UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C. 20549
 
 Form
10-KSB
 
 
 ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
fiscal year ended December
31, 2007
 
 TRANSITIONAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
transition period from________________to
 
 Commission
file number: 333-64122
 
 Blast Energy Services,
Inc.
 (Name of
small business issuer in its charter)
 
 Texas
              22-3755993(State
      of incorporation)
              (I.R.S.
      Employer
                Identification
      No.)
 
 
 14550
Torrey Chase Blvd, Suite 330
 Houston,
Texas 77014
 (Address
of principal executive offices)
  (281)
453-2888
 (Telephone
number)
 
 Securities
registered under Section 12(b) of the Exchange Act: None
 
 
 Securities
registered under Section 12(g) of the Exchange Act: None
 
 
 Check
whether issuer (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yesx  Noo
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendments to this Form 10-KSB. x
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
oYes  xNo
 
 Issuer’s
revenues for the most recent fiscal year: $418,468
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold on April 1, 2008 is $8,478,046.
 
 The
number of shares outstanding of each of the issuer’s classes of common equity,
as of March 31, 2008:
 
 Common
Stock: 51,162,404 shares, including 1,150,000 approved shares arising from the
class action settlement and 900,000 shares, which are still outstanding as of
the filing of this report, but which shares Blast plans to cancel in the second
quarter 2008, described below in greater detail.
 
 No (1)
annual report to security holders; (2) proxy or information statement; or (3)
any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933; are incorporated by reference into any part of this Form
10-KSB.
 
 Transitional
Small Business Disclosure Format: oYes xNo
  
  
  Table
of Contents
  
 PagePART
      IITEM
      1. DESCRIPTION OF BUSINESS
              3ITEM
      2. DESCRIPTION OF PROPERTY
              16ITEM
      3. LEGAL PROCEEDINGS
              16ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              20PART
      IIITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
    MATTERS
              21ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
    OPERATION
              24ITEM
      7. FINANCIAL STATEMENTS
              41ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING   AND FINANCIAL DISCLOSURE
              67ITEM
      8A. CONTROLS AND PROCEDURES
              67ITEM
      8B. OTHER INFORMATION
              68PART
      IIIITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS
              69ITEM
      10. EXECUTIVE COMPENSATION
              71ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT
              77ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
              79ITEM
      13. EXHIBITS AND REPORTS ON FORM 8-K
              81ITEM
      14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
              86SIGNATURES
              88
  
  2
  PART
I
 
 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-KSB, UNLESS ANOTHER DATE
IS STATED, ARE TO DECEMBER 31, 2007.  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.
 
 Item
1. Description of Business
 
 Organizational
History
 
 Important Investor Information
 
 On
January 19, 2007, Blast Energy Services, Inc. and its wholly owned subsidiary,
Eagle Domestic Drilling Operations LLC, filed voluntary petitions with the US
Bankruptcy Court for the Southern District of Texas – Houston Division, under
Chapter 11 of Title 11 of the US Code in order that they may dispose of
burdensome and uneconomical assets and reorganize their financial obligations
and capital structure. On February 27, 2008 we emerged from bankruptcy after
having our plan of reorganization confirmed by the court. Accordingly, we urge
that caution be exercised with respect to existing and future investments in our
equity securities.
 
 Business
Development
 
 Blast was
originally incorporated in September 2000 as Rocker & Spike
Entertainment, Inc, a California corporation. Effective January 1, 2001, we
purchased the assets and web domain of Accident Reconstruction Communications
Network, following which we filed articles of amendment to our articles of
incorporation with California to change our name to Reconstruction Data Group,
Inc. At that time, we provided research, communication and marketing exposure to
the accident reconstruction industry through our website and
seminars.
 
 In April
2003, we entered into a merger agreement with Verdisys, Inc. Verdisys was
initially incorporated as TheAgZone Inc. in 1999 as a California corporation.
Its purpose was to provide e-Commerce satellite services to agribusiness. We
changed our name to Verdisys in 2001, and in 2003, with the acquisition of
exclusive rights to a proprietary lateral drilling process throughout most of
the US and Canada, we changed our market focus to concentrate on services to the
oil and natural gas (“oil and gas”) industry.
  3
  The
merger agreement with Verdisys called for us to be the surviving company. Our
name was changed to Verdisys, Inc., our articles of incorporation and bylaws
remained in effect, the officers and directors of Verdisys became our officers
and directors, each share of Verdisys’ common stock was converted into one share
of our common stock, our accident reconstruction assets were sold, and our
business focus was changed to the oil and gas industry. On June 6, 2005, we
filed articles of amendment to our articles of incorporation with California to
change our name to Blast Energy Services, Inc. (“Blast” or “Blast Energy”) in
part to reflect our focus on the energy service business.
 
 In August
2006, we acquired Eagle Domestic Drilling Operations LLC (“Eagle”), a drilling
contractor which at that time owned three land rigs, and had three more under
construction; henceforth references to our operations include the operations of
Eagle, unless otherwise stated or the context suggests otherwise.
 
 As part
of the financial consideration for the purchase of Eagle, we  received
$15 million in cash in exchange for the issuance of 15,000,000 common shares and
three–year warrants for the right to purchase 3.750,000 shares with an exercise
price of $0.01. We also entered into a Securities Purchase Agreement (“SPA”)
dated August 25, 2006 with Laurus Master Fund, Ltd. (“Laurus”) to finance $40.6
million of the total purchase price of Eagle. Under the SPA, we issued a Secured
Term Note (“the Note”) in the original principal amount of $40.6 million with a
final maturity in three years, with interest at prime plus 2.5%, with a minimum
rate of 9%, payable quarterly to Laurus. The principal was to be repaid
commencing April 1, 2007 at a rate of $800,000 per month for the first twelve
months from that date, $900,000 per month for the subsequent twelve months and
$1,000,000 per month until the Note matures. The remaining balance of the Note
was to be paid at maturity with any associated interest.
 
 The SPA
required the additional payment in cash fees to Laurus of 3.5% of the total
value of the investment of $40.6 million at closing. The SPA further required
the issuance of Common Stock Purchase Warrants (“Warrants”) to purchase
6,090,000 shares of our common stock at an exercise price of $1.44 per share,
and an additional 6,090,000 shares of common stock at an exercise price of $0.01
per share. The Warrants have a seven year term and we were required to file a
registration statement to register the underlying shares within 60 days after
closing and to obtain effectiveness with the SEC within 180 days after closing,
which registration statement has since been filed and withdrawn, and which
filing has since been abandoned by us. The Laurus financing was privately
arranged through a broker who received a 2% commission in cash and warrants with
a two year term to purchase 304,500 shares of our common stock at an exercise
price of $0.01 per share. We ceased making payments on the Note as of December
31, 2006.
 
 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. We had used assumptions in the Eagle acquisition that
included high revenue and full utilization rate expectations based upon the 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 reduced our revenue
expectations and consequently our ability to meet the scheduled payments on the
Laurus’ Note. We believe this cancellation was in violation of the terms of the
drilling contracts and we and Eagle have subsequently filed suit for breach of
those contracts.
 
 On
January 19, 2007, Blast and Eagle, filed voluntary petitions with the US
Bankruptcy Court for the Southern District of Texas – Houston Division (the
“Court”) under Chapter 11 of Title 11 of the US Code in order that we could
dispose of burdensome and uneconomical assets and reorganize our financial
obligations and capital structure (Case Nos. 07-30424-H4-11 and 07-30426-H4-11,
respectively).  This action also stayed any existing lawsuits filed
against us and Eagle, regardless of jurisdiction. 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.
 
 On May
17, 2007 we executed an agreement with Laurus 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, including accrued interest and default penalties. As a
result of this settlement, the customer litigation, the satellite communication
business and the abrasive fluid jetting technology, remained with us subsequent
to the sale of the rigs. The Settlement Agreement is described
below.
 
 On
February 26, 2008, the Bankruptcy Court entered an order confirming our Second
Amended Plan of Reorganization (the “Plan”).  This ruling allows Blast
to emerge from Chapter 11 bankruptcy.
  4
  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.  The major components of
the Plan, which was overwhelmingly approved by creditors and shareholders, are
detailed in the following paragraphs.
 
 Under the
terms of this confirmed Plan, Blast has 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 will be 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.
 
 The sale
of the convertible preferred securities was conditioned on approval of the Plan
and as such, the securities can only be issued after the Merger (defined below)
is effected, which only occurred recently.  As such, we anticipate
issuing the convertible preferred securities shortly after the filing of this
report.
 
 This Plan
also preserves the equity interests of our existing shareholders. Furthermore,
Blast will continue to prosecute the litigation against Quicksilver and
Hallwood, if they are unable to meet the terms of the settlement agreement
(described below).
 
 Under the
terms of the Plan, Blast will carry three secured obligations:
 
 ·
              A
      $2.1 million interest-free senior obligation with Laurus Master Fund,
      Ltd., which is secured by the assets of Blast and is payable only by way
      of a 65% portion of the proceeds that may be received for the customer
      litigation lawsuits or any asset sales that may occur in the
      future;
 
 ·
              A
      $125,000 note to McClain County, Oklahoma for property taxes, which can
      also be paid from the receipt of litigation proceeds from Quicksilver, or
      if not paid, it will convert into a six and one half percent interest
      bearing note in February 27, 2010, and due in twelve monthly installments
      of $10,417;  and
 
 ·
              A
      pre-existing secured $1.12 million note with Berg McAfee Companies has
      been extended for an additional three years from the effective date of the
      Plan, February 27, 2008 at eight-percent (8%) interest, 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.
 
 No other
claims exist on the future operating cash flows of Blast.
 
 
 Laurus
Settlement Agreement
 
 We
previously reached an agreement with Laurus, on the terms of an asset purchase
agreement intended to offset the full amount of the $40.6 million senior note,
accrued interest and default penalties owed to Laurus. Under the terms of this
agreement, only five land drilling rigs and associated spare parts were sold to
repay Laurus’ note, accrued interest and default penalties on the
note.  We had previously requested authority to consummate the
agreement with Laurus from Thornton, which proposed sale was originally objected
to by Thornton Oilfield Holdings LLC and various other entities controlled by
Rodney D. Thornton (collectively “Thornton Entities”), at the time a significant
shareholder of Blast.
 
 The
Settlement provided that Thornton Entities shall dismiss their lawsuits against
us in Oklahoma and New York, respectively, and they shall support the proposed
sale of our rigs to Laurus or its designee Boom Drilling LLC.  The
Settlement also provided that we agreed to pay Laurus $2.1 million as a
reimbursement which payment is secured by all of our assets which Laurus had
security interests in at the time we entered bankruptcy (the “Bankruptcy
Assets”), and that we and Laurus shall split the proceeds 35%/65%, respectively,
from the sale of any Bankruptcy Assets, and; that we would purchase 900,000
shares of Blast common stock from Second Bridge LLC for $900 These shares have
been returned to Blast and are in the process of being retired.
 
 The
Settlement was approved by the Bankruptcy Court on May 10, 2007 and the rig sale
was completed shortly thereafter.
  5
  
 Stock
Repurchase
 
 In August
2007 we entered into an Agreement and Mutual Release with the Thornton Security
Business Trust whereby the parties would release each other and their associates
from any legal proceedings (See Item 3 Legal Proceedings). In addition Blast
agreed to repurchase 16,447,500 shares of common stock from the Trust for
$16.48. The shares were retired in 2007 and reduced he number of shares of
common stock we had outstanding by approximately 24 per cent.
 
 Director
Fees Conversions
 
 Blast’s
Directors converted unsecured claims for unpaid directors fees totaling
approximately $164,000, into shares of Blast’s common stock at the rate of one
share of common stock for each $0.20 of the deferred amount owed in connection
with the approval of the Plan. Such conversions will result in the issuance of
the following shares to our current and former Directors, which issuances are
still in process and have therefore not been included in the number of issued
and outstanding shares disclosed throughout this report:
 
 John
      Block
              92,500Roger
      P. (Pat) Herbert
              120,000Scott
      Johnson
              72,500Joseph
      Penbera
              202,500Jeff
      Pendergraft
              55,000Fred
      Ruiz
              100,000O.
      James Woodward III
              177,500
 
 
 Management
Warrants
 
 Under the
Plan, Blast’s Board of Directors was given the authority to enter into long-term
warrant agreements with Blast’s senior management, and grant such senior
management the right to purchase up to 4,000,000 warrants to purchase shares of
Blast’s common stock at $0.20 per share, for a period of five
years.  No warrant grants have been issued to date.
 
