,500
                
                10,500
                
                34,035
                
                113,035Michael
      L. Peterson
                
                -
                
                10,000
                
                7,500
                
                31,128
                
                48,628Frederick
      R. Ruiz(5)
                
                -
                
                39,000
                
                -
                
                -
                
                39,000O.
      James Woodward, III(5)
                
                61,000
                
                35,500
                
                -
                
                -
                
                96,500




No
Director received any non-equity incentive plan compensation, or non-qualified
deferred compensation earnings during the periods presented
above.  The table above excludes perquisites and other personal
benefits, or property, in the event the aggregate amount of such compensation is
less than $10,000.


_____________________





(1)
            Reflects
      payment in cash of deferred compensation for the 2007 fiscal year and
      through September 30, 2008.




(2)
            Reflects
      payment in shares of common stock of deferred compensation from 2006
      totaling $164,000 and unpaid director fees totaling $191,000 for the 2007
      fiscal year and through September 30, 2008. The stock was issued at $0.20
      per share.




(3)
            Reflects
      fourth quarter 2008 board fees deferred at year
  end.




(4)
            Reflects
      the dollar amount recognized for financial statement reporting purposes
      for the year ended December 31, 2008 in accordance with FAS 123R (but
      disregarding forfeiture estimates related to service-based vesting
      conditions).




41




(5)
            Former
      director – retired in 2008.






Former
directors Frederick R. Ruiz and O. James Woodard, III each exercised options for
50,000 shares of common stock during the fiscal year ended December 31,
2008.





The
following table presents the fair value of each grant of stock options in 2008
to non-employee members of our board of directors, computed in accordance with
FAS 123R:





Name
                
                Grant
      Date
                
                Number
      of Securities Underlying Options
                
                Exercise
      Price of Option Awards
                
                Grant
      Date Fair Value of OptionsJohn
      R. Block
                
                05/05/08
                
                150,000
                
                $
      0.20
                
                $
      34,035Roger
      P. (Pat) Herbert
                
                05/05/08
                
                150,000
                
                $
      0.20
                
                $
      34,035Joseph
      J. Penbera, PhD
                
                05/05/08
                
                150,000
                
                $
      0.20
                
                $
      34,035Jeffrey
      R. Pendergraft
                
                05/05/08
                
                150,000
                
                $
      0.20
                
                $
      34,035Michael
      L. Peterson
                
                05/28/08
                
                150,000
                
                $
      0.20
                
                $
      31,128





Compensation
of Directors




Currently,
each independent director earns compensation as outlined in the table below. In
April and October 2008 Blast’s current and former Directors converted unsecured
claims for unpaid director fees from 2006 totaling $164,000 and unpaid director
fees from 2007 and as of September 30, 2008 totaling $191,000 into 820,000
shares and 955,000 shares of Blast’s common stock, respectively. These
conversions were at the rate of one share for each $0.20 of the deferred amount
owed. In total, the following shares were issued to Board members in 2008 for
unpaid fees:





No.
      of  sharesJack
      Block
              275,000Roger
      (Pat) Herbert
              460,000Scott
      Johnson (retired)
              72,500Joe
      Penbera
              202,500Jeffrey
      Pendergraft
              342,500Michael
      Peterson
              50,000Fred
      Ruiz (retired)
              195,000O.
      James Woodward III (retired)
              177,500





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
Blast, which awards, if granted shall be in the sole determination of the Board
of Directors.





In
summary, Board members fees are calculated on the following basis:





Monthly
      Retainer
              
              AmountBoard
      Chair
              
              $
      2,500Board
      Member
              
              $
      2,500Audit
      Committee Chair
              
              $
      1,500Compensation
      Committee Chair
              
              $
      1,000Nominating
      and Governance Committee Chair
              
              $
      1,000







42


Item 12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.




The
following table sets forth, as of March 30, 2009, the number and percentage of
outstanding shares of our common stock owned by: (a) each person who is
known by us to be the beneficial owner of more than 5% of our outstanding shares
of common stock; (b) each of our directors; (c) the named executive
officers as defined in Item 402 of Regulation S-K; and (d) all current
directors and executive officers, as a group. As of March 30, 2009, there were
61,817,404 shares of common stock issued and outstanding including 1,150,000
approved but unissued shares arising from the class action settlement from 2005
and 35,000 shares, that are still outstanding as of the filing of this report,
but which shares the Blast expects to cancel in the second quarter of
2009.




Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within 60 days of the date
as of which the information is provided. In computing the percentage ownership
of any person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person by reason of such acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person’s actual voting power at
any particular date.




To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.





Name
      and Address of Beneficial Owner1
                  
                  Number
      of Shares Owned
                  
                  
                  Percentage
      of ClassBeneficial Owners of more than
      5%Laurus
      Master Fund Ltd.
                  
                  8,995,089
                  (2)
                  
                  12.95%335
      Madison Ave.New
      York, New York  10017Berg
      McAfee Companies LLC(3)
                  
                  8,733,436
                  (4)
                  
                  14.13%10600
      N. De Anza Blvd., #250Cupertino,
      California  95014McAfee
      Capital LLC(5)
                  
                  6,080,000
                  (6)
                  
                  9.24%10600
      N. De Anza Blvd., #250Cupertino,
      California  95014Eric
      A. McAfee
                  
                  16,026.534
                  (7)
                  
                  24.35%10600
      N. De Anza Blvd., #250Cupertino,
      California  95014Clyde
      Berg
                  
                  15,188,436
                  (8)
                  
                  23.08%10600
      N. De Anza Blvd., #250Cupertino,
      California  95014Officers and Directors:John
      O’Keefe
                  
                  1,845,000
                  (9)
                  
                  2.92%John
      MacDonald
                  
                  531,450
                  (10)
                  
                  *John
      R. Block
                  
                  670,083
                  (11)
                  
                  1.07%Roger
      P. (Pat) Herbert
                  
                  617,333
                  (12)
                  
                  1.00%Joseph
      J. Penbera, PhD
                  
                  1,480,785
                  (11)
                  
                  2.38%Jeffrey
      R. Pendergraft
                  
                  480,333
                  (13)
                  
                  *Michael
      L. Peterson
                  
                  920,833
                  (14)
                  
                  1.48%All
      directors and executive officers as a group (7 persons)
                  
                  6,545,817
                  (15)
                  
                  10.47%





* Less
than 1%




(1)
            Unless
      otherwise indicated, the mailing address of the beneficial owner is c/o
      Blast Energy Services, Inc., 14550 Torrey Chase Blvd., Suite 330, Texas
      77014.




43




(2)
            Consisting
      of (i) 1,350,000 shares of common stock, (ii) 6,090,000 shares of common
      stock underlying warrants exercisable at $1.44 per share and (iii)
      1,555,089 shares of common stock underlying warrants exercisable at a
      price of $0.01 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.




(3)
            Berg
      McAfee Companies is controlled by Clyde Berg and Eric
    McAfee.




(4)
            Consisting
      of 8,733,436 shares of common stock held by Berg McAfee Companies
      LLC.




(5)
            McAfee Capital is controlled by
      Eric McAfee. Eric McAfee is the Company’s former
      Vice-Chairman.




(6)
            Consisting
      of (i) 2,080,000 shares of common stock held, (ii) 3,000,000 shares of
      common stock underlying preferred stock exercisable at $.50 per share and
      (iii) 1,000,000 shares of common stock underlying warrants exercisable at
      $0.10 per share.




(7)
            Consisting
      of: (i) 1,213,098 common shares held personally, including 90,000 shares
      held by members of Mr. McAfee’s household, which Mr. McAfee is deemed to
      beneficially own; (ii) 8,733,436 shares of common stock held by Berg
      McAfee Companies LLC, which Mr. McAfee is deemed to beneficially own;
      (iii) 2,080,000 common shares, 3,000,000 common shares issuable upon the
      exercise of the Convertible Preferred stock  and 1,000,000
      warrants issued in connection with the Convertible Preferred stock
      offering held by McAfee Capital LLC, which Mr. McAfee is deemed to
      beneficially own (as described
herein).