 Debtor-in-Possession
(DIP) Loan
 
 The
Bankruptcy court approved Blast’s ability to draw $800,000 from Berg McAfee and
related entities to finance Blast on a temporary basis.  The Plan
allows Berg McAfee to convert the outstanding balance of the DIP loan into
Company common stock on the effective date of the Plan at the rate of one share
of common stock for each $0.20 of the DIP loan outstanding.  No amount
of this loan has been converted into stock to date.
 
 Re-domicile
to Texas
 
 Pursuant
to the Plan, Blast was to re-domicile 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. Blast also adopted a resolution
providing for the issuance of a series of Eight Million (8,000,000) shares of
Series A Convertible Preferred Stock (described below).
 
  6
  Hallwood
Settlement
 
 On April
3, 2008, Eagle and Hallwood signed an agreement to settle the litigation between
them for a total settlement amount of approximately $6.4 million. Under the
terms of this agreement, Hallwood will pay to Eagle $2.0 million in cash, issue
$2.75 million in equity from a pending major financing and has agreed to
irrevocably forgive approximately $1.65 million in Eagle payment obligations
effective immediately. In return, Eagle has agreed to suspend its legal actions
against Hallwood for approximately six months.  Additionally, in the
event Hallwood is able to secure an aggregate of $20 million in bridge financing
prior to June 30, 2008, Hallwood will pay Eagle a $500,000 advance on its cash
obligation. Should Hallwood be unable to complete its major financing by
September 30, 2008, Eagle will immediately resume their legal actions against
Hallwood and the $500,000 advance will not be credited against any future
judgment or settlement amounts.  Upon receipt of the entire settlement
amount by Eagle, the parties and their affiliates will be fully and mutually
released from all and any claims between them. This settlement agreement has
been approved by both companies’ boards of directors but is subject to the
approval of the Bankruptcy Court.
 
 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 operate a website at www.blastenergyservices.com, which
includes information we do not desire to be incorporated by reference into this
report. 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 abrasive 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 also seek to maximize value from the customer
litigation (described in Item 3 “Legal Proceedings”).
 
 One of
our business segments is providing satellite communication services to energy
companies. This service allows such energy companies to remotely monitor and
control well head, pipeline, drilling, and other oil and gas operations through
low cost broadband data and voice services, transmitted from remote operations
where terrestrial or cellular communication networks do not exist or are too
costly to install.
 
 Also, we
have been striving to develop a commercially viable lateral drilling technology
with the potential to penetrate through well casing and into reservoir
formations to stimulate oil and gas production using abrasive fluid jetting
(“AFJ”) and the principles gained from the non-abrasive process used in the
Landers lateral drilling technology, which we obtained the patented rights to in
April 2003, as described below under “Patents and Licenses.”  After
redesigning and improving the existing process and introducing AFJ technology,
we believe that we can deliver a valuable and cost effective production
enhancement service to onshore oil and gas producers, particularly operators of
marginal wells. We have completed the construction of a new generation specialty
rig based upon modifications using existing coiled tubing technology as the
primary platform. The capabilities of our rig include: one-inch coiled tubing
with a working depth capability of approximately 8,000 feet; a fluid pressure
pumping system; an abrasive slurry system; and a computer-controlled system to
guide and control the down-hole formation access tool for precise casing milling
and jetting services. The AFJ rig was deployed during the fourth quarter of 2006
and has undergone developmental tests with the US Department of Energy Rocky
Mountain Oilfield Testing Center, outside Casper, Wyoming.
 
 Following
the execution of our Settlement Agreement with Laurus, we sold substantially all
of our contract land drilling operations and currently operate solely in the
down-hole solutions and satellite communication segments. As a result, although
we operated in the contract land drilling industry on a limited basis during
2006, the description of our current business operations below focuses more on
our planned operations moving forward. Furthermore, the results of operations
described throughout this Form 10-KSB focuses on our operations during the
twelve months ended December 31, 2007, which included only our satellite
communications services and down-hole solutions.
 
  7
  In
connection with the Eagle acquisition in August 2006 and the subsequent
termination of the five IADC two year drilling contracts by Hallwood and
Quicksilver in September of 2006, both Hallwood and Quicksilver have filed suits
against Eagle to rescind the contracts.  In April 2008, Blast agreed
to settle their dispute with Hallwood, subject to certain conditions, as
discussed below in Item 3, “Legal Proceedings,” of this annual
report.  Failure to meet these conditions will cause Blast to resume
their legal actions against Hallwood. Both suits are currently pending in US
Bankruptcy Court and District Court for the Southern District of
Texas,.  We believe that Blast has claims for damages arising from
early termination of these contracts. Further, we estimate these claims to be in
the $15-45 million (gross) range and as such may represent Blast’s largest
asset. We can make no assurances, however, that Blast will be successful in
prosecuting these suits nor can we make any assurances as to the ultimate
outcome of any litigation in connection with these contract
terminations.
 
 Energy
Industry
 
 We
operate in the energy services industry which services the broader upstream
energy industry, where companies explore, develop, produce, transport, and
market oil and gas. This industry is comprised of a diverse number of operators,
ranging from very small independent contractors to the extremely large
corporations. While the majority of oil and gas production is produced by very
large international oil companies, there are also a large number of smaller
independent companies who own and operate a large number of new and existing
wells.
 
 As a
smaller firm with a specialized service, we intend to provide 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 hope 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
contract drilling and abrasive jetting service where the use of such services
costs those developers less than other available alternative services and/or
when they perceive such use will be able to cost effectively increase their
production and reserves. We also believe the use of our technology will be
influenced by macro-economic factors driving oil and gas
fundamentals.
 
 We
believe that producing companies will react to the combination of the increased
demand and the limited supply of oil and gas in a manner that requires them to
utilize all segments of our business. We believe that oil and gas producers have
and will continue to have great economic incentives to recovering additional
production and reserves from known reservoirs rather than pursuing a more risky
exploration approach. Our abrasive jetting technology may permit producers to
add value by potentially recovering a significant additional percentage of the
oil and gas from a reservoir. We believe that a large potential market exists in
North America for our abrasive jetting stimulation methods.
 
 Activity
in the energy services industry tends to be cyclical with oil and gas prices. In
addition to the currently positive industry fundamentals, we believe the
following sector-specific trends enhance the growth potential of our business
sectors:
 
 ·
              While
      oil prices are unpredictable, they have remained high and we believe they
      will continue to remain relatively high by historic terms for several
      years. We expect continuing high consumption and strong growth in Asian
      demand, along with limitations in delivery infrastructures and political
      unrest in major supplying countries are expected to be contributing
      factors.
 
 ·
              We
      believe gas prices, while volatile, will remain high for several years due
      to the combination of strong demand and major supply
      constraints.
 
 ·
              We
      do not believe there is any substitution threat to oil and gas in the
      foreseeable future. In particular, any significant substitution by
      hydrogen or any other potential source is believed by management to be
      some decades away.
 
  8
  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.
Satellites capability to operate off stationary and mobile remote dishes with no
supporting infrastructure has proven invaluable in both disaster recovery and
remote or continuously moving commercial operations.
 
 Our
satellite services can be optimized to provide cost effective applications such
as VoIP, Virtual Private Networking “VPN” and Real-time Supervisory Control and
Data Acquisition Systems, commonly referred to as “SCADA”. SCADA permits oil and
gas companies to dispense with a manual structure and move to a real-time,
automated, energy management program. Utilizing SCADA, a service we currently
offer, production levels can be optimized to meet the producer’s current market
demands and commitments.
 
 
 At
present, we acquire modem hardware from ViaSat 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 Constellation, Isotropic Networks, Viasat and Spacenet,
Inc.
 
 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.
  9
  Major
Customers
 
 Our
current satellite services customers include BP America and Apache, representing
40% and 29%, respectively, of our satellite revenues for the year ended December
31, 2007. Contracts are usually for hardware, backhaul, and bandwidth. Virtually
any oil and gas producer, of which there are thousands, is a potential customer
for our satellite services.
 
 Market
 
 According
to the Department of Energy there are more than two million oil and gas wells in
existence in the US alone, many of which are located in remote or rural areas
where communications and monitoring well status can be difficult and
expensive.  Such well locations could benefit from the economics of
our real-time, high speed satellite connectivity services as compared to more
conventional monitoring alternatives, such as, the time consuming and costly
transportation of personnel to remote well locations, or the equipment and
maintenance costs of laying land lines for real-time monitoring of remote well
operations. Our focus is serving the needs of oil and gas producers worldwide to
control their production effectively and to enhance customer satisfaction by
providing worldwide real-time access to information. This market for satellite
services is very competitive with increasing pressure on margins. 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.
 
 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 are focused on the top 20% of the market, particularly international and
offshore platforms, and Stratus Global is focused on the offshore market using a
traditional wireless network. We believe our satellite services offer advantages
over those services by:
 
 ·
              Customizing
      the provided service to better meet the customer’s
  needs;
 ·
              Offering
      superior speed;
 ·
              Providing
      single vendor convenience; and
 ·
              Offering
      lower up-front infrastructure and operating
  costs.
 
 Digital
Oilfield, a New Business Opportunity
 
 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. The advances in
new technology may also facilitate:
 
 ·
              Utilizing
      existing legacy networks for SCADA and sensor monitoring together with the
      capability to support internet access, VoIP phones and video
      surveillance;
 ·
              Achieving
      economies of scale in monitoring systems and personnel by allowing
      multiple systems to be monitored by reduced
  staff;
 ·
              Integrating
      video, voice and data networks so that producers can detect, review and
      respond to emergencies utilizing multiple
  networks;
  10
  ·
              Deploying
      standard policies and procedures across disparate networks to ensure a
      uniform response to health, safety and environment
  issues;
 ·
              Tracking
      events to ensure compliance with government rules and
      regulations;
 ·
              Further
      automating process and control monitoring to capture long term savings in
      costs and personnel; and
 ·
              Promoting
      the use of standardized policies and procedures to capture “best
      practices” and further efficiency
improvements.
 
 Energy and Communications
Industry Convergence
 
 Operations
in the energy sector have several unique characteristics: (i) generally remote
and sometimes hostile locations without communications infrastructure both
onshore and offshore (ii) expensive unmanned assets in those locations and (iii)
high sensitivity to continued flow of oil and gas production or pipeline
throughput. Blasts’ experience in marketing Satellite Communications solutions
to the industry puts it in a unique position to offer a new and improved way for
the oilfield to communicate with its operating headquarters, both from remote
sensors and between humans.
 
 Technological
breakthroughs now allow us to offer voice, data and video communications to our
customers based on digitization of radio waves routed through communication
centers and managed by sophisticated software. We are calling this suite of
products the “Digital Oilfield”. Since its Chapter 11 filing January 19, 2007,
in order to expand its business base and develop additional business
opportunities Blast has aligned itself with Spacenet, Inc., among others, to
supply satellite hardware and bandwidth, with Cisco Systems, Inc. to supply
technology, routers, and communication centers, and with outside contractors to
supply sensor policy management software. Spacenet, Inc. has developed an
exclusive relationship with Cisco Systems to fully integrate its satellite
equipment with some of Cisco’s router products. Our outside contractors have
completed initial deployment of its sensor policy management software performing
monitoring and control functions at Cisco’s headquarters and regional offices
and is active in a number of pilots. Management believes that these
relationships provide Blast with a major opportunity to create an early entry
into a significant market growth opportunity in the energy sector. Cisco and our
outside contractors had previously developed the technology, equipment, and
protocols for the Homeland Security market, but Blast believes there is vast
potential in the energy sector to offer these products and services
 
 Oil and
gas producers have been early adopters of radio and non-Internet Protocol (IP)
networks to support SCADA systems, which monitor and control oil fields and
pipelines, as well as remote communications for personnel support. Initially,
the systems were targeted at controlling oil and gas production and its
transportation to refineries and other distribution points. Later, environmental
and safety regulations required the industry to implement additional SCADA
systems and monitor and control them in some remote and hostile environments.
Due to the remoteness, often the only solution involved extensive radio-based
networks supporting proprietary communications devices. Technological
breakthroughs have recently occurred in converting radio signals into digital IP
and creation of wireless networks that cover greater distance at increased
speeds. This has created an opportunity to integrate these disparate radio,
non-IP and IP networks together with centralized communication networks, thereby
improving the speed of responsiveness and more effective sharing of
information.
 
 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. Below is an example of a potential network.
 
  11
  
 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 determining how we can best exploit the market opportunities such
services present. 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 the market is there and we can effectively exploit it in the
future to meet our objectives but we can offer no assurances that we will be
successful.
 
 Down-Hole
Solutions
 
 Our
down-hole solutions division intends to provide casing milling, perforation,
well stimulation and lateral drilling services to oil and gas producers. As a
co-owner of intellectual property with Alberta Energy Partners (“Alberta”) we
also have exclusive worldwide licensing rights for the application of Alberta’s
patent pending Abrasive Fluid Jet (“AFJ”) cutting technique to cut through well
casing and formation rock in oil and gas wells. AFJ is being added to, and we
believe will enhance the existing principles of non-abrasive lateral jetting and
completion techniques utilized by us and the industry as a whole. Applications
of such abrasive cutting techniques are a proven feature in industries as
diverse as munitions disposal in the military, offshore platform dismantlement
in the salvage industry and cutting specialty glass and steel in the machining
business. If we are able to commercialize our technology, we would be among the
first to commercially apply the proven abrasive jetting techniques to the energy
producing business.
  12
  
 In 2006
we completed the construction of a new generation specialty rig based upon
modifications using existing coiled tubing technology as the primary platform.
The capabilities of our new rig include: one-inch coiled tubing with a working
depth capability of 8,000 feet; a fluid pressure pumping system; an abrasive
slurry system; and a computer-controlled system to guide and control the
down-hole formation access tool for precise casing milling and jetting services.
During November 2006, the Department of Energy operated the Rocky Mountain
Oilfield Testing Center (RMOTC), and Blast successfully tested the prototype rig
at their location in Wyoming.  While on location, down-hole video
cameras verified the results of operations in the down-hole
environment.  In this case, the camera verified that Blast’s new
technology was able to cut holes, slots and windows in the well casing and
confirmed further penetration into the rock formations beyond the well casing.
The testing team believes that this can be an innovative new oil and gas
drilling technology and that assuming it can be commercialized could facilitate
lower production costs and increased access to reserves. We plan to retain the
rights to our AFJ technology and the current rig. Our AFJ rig is currently
undergoing some minor repairs and we are seeking additional funding to continue
testing and developing such technology with a view to deployment in the second
half of 2008. We can provide no assurances that such funding will be
forthcoming. As such, we can provide no assurances that we will be able to
successfully commercialize our AFJ technology.
 
 Major
Customers
 
 We
currently have no active customers for our AFJ rig, as the rig has not yet been
proven commercially successful.   However we entered into an
Equipment Repair Agreement in November 2007 to repair the rig and develop
additional elements of the overall process as well as a Revenue Sharing
Agreement in January 2008 with Reliance Oil and Gas Inc., a private operator, to
put the rig to work in some of their ventures in Texas.
 
 Market
 
 We
believe it has become clear in recent years that while the demand of oil and gas
in the US continues to grow, its ability to meet this demand from existing and
new sources is rapidly declining. This accelerated decline will require
producers to seek new extraction methods or technologies to exploit oil and gas
production from existing fields and we anticipate that our abrasive jetting
process will help satisfy the need for these new technologies. According to the
Department of Energy, there have been 2.3 million wells drilled in the US
since 1949. “Historically, only some 30% of the total oil in a reservoir – the
“original oil-in-place” – was recoverable. As pressure declines in the
reservoir, the oil becomes costlier and costlier to produce until further
production becomes uneconomic...recent advances now allow greater recovery from
old reservoirs.”
 
 Competition
 
 We plan
for our AFJ business to operate in a niche that lies between the more expensive
and higher impact conventional horizontal drilling business and the much cheaper
and lower impact casing milling and perforation businesses. We believe that our
abrasive jetting service, assuming it is proven, can provide significant
reservoir exposure, and therefore greater production potential, similar to
horizontal drilling at a cost closer to that of a perforation
service.
 
 Conventional
horizontal or directional drilling is slower and significantly more expensive to
the extent that it is only being used if its much longer drilling radius is
required as is necessary in offshore or environmentally sensitive areas.
Companies offering this service include Halliburton, Baker Hughes, Schlumberger
and other independent service companies. However, our competitors are better
financed, equipped and resourced than us.
 
 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.
  13
  In
addition, claims for loss of oil and gas production and damage to formations can
occur in the well service industry. Litigation arising from a catastrophic
occurrence at a location where our equipment and services are being used may
result in us being named as a defendant in lawsuits asserting large
claims.
 
 We
maintain insurance coverage that we believe to be customary in the industry
against these types of hazards. However, we may not be able to maintain adequate
insurance in the future at rates we consider reasonable. In addition, our
insurance is subject to coverage limits and some policies exclude coverage for
damages resulting from environmental contamination. The occurrence of a
significant event or adverse claim in excess of the insurance coverage that we
maintain or that is not covered by insurance could have a materially adverse
effect on our financial condition and results of operations.
 
 Patents
and Licenses
 
 Effective
August 25, 2005, we entered into a definitive agreement to purchase from
Alberta Energy Partners (“Alberta”) an interest in the AFJ technology that
provides us the unrestricted right to use the technology and license the
technology worldwide to others. We expect to utilize the technology as the
foundation for our down-hole solutions business once it is
commercialized.
 
 As part
of the agreement, we issued Alberta 3,000,000 shares of restricted common stock,
with registration rights, and warrants to purchase 750,000 shares of our common
stock at an exercise price of $0.45 per share. The warrants have a three-year
term and vest when we receive $225,000 in revenue from our initial rig utilizing
the technology, which has not occurred to date. We also agreed to pay Alberta a
royalty payment of $2,000 per well bore or 2% of the gross revenues received in
connection with each well bore, whichever is greater, in connection with the
licensing of the technology. The parties also agreed to share any revenues
received by us from licensing the technology, with Alberta receiving 75% of
licensing revenues until it receives $2,000,000, at which time its proportion of
the licensing revenue shall decrease to 50%, thereafter. Our ownership interest
in the technology is 50%. Either party has a right of first refusal on any new
applications of the technology by the other party, or any sale of the other
party’s interest in the technology. However, in connection with our Chapter 11
restructuring, Alberta Energy Partners filed pleadings to rescind the Technology
Purchase Agreement, which is discussed in Item 3, “Legal
Proceedings.”   While these issues are under appeal by Alberta in
District Court, we intend to vigorously defend our ownership rights to this
technology in any future legal actions in this matter.
 
 On
April 24, 2003, we entered into an agreement to license the Landers
Horizontal Drilling Process, based on US Patent Nos. 5,413,184, 5,853,056, and
6,125,949, relating to certain oil and gas well production enhancement
techniques and devices and related trade secrets with the inventor and holder of
the patents and trade secrets, Carl Landers. The license gave us exclusive
rights to apply the technology and the related trade secrets in all of the US
(except for Utah, and the section of Colorado west of the Rocky Mountains) and
Canada. The license terminates upon the expiration of the underlying patents,
the earliest date being October 1, 2013.
 
 On
March 8, 2005, we entered into an Assignment of License Agreement
(“Assignment”) with Maxim TEP (“Maxim”). The President and CEO of Maxim is
Daniel W. Williams, our former President and CEO. We assigned to Maxim our
rights in the license of the Landers Horizontal Drilling Process, as well as,
all current and future negotiations for assignments, sublicenses or territorial
royalty pertaining to the license and two lateral drilling rigs. As
consideration, Maxim paid $1,800,000 in cash and released a $270,000 credit
obligation owed to Maxim. We will retain a non-exclusive sublicense interest in
the Landers Horizontal Technology provided we pay all required royalties in
utilizing the technology.
 
 We
believe the AFJ technology and related trade secrets are instrumental to our
competitive edge in the oil and gas service industry. We are highly committed to
protecting the technology. We cannot assure our investors that the scope of any
protection we are able to secure for our 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.
 
  14
  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 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
2006 and 2007, we incurred an insignificant amount of research and development
costs as it relates to our abrasive jetting process.  We incurred no
research and development costs in our satellite business during 2006 or
2007.
  Employees
  As of
December 31, 2007, we had a total of 5 full time and 2 part time employees. We
also utilize independent contractors and consultants to assist us with the
abrasive jetting activities, 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.
 
  15
  Item
2. Description of Property
 
 Office
Facilities
 
 On April
1, 2007, we entered into a nine month lease for office space for our principal
executive office in Houston, Texas. Pursuant to the lease which expired on
December 31, 2007, we agreed to lease approximately 2,000 square feet of office
space at a cost of $2,000 per month. Currently, we renew this lease on a month
to month basis.
 
 Equipment
 
 As of
December 31, 2007, our primary equipment consisted of one mobile AFJ coiled
tubing unit, which is currently located at the Reliance facility in Lulling,
Texas. We also maintain certain satellite communication equipment, computer
equipment, and furniture at our principal executive office. We believe that our
facilities and equipment are in good operating condition and that they are
adequate for their present use.
 
 Item
3. Legal Proceedings
 
 Chapter 11
Proceedings
 
 On
January 19, 2007, Blast Energy Services, Inc. and its wholly owned subsidiary,
Eagle Domestic Drilling Operations LLC, the (“Debtors”), filed voluntary
petitions with the US Bankruptcy Court for the Southern District of Texas -
Houston Division under Chapter 11 of Title 11 of the US Code (the “Bankruptcy
cases”). The Debtors continued to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.
 
 As of the
date of the filing, then pending litigation against the Debtors was
automatically stayed pursuant to 11 USC§ 362. Absent termination or
modification of the automatic stay by order of the Bankruptcy Court, litigants
may not take any action to recover on pre-petition claims against the Debtors.
These stayed lawsuits include: (i) a state court suit filed by Second Bridge LLC
in Cleveland County, Oklahoma (“Oklahoma State Court Suit”) claiming breach of
contract under a consulting services agreement signed on August 25, 2006,
asserting a personal property lien and claiming damages of $4.8 million; and
(ii) a complaint in Franklin County, Arkansas filed by Chrisman Ready Mix
claiming approximately $126,000 for drilling rig transportation expenses
incurred on behalf of the Debtors. All such pre-petition claims were resolved in
the Bankruptcy Cases.
 
 The
Debtors were also involved with the following additional disputes filed in the
Bankruptcy Cases, which are separate and distinct from proofs of claim filed in
the cases:
 
 (a) the
Debtors filed an adversary proceeding against Second Bridge LLC seeking to
invalidate the personal property lien asserted by Second Bridge, to recover
preferences and fraudulent transfers and to avoid the consulting services
agreement as a fraudulent conveyance. Second Bridge filed a second suit in the
form of an adversary proceeding essentially alleging the same claims asserted in
the Oklahoma State Court Suit.   Second Bridge and numerous other
Thornton entities also filed objections to the debtors planned rig sale
referenced below, but all parties entered into a settlement agreement approved
on May 14, 2007 and all claims, including this suit and the Oklahoma State Court
Suit, were mutually released.
 
 (b) the
Debtors requested authority to sell the Eagle drilling rigs to their senior
secured lender Laurus for a consideration equal to the outstanding debt
obligations owed to Laurus. The Debtors’ efforts to complete this transaction
were objected to by various entities controlled by Rodney D. Thornton. On May
14, 2007, the Court approved a settlement agreement between Thornton entities
and the Debtors. Laurus and the Debtors signed an Asset Purchase Agreement May
17, 2007 to sell the rigs to Boom Drilling LLC, a designee of
Laurus.
 
 
  16
  (c) the
Debtors sued Saddle Creek Energy Development, a Texas joint venture, for
non-payment of work performed under an IADC drilling contract that provided for
the drilling of three initial wells, and which was subsequently amended to
provide for the drilling of an additional three wells as well as providing labor
and materials to operate a Saddle Creek rig. Eagle also filed liens on certain
leases and on the Saddle Creek rig and initiated a foreclosure action in the
Court. On April 23, 2007, Saddle Creek and Eagle entered into a mediated
settlement whereby Saddle Creek would pay Eagle $475,000 and $200,000 on May
15th
and June 1st,
respectively.  In return, Eagle would release all liens filed on
Saddle Creek’s assets. On May 15, 2007, Saddle Creek failed to perform its
obligations and Eagle has continued its litigation claims against Saddle Creek
for an amount in excess of $3.4 million. Saddle Creek filed bankruptcy itself in
the US Bankruptcy Court for the Northern District of Texas, which case is still
pending.
 
 (d)
Alberta Energy Partners filed pleadings in the nature of contested matters
asserting that Blast cannot retain its interests under that certain Technology
Purchase Agreement entered into by Blast in August, 2005. Blast has vigorously
defended itself against such action, and asserted the rights available to it
under the Bankruptcy Code. At the Bankruptcy Court level all issues have been
resolved in favor of Blast. Alberta continues to appeal the Court’s decisions in
the District Court for the Southern District and Blast plans to vigorously
defend itself.
 