(8)
            Consisting
      of: (i) 2,455,000 common shares held personally, (ii) 8,733,436 shares of
      common stock held by Berg McAfee Companies LLC, which Clyde. Berg is
      deemed to beneficially own; (iii) 3,000,000 common shares issuable upon
      the exercise of the Convertible Preferred stock; and (iv) 1,000,000
      warrants issued in connection with the Convertible Preferred stock
      offering (as described herein).




(9)
            Consisting
      of: (i) 545,000 shares of common stock held personally or through
      family-owned entities in which Mr. O’Keefe has investment and voting power
      and (ii) 1,300,000 shares of common stock underlying options or
      warrants.




(10)
            Consisting
      of: (i) 181,450 shares of common stock and (ii). 350,000 shares of
      common stock underlying options or
warrants.




(11)
            Consisting
      of (i) 443,250 shares of common stock and (ii) 222,667 shares of common
      stock underlying options .




(12)
            Consisting
      of (i) 472,500 shares of common stock and (ii)140,667 shares of common
      stock underlying options .




(13)
            Consisting
      of (i) 1,253,952 shares of common stock and (ii) 222,667 shares of common
      stock underlying options .




(14)
            Consisting
      of (i) 347,500 shares of common stock and (ii)128,667 shares of common
      stock underlying options .




(15)
            Consisting
      of (i) 800,000 shares of common stock and (ii)116,667 shares of common
      stock underlying options .






(16)
            Consisting
      of the holdings provided above in notes 9 through
  15.







Item
13. Relationships and Related Transactions, and Director
Independence.




Certain
Relationships and Related Transactions







Berg McAfee
Companies





In 2008,
Berg McAfee Companies, LLC (“BMC”) extended the term for the $1.0 million Note
secured on the Applied Fluid Jetting rig (described below) for three years. The
revised Note was issued for $1.12 million, including accumulated interest, and
carries an 8% interest rate and is convertible into common stock at $0.20 per
share.





On
July 15, 2005, Blast entered into an agreement to develop its initial
applied jetting rig with BMC. 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.
BMC also has the option to fund an additional three rigs under these commercial
terms.  This note originally due in March 2007 was extended for three
years, as described above.


44


McAfee
Capital





On the
effective date, the Plan allowed McAfee Capital to convert the $416,000
outstanding balance of the DIP loan, including accrued interest, they provided
during the bankruptcy into the Company’s common stock at the rate of one share
of common stock for each $0.20 of the DIP loan outstanding. Accordingly,
2,080,000 shares were issued to McAfee Capital in April 2008.





In
January 2008, Blast sold the rights to an aggregate of 1,000,000 units each
consisting of four shares of Series A Convertible Preferred Stock and one three
year warrant with an exercise price of $0.10 per share (the “Units”), for an
aggregate of $2,000,000 or $2.00 per Unit, to McAfee Capital,
LLC.  The Units were issued after Blast was re-domiciled and the
Preferred Stock authorized.  The shares of common stock issuable in
connection with the exercise of the warrants and in connection with the
conversion of the Preferred Stock were granted piggy-back registration rights in
connection with the sale of the Units. In October 2008, the Company redeemed
1,000,000 of the Preferred Stock shares for $500,000.





Clyde
Berg





On the
effective date, the Plan allowed Mr. Berg to convert the $416,000 outstanding
balance of the DIP loan , including accrued interest, he provided during the
bankruptcy into the Company’s common stock at the rate of one share of common
stock for each $0.20 of the DIP loan outstanding. Accordingly, 2,080,000 shares
were issued to Mr. Berg in April 2008.





In
January 2008, Blast sold the rights to an aggregate of 1,000,000 units each
consisting of four shares of Series A Convertible Preferred Stock and one three
year warrant with an exercise price of $0.10 per share (the “Units”), for an
aggregate of $2,000,000 or $2.00 per Unit, to Clyde Berg, an
individual.  The Units were issued after Blast was re-domiciled and
the Preferred Stock authorized.  The shares of common stock issuable
in connection with the exercise of the warrants and in connection with the
conversion of the Preferred Stock were granted piggy-back registration rights in
connection with the sale of the Units. In October 2008, the Company redeemed
1,000,000 of the Preferred Stock shares for $500,000.  As a partner in
BMC and in combination with holding these units, Mr. Berg is the beneficial
holder of more than 5% of the outstanding shares of common stock of
Blast.





Eric
McAfee




As a
partner in BMC and McAfee Capital and in combination with his personal holdings,
Mr. McAfee is the beneficial holder of more than 5% of the outstanding shares of
common stock of Blast. Eric McAfee is the Company’s former
Vice-Chairman.




Director
Independence


Director
                  
                  Independent
                  
                  Audit
      Committee
                  
                  Nominating
      & Corporate Governance CommitteeJohn
      R. Block
                  
                  X
                  
                  XRoger
      P. (Pat) Herbert
                  
                  X
                  
                  X
                  
                  XJoseph
      J. Penbera
                  
                  X
                  
                  X
                  
                  XJeffrey
      R. Pendergraft
                  
                  X
                  
                  
                  
                  XMichael
      L. Peterson
                  
                  X
                  
                  X





In
October 2008, Mr. Block was appointed to the board of directors for AE Biofuels,
a California-based vertically integrated biofuels company.  The
Chairman and CEO of AE Biofuels is Eric McAfee. Mr. McAfee is also the managing
partner for McAfee Capital LLC and president of Berg McAfee Companies LLC, both
of whom are significant shareholders of Blast. Michael Peterson is also a
director of AE Biofuels.





Employment
Agreements





John
O’Keefe is employed by us pursuant to an Employment Agreement entered into upon
the confirmation of the Plan of Reorganization on February 27, 2008. Mr. O’Keefe
is employed as CEO and President of the Company at an annual salary of
$200,000.


45


John
MacDonald is employed by us pursuant to an Employment Agreement entered into
upon the confirmation of the Plan of Reorganization on February 27,
2008.  Mr. MacDonald is employed as Executive Vice President and
CFO of the Company at an annual salary of $150,000.





Andrew
Wilson is employed by us pursuant to an Employment Agreement entered into upon
the confirmation of the Plan of Reorganization on February 27,
2008.  Mr. Wilson is employed as Vice President of Business
Development of the Company at an annual salary of $175,000.





The
Employment Agreements are described in greater detail above under “Item 11.
Executive Compensation.”





Item
14. Principal Accountant Fees and Services.





The
following table presents fees for professional audit services performed by GBH
CPAs, PC for the audit of our annual financial statements for the fiscal years
ended December 31, 2008 and 2007 and Malone & Bailey, PC for the quarterly
reviews for the year ended December 31, 2007 and fees billed for other services
rendered by it during those periods.





2008
              
              2007GBH
      CPAs, PC:Audit
      fees
              
              $
      55,000
              
              $
      24,000Other
      non-audit fees
              
              -
              
              -Tax
      related fees
              
              -
              
              -Malone
      & Bailey, PCAudit
      fees
              
              -
              
              42,046Other
      non-audit fees
              
              -
              
              10,368Tax
      related fees
              
              -
              
              -Total
              
              $
      55,000
              
              $
      76,414





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 Blast’s
consolidated financial statements and are not reported under Audit
fees.





Tax
Fees





Tax
related fees consist 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 minimusexceptions 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 wereengaged. All of the
services for which fees are listed above were pre−approved by our Board of
Directors.





46


PART
IV





Item15.
Exhibits and Financial Statement Schedules.