 (e) On
August 20, 2007, the Debtors entered into an Agreement and Mutual Release with
the Thornton Security Business Trust (the “Trust”) whereby the Debtors and the
Trust agreed to release, acquit and forever discharge each other, their current
and former agents, officers, directors, servants, attorneys, representatives,
successors, employees, trustees, beneficiaries, accountants, and assigns from
any and all rights, obligations, claims, demands and causes of action, whether
in contract, tort, under state and/or federal law, or state and/or federal
securities regulations, whether asserted or unasserted, whether known or
unknown, suspected or unsuspected, for or by reason of any matter, cause or
thing whatsoever, including all obligations arising therefrom, and omissions
and/or conduct of each party, and/or each parties’ agents, attorneys, servants,
representatives, successors, employees, directors, officers, trustees,
beneficiaries, accountants and assigns, relating directly or indirectly thereto
(the “Release”).  Additionally, the Trust agreed to sell its entire
share ownership of Blast common stock (16,477,500 shares) to Blast in
consideration for the Release and $16.48 in cash. The Release and the stock
repurchase were approved by the Bankruptcy Court.  As a result, the
Trust, no longer owns any Blast securities resulting in the number of
outstanding Blast shares being reduced by approximately 24%.
 
 (f) On
August 21, 2007, the Debtors entered into an Agreement and Mutual Release with
Edge Capital and the Frazier Entities (collectively “Edge”). Edge had made a
claim against the Debtors for about $2.4 million for allegedly failing to
register stock on their behalf. The Agreement and Mutual Release included
provisions that Edge withdraw their claims, that Edge confirm and ratify the
stipulation entered by the Court, that Edge sign a mutual release in exchange
for the Debtors entering into a revised Warrant Agreement with Edge that
extended the term of 750,000 preexisting warrants by three years to January 19,
2011, for the Debtors agreeing to not require return of a certain Landers rig
and for the Debtors waiving a royalty fee on any operations performed with said
Landers rig.
 
 Emergence from
Bankruptcy
 
 On
November 28, 2007 Blast entered into an agreement with Eric McAfee, a major
shareholder to guarantee $4 million of funding to Blast in exchange for certain
Convertible Preferred shares, to provide additional DIP financing and a
commitment to pay all unsecured creditors in full. On February 26, 2008, the
Court entered an order confirming our Second Amended Plan of Reorganization (the
“Plan”).  This ruling allows the Debtors to emerge from Chapter 11
bankruptcy, which became effective February 27, 2008.
 
 The
overall impact of the confirmed Plan was for Blast to emerge with allowed
unsecured claims fully paid, have no debt service scheduled for at least two
years, and to keep equity shareholders’ interests intact.  The major
components of the Plan, which was overwhelmingly approved by creditors and
shareholders, are detailed below.
 
 Under the
terms of the confirmed Plan, Blast has 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 (unless a contrary
agreement was reached), for a total amount of approximately $2.4
million.  The remaining $1.6 million will be 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.
  17
  The sale
of the convertible preferred securities was conditioned on approval of the Plan
and as such, the securities will be issued after Blast successfully merges with
its wholly owned subsidiary, Blast Energy Services, Inc., a Texas corporation,
whereby Blast re-domiciles in the State of Texas
 
 This Plan
also preserves the equity interests of our existing shareholders. Furthermore,
Blast will continue to prosecute the litigation against Quicksilver and
Hallwood, if they are unable to meet the terms of the settlement agreement
(described below). Blast has previously estimated these legal recoveries to be
in the range of $15 million to $45 million (gross). Blast can make no assurances
as to the outcome or success of the Quicksilver litigation or that Hallwood can
complete their major financing and satisfy the terms of their settlement
agreement.
 
 Under the
terms of the Plan, Blast will carry three secured obligations:
 
 ·
              A
      $2.1 million interest-free senior obligation with Laurus, that is secured
      by the assets of Blast and is payable only by way of a 65% portion of the
      proceeds that may be received for the customer litigation lawsuits or any
      asset sales that may occur in the future;
and
 
 ·
              A
      $125,000 note to McClain County, Oklahoma for property taxes, which can
      also be paid from the receipt of litigation proceeds from Quicksilver, or
      if not paid, it will convert into a six and one half percent interest
      bearing note in February 27, 2010, and due in twelve monthly installments
      of $10,417;  and
 
 ·
              A
      pre-existing secured $1.12 million eight-percent (8%) note with Berg
      McAfee Companies has been extended for an additional three years from
      February 27, 2008 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.
 
 No other
claims exist on the future operating cash flows of Blast except for ongoing
ordinary operating expenses.
 
 Non-Bankruptcy Related
Litigation Matters
 
 Hallwood Energy/Hallwood
Petroleum Lawsuit
 On
September 1, 2006, Hallwood Petroleum, LLC and Hallwood Energy, LP (“Hallwood”)
filed suit in the state district court of Tarrant County, Texas, against Eagle
Domestic Drilling Operations, LLC (“Eagle”), a wholly owned subsidiary of Blast,
and a separate company, Eagle Drilling, LLC. The lawsuit seeks to rescind two
IADC two-year term day rate drilling contracts between Eagle Drilling and
Hallwood, which had been assigned to Eagle by Eagle Drilling prior to Blast’s
acquisition of the membership interests of Eagle.  Hallwood alleged Eagle
Drilling and Eagle were in breach of the IADC contracts and it ceased
performance under the contracts.  Hallwood claimed that the rigs provided
for use under the IADC contracts did not meet contract specifications and that
the failures to meet such specifications are material breaches of the
contracts.  In addition, Hallwood has demanded that the remaining balance
of funds advanced under the contracts, in the amount of $1.65 million, be
returned. The Hallwood suit pending in Tarrant County, Texas is currently stayed
by operation of the automatic stay provided for in the US Bankruptcy Code as a
result of the Chapter 11 filing of Blast and its subsidiary, Eagle. Eagle
vigorously contests the claims by Hallwood and has instituted proceedings (“the
Adversary Proceeding”) to prosecute causes of action for breach of contract,
tortious interference and business disparagement against Hallwood in the US
Bankruptcy Court for the Southern District of Texas in
Houston.  Hallwood filed its counterclaim in the Adversary Proceeding,
largely mirroring the claim that was filed in the Tarrant County
litigation.  Eagle and Hallwood have discussed potential settlements
to this litigation; however, there can be no assurance that any settlement will
be reached, or that it will be on favorable terms to Eagle.  The
parties’ have agreed to try the case in the US Bankruptcy Court for the Southern
District of Texas in Houston.  This agreement was approved by the US
Bankruptcy Court and a trial date has been scheduled for May 20,
2008.
 
  18
  On April
3, 2008, Eagle and Hallwood signed an agreement to settle the litigation between
them for a total settlement amount of approximately $6.4 million. Under the
terms of this agreement, Hallwood will pay to Eagle $2.0 million in cash, issue
$2.75 million in equity from a pending major financing and has agreed to
irrevocably forgive approximately $1.65 million in Eagle payment obligations
effective immediately. In return, Eagle has agreed to suspend its legal actions
against Hallwood for approximately six months.  Additionally, in the
event Hallwood is able to secure an aggregate of $20 million in bridge financing
prior to June 30, 2008, Hallwood will pay Eagle a $500,000 advance on its cash
obligation. Should Hallwood be unable to complete their major financing by
September 30, 2008, Eagle will immediately resume its legal actions against
Hallwood and the $500,000 advance will not be credited against any future
judgment or settlement amounts.  Upon receipt of the entire settlement
amount by Eagle, the parties and their affiliates will be fully and mutually
released from all and any claims between them. This settlement agreement has
been approved by both companies’ board of directors but is subject to the
approval of the Bankruptcy Court.
 
 Quicksilver Resources
Lawsuit
 On
October 13, 2006, Quicksilver Resources, Inc. (“Quicksilver”) filed suit in the
state district court of Tarrant County, Texas against Eagle and a separate
company, Eagle Drilling, LLC. The lawsuit seeks to rescind three IADC two-year
term day rate contracts between Eagle Drilling and Quicksilver, which had been
assigned to Eagle by Eagle Drilling prior to Blast’s acquisition of the
membership interests of Eagle.  The lawsuit includes further allegations of
other material breaches of the contracts and negligent operation by Eagle and
Eagle Drilling under the contracts. Quicksilver asserts that performance under
one of the contracts was not timely and that mechanical problems of the rig
provided under the contract caused delays in its drilling
operations.  Quicksilver repudiated the remaining two contracts prior
to the time for performance set forth in each respective contract.  After
Blast and Eagle filed their petition for reorganization in the US Bankruptcy
Court for the Southern District of Texas in Houston, Quicksilver removed the
lawsuit to the US Bankruptcy Court for the Northern District of
Texas.  On May 7, 2007, the US Bankruptcy Court for the Northern
District of Texas approved the motion filed by Eagle seeking to have the lawsuit
transferred to the US Bankruptcy Court for the Southern District of Texas in
Houston where its petition for reorganization under Chapter 11 of the US
Bankruptcy Code was pending.  Subsequent to the transfer, Eagle and
Quicksilver entered into a stipulation that the lawsuit would be tried in the
Bankruptcy Court before a jury and the case was set for a jury trial in
September 2008.  On motion filed by Eagle Drilling, the US Bankruptcy
Court for the Southern District of Texas in Houston recommended that the US
District Court for the Southern District of Texas withdraw its reference of the
adversary proceeding to the Bankruptcy Court.  The District Court has
not yet acted on the Bankruptcy Court’s recommendation.  It is unknown
what, if any, affect the Bankruptcy Court’s recommendation will have on the date
for the trial of this matter.
 
 Steinberger Derivative
Lawsuit (Settled)
 Blast
entered into a settlement agreement with Mr. Charles Steinberger in August 2005
in full settlement of a lawsuit for wrongful dismissal between the parties. Such
settlement resulted in the creation of a $500,000 interest free note being made
in favor of Mr. Steinberger on Blast’s books payable at June 30, 2007.
Subsequently, Blast was named as a party in the derivative lawsuit between Mr.
Steinberger and his attorney but this case has now been settled and Mr.
Steinberger was paid $500,000 in full February 27, 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.
 
 
  19
  Item
4. Submission of Matters to a Vote of Security Holders
 
 In
October 2007, as a part of the restructuring process under Chapter 11
bankruptcy, Blast distributed to shareholders a copy of its First Amended Plan
of Reorganization and an accompanying ballot to vote for or against the
Plan.  The terms of the Plan that required a vote of the shareholders
included Blast’s plan to increase authorized common shares from 100,000,000 to
180,000,000, authorize 20,000,000 shares of new preferred stock and change its
corporate registration from California to Texas. Shareholders overwhelmingly
approved the Plan with over 99% of the returned ballots voting in favor of the
Plan.
  20
  Part
II
 
 Item
5. Market for Common Equity and Related Stockholder Matters
 
 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, for the periods indicated, the high and low trading
prices of a share of our common stock as reported on the OTC Bulletin Board for
the past two fiscal years. The quotations provided are for the over the counter
market which reflect interdealer prices without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
 
 QUARTER
      ENDED
              
              HIGH
              
              LOWDecember
      31, 2007
              
              $
      0.24
              
              $
      0.12September
      30, 2007
              
              $
      0.34
              
              $
      0.10June
      30, 2007
              
              $
      0.24
              
              $
      0.12March
      31, 2007
              
              $
      0.37
              
              $
      0.08December
      31, 2006
              
              $
      0.90
              
              $
      0.30September
      30, 2006
              
              $
      1.56
              
              $
      0.88June
      30, 2006
              
              $
      1.10
              
              $
      0.44March
      31, 2006
              
              $
      1.59
              
              $
      0.71
 
 Holders
 
 As of
March 31, 2008, we had 51,162,404 shares of common stock issued and outstanding
held by approximately 370 shareholders of record, which amount includes
1,150,000 shares of common stock approved for issuance under the class action
settlement, which shares have not been issued to date. It also includes 900,000
shares, that are still outstanding as of the filing of this report, but which
shares Blast plans to cancel in the second quarter 2008.
 
 Dividends
 
 We have
never paid cash dividends. At present, we do not anticipate paying any dividends
on our common stock in the foreseeable future and intend to devote any earnings
to the development of our business.
 