(a)           1.           Financial
Statements of the Company (attached below)





INDEX
TO FINANCIAL STATEMENTS





Audited
      Financial Statements for years ended December 31, 2008
      and  2007Report
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
              F-3Consolidated
      Statements of Changes in Stockholders’ Equity For the Years Ended December
      31, 2008 and 2007
              F-4Consolidated
      Statements of Cash Flows for the Years ended December 31, 2008 and
      2007
              F-5Notes
      to Consolidated Financial Statements
              F-6





2.
            Financial
      Statement Schedules





The required information is included in
the Consolidated Financial Statements or Notes thereto.





3.
            List
      of Exhibits







Exhibit
      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-KExhibit
      2.2
                
                Articles
      of Merger (California and Texas)
                  Filed
      on April 7, 2008 with the SEC, Form 10-KSBExhibit
      3.1
                
                Certificate
      of Formation Texas
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      3.2
                
                Certificate
      of Designation of Series A Preferred Stock
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      3.3
                
                Bylaws
      of Blast Energy Services, Inc., Texas
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      4.1
                
                $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-KExhibit
      4.2
                
                $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-KExhibit
      10.1
                
                Second
      Amended Plan of Reorganization
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.2
                
                First
      Amended Plan of Reorganization
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.3
                
                Subscription
      Agreement and Related Exhibits with Clyde Berg
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.4
                
                Subscription
      Agreement and Related Exhibits with McAfee Capital, LLC
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.5
                
                Laurus
      Master Fund, Ltd. $2.1 million Security Agreement
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.6
                
                Berg
      McAfee Companies $1.12 million Note
                  Filed
      March 6, 2008 with the SEC, Form 8-KExhibit
      10.7
                
                Settlement
      Agreement
                  Filed
      on May 14, 2007 with the SEC, Form 8-KExhibit
      10.8
                
                Eagle
      Domestic Drilling Operations LLC and Hallwood Energy, LP and Hallwood
      Petroleum LLC  Settlement Agreement
                  Filed
      on April 7, 2008 with the SEC, Form 10-KSBExhibit
      10.9
                
                Employment
      Agreement with John O’Keefe
                  Filed
      on November 13, 2008 with the SEC, Form 10-QExhibit
      10.10
                
                Employment
      Agreement with John MacDonald
                  Filed
      on November 13, 2008 with the SEC, Form 10-QExhibit
      16.1
                
                Letter
      from Malone & Bailey, PC
                  Filed
      on March 5, 2008 with the SEC, Form 8-KExhibit
      21.1*
                
                SubsidiariesExhibit
      31.1*
                
                Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      31.2*
                
                Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002Exhibit
      32.1*
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit
      32.2*
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





*
            Filed
      herewith





47


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





SIGNATURES





BLAST
      ENERGY SERVICES, INC.By:
            /s/
      John O’KeefeJohn
      O’Keefe
              Chief
      Executive Officer and
              Principal
      Executive OfficerBy:
            /s/
      John MacDonaldJohn
      MacDonald
              Chief
      Financial Officer and
              Principal
      Accounting OfficerDate:
            March
      31, 2009









Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacity
and on the dates indicated.





Signature
            
            Title
            
            Date/s/
      JOHN O’KEEFE
            
            Chief
      Executive Officer and
            
            March
      31, 2009John
      O’Keefe
            
            Principal
      Executive Officer/s/
      JOHN MACDONALD
            
            Chief
      Financial Officer and
            
            March
      31, 2009John
      MacDonald
            
            Principal
      Accounting Officer/s/
      JOHN R. BLOCK
            
            Director
            
            March
      31, 2009John
      R. Block/s/
      ROGER P. HERBERT
            
            Director
            
            March
      31, 2009Roger
      P. Herbert/s/
      JOSEPH J. PENBERA
            
            Director
            
            March
      31, 2009Joseph
      J. Penbera/s/
      JEFFREY R. PENDERGRAFT
            
            Director
            
            March
      31, 2009Jeffrey
      R. Pendergraft/s/
      MICHAEL L. PETERSON
            
            Director
            
            March
      31, 2009Michael
      L. Peterson





48


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors


Blast
Energy Services, Inc.


Houston,
Texas











We have
audited the accompanying consolidated balance sheets of Blast Energy Services,
Inc. as of December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the years ended
December 31, 2008 and 2007.  These financial statements are the
responsibility of Blast Energy Services, Inc.’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 (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  Blast is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Blast’s internal control over financial
reporting. Accordingly, we express no such opinion.  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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Blast Energy Services, Inc.
as of December 31, 2008 and 2007 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 United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
Blast Energy Services, Inc. will continue as a going concern. As discussed in
Note 2 to the financial statements, Blast incurred a loss from continuing
operations for the year ended December 31, 2008 and an accumulated deficit at
December 31, 2008 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.














GBH CPAs,
PC


www.gbhcpas.com


Houston,
Texas





March 30,
2009





F-1




BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
BALANCE SHEETS











December
      31, 2008
                  
                  
                  December
      31, 2007AssetsCurrent
      Assets:Cash
                  
                  $
                  731,631
                  
                  
                  $
                  48,833Accounts
      receivable, net
                  
                  
                  107,065
                  
                  
                  
                  46,292Other
      assets
                  
                  
                  53,254
                  
                  
                  
                  57,409Current
      portion of long-term receivable
                  
                  
                  666,667
                  
                  
                  
                  -Total
      Current Assets
                  
                  
                  1,558,617
                  
                  
                  
                  152,534Equipment,
      net of accumulated depreciation of $68,282 and $35,488
                  
                  
                  1,191,263
                  
                  
                  
                  1,083,645Long-term
      accounts receivable
                  
                  
                  2,933,333
                  
                  
                  
                  -Total
      Assets
                  
                  $
                  5,683,213
                  
                  
                  $
                  1,236,179Liabilities
      and Stockholders’ Equity (Deficit)Current
      Liabilities:Accounts
      payable
                  
                  $
                  24,085
                  
                  
                  $
                  1,384,929Accrued
      expenses
                  
                  
                  225,312
                  
                  
                  
                  612,476Deferred
      revenue
                  
                  
                  9,459
                  
                  
                  
                  10,517Advances-related
      parties
                  
                  
                  -
                  
                  
                  
                  1,700,000Notes
      payable – other
                  
                  
                  -
                  
                  
                  
                  542,500Liabilities
      of discontinued operations
                  
                  
                  -
                  
                  
                  
                  2,112,413Short-term
      portion of senior debt
                  
                  
                  -
                  
                  
                  
                  2,100,000Total
      Current Liabilities
                  
                  
                  258,856
                  
                  
                  
                  8,462,835Long-Term
      Liabilities:Notes
      payable – related party
                  
                  
                  1,120,000
                  
                  
                  
                  -Liabilities
      of discontinued operations
                  
                  
                  -
                  
                  
                  
                  125,000Total
      Liabilities
                  
                  
                  1,378,856
                  
                  
                  
                  8,587,835Stockholders’
      Equity (Deficit):Preferred
      Stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and -0-
      shares issued and outstanding
                  
                  
                  6,000
                  
                  
                  
                  -Common
      stock, $.001 par value, 180,000,000 shares authorized; 60,432,404 and
      52,027,404 shares issued and outstanding
                  
                  
                  60,432
                  
                  
                  
                  52,027Additional
      paid-in capital
                  
                  
                  75,102,481
                  
                  
                  
                  70,471,873Accumulated
      deficit
                  
                  
                  (70,864,556
                  )
                  
                  
                  (77,875,556
                  )Total
      Stockholders’ Equity (Deficit)
                  
                  
                  4,304,357
                  
                  
                  
                  (7,351,656
                  )Total
      Liabilities and Stockholders’ Equity (Deficit)
                  
                  $
                  5,683,213
                  
                  
                  $
                  1,236,179











See notes
to the consolidated financial statements.


F-2


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
Ended December 31, 2008 and 2007








2008
                
                
                2007Revenue:
                
                $
                432,012
                
                
                $
                418,468Operating
      expenses:Cost
      of sales
                
                
                682,995
                
                
                
                451,853Selling,
      general and administrative
                
                
                1,923,814
                
                
                
                4,198,283Depreciation
      and amortization
                
                
                38,458
                
                
                
                93,366Impairment
      of intellectual property
                
                
                -
                
                
                
                975,000Total
      operating expenses
                
                
                2,645,267
                
                
                
                5,718,502Operating
      loss
                
                
                (2,213,255
                )
                
                
                (5,300,034
                )Other
      income (expense):Other
      income
                
                
                19,947
                
                
                
                232,434Interest
      income
                
                
                22,177
                
                
                
                2,740Interest
      expense
                
                
                (112,951
                )
                
                
                (23,758
                )Loss
      on disposal of equipment
                
                
                (1,270
                )
                
                
                -Total
      other income (expense)
                
                
                (72,097
                )
                
                
                211,416Loss
      from continuing operations
                
                
                (2,285,352
                )
                
                
                (5,088,618
                )Income
      (loss) from discontinued operations
                
                
                9,296,352
                
                
                
                (4,785,554
                )Net
      Income (loss)
                
                $
                7,011,000
                
                
                $
                (9,874,172
                )Preferred
      dividends
                
                
                253,151
                
                
                
                -Net
      income (loss) attributable to common shareholders
                
                $
                6,757,849
                
                
                $
                (9,874,172
                )Basic
      income (loss) per common share:Continuing
      operations
                
                $
                (0.04
                )
                
                $
                (0.08
                )Discontinued
      operations
                
                
                0.16
                
                
                
                (0.08
                )Net
      income (loss)
                
                $
                0.12
                
                
                $
                (0.16
                )Diluted
      net income (loss) per common share:Continuing
      operations
                
                $
                (0.03
                )
                
                $
                (0.08
                )Discontinued
      operations
                
                
                0.13
                
                
                
                (0.08
                )Net
      income (loss)
                
                $
                0.10
                
                
                $
                (0.16
                )Weighted
      average common shares outstandingBasic
                
                
                57,627,725
                
                
                
                61,680,431Diluted
                
                
                67,098,771
                
                
                
                61,680,431








See notes
to the consolidated financial statements.


F-3


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


Years
Ended December 31, 2008 and 2007











Series
      A Convertible
                  Preferred Stock
                
                
                Common StockShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Additional
      Paid-In Capital
                
                
                Accumulated
      Deficit
                
                
                TotalBalances
      at December 31, 2006
                
                
                -
                
                
                $
                -
                
                
                
                67,609,904
                
                
                $
                67,610
                
                
                $
                69,116,253
                
                
                $
                (68,001,384
                )
                
                $
                1,182,479Common
      stock issued for:Cash
      exercise of warrants and options
                
                
                -
                
                
                
                -
                
                
                
                900,000
                
                
                
                900
                
                
                
                89,100
                
                
                
                -
                
                
                
                90,000Cancellation
      of shares
                
                
                -
                
                
                
                -
                
                
                
                (16,482,500
                )
                
                
                (16,483
                )
                
                
                12,967
                
                
                
                -
                
                
                
                (3,516
                )Option
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,253,553
                
                
                
                -
                
                
                
                1,253,553Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,874,172
                )
                
                
                (9,874,172
                )Balances
      at December 31, 2007
                
                
                -
                
                
                $
                -
                
                
                
                52,027,404
                
                
                $
                52,027
                
                
                $
                70,471,873
                
                
                $
                (77,875,556
                )
                
                $
                (7,351,656
                )Issuance
      of preferred shares
                
                
                8,000,000
                
                
                
                8,000
                
                
                
                -
                
                
                
                -
                
                
                
                3,992,000
                
                
                
                -
                
                
                
                4,000,000Common
      stock issued for:Notes
      payable and accrued interest
                
                
                -
                
                
                
                -
                
                
                
                4,160,000
                
                
                
                4,160
                
                
                
                827,634
                
                
                
                -
                
                
                
                831,794Services
                
                
                -
                
                
                
                -
                
                
                
                2,145,000
                
                
                
                2,145
                
                
                
                424,855
                
                
                
                -
                
                
                
                427,000Cashless
      exercise of warrants and options
                
                
                -
                
                
                
                -
                
                
                
                2,900,000
                
                
                
                2,900
                
                
                
                (2,900
                )
                
                
                -
                
                
                
                -Cash
      exercise of warrants and options
                
                
                -
                
                
                
                -
                
                
                
                100,000
                
                
                
                100
                
                
                
                9,900
                
                
                
                -
                
                
                
                10,000Cancellation
      of shares
                
                
                
                
                
                
                
                
                
                
                (900,000
                )
                
                
                (900
                )
                
                
                -
                
                
                
                -
                
                
                
                (900
                )Redemption
      of preferred shares
                
                
                (2,000,000
                )
                
                
                (2,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (998,000
                )
                
                
                -
                
                
                
                (1,000,000
                )Option
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                233,317
                
                
                
                -
                
                
                
                233,317Warrant
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                143,802
                
                
                
                -
                
                
                
                143,802Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,011,000
                
                
                
                7,011,000Balances
      at December 31, 2008
                
                
                6,000,000
                
                
                $
                6,000
                
                
                
                60,432,404
                
                
                $
                60,432
                
                
                $
                75,102,481
                
                
                $
                (70,864,556
                )
                
                $
                4,304,357








See notes
to the consolidated financial statements.




F-4




BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
Ended December 31, 2008 and 2007








2008
                    
                    
                    2007Cash
      Flows From Operating ActivitiesNet
      income (loss)
                    
                    $
                    7,011,000
                    
                    
                    $
                    (9,874,172
                    )(Income)
      loss from discontinued operations
                    
                    
                    (9,296,352
                    )
                    
                    
                    4,785,554Loss
      from continuing operations
                    
                    $
                    (2,285,352
                    )
                    
                    $
                    (5,088,618
                    )Adjustments
      to reconcile net loss to net cash provided from operating:Depreciation
      and amortization
                    
                    
                    38,458
                    
                    
                    
                    93,366Impairment
      of intellectual property
                    
                    
                    -
                    
                    
                    
                    975,000Share-based
      compensation
                    
                    
                    377,119
                    
                    
                    
                    1,253,553Stock
      issued for services
                    
                    
                    75,000
                    
                    
                    
                    -Bad
      debt provisions
                    
                    
                    -
                    
                    
                    
                    12,436Loss
      on disposition of equipment
                    
                    
                    1,270
                    
                    
                    
                    -Change
      in:Accounts
      receivable
                    
                    
                    1,298,166
                    
                    
                    
                    56,182Other
      current assets
                    
                    
                    111,030
                    
                    
                    
                    19,172Accounts
      payable
                    
                    
                    (1,360,845
                    )
                    
                    
                    1,429,831Accrued
      expenses
                    
                    
                    116,630
                    
                    
                    
                    192,195Deferred
      revenue
                    
                    
                    (1,058
                    )
                    
                    
                    (40,413
                    )Net
      Cash Used in Operating Activities
                    
                    
                    (1,629,582
                    )
                    
                    
                    (1,097,296
                    )Cash
      Flows From Investing ActivitiesProceeds
      from restricted cash
                    
                    
                    -
                    
                    
                    
                    30,000Cash
      paid for purchase of fixed assets
                    
                    
                    (7,840
                    )
                    
                    
                    (41,649
                    )Cash
      paid for construction of equipment
                    
                    
                    (139,505
                    )
                    