 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
of Directors 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
Directors of Blast approved a change in domicile of Blast from California to
Texas, which also included the authorization of  20,000,00 shares of
Preferred Stock, of which 8,000,000 shares were designated Series A Convertible
Preferred Stock, of which we have sold 8,000,000 shares to date, but which
shares have not been issued as of the date of this filing.  We
currently anticipate issuing such shares of Series A Convertible Preferred Stock
shortly after the filing of this report.
 
  21
  The
8,000,000 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.  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
either (or both) of Blast’s pending litigation proceedings with Hallwood or
Quicksilver in excess of $4,000,000, Blast is required to pay any and all
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.
 
 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 into shares of Blast’s
common stock at a conversion price of $0.50 per share, if Blast’s common stock
trades for a period of more than twenty consecutive trading days at greater than
$3.00 per share and the average trading volume of Blast’s common stock exceeds
50,000 shares per day.
 
 The
Preferred Stock has the right to vote at any shareholder 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 Cash Settlement from the pending Hallwood and Quicksilver litigation
in excess of $7,500,000 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 underlying shares of Blast’s common stock.
 
 
 EQUITY
COMPENSATION PLAN INFORMATION
 
 The
following table provides information as of December 31, 2007 regarding
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance:
 
 Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
              
              Number
      of securities available for future issuance under equity compensation
      plans (excluding securities shown in first column)Equity
      compensation plans approved by shareholders
              
              -0-
              
              -0-
              
              -0-Equity
      compensation plans not approved by shareholders
              
              3,842,375
              
              $0.89
              
              4,157,625Total
              
              3,842,375
              
              $0.89
              
              4,157,625
 
  Recent
Sales of Unregistered Securities
  
 There
were no shares of common stock issued in 2007 from fund raising or private
placement offerings of securities.  However, the Thornton Security
Business Trust sold 16,447,500 shares of common stock back to Blast for $16.48
in August, 2007, which shares were then retired.  The retirement of
the shares represented approximately a twenty-four percent decrease in the
number of shares of common stock then outstanding. These shares were originally
issued to the Trust as a part the purchase of the Eagle drilling rig business in
August 2006.
 
  22
  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 sale of the
Units was conditioned on approval of the Plan and as such, the Units could not
be issued until after the Merger is effected, Blast is re-domiciled and the
Preferred Stock is authorized, however, the shares of Series A Preferred Stock
have not been issued to date.  We currently anticipate the Units being
issued shortly after the filing of this report.  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 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.
 
 In
connection with the approval of the Bankruptcy Plan in February 2008, Blast’s
Directors agreed to convert their unsecured claims for unpaid directors’ fees
totaling approximately $164,000, into shares of Blast’s common stock at the rate
of one share of common stock for each $0.20 of the deferred amount owed in
connection with the approval of the Plan. Such conversions, currently still in
progress, will result in the issuance of the following shares to our current and
former Directors:
 
 John
      Block
              92,500Roger
      P. (Pat) Herbert
              120,000Scott
      Johnson
              72,500Joseph
      Penbera
              202,500Jeff
      Pendergraft
              55,000Fred
      Ruiz
              100,000O.
      James Woodward III
              177,500
 
 We will
claim an exemption from registration afforded by Section 4(2) of the Securities
Act of 1933, for the above issuances, since the issuances will not involve a
public offering, the recipients will take the securities for investment and not
resale and Blast will take appropriate measures to restrict
transfer.
 
 
 Common Stock Issued Upon
Exercise of Options
 
 Date
              
              Shares
      Issued Upon Exercise
              
              Value
              
              CommentFourth
      Quarter 2007
              
              900,000
              
              $90,000
              
              Issued
      to a former CEO under the terms of a lawsuit settlement agreement signed
      in August 2005.
 
 
 Common Stock Issued Upon
Exercise of Warrants
 
 Date
              
              Shares
      Issued Upon Exercise
              
              Value
              
              CommentYear
      2007
              
              None
 
 We claim
an exemption from registration afforded by Section 4(2) of the Act since the
foregoing issuances did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
grants and no underwriting discounts or commissions were paid by
us.
 
  23
  Options
  The
following table summarizes option grants for the last two fiscal
years:
 
 Date
              Number
      of Shares
              Exercise
      Price
              Market
      Price
              Vesting
              Term
      (years)
              Fair
      Value
              To
      Whom IssuedYear
      2007
              NoneAugust
      2006
              1,500,000
              $
      1.30
              $
      1.30
              Quarterly
      over 3 years
              10
              $1,950,000
              Richard
      ThorntonMay
      2006
              96,000
              $
      0.61
              $
      0.61
              Monthly
      over 1 year
              10
              $
      58,560
              Non-employee
      directors
 
 Mr.
Thornton subsequently resigned prior to any of these options vesting and his
options were cancelled. We recorded no expense for the intrinsic value
associated with the options vesting in 2007 and 2006, respectively.
  Warrants
  The
following table summarizes warrants granted for the last two fiscal
years:
 
 Date
              Number
      of Shares
              Exercise
      Price
              Term
      (years)
              OtherYear
      2007
              NoneAugust
      2006
              5,000,000
              $
      0.01
              2
              Issued
      to selling members of Eagle Domestic Drilling Operations,
    LLC6,090,000
              $
      1.44
              7
              Issued
      to Laurus Master Fund in connection with providing senior debt for
      purchase of land rig drilling business.6,090,000
              $
      0.01
              7
              Issued
      to Laurus Master Fund in connection with providing senior debt for
      purchase of land rig drilling business.304,500
              $0.01
              2
              Issued
      to Equity Source Partners as a commission to raise funds in
      2006.May
      2006
              300,000
              $
      0.55
              2
              Issued
      in connection with Private
Placement.
  We claim
an exemption from registration afforded by Section 4(2) of the Act since the
foregoing grants did not involve a public offering, the recipients took the
securities for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
grants and no underwriting discounts or commissions were paid by
us.
 
 
 Item
6. Management’s Discussion and Analysis or Plan of Operation
 
 The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto included in this report. All statements that are included in
this Report, other than statements of historical fact, are forward-looking
statements. You can identify forward-looking statements by words such as
“anticipate”, “believe”, “expect” and similar expressions and statements
regarding our business strategy, plans and objectives for future operations.
Although management believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. The forward-looking statements in
this filing involve known risks and uncertainties, which may cause our actual
results in future periods to be materially different from any future performance
suggested in this report. Such factors may include, but are not limited to, such
risk factors as: changes in technology, reservoir or sub-surface conditions, the
introduction of new services, commercial acceptance and viability of new
services, fluctuations in customer demand and commitments, pricing and
competition, reliance upon subcontractors, the ability of our customers to pay
for our services, together with such other risk factors as may be included in
this report.
 
 
  24
  Risk
Factors
 
 You
should carefully consider the following risk factors and other information in
this annual report on Form 10-KSB before deciding to become a holder of our
common stock. If any of the following risks actually occur, our business and
financial results could be negatively affected to a significant
extent.
 
 The
business and the value of our common stock are subject to the following Risk
Factors:
 
 GENERAL
RISKS RELATING TO OUR COMPANY
 
 We
filed for reorganization under Chapter 11 of the Bankruptcy Code on January 19,
2007 and despite having emerged effective February 27, 2008, we continue to be
subject to the risks and uncertainties associated with residual Chapter 11
proceedings.
 
 Because
of the residual risks and uncertainties associated with our Chapter 11
proceedings, the ultimate impact that events that occur during and subsequent to
these proceedings will have on our business, financial condition and results of
operations cannot be accurately predicted or quantified.
 
 We
experienced substantial operating losses in 2007 and 2006, and do not currently
have a sufficient amount of cash on hand or sources of available capital to meet
our current liabilities and sustain our operations.   It is
uncertain when, if ever, we will have significant operating income or cash flow
from operations sufficient to meet our current liabilities and/or sustain our
operations.
 
 We
suffered net losses since our inception, including net losses of approximately
$9.9 million and $38.1 million for the years ended December 31, 2007 and
2006, respectively. These losses are the result of a sporadic revenue stream
which has been inadequate to compensate for our operating and overhead costs as
well as the impairment of our Landers license and our AFJ technology (as
described above). As of December 31, 2007, our cash balance was approximately
$49,000; however, during our bankruptcy case we were able to secure financing of
$4 million through the sale of Convertible Preferred shares to our major
shareholders and such funding occurred in January of 2008. At March 31, 2008,
our cash balance was approximately $1.6 million. However, our base business
still consumes cash and we have to generate more revenues and/or funding to
avoid running out of cash and can give no assurances that we will not run out of
cash.  If that were to occur, the value of our securities could
decline in value and/or become worthless.
 
 We
are highly leveraged which limits our financial flexibility.
 
 Our $2.1
million interest-free senior note with Laurus Master Fund contains various
covenants that limit our ability to engage in specified types of transactions.
These covenants limit our ability to, among other things:
 
 ·
                Incur
      additional indebtedness or issue certain types of
    securities;
 ·
                Pay
      dividends or make distributions of our capital
  stock;
 ·
                Make
      certain investments, including capital
  expenditures;
 ·
                Sell
      or merge certain assets;
 ·
                Create
      liens; and
 ·
                Consolidate,
      merge, sell or otherwise dispose of all or substantially all our
      assets.
 
 If we are
unable to meet our debt service requirements, satisfy our debt covenants or any
other event were to occur which would cause an event of default under the note,
we will be unable to continue in our current form and will be forced to
restructure or seek creditor protection, which could cause any investment in
Blast or Blast’s securities to become worthless.
 
  25
  We
may be unable to raise the additional capital needed to fund our businesses,
which would prevent us from continuing operations
 
 We may
need to raise additional funds through public or private debt or equity
financing or other various means to fund our business after the completion of
such bankruptcy proceedings.  In such a case, adequate funds may not
be available when needed or may not be available on favorable terms. If we need
to raise additional funds in the future, by issuing equity securities, dilution
to existing stockholders will result, and such securities may have rights,
preferences and privileges senior to those of our common stock. We may be unable
to raise additional funds by issuing debt securities due to our high leverage
and due to restrictive covenants contained in our senior debt, assuming such
senior debt, 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.
 
 Our
Independent Auditors have expressed doubt as to our ability to continue as a
going concern.
 
 We
incurred a net loss of approximately $9.9 million for the year ended December
31, 2007, and had an accumulated deficit of $77.9 million and a working capital
deficit of $8.3 million as of December 31, 2007 and have several significant
future financial obligations. These conditions raise substantial doubt as to our
ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary if we are unable to continue as a going
concern.  If we are unable to continue as a going concern, any
investment in Blast could become devalued or worthless.
 
 We
have historically had negative working capital, which will impair our ability to
continue operations if we are unable to reverse this trend.
 
 We had
negative working capital of approximately $8.3 million and $41.6 million as of
December 31, 2007 and 2006, respectively. We have also discontinued certain
payments to vendors due to our previously pending bankruptcy proceedings. As a
result, our vendors may decide to stop providing services and/or materials until
we are able to pay them according to their terms. Our vendors may decide to no
longer offer credit to us and they may cease to assist us until we can make
satisfactory payment arrangements. If we cannot raise capital, we will need our
lenders to extend payment terms or accept stock in lieu of cash, which they may
not be willing to do.  If we are unable to arrange new financing or
convince our lenders to extend payment terms or accept stock in lieu of cash, we
may be unable to continue our business operations.
 
  26
  We
have a limited operating history, just emerged from Chapter 11 Bankruptcy, and
our business and marketing strategies planned are not yet proven, which makes it
difficult to evaluate our business performance.
 
 We have
been in existence for only a few years.  We recently emerged from
bankruptcy. Additionally, the two major customers which our drilling business
had contracts with prior to our acquisition of certain drilling rigs, which were
subsequently sold, terminated their agreements with us, and there can be no
assurance that any damages will be received from such litigation. We have not
yet been able to commercialize the capabilities of our abrasive jetting
technology and are not conducting operations with the prior
technology.  Abrasive jetting has been successfully commercialized in
several industries but is not yet proven in the energy drilling
industry.  Also, we have conducted satellite services to the oil and
gas industry only since June 2002. We have no established basis to assure
investors that our business or marketing strategies will be
successful.  Because we have a limited operating history, there is
little historical financial data upon which an investor may evaluate our
business performance.   An investor must consider the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies with limited capital
in a rapidly evolving market. These risks and difficulties include our ability
to meet our debt service and capital obligations, develop a commercial milling
or jetting process with our abrasive jetting technology, attract and maintain a
base of customers, provide customer support, personnel, and facilities to
support our business, and respond effectively to competitive and technological
developments, which difficulties have been further exacerbated by our Chapter 11
Bankruptcy. Our business strategy may not be successful or may not successfully
address any of these risks or difficulties and we may not be able to generate
future revenues.
 