                    
                    -Net
      Cash Used in Investing Activities
                    
                    
                    (147,345
                    )
                    
                    
                    (11,649
                    )Cash
      Flows From Financing ActivitiesBorrowings
      on debtor-in-possession financing
                    
                    
                    100,000
                    
                    
                    
                    700,000Payments
      on short term debt
                    
                    
                    (649,375
                    )
                    
                    
                    -Issuance
      of convertible preferred stock
                    
                    
                    4,000,000
                    
                    
                    
                    -Proceeds
      from exercise of options
                    
                    
                    10,000
                    
                    
                    
                    90,000Common
      stock repurchased and cancelled
                    
                    
                    (900
                    )
                    
                    
                    -Redemption
      of preferred stock
                    
                    
                    (1,000,000
                    )
                    
                    
                    -Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (16
                    )Net
      Cash Provided By Financing Activities
                    
                    
                    2,459,725
                    
                    
                    
                    789,984Discontinued
      OperationsDiscontinued
      operating activities
                    
                    
                    2,225,000
                    
                    
                    
                    (1,020,870
                    )Discontinued
      investing activities
                    
                    
                    -
                    
                    
                    
                    94,131Discontinued
      financing activities
                    
                    
                    (2,225,000
                    )
                    
                    
                    (240,070
                    )Net
      Cash Used in Discontinued Operations
                    
                    
                    -
                    
                    
                    
                    (1,166,809
                    )Net
      change in cash
                    
                    
                    682,798
                    
                    
                    
                    (1,485,770
                    )Cash
      at beginning of period
                    
                    
                    48,833
                    
                    
                    
                    1,534,603Cash
      at end of period
                    
                    $
                    731,631
                    
                    
                    $
                    48,833Cash
      paid for:Interest
                    
                    $
                    33,537
                    
                    
                    $
                    -Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -Non-Cash
      Transactions:Conversion
      of deferred board compensation to common stock
                    
                    $
                    352,000
                    
                    
                    
                    -Conversion
      of related party interest to common stock
                    
                    
                    31,794
                    
                    
                    
                    -Conversion
      of related party advances to common stock
                    
                    
                    800,000
                    
                    
                    
                    -Cashless
      exercise of warrants
                    
                    
                    2,900
                    
                    
                    
                    -Issuance
      of note payable for related party debt and accrued
interest
                    
                    
                    1,120,000
                    
                    
                    
                    -Exchange
      of rigs for debt
                    
                    
                    -
                    
                    
                    
                    45,822,321Prepaid
      insurance financed with note payable
                    
                    
                    106,875
                    
                    
                    
                    112,907Cancellation
      of insurance finance note
                    
                    
                    -
                    
                    
                    
                    186,325








See notes
to the consolidated financial statements.


F-5


BLAST
ENERGY SERVICES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION





Business.Our mission is to
substantially improve the economics of existing and evolving oil and gas
operations through the application of Blast licensed and owned technologies. We
are an emerging technology company in the energy sector and strive to assist oil
and gas companies in producing more economically. We seek to provide quality
services to the energy industry through our two divisions (i) Satellite
Communications services and (ii) Down-hole Solutions, such as our AFJ
technology.





Our
strategy is to grow our businesses by maximizing revenues from the
communications and down-hole segments and controlling costs while analyzing
potential acquisitions and new technology opportunities in the energy service
sector.





On
February 26, 2008, the Court confirmed our Second Amended Plan of Reorganization
(the “Plan”) allowing Blast to emerge from Chapter 11 bankruptcy. The overall
impact of the confirmed Plan was for Blast to emerge with unsecured creditors
fully paid, have no debt service scheduled for at least two years, and keep
equity shareholders’ interests intact.





Basis of
Presentation. Blast’s 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”). This contemplates
the realization of assets and satisfaction of liabilities in the ordinary course
of business. Accordingly, Blast’s consolidated financial statements do not
include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should Blast be unable to
continue as a going concern.





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





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





Use of
Estimates in Financial Statement Preparation.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.





Amendments
to Articles of Incorporation.In connection with the
approval of the Plan, the Court, and the Board of Blast approved a change in
Blast’s domicile from California to Texas.  Blast effected the
re-domicile by forming a wholly owned subsidiary, Blast Energy Services, Inc.,
in the State of Texas.  Blast then merged with and into this
subsidiary thereby becoming a Texas Corporation (the
“Merger”).  Following the Merger, Blast has 200,000,000 authorized
shares of stock, of which 180,000,000 shares are common stock, $0.001 par value
per share and 20,000,000 shares are preferred stock, $0.001 par value per
share.  The Certificate of Formation of the resulting Texas
Corporation also allows the Board to issue “blank check” preferred stock with
rights and privileges as it may decide in its sole discretion, but which shares
must have voting rights.  Blast also authorized 8,000,000 shares of
Series A Convertible Preferred Stock and adopted new bylaws in support of the
Merger.





Fair
Value of Financial Instruments.  The
carrying amount of Blast’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.





F-6


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 collectability 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 three to twelve month warranties for
satellite hardware.  Blast has a 30-day return
policy.  Revenue for applied fluid jetting services is recognized when
the services are performed and collectability is reasonably assured and when
collection is uncertain, revenue is recognized when cash is
collected.





Allowance
for Doubtful Accounts.  Blast does not require collateral from
its customers with respect to accounts receivable but performs periodic credit
evaluations of such customer’s financial condition. Blast determines any
required allowance by considering a number of factors including length 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, 2008 and 2007, Blast has determined
that no allowance for doubtful accounts 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.





Stock-Based
Compensation.  Effective January 1, 2006, Blast began recording
compensation expense associated with stock options and other forms of equity
compensation in accordance with Statement of Financial Accounting Standards
(“SFAS”) No.123R, Share−Based
Payment, as interpreted by SEC Staff Accounting Bulletin No.
107.





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 carry-forwards
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 incurred a net loss
for the years ended December 31, 2007 and therefore, basic and diluted earnings
per share for 2007 are the same as all potential common equivalent shares would
be anti-dilutive.





Recently
Issued Accounting Pronouncements.  In July 2006, the FASB
issued FASB Interpretation (“FIN”) No. 48 - Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109.  FIN 48
prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes.  Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.  Blast adopted FIN 48 effective
January 1, 2007.  The impact of the adoption of FIN 48 did not have a
material effect on Blast’s financial position, results of operations, or cash
flows.


F-7


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements”.  SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements.  This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.  Blast implemented SFAS No. 157 effective January
1, 2008, and it did not have a significant impact on Blast’s financial position,
results of operations, and cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
statement No. 115.” This Statement permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the “fair value
option”). A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each
subsequent reporting date. Upfront costs and fees related to items for which the
fair value option is elected shall be recognized in earnings as incurred and not
deferred. If an entity elects the fair value option for a held-to-maturity or
available-for-sale security in conjunction with the adoption of this Statement,
that security shall be reported as a trading security under Statement 115, but
the accounting for a transfer to the trading category under paragraph 15(b) of
Statement 115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intention of an entity
to hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15,
2007.





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





NOTE
2 – GOING CONCERN





In
October, 2008, Blast entered into a settlement of customer lawsuits which
provided Blast with cash, other assets and reductions in liabilities that
dramatically improved Blast’s financial position. However, Blast had a loss from
continuing operations of approximately $2.3 million for the year ended December
31, 2008, and an accumulated deficit of approximately $70.8 million as of
December 31, 2008. The financial statements do not include any adjustments that
might be necessary if Blast is unable to continue as a going
concern.





NOTE
3 – EQUIPMENT





Equipment
consists of the following:





Description
                    
                    Life
                    
                    December
      31, 2008
                    
                    December
      31, 2007Computer
      equipment
                    
                    3
      years
                    
                    $
      22,313
                    
                    $
      25,788IPSM,
      in progress
                    
                    3
      years
                    
                    50,479
                    
                    -Tractor
                    
                    4
      years
                    
                    26,265
                    
                    21,883Service
      Trailer
                    
                    5
      years
                    
                    4,784
                    
                    4,784AFJ
      Rig
                    
                    10
      years
                    
                    1,155,704
                    
                    1,066,678Equipment
                    
                    
                    
                    $
      1,259,545
                    
                    $
      1,119,133Less:  accumulated
      depreciation
                    
                    
                    
                    (68,282)
                    
                    (35,488)Equipment,
      net
                    
                    
                    
                    $
      1,191,263
                    
                    $
      1,083,645





NOTE
3 – ACCRUED EXPENSES





Accrued
expenses at December 31, 2008 and 2007 consisted of the following:





Description
                
                2008
                
                2007Director
      fees
                
                $
      55,500
                
                $
      372,000Interest
                
                75,748
                
                148,129Other
                
                94,064
                
                92,347$
      225,312
                
                $
      612,476





F-8


NOTE
4 – 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
$9,459 at December 31, 2008, all of which is expected to be recognized in the
next twelve months.





NOTE
5 – RELATED PARTY TRANSACTIONS





Convertible
Preferred Stock.Under the terms
of the confirmed Plan, Blast raised $4.0 million in cash from the sale of
convertible preferred securities to Clyde Berg and McAfee Capital, two parties
related to Blast’s largest shareholder, Berg McAfee Companies.  A
total of $2.4 million of the proceeds from the sale of the securities were used
to pay 100% of the unsecured creditor claims, all administrative claims, and all
statutory priority claims.  The remaining $1.6 million was used to
execute an operational plan including, but not limited to, reinvesting in the
Satellite Services and Down-hole Solutions businesses and pursue an emerging
remote monitoring and control business. The sale of the convertible preferred
securities was conditioned on approval of the Plan and as such, the securities
were issued after the Merger became effective in March 2008.





In
October 2008 Blast agreed to redeem 2,000,000 shares of Blast’s Series A
Preferred Stock held by Clyde Berg and McAfee Capital, LLC at the face value of
the Preferred shares, $0.50 per share, and paid $1,000,000 to redeem the
Preferred shares.  The Preferred shares have a dividend rate of 8% per
annum until paid or converted.  In connection with the Redemption,
Blast cancelled the 1,000,000 Preferred shares each held by Clyde Berg and
McAfee Capital, LLC, and consequently only 6,000,000 Preferred Shares remain
outstanding as of the December 31, 2008.





Note
Extension.  A
pre-existing secured $1.12 million note with Berg McAfee Companies was extended
for an additional three years from the Plan effective date of February 27,
2008.  The note bears interest at 8% and contains an option for the
principal and interest to be convertible into Company stock at the rate of one
share for each $0.20 of the note outstanding.





Debtor-in-Possession
(“DIP”) Loan.The Bankruptcy
court approved Blast’s ability to draw $800,000 from  McAfee Capital
and Clyde Berg  to finance Blast’s working capital needs on a
temporary basis.  The Plan allowed them to convert the outstanding
balance of the DIP loan and including accrued interest into Company common stock
at the rate of one share for each $0.20 of the DIP loan
outstanding.  In March 2008 after the Merger became effective,
4,160,000 shares of common stock were issued in full payment of the principal
and accrued interest on this obligation in April 2008.





Director
Fee Conversion.  In April and October 2008 Blast’s Directors
converted unsecured claims for unpaid directors fees from 2006 totaling $164,000
and unpaid director fees from 2007 and 2008 year-to-date totaling $191,000 into
820,000 shares and 955,000 shares of Blast’s common stock, respectively. These
conversions were at the rate of one share for each $0.20 of the deferred amount
owed.





NOTE
6 – NOTES PAYABLE





In
October, 2008, Blast paid off its $2.1 million Senior Lien with Laurus Master
Fund, Ltd. and $125,000 note with McClain County, Oklahoma as a result of cash
received from settling certain lawsuits with Hallwood and
Quicksilver.





NOTE
7 - INCOME TAXES





As of
December 31, 2008, Blast had accumulated net operating 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 $23,566,119 at December 31, 2008,
and will expire in the years 2019 through 2027.





F-9


At
December 31, 2008, the deferred tax assets consisted of the
following:





Deferred
      tax assetsNet
      operating losses
                  $8,012,480Less:  valuation
      allowance
                  (8,012,480)Net
      deferred tax asset
                  $              –





The
change in the valuation allowance for the years ended December 31, 2008 and 2007
totaled approximately $2,547,520 and $ 2,700,000, respectively.





NOTE
8 – PREFERRED STOCK





In
January 2008, Blast sold the rights to an aggregate of 2,000,000 units each
consisting of four shares of Series A Convertible Preferred Stock, and one three
year warrant with an exercise price of $0.10 per share (the “Units”), for an
aggregate of $4,000,000 or $2.00 per Unit, to Clyde Berg and to McAfee Capital
LLC.   The shares of common stock issuable in connection with the
exercise of the warrants and the conversion of the Preferred Stock were granted
piggy-back registration rights.  The proceeds from the sale of the
Units were used to satisfy creditor claims of $2.4 million under the terms of
the Plan and provide working capital of $1.6 million.





Series A Convertible
Preferred Stock


The
8,000,000 shares of Series A Preferred Stock (the “Preferred Stock”) accrue
dividends at the rate of 8% per annum, in arrears for each month that the
Preferred Stock is outstanding.  Blast has the right to pay any or all
of the accrued dividends at any time by providing the holders of the Preferred
Stock at least five days written notice of their intent to pay such
dividends.  In the event Blast receives a “Cash Settlement,” defined
as an aggregate total cash settlement received by Blast, net of legal fees and
expenses, in connection with Blast’s litigation proceedings with Hallwood and
Quicksilver in excess of $4 million, Blast is required to pay outstanding
dividends within thirty days in cash or stock at the holder’s
option.  If the dividends are not paid within thirty days of the date
the Cash Settlement is received, a “Dividend Default” occurs. As of December 31,
2008, the aggregate arrearages for the 6,000,000 preferred shares outstanding
are $202,521. Also included in the arrearages per share calculation are
additional dividends in arrearage of $50,630 related to the 2,000,000 preferred
shares that were redeemed in October 2008. As of December 31, 2008, the
aggregate per share arrearages on the outstanding Preferred Stock were
approximately $0.04 per share.





The
Preferred Stock and any accrued and unpaid dividends, have optional conversion
rights into shares of Blast’s common stock at a conversion price of $0.50 per
share. The Preferred Stock automatically converts if Blast’s common stock trades
for a period of more than twenty consecutive trading days at a price greater
than $3.00 per share and if the average trading volume of Blast’s common stock
exceeds 50,000 shares per day.





The
Preferred Stockholder has the right to vote the number of underlying common
shares of voting stock that the Preferred Stock is then convertible
into.  The Preferred Stock may be redeemed at the sole option of Blast
upon the receipt by Blast of a cash settlement from the litigation in excess of
$7.5 million, provided that the holders, at their sole option, may have six
months from the date of Blast’s receipt of the cash settlement to either accept
the redemption of the Preferred Stock or convert into shares of Blast’s common
stock.





On
October 16, 2008, Blast agreed to redeem 2,000,000 shares of Preferred Stock,
1,000,000 shares each held by Clyde Berg and McAfee Capital, LLC at the face
value of $0.50 per share, and paid $1,000,000 to redeem those Preferred Shares.
Blast cancelled the 1,000,000 Preferred Shares each held by Clyde Berg and
McAfee Capital, LLC, and only 6,000,000 Preferred Shares remain outstanding as
of December 31, 2008.