 Significant
amounts of our outstanding 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 31, 2008, we had 51,162,404 shares of common stock issued and outstanding
held by approximately 370 shareholders of record, including the pending
retirement of 900,000 shares as described above and 1,150,000 shares approved
for issuance but remain un-issued under the class action settlement from 2005.
Blast is waiting on plaintiff counsel to provide our 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, effectively control approximately 22% of
our outstanding common stock on December 31, 2007, or 38% including common and
preferred shares and warrants to be issued under the terms of the Plan of
Reorganization in April 2008. Therefore, the Berg McAfee Companies may have the
ability to substantially influence all decisions made by us. Additionally, these
two major shareholders’ control could have a negative impact on any future
takeover attempts or other acquisition transactions. Furthermore, certain types
of equity offerings require stockholder approval depending on the exchange on
which shares of a company’s common stock are traded. Because our officers and
Directors do not exercise majority voting control over us, our shareholders who
are not officers and Directors of us may be able to obtain a sufficient number
of votes to choose who serves as our Directors. Because of this, the current
composition of our Board of Directors may change in the future, which could in
turn have an effect on those individuals who currently serve in management
positions with us. If that were to happen, our new management could affect a
change in our business focus and/or curtail or abandon our business operations,
which in turn could cause the value of our securities, if any, to
decline.
 
  27
  Our
common stock is currently traded over the counter on the OTC Bulletin Board and
is considered a “penny stock” resulting in potential illiquidity and high
volatility in the market price of our common stock.
 
 The
market price of our common stock is likely to be highly volatile, as is the
stock market in general, as well as the capital stock of most small cap
companies. Our common stock currently trades over the counter on the OTC
Bulletin Board, where stocks typically suffer from lower liquidity. This may
lead to depressed trading prices, greater price volatility and difficulty in
buying or selling shares in large quantities. Currently, there is a limited
trading market for our common stock If a fully developed public market for the
common stock does not occur, our stock will continue to have reduced liquidity
and our shareholders may have difficulty in selling our stock.
 
 If
we are late in filing our Quarterly or Annual reports with the SEC, we may be
de-listed from the Over-The-Counter Bulletin Board.
 
 Pursuant
to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
of periodic reports with the SEC, any OTCBB issuer which fails to file a
periodic report (Form 10-QSB's or 10-KSB's) by the due date of such report (not
withstanding any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period is
automatically de-listed from the OTCBB. Such removed issuer would not be
re-eligible to be listed on the OTCBB for a period of one-year, during which
time any subsequent late filing would reset the one-year period of de-listing.
If we are late in our filings three times in any twenty-four (24) month period
and are de-listed from the OTCBB, our securities may become worthless and we may
be forced to curtail or abandon our business plan.
 
 Because
our common stock is considered a “penny stock,” certain rules may impede the
development of increased trading activity and could affect the liquidity for
stockholders.
 
 Penny
stocks generally are equity securities with a price of less than $5.00 per share
other than securities registered on certain national securities exchanges or
quoted on the NASDAQ stock market, subject to certain exceptions for companies
which exceed certain minimum tangle net worth requirements.
 
 Our
common stock is subject to the SEC “penny stock rules.” The rules impose
additional sales practice requirements on broker-dealers who sell penny stock
securities to persons other than established customers and accredited investors.
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of penny stock securities and have
received the purchaser’s written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the “penny stock rules” require the delivery, prior to the transaction,
of a disclosure schedule relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. And,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These rules may restrict the ability of
broker-dealers to sell our securities and may have the effect of reducing the
level of trading activity of our common stock in the secondary market. In
addition, the penny-stock rules could have an adverse effect on our ability to
raise capital in the future from offerings of our common stock.
 
 On
July 7, 2005, the SEC approved amendments to the penny stock rules to
ensure that investors continue to receive the protections of those rules. The
amendments also provide that broker-dealers be required to enhance their
disclosure schedule to investors who purchase penny stocks, and that those
investors have an explicit “cooling-off period” to rescind the transaction.
These amendments could place further constraints on broker-dealers’ ability to
sell our securities.
 
 Our
markets may be adversely affected by oil and gas industry conditions that are
beyond our control.
 
 Oil and
gas industry conditions are influenced by numerous factors over which we have no
control, such as the supply of and demand for oil and gas, domestic and
worldwide economic conditions, political instability in oil producing countries
and merger and divestiture activity among oil and gas producers. Those
conditions could reduce the level of drilling and work-over activity by oil and
gas producers. A reduction in activity could increase competition among energy
services business such as ours, making it more difficult for us to attract and
maintain customers, or could adversely affect the price we could charge for our
services and the utilization rate we may achieve.
  28
  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.
 
 Our
operations are subject to environmental, health and safety laws and regulations
that may expose us to liabilities for noncompliance, which could adversely
affect us.
 
 The US
oil and natural gas industry is affected from time to time in varying degrees by
political developments and federal, state and local environmental, health and
safety laws and regulations applicable to our business. Our operations are
vulnerable to certain risks arising from the numerous environmental health and
safety laws and regulations. These laws and regulations may restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling activities, require reporting of the
storage, use or release of certain chemicals and hazardous substances, require
removal or cleanup of contamination under certain circumstances, and impose
substantial civil liabilities or criminal penalties for violations.
Environmental laws and regulations may impose strict liability, rendering a
company liable for environmental damage without regard to negligence or fault,
and could expose us to liability for the conduct of, or conditions caused by,
others, or for our acts that were in compliance with all applicable laws at the
time such acts were performed. Moreover, there has been a trend in recent years
toward stricter standards in environmental, health and safety legislation and
regulation, which may continue.
 
 We may
incur material liability related to our operations under governmental
regulations, including environmental, health and safety requirements. We cannot
predict how existing laws and regulations may be interpreted by enforcement
agencies or court rulings, whether additional laws and regulations will be
adopted, or the effect such changes may have on our business, financial
condition or results of operations. Because the requirements imposed by such
laws and regulations are subject to change, we are unable to forecast the
ultimate cost of compliance with such requirements. The modification of existing
laws and regulations or the adoption of new laws or regulations curtailing
exploratory or development drilling for oil and natural gas for economic,
political, environmental or other reasons could have a material adverse effect
on us by limiting drilling opportunities.
 
 Our
success depends on key members of our management, the loss of whom could disrupt
our business operations.
 
 We depend
to a large extent on the services of some of our executive officers and
directors. The loss of the services of John O’Keefe or John MacDonald could
disrupt our operations. We may not be able to retain our executive officers and
may not be able to enforce the non-compete provisions in 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.
 
  29
  Compliance
with Section 404 of the Sarbanes-Oxley Act will strain our limited financial and
management resources.
 
 Moving
forward, 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-KSB, 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.
 
 RISKS
RELATED TO OUR DOWN-HOLE SOLUTIONS BUSINESS
 
 We
currently have no active customers.  If we are unable to attract more
permanent and active customers, we will not be able to generate
revenue.
 
 We
currently have no active customers. We are in the process of testing and
commercializing our AFJ technology.  If the technology cannot be
commercialized, we will not be able to generate revenue for our abrasive jetting
services. Our new AFJ drill rig may not convert into customer orders or cash
revenue. If we are unable to attract 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.
 
  30
  Our
business plan relies on the successful deployment of a new generation coiled
tubing unit utilizing abrasive fluid jetting which has been unproven in the
energy service industry.
 
 Our
abrasive jetting service intends to provide casing milling, well stimulation and
lateral drilling services to oil and gas producers. Applications of such
abrasive cutting techniques are a proven feature in industries as diverse as
munitions disposal in the military, offshore platform dismantlement in the
salvage industry and cutting specialty glass and steel in the machining
business. We are currently building and testing a custom drilling rig based on
the abrasive jetting concept. Since we would be among the first to commercially
apply the proven abrasive jetting techniques to the energy producing business,
we cannot guarantee that our custom drilling rig design based on the abrasive
jetting concept will be adequate, that the rig will be built correctly or
timely, or that the abrasive jetting technology will stimulate additional oil
and gas production. We may not achieve the designed results for the rig.
Customers may not accept the services we offer. Any of these results would have
a negative impact on the development of our abrasive jetting
business.
 
 We
may not be able to protect our abrasive jetting technology.  Providers
utilizing an infringing technology may compete with us, which may impair the
development of our abrasive jetting business.
 
 The
technology purchase agreement between us and Alberta allocates joint
responsibility for maintaining the status of the patents underlying the
technology with the US Patent and Trademark Office to Alberta.  In the
event that both parties had to assume these responsibilities, additional
pressure on our financial resources would result.  Competition from
infringers of our technology may significantly impair the development of our
abrasive jetting business.
 
 We
have been in an adversarial relationship with Alberta Energy Partners, which
could ultimately cause our Technology Purchase Agreement to be
rescinded.
 
 Alberta
Energy Partners filed pleadings in the nature of a contested matter asserting
that Blast cannot retain its interests under the Technology Purchase Agreement
entered into by Alberta and Blast in August, 2005, as amended in March 2006.
Blast has vigorously defended itself against such action, and asserted the
rights available to it under the Bankruptcy Code. Alberta continues to appeal
the Court’s decisions and Blast plans to vigorously defend itself. The fact that
we are in an adversarial relationship with our partner could have an adverse
effect on our operations, the AFJ technology and/or the development thereof,
which in turn could cause the value of our securities to decline in value or
become worthless
 
 Our
customers may not realize the expected benefits of enhanced production or lower
costs from our abrasive jetting technology, which may impair market acceptance
of our drilling services.
 
 Our
abrasive jetting business will be heavily dependent upon our customers achieving
enhanced production, or lower costs, from certain types of existing oil and gas
wells. Many of the wells for which the abrasive jetting technology will be used
on have been abandoned for some time due to low production volumes or other
reasons. In some cases, we could experience difficulty in having the enhanced
production reach the market due to the gathering field pipeline system’s
disrepair resulting from the age of the fields, significant amounts of
deterioration of the reservoirs in the abandoned wells or the reliability of the
milling process. Our abrasive jetting technology may not achieve enhanced
production from every well drilled, or, if enhanced production is achieved
initially, it may not continue for the duration necessary to achieve payout or
reach the market on a timely basis. The failure to screen adequately and achieve
projected enhancements could result in making the application of the technology
uneconomic for our customers. Failure to achieve an economic benefit for our
customers in the provision of this service would significantly impair the
development of our abrasive jetting business and limit our ability to achieve
revenue from these operations.
 
 Geological
uncertainties may negatively impact the effectiveness of our abrasive jetting
services.
 
 Oil and
gas fields may be depleted and zones may not be capable of stimulation by our
abrasive jetting technology due to geological uncertainties such as lack of
reservoir drive or adequate well pressure. Such shortcomings may not be
identifiable. The failure to avoid such shortcomings could have a material
adverse effect on our results of operations and financial
condition.
 
  31
  Competition
within the well service industry may adversely affect our ability to market our
services.
 
 The well
service industry is highly competitive and includes several large companies as
well as other independent drilling companies that possess substantially greater
financial and other resources than we do. These greater resources could allow
those competitors to compete more effectively than we can. Additionally, the
number of rigs available continues to exceed demand, resulting in active price
competition. Moreover, many contracts are awarded on a bid basis, which further
increases competition based on price. Failure to successfully compete within our
industry would significantly impair the development of our abrasive jetting
business and limit our ability to generate revenue from these
operations.
 
 The
energy service market is currently experiencing tight supply conditions and key
equipment items are subject to long lead-times as well as cost
escalation.
 
 We depend
on the key equipment suppliers for our AFJ rigs to deliver in a timely manner
and at a reasonable price, but lead-times in items, such as coiled tubing
strings, have lengthened and prices have firmed with the current tightness in
the energy service supply industry.  If we are unable to source our
key equipment in a reasonable period and at a reasonable price, our planned
revenues and costs may suffer, which would have a material negative impact on
our abrasive jetting business and/or our ability to commercialize such
technology.
 
 
 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.  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.
 
 We
are dependant on 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, 2007, we generated $418,468 in revenues through our
satellite business, of which  69% of those revenues came from only two
customers.  If we were to lose any of those customers and were unable
to find similarly sized customers to take their place, our results of operations
and revenues could be severely impacted, and we could be forced to curtail or
abandon our current business plan and/or business operations.
 