Warrants


Blast
also issued warrants to the Preferred Stockholders to purchase up to 2,000,000
shares of common stock at an exercise price of $0.10 per share.  These
warrants have a three-year term. The relative fair value of the warrants
determined utilizing the Black-Scholes model was approximately $446,000 on the
date of sale.  The significant assumptions used in the valuation were:
the exercise price of $0.10; the market value of Blast’s common stock on the
date of issuance of $0.29; expected volatility of 131%; risk free interest rate
of 2.25%; and a term of three years.  Management has evaluated the
terms of the Convertible Preferred Stock and the issuance of warrants in
accordance with EITF 98-5 and EITF 00-27, and concluded that there is not a
beneficial conversion feature at the date of issuance.


F-10


NOTE
9 – COMMON STOCK





During
2007, Blast issued 900,000 shares of common stock as a result of a cashless
exercise of options valued at $90,000.





During
2008 Blast issued 9,305,000 shares of common stock as follows:


·
            2,900,000
      shares issued in connection with the cashless exercise of warrants and
      options


·
            4,160,000
      shares issued in repayment of notes payable and accrued interest valued at
      $831,794


·
            1,775,000
      shares issued to directors in payment of board compensation fees for 2007
      and partial year 2008 valued at
$352,000


·
            370,000
      shares issued to consultants for their services valued at
      $75,000


·
            100,000
      shares issued as a result of cash exercise of warrants and options valued
      at $10,000





During
2008 Blast cancelled 900,000 shares of common stock pursuant to the settlement
agreement approved on May 14, 2007, whereby Blast repurchased shares of common
stock previously issued to Second Bridge LLC for $900.





NOTE
10 - STOCK OPTIONS AND WARRANTS





Options





During
2007 no new options were issued or awarded.





During
2008, options to purchase 750,000 shares of common stock were granted by Blast
to its directors at an exercise price of $0.20 per share. These options have a
term of ten years of which 500,000 shares vested immediately on the date of
grant and the remainder vest 1/12th per quarter thereafter.  Fair
value of $167,266 was recorded using the Black-Scholes method of option-pricing
model.  Variables used in the Black-Scholes pricing model for warrants
issued during the year ended December 31, 2008 include (1) discount rate range
of 3.1% to 3.4%, (2) expected life of 6 years, (3) expected volatility of 150%
and (4) zero expected dividends.





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.





No
warrants were issued or awarded in 2007. However, warrants to purchase 750,000
shares with Edge Capital were extended three years to 2013 as part of an
Agreement for Settlement and Mutual Release.





During
2008, warrants to purchase 900,000 shares of common stock were granted by Blast
to its employees at an exercise price of $0.20 per share. These warrants have a
term of five years and vested on the date of the grant.  Fair value of
$143,802 was recorded using the Black-Scholes method of option-pricing
model.  Variables used in the Black-Scholes pricing model for warrants
issued during the year ended December 31, 2008 include (1) discount rate of
2.7%, (2) expected life of 3 years, (3) expected volatility of 131.8% and (4)
zero expected dividends.





Blast
also issued warrants to the Preferred Stockholders to purchase up to 2,000,000
shares of common stock at an exercise price of $0.10 per share.  These
warrants have a three-year term. The relative fair value of the warrants
determined utilizing the Black-Scholes model was approximately $446,000 on the
date of sale.  The significant assumptions used in the valuation were:
the exercise price of $0.10; the market value of Blast’s common stock on the
date of issuance of $0.29; expected volatility of 131%; risk free interest rate
of 2.25%; and a term of three years.


F-11


Summary
information regarding options and warrants is as follows:





Options
                
                Weighted
      Average Share Price
                
                Warrants
                
                Weighted
      Average Share PriceOutstanding
      at December 31, 2006
                6,034,792
                
                $
      0.89
                
                15,141,635
                
                $
      0.74Year
      ended December 31, 2007:Granted
                -
                
                -
                
                -
                
                -Exercised
                (900,000)
                
                0.10
                
                -
                
                -Forfeited
                (2,562,000)
                
                1.31
                
                (668,800)
                
                0.81Outstanding
      at December 31, 2007
                2,572,792
                
                $
      0.77
                
                14,472,835
                
                $
      0.74Year
      ended December 31, 2008:Granted
                750,000
                
                0.20
                
                2,900,000
                
                0.13Exercised
                (100,000)
                
                0.10
                
                (2,900,000)
                
                0.01Forfeited
                (190,000)
                
                1.63
                
                (968,922)
                
                0.81Outstanding
      at December 31, 2008
                3,032,792
                
                $
      0.60
                
                13,503,913
                
                $
      0.76





Summary
of options outstanding and exercisable as of December 31, 2008 is as
follows:





Exercise
      Price
              
              Weighted
      Average Remaining Life (years)
              
              Options
      Outstanding
              
              Options
      Exercisable$
      0.10
              
              4.3
              
              854,792
              
              854,7920.20
              
              9.4
              
              750,000
              
              541,6670.38
              
              6.4
              
              36,000
              
              36,0000.40
              
              6.3
              
              120,000
              
              120,0000.61
              
              7.4
              
              48,000
              
              41,3330.80
              
              7.0
              
              660,000
              
              660,0000.90
              
              5.6
              
              420,000
              
              420,0002.20
              
              5.4
              
              24,000
              
              24,0004.28
              
              5.1
              
              120,000
              
              120,000$0.10
      to $4.28
              
              6.5
              
              3,032,792
              
              2,817,792





Summary
of warrants outstanding and exercisable as of December 31, 2008 is as
follows:





Exercise
      Price
                      
                      Weighted
      Average Remaining Life (years)
                      
                      Warrants
      Outstanding
                      
                      Warrants
      Exercisable$
      0.01
                      
                      4.7
                      
                      3,063,913
                      
                      3,063,9130.10
                      
                      2.2
                      
                      2,000,000
                      
                      2,000,0000.20
                      
                      4.4
                      
                      850,000
                      
                      850,0000.45
                      
                      4.1
                      
                      750,000
                      
                      750,0001.00
                      
                      4.1
                      
                      750,000
                      
                      750,0001.44
                      
                      4.7
                      
                      6,090,000
                      
                      6,090,000$0.01to
      $1.44
                      
                      3.9
                      
                      13,503,913
                      
                      13,503,913














F-12


NOTE
11 – CONCENTRATIONS & CREDIT RISKS





One
customer accounted for 37% and 44% of total revenues in 2008 and 2007,
respectively.  There were no related party revenues in 2008 and 2007,
respectively.





Blast at
times has cash in banks in excess of FDIC insurance limits.  At
December 31, 2008, Blast had no 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
12 – COMMITMENTS & CONTINGENCIES





Three of
Blast’s executive employees are under employment agreements with base salaries
of $200,000, $175,000 and $150,000 per annum plus bonus potential up to 50% of
the base salary.





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 abrasive jetting 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 a 20% ownership in the technology but this
was increased to 50% on March 17, 2006. There are currently no material amounts
payable to Alberta under the terms of this agreement.





NOTE
13 – LITIGATION





Emergence fromChapter 11
Proceedings





On
February 26, 2008, the Court entered an order confirming our Second Amended Plan
of Reorganization (the “Plan”).  This ruling allowed Blast to emerge
from Chapter 11 bankruptcy effective one day later. The overall impact of the
confirmed Plan was for Blast to emerge with unsecured claims fully paid, having
no debt service scheduled for at least two years, and to keep equity
shareholders’ interests intact.