 
  32
  We
depend upon our vendors and their affiliates to provide services that we require
to operate the network we use to provide services to our customers.
 
 We are
not and do not plan to become a licensee of the Federal Communications
Commission (“FCC”) and do not hold any authorization to operate satellite
communications facilities. We depend upon licenses held by Spacenet and ViaSat
and their subsidiaries for our satellite communications. If the licenses held by
Spacenet and ViaSat are limited or revoked, if the FCC limits the number of its
customer premises earth stations or if Spacenet or ViaSat fails to operate the
earth stations providing service to us and our subscribers in a satisfactory
manner, we may not be able to provide our customers with proper service, which
could lead to a loss in revenues and could adversely affect our results of
operations and financial condition.
 
 We
rely on third-party independent contractors to install our customer premises
equipment at new subscribers’ businesses and remote locations.
 
 We do not
control the hiring, training, certification and monitoring of the employees of
our third-party independent contractors. If growth of our new subscriber base
outpaces growth of our installer base or if the installers fail to provide the
quality of service that our customers expect, the introduction of our service
could be delayed, and which could lead to a deferment or loss in satellite
revenues.
 
 The
service we provide is entirely dependent on the functionality of satellites on
which we lease transponders and on our computer and communications hardware and
software.
 
 Our
ability to provide service is entirely dependent on the functionality of
satellites on which we lease transponders. These satellites may experience
failure, loss, damage or destruction from a variety of causes, including war,
anti-satellite devices and collision with space debris.  The ability
to provide timely information and services depends also on the efficient and
uninterrupted operation of our computer and communications hardware and software
systems. These systems and operations are vulnerable to damage or interruption
from human error, natural disasters, telecommunication failures, break-ins,
sabotage, computer viruses, intentional acts of vandalism and similar events.
Despite precautions, there is always the danger that human error or sabotage
could substantially disrupt the system.
 
 If any of
these events occurs, we are likely to suffer a permanent loss of service;
temporary gaps in service availability; or decreased quality of service. Any
such failure in the service we provide could lead to a loss in revenues and
could adversely affect our results of operations and financial
condition.
 
 We
may be unable to attract or retain subscribers.   If we are
unable to attract or retain subscribers, our Satellite Communications business
will be harmed.
 
 Our
success depends upon our ability to rapidly grow our subscriber base and retain
our existing customers. Several factors may negatively impact this ability,
including:
 
 ·
              loss
      of our existing sales employees, resulting in our lack of access to
      potential subscribers;
 ·
              failure
      to establish and maintain the Blast Energy Services brand through
      advertising and marketing, or erosion of our brand due to misjudgments in
      service offerings;
 ·
              failure
      to develop or acquire technology for additional value added services that
      appeals to the evolving preferences of our
  subscribers;
 ·
              failure
      to meet our expected minimum sales commitments to Spacenet and ViaSat;
      and
 ·
              failure
      to provide the minimum transmission speeds and quality of service our
      customers expect.
 
 In
addition, our service may require customers to purchase our satellite system
equipment and to pay our monthly subscriber fees. The price of the equipment and
the subscription fees may be higher than the price of many dial-up, DSL and
cable modem internet access services, where available. In some instances, we
expect to subsidize our subscribers’ customer premises equipment to encourage
the purchase of our service and to offset our higher relative costs but such
subsidy may not be possible. Failure to attract or retain subscribers would
affect our ability to generate satellite revenues.
 
  33
  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 reduced pricing.
 
 Intense
competition in the internet services market and inherent limitations in existing
satellite technology may negatively affect the number of our subscribers.
Competition in the market for consumer internet access services is intense, and
we expect the level of competition to intensify in the future. We compete with
providers of various high-speed communications technologies for local access
connections such as cable modem and DSL. We also may face competition from
traditional telephone companies, competitive local exchange carriers and
wireless communication companies. As our competitors expand their operations to
offer high speed internet services, we may no longer be the only high-speed
service available in certain markets. We also expect additional competitors with
satellite-based networks to begin operations soon. In particular, some satellite
companies have announced that in the future they may offer high-speed internet
service at the same price or at a lower price than we currently intend to offer
and are offering our services. The market for internet services and satellite
technology is characterized by rapid change, evolving industry standards and
frequent introductions of new technological developments. These new standards
and developments could make our existing or future services obsolete. Many of
our current and potential competitors have longer operating histories, greater
brand name recognition, larger subscriber bases and substantially greater
financial, technical, marketing and other resources than we have. Therefore,
they may be able to respond more quickly than we can respond to new or changing
opportunities, technologies, standards or subscriber requirements. Our effort to
keep pace with the introduction of new standards and technological developments
and effectively compete with larger service providers could result in additional
costs or the effort could prove difficult or impossible. The failure to keep
pace with these changes and to continue to enhance and improve the
responsiveness, functionality and features of our services could harm our
ability to attract and retain users, which could lead to a loss of satellite
revenues.
 
 We
may be subject to significant liability for our products.
 
 If our
products contain defects, we may be subject to significant liability claims from
subscribers and other users of our products and incur significant unexpected
expenses or lost revenues. Our satellite communications products are complex and
may contain undetected errors or failures. We also have exposure to significant
liability claims from our customers because our products are designed to provide
critical communications services. Our product liability insurance and
contractual limitations in our customer agreements may not cover all potential
claims resulting from a defect in one or more of our products. Failure of our
products to perform satisfactorily could cause us to lose revenue, as well as to
experience delay in or loss of market acceptance and sales, products returns,
diversion of research and development resources, injury to our reputation or
increased service and warranty costs.
 
 
  34
  Plan
of Operations
 
 Background
 
 On
February 26, 2008, the Bankruptcy Court entered an order confirming our Second
Amended Plan of Reorganization (the “Plan”).  This ruling allows Blast
to emerge from Chapter 11 bankruptcy. The overall impact of the confirmed Plan
is 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 has 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 will be 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. It also allows Blast and Eagle to pursue their
claims against Quicksilver and Hallwood, if Hallwood is unable to meet the terms
of the settlement agreement.
  Critical
Accounting Policies
 
 The
following is a discussion of our critical accounting policies pertaining to
accounts receivable, equipment, license, revenue recognition and the use of
estimates.
 
 Accounts
Receivable
 
 Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for doubtful accounts represents our estimate
of the amount of probable credit losses existing in our accounts
receivable.  We determine the allowance based on management’s estimate
of likely losses based on a review of current open receivables and our
historical write-off experience.  We review the adequacy of our
allowance for doubtful accounts quarterly.  Significant individual
accounts receivable balances and balances which have been outstanding greater
than 90 days are reviewed individually for collectibility.  Account
balances, when determined to be uncollectible, are charged against the
allowance.
 
 Equipment
 
 Equipment,
including betterments which extend the useful life of the asset, is stated at
cost.  Maintenance and repairs are charged to expense when
incurred.  We provide for the depreciation of our equipment using the
straight-line method over the estimated useful lives.  Our method of
depreciation does not change when equipment becomes idle; we continue to
depreciate idled equipment on a straight-line basis.  No provision for
salvage value is considered in determining depreciation of our
equipment.  We review our assets for impairment when events or changes
in circumstances indicate that the carrying values of certain assets either
exceed their respective fair values or may not be recovered over their estimated
remaining useful lives.  Provisions for asset impairment are charged
to income when estimated future cash flows, on an undiscounted basis, are less
than the asset’s net book value.  In the case of the asset impairment
booked in 2006, the future value of the rig assets was based upon the value of
the proposed rig sale described in Note 8 in the Notes to the Consolidated
Financial Statements.
 
 Intellectual
Property
 
 We review
our carrying value of the IP for impairment on an annual basis or when events or
changes in circumstances indicate that the carrying values may no longer be
appropriate.
 
 During
the bankruptcy process, Blast suffered several legal attacks by Alberta Energy
Partners in their effort to rescind the AFJ Technology Purchase Agreement of
March 17, 2006, which sold 50% of the technology to Blast. Such adversarial
actions were defeated in Bankruptcy Court and are believed to be without merit
by Blast but are now subject to appeal in the US District Court for the Southern
District. Also during 2007, Blast was prevented from developing the AFJ
technology due to severe cash constraints. Blast management continues to see
huge market potential for the AFJ technology and plans to develop the technology
as and when cash and human resources may be prudently applied to its
commercialization. To this end, it has entered into Repair and Revenue Sharing
agreements with Reliance Oil and Gas, a private operator.
  35
  The
original cost of the Abrasive Fluid Jetting (“AFJ”) technology was $1,170,000
and the unamortized balance at December 31, 2007 was approximately $975,000 but
management decided to impair the carrying value of the intellectual property to
zero in order to reflect the uncertainty of the valuation of the technology,
which is not yet commercially proven and which ownership is subject to dispute
by its 50% owner, Alberta Energy Partners. Accordingly an impairment of $975,000
was recognized at December 31, 2007 and the AFJ technology is consequently being
carried on the balance sheet at zero 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
collectibility is reasonably assured.  Revenue is derived from sales
of satellite hardware, satellite bandwidth, satellite service and lateral
drilling services.  Revenue from satellite hardware is recognized when
the hardware is installed.  Revenue from satellite bandwidth is
recognized evenly over the term of the contract.  Revenue from
satellite service is recognized when the services are performed.  We
provide no warranty but sell commercially obtained 3 to 12 month warranties for
satellite hardware.  We have a 30 day return
policy.  Revenue for lateral drilling services is recognized when the
services are performed and collectibility is reasonably assured and when
collection is uncertain, revenue is recognized when cash is
collected.  In accordance with Emerging Issues Task Force Issue
No. 00-14, we recognize reimbursements received from third parties for
out-of-pocket expenses incurred as revenues and account for out-of-pocket
expenses as direct costs.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the US of America requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets during the reporting
period.  Actual results could differ from such estimates.
 
 Estimates
are used by management in the following financial reporting areas:
 
 ·
              Allowance
      for doubtful accounts,
 ·
              Depreciation
      and amortization,
 ·
              Asset
      impairment,
 ·
              Income
      taxes and
 ·
              Stock
      option values
 
 For
additional information on our accounting policies, see Note 1 of Notes to
Financial Statements included as part of Item 7 of this Report.
 
 Fiscal
Year ended December 31, 2007 Compared to the Fiscal Year Ended December 31,
2006
 
 Satellite
Communications
 
 Satellite
Communications’ revenues decreased by approximately $618,000 to $418,000 for the
year ended December 31, 2007, compared to $1,036,000 for the year ended December
31, 2006. Costs of services provided in connection with our Satellite
Communications decreased by $493,000 to $445,000 for the year ended December 31,
2007, compared to $938,000 for the year ended December 31, 2006. The operating
margin from Satellite Communications decreased by $147,000 to a negative
contribution of $39,000 for the year ended December 31, 2007, compared to a
positive contribution of $108,000 for the year ended December 31, 2006. The
revenue and margin declines were a result of the loss of renewal and new
business due to the customers’ reluctance to sign multi-year contracts while we
were in Chapter 11 bankruptcy.
 
 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, 2007,
$10,517 was reflected on the balance sheet as deferred revenue relating to
Satellite Communication Services.
 
  36
  Down-hole
Solutions
 
 Down-hole
Solution revenues decreased by approximately $14,000 to zero for the year ended
December 31, 2007, compared to $14,000 for the year ended December 31,
2006.  Cost of services in connection with our Down-hole Solution
revenues decreased $1,087,000 to $7,000 for the year ended December 31, 2007,
compared to $1,094,000 for the year ended December 31, 2006. The operating
margin from Down-hole Solutions increased by $107,000, to a loss of $1,075,000
for the year ended December 31, 2007, compared to a loss of $1,182,000 for the
year ended December 31, 2006. The operating loss in 2007 is primarily related to
the impairment of AFJ intellectual property described below.  The
development of this technology has been on hold due to a lack of discretionary
cash prior to and during our  Chapter
11  proceedings.
 