Under the
terms of this Plan, Blast raised $4.0 million in cash proceeds from the sale of
convertible preferred securities to Clyde Berg and McAfee Capital, two parties
related to Blast’s largest shareholder, Berg McAfee Companies.  The
proceeds from the sale of the securities were used to pay 100% of the allowed
unsecured claims, all allowed unsecured administrative claims, and all statutory
priority claims, for a total amount of $2.4 million.  The sale of the
convertible preferred securities were issued after Blast successfully merged
with its wholly owned subsidiary, Blast Energy Services, Inc., a Texas
corporation, whereby Blast re-domiciled in Texas.





Hallwood Energy/Hallwood
Petroleum Lawsuit


In
April 2008, Eagle and Hallwood agreed to settle the litigation for
approximately $6.5 million. Under the terms of the settlement, Hallwood agreed
to pay $2.0 million in cash, issue $2.75 million in equity and irrevocably
forgave $1.65 million in deposits paid to Eagle.  The parties and
their affiliates were fully and mutually released from any and all claims
between them.  The terms of the settlement agreement were approved by
the board of directors of each company and was confirmed by the
Court.





Under the
terms of the settlement agreement Hallwood paid Eagle $0.5 million in July 2008
and $1.5 million in September 2008.  Payments received from Hallwood
were distributed in October 2008.





On
February 11, 2009, Blast and Eagle entered into an amended settlement letter
with Hallwood that modified and finalized the terms of the parties April 3, 2008
settlement letter.  The amended settlement provided that the equity
component would be satisfied by the issuance to Blast of Class C Partnership
Interests in Hallwood Energy, equal to 7% of such Interests, having a face value
of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement
was approved by the board of directors of each company and was confirmed by the
Court.





F-13


On March
2, 2009, Hallwood Energy filed voluntary petitions with the U.S. Bankruptcy
Court for the Northern District of Texas under Chapter 11 of Title 11 of the
U.S. Bankruptcy Code in order that it could dispose of burdensome and
uneconomical assets and reorganize its financial obligations and capital
structure. This bankruptcy filing creates uncertainty on the future value of
this equity position in Hallwood, so we are recognizing a zero carrying value in
our financial statements relating to the Class C Interests in
Hallwood.





Quicksilver Resources
Lawsuit


In
September 2008, Blast and Eagle entered into a Compromise Settlement and Release
Agreement with Quicksilver in the Court to resolve the pending
litigation.  Blast and Quicksilver also agreed to release all the
claims against each other and certain related parties.





Quicksilver
agreed to the terms and conditions of the Settlement and agreed to pay Eagle a
total of $10 million (the “Settlement Fees”), as follows:





·
            $5
      million payable upon the parties’ entry into the
    settlement;


·
            $1million
      payable on or before the first anniversary date of the execution of the
      settlement;


·
            $2
      million payable on or before the second anniversary date of the execution
      of the settlement; and


·
            $2
      million payable on or before the third anniversary date of the execution
      of the settlement.





In the
event any Settlement Fees are not paid on their due date and Quicksilver’s
failure to pay is not cured within 10 days after written notice, then all of the
remaining payments immediately become due and payable. Quicksilver made the
first payment of $5 million to Eagle in October 2008.





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 Blast, 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.





NOTE
14 – BUSINESS SEGMENTS





Blast has
two reportable segments: (1) Satellite Communications and (2) 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.





F-14


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 Year Ended
                  December
      31,2008
                
                
                2007Revenues:Satellite
      Communications
                
                $
                396,012
                
                
                $
                418,468Down-hole
      Solutions
                
                
                36,000
                
                
                
                -Total
      Revenue
                
                $
                432,012
                
                
                $
                418,468Cost
      of Goods Sold:Satellite
      Communications
                
                $
                404,151
                
                
                $
                445,060Down-hole
      Solutions
                
                
                278,844
                
                
                
                6,793Corporate
                
                
                1,962,272
                
                
                
                5,266,649Total
      Costs Loss
                
                $
                2,645,267
                
                
                $
                5,718,502Operating
      profit (loss):Satellite
      Communications
                
                $
                (8,139
                )
                
                $
                (26,592
                )Down-hole
      Solutions
                
                
                (242,844
                )
                
                
                (6,793
                )Corporate
                
                
                (1,962,272
                )
                
                
                (5,266,649
                )Total
      Loss
                
                $
                (2,213,255
                )
                
                $
                (5,300,034
                )





Blast’s
fixed assets at December 31, 2008 were as follows:





2008Satellite
      Communications
              $                -Down-hole
      Solutions
              1,188,055Corporate
              3,208$
      1,191,263





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





F-15


NOTE
15 – DISCONTINUED OPERATIONS





The
assets and liabilities of the discontinued operations of Eagle are presented
separately under the captions “Current assets of discontinued operations”,
“Current liabilities of discontinued operations” and “Long term liabilities of
discontinued operations” respectively in the accompanying balance
sheet.





December
      31,2008
                
                
                2007Assets:Current
      Assets:Cash
                
                $
                -
                
                
                $
                -Total
      Current Assets
                
                $
                -
                
                
                $
                -Liabilities:Current
      Liabilities:Accrued
      liabilities
                
                $
                -
                
                
                $
                1,783,557Accounts
      payable
                
                
                -
                
                
                
                328,856Notes
      payable
                
                
                -
                
                
                
                -Total
      Current Liabilities
                
                $
                -
                
                
                $
                2,112,413Long
      Term Liabilities:Notes
      payable
                
                
                -
                
                
                
                125,000Total
      Liabilities
                
                $
                -
                
                
                $
                2,237,413








Net
income (loss) from the discontinuance of drilling operations for the years ended
December 31, 2008 and 2007 are as follows:





2008
                
                
                2007Revenues
                
                $
                -
                
                
                $
                419,650Operating
      Expenses:Cost
      of sales
                
                
                (43,403
                )
                
                
                1,600,093Selling,
      general and administrative
                
                
                365,355
                
                
                
                142,543Depreciation
      and amortization
                
                
                -
                
                
                
                95,196Total
      operating expenses
                
                
                (321,952
                )
                
                
                1,837,832Gain
      (loss) from discontinued operations
                
                
                (321,952
                )
                
                
                (1,418,182
                )Other
      income (expense)Other
      income
                
                
                9,620,291
                
                
                
                -Other
      (expenses)
                
                
                (1,005
                )
                
                
                -Interest
      income
                
                
                66
                
                
                
                -Interest
      expense
                
                
                (1,048
                )
                
                
                (1,264,801
                )Loss
      on sale of equipment
                
                
                -
                
                
                
                (2,033,714
                )Total
      other income (expense)
                
                
                9,618,304
                
                
                
                (3,298,515
                )Net
      income (loss) from discontinued operations
                
                $
                9,296,352
                
                
                $
                (4,716,697
                )





The
increase in net income from discontinued operations is primarily due to the lack
of activity from discontinued operations, the debt forgiveness from the Hallwood
settlement and other income recognized from the lawsuit settlements with
Hallwood and Quicksilver during 2008.





F-16


NOTE
16 – OTHER SUBSEQUENT EVENTS





Hallwood
Energy Chapter 11 Bankruptcy





On
February 11, 2009, Blast and Eagle entered into a settlement with Hallwood that
modified and finalized the terms of the parties April 3, 2008 settlement
letter.  The amended settlement provided that the equity component
would be satisfied by the issuance to Blast of Class C Partnership Interests in
Hallwood Energy, equal to 7%  and having a face value of $7,658,000 as
of September 30, 2008 (the “Class C Interests”).





On March
2, 2009, Hallwood Energy filed voluntary petitions with the US Bankruptcy Court
for the Northern District of Texas under Chapter 11 of Title 11 of the US Code
in order that it could dispose of burdensome and uneconomical assets and
reorganize its financial obligations and capital structure. This bankruptcy
filing creates uncertainty on the future value of this equity position in
Hallwood, therefore we are recognizing a zero carrying value in our financial
statements relating to the Class C Interests.