 Selling, General and
Administrative Expense
 
 Selling,
general and administrative (“SG&A”) expense increased by $1.0 million to
$4.2 million for the year ended December 31, 2007, compared to $3.2 million for
the year ended December 31, 2006.  The following table details the
major components of SG&A expense over the periods:
 
 
 In
      thousands2007
              
              2006
              
              Increase
                (Decrease)Payroll
      and related costs
              
              $
              377
              
              $
              400
              
              $
              (23)Option
      and warrant expense
              
              1,254
              
              737
              
              517Legal
      fees and settlements
              
              1,940
              
              880
              
              1,060External
      services
              
              387
              
              644
              
              (257)Insurance
              
              152
              
              213
              
              (60)Travel
      & entertainment
              
              71
              
              166
              
              (95)Office
      rent, Communications and Miscellaneous
              
              5
              
              120
              
              (115)$4,186
              
              $
      3,159
              
              $
      1,027
 
 The main
reason for the increase in SG&A expenses was a result of approximately
$1,060,000 from increased legal fees associated with the restructuring of the
debtors while in bankruptcy, which includes not only debtors counsel but the
costs incurred by the creditors’ committee and its support. For the most part,
lower administrative costs were a result of managements’ efforts to reduce
overhead costs while in Chapter 11.  Additionally, the calculation of
non-cash expense associated with the employee stock options issued to a new
employee hired as a part of the rig acquisition caused option and warrant
expense to be significantly higher in 2007 than 2006.
 
 Depreciation and
Amortization
 
 Depreciation
and amortization expense decreased by approximately $11,000 to $93,000 for the
year ended December 31, 2007 compared to $104,000 for the year ended December
31, 2006.
 
 Other
Income
 
 Total
other income increased by approximately $490,000 to $211,000 for the year ended
December 31, 2007 compared to total other expense of $279,000 for the year ended
December 31, 2006.  The increase was primarily due to other income
increasing by $141,000 in large part from a commission paid to Blast by Maxim
TEP, a third-party oil and gas producer, in the sale of one of their producing
fields and a $262,000 decrease in loss on extinguishment of debt resulting from
the accounting for discontinued Eagle drilling operations in 2006.
 
 Loss from Continuing
Operations
 
 Loss from
continuing operations increased by approximately $576,000 to $5,089,000 for the
year ended December 31, 2007 compared to $4,513,000 for the year ended
December 31, 2006.  This increase is primarily related to the
bankruptcy legal fees incurred in 2007.
 
  37
  Loss From Discontinued
Operations
 
 The loss
from discontinued operations decreased by approximately $13,373,000 to a loss of
$2,752,000 for the year ended December 31, 2007 compared to a loss of
$16,125,000 for the year ended December 31, 2006.  The decrease in
loss is primarily due to the significant reduction in operational activity
resulting from the discontinued operations at the end of the first quarter of
2007 as Eagle’s business was being wound down and auctioned off in the
bankruptcy process.
 
 Asset Impairment
Expense
 
 In 2007,
we fully impaired the value of the remaining Intellectual Property by writing
off $975,000 due to legal challenges by our 50% partner Alberta Energy Partners
and uncertainty as to its value. The charge for this impairment was made to
operating income for the Down-hole Solutions business segment.
 
 There
were no asset impairments from our discontinued operations during
2007.  For the year ended December 31, 2006, following the
cancellations of the two-year term contracts by our customers and our inability
to replace these contracts with new customers, under the guidance of FAS 144,
Blast has elected to impair the asset value of the land drilling rigs acquired
in August 2006.and an impairment of approximately $17,435,000 was made against
these assets for the year ended December 31, 2006.
 
 Gain or Loss on Sale of
Property
 
 In 2007,
we had a net loss of approximately $2.0 million from the sale of the contract
land drilling business. In 2006, there were no sales of equipment.
 
 Net Loss
 
 The net
loss for the year ended December 31, 2007 decreased to approximately $9.9
million from $38.1 million for the year ended December 31, 2006.  The
decrease in net loss is primarily attributable to the reduction in impairment
expense and a lower loss from discontinued operations offset in part by
increases in general and administrative expenses from  legal costs
while in Chapter 11. The tax benefit associated with our loss has been fully
reserved as we have recurring net losses and it is more likely than not that tax
benefits will not be realized.
 
 Liquidity
and Capital Resources
 
 Blast had
total current assets of approximately $153,000 as of December 31, 2007,
including a cash balance of $49,000, compared to total current assets of $4.4
million as of December 31, 2006, including a cash balance of $1.5
million.  The main reason for a decrease in current assets and cash
was caused by the discontinued operations and tight cash availability during
bankruptcy.
 
 
 Blast had
total assets as of December 31, 2007 of approximately $1.2 million compared to
total assets of $52.0 million for the year ended December 31,
2006.  This decrease in total assets was mainly due to the decrease in
non-current assets of discontinued operations from $45.0 million as of December
31, 2006 compared to zero as of December 31, 2007.
 
 Blast
also had total liabilities of approximately $8.6 million as of December 31,
2007, consisting of current liabilities of $8.5 million compared to total
liabilities of $50.7 million as of December 31, 2006, consisting of current
liabilities of $46.0 million.  The main reason for the decrease in
liabilities is a $41.4 million decrease in current liabilities from discontinued
operations.
 
 We had
negative net working capital of approximately $8.3 million and a total
accumulated deficit of $77.9 million as of December 31, 2007.
 
 Blast was
also subject to certain contingent liabilities for approximately $1.65 million
relating to litigation matters, including the dispute with Hallwood. However,
under the terms of the April 2008 Hallwood Settlement Agreement, Hallwood has
forgiven this obligation.
  38
  During
our bankruptcy case we were able to secure financing of $4.0 million through the
sale of Series A Convertible Preferred shares to Clyde Berg and McAfee Capital,
LLC affiliates of our major shareholder Berg McAfee Companies. This funding
became available to Blast when the Plan of Reorganization became effective on
February 27, 2008. At March 31, 2008, our cash balance was approximately $1.6
million. However, our base business still consumes cash and we have to generate
more revenues or funding to avoid running out of cash at some point and can
provide no assurances that such generation will occur or that we will be
successful in prosecuting our litigation claims against Quicksilver or Hallwood,
if Hallwood is unable to meet the terms of the settlement
agreement.
 
 In May
2007 as a part of the Plan of Reorganization, Blast agreed with Laurus to
exchange the $40.6 million of senior secured debt plus interest and penalties
for five drilling rigs, which were sold to Laurus designee Boom Drilling, LLC.
In August 2007, Blast also entered into an agreement and mutual release with the
Thornton Securities Business Trust and repurchased 16.48 million shares for
$16.48. Those shares were originally sold in August 2006 in the acquisition of
Eagle and were retired by Blast following the repurchase in August 2007,
reducing Blast’s outstanding shares by approximately 24%.
 
 Under the
terms of the Plan, Blast will carry three secured obligations:
 
 ·
              A
      $2.1 million interest-free senior obligation with Laurus, that is secured
      by the assets of Blast and is payable only by way of a 65% portion of the
      proceeds that may be received for the customer litigation lawsuits or any
      asset sales that may occur in the future;
and
 
 ·
              A
      $125,000 note to McClain County, Oklahoma for property taxes, which can
      also be paid from the receipt of litigation proceeds, or if not paid, it
      will convert into a six and one half percent interest bearing note due
      February 27, 2010, and due in twelve monthly installments of
      $10,417;  and
 
 ·
              A
      pre-existing secured $1.12 million eight-percent (8%) note with Berg
      McAfee Companies has been extended for an additional three years from
      February 27, 2008 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.
 
 No other
claims exist on the future operating cash flows of Blast except for ongoing
ordinary operating expenses.
 
 Cash Flows From Operating
Activities
 
 We had
net cash used in operating activities of approximately $1,097,000 for the year
ended December 31, 2007, which was mainly due to a $5,089,000 loss from
continuing operations offset by positive changes in working capital, which
included a non-cash charge for option and warrant expense of $1,254,000, a
decrease in accounts payable of $1,430,000 and $975,000 of impairment of
intellectual property .
 
 Cash Flows from Investing
Activities
 
 We had
net cash used in investing activities of $12,000 for the year ended December 31,
2007 compared to $1,132,000 as of December 31, 2006.  Net cash used in
investing activities for the year ended December 31, 2007, included $41,649 of
purchase of property and equipment offset by $30,000 of proceeds from restricted
cash.  We spent approximately $127,000 in 2006, primarily for the
construction costs on the prototype abrasive fluid jetting rig.
 
 Cash Flows from Financing
Activities
 
 We had
approximately $790,000 in net cash provided by financing activities for the year
ended December 31, 2007, which was mainly due to $700,000 of proceeds received
from the Debtor-in-Possession financing arrangement with McAfee Capital and
Clyde Berg. The Debtor-in-Possession loan had a balance of $800,000 at the time
of the approval of the Plan and Blast currently anticipates converting such debt
into shares of Blast’s common stock at the rate of one share of common stock for
each $0.20 owed, shortly after the filing of this report.
 
  39
  In
connection with the approval of Blast’s Bankruptcy 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 will be 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.
 
 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 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.
 
 
  40
  
 
 Item
7. Financial Statements
 
 
 Index
to Consolidated Financial Statements
 
 PageReport
      of Independent Registered PublicAccounting
      Firm
              42Consolidated
      Balance Sheet as of December 31, 2007
              43Consolidated
      Statements of OperationsYears
      ended December 31, 2007 and 2006
              44Consolidated
      Statements of Stockholders’ DeficitYears
      ended December 31, 2007 and 2006
              45Consolidated
      Statements of Cash FlowsYears
      ended December 31, 2007 and 2006
              47Notes
      to Consolidated Financial Statements
              49
  
  41
  
 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 sheet of Blast Energy Services,
Inc. as of December 31, 2007 and the related consolidated statements of
operations, stockholders’ deficit and cash flows for the years ended December
31, 2007 and 2006.  These financial statements are the responsibility
of Blast Energy’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (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, 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 net loss for the year ended
December 31, 2007 and has a working capital deficit and an accumulated deficit
at December 31, 2007  which raises substantial doubt about its ability
to continue as a going concern. Management’s plans regarding those matters also
are described in Note 2. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
 
 
 
 
 GBH CPAs,
PC
 www.gbhcpas.com
 Houston,
Texas
 
 April 4,
2008
  42
  
 BLAST
ENERGY SERVICES, INC.
 CONSOLIDATED
BALANCE SHEET
 As of
December 31, 2007
 
 
 2007AssetsCurrent
      Assets:Cash
              
              $
              48,833Accounts
      receivable, net
              
              
              46,292Other
      assets
              
              
              57,409Total
      Current Assets
              
              
              152,534Intellectual
      property, net of accumulated amortization of $195,000 and impairment of
      $975,000
              
              
              -Equipment,
      net of accumulated depreciation of $35,488 and $38,171
              
              
              1,083,645Total
      Assets
              
              $
              1,236,179Liabilities
      and Stockholders’ DeficitCurrent
      Liabilities:Accounts
      payable
              
              $
              1,384,929Accrued
      expenses
              
              
              612,476Deferred
      revenue
              
              
              10,517Advances-related
      parties
              
              
              1,700,000Notes
      payable
              
              
              542,500Senior
      Debt
              
              
              2,100,000Current
      liabilities of discontinued operations
              
              
              2,112,413Total
      Current Liabilities
              
              
              8,462,835Notes
      payable
              
              
              125,000Total
      Liabilities
              
              
              8,587,835Stockholders’
      Deficit:Common
      stock, $.001 par value, 100,000,000 shares authorized; 52,027,404 shares
      issued and outstanding
              
              
              52,027Additional
      paid-in capital
              
              
              70,471,873Accumulated
      deficit
              
              
              (77,875,556
              )Total
      Stockholders’ Deficit
              
              
              (7,351,656
              )Total
      Liabilities and Stockholders’ Deficit
              
              $
              1,236,179
 
 
 See notes
to the consolidated financial statements
  43
  BLAST
ENERGY SERVICES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
Ended December 31, 2007 and 2006
 
 
 2007
              
              
              2006Revenue:Satellite
      Communications
              
              $
              418,468
              
              
              $
              1,035,712Down-hole
      Solutions
              
              
              -
              
              
              
              14,150Total
      Revenue
              
              
              418,468
              
              
              
              1,049,862Cost
      of services provided:Satellite
      Communications
              
              
              445,060
              
              
              
              937,918Down-hole
      Solutions
              
              
              6,793
              
              
              
              1,093,506Total
      Cost of Services Provided
              
              
              451,853
              
              
              
              2,031,424Depreciation
      and amortization
              
              
              93,366
              
              
              
              103,602Impairment
      of intellectual property
              
              
              975,000
              
              
              
              –Gross
      deficit
              
              
              (1,101,751
              )
              
              
              (1,085,164
              )Operating
      expenses:Selling,
      general and administrative
              
              
              4,185,847
              
              
              
              3,159,030Bad
      debts expense (recoveries)
              
              
              12,436
              
              
              
              (10,290
              )Operating
      loss
              
              
              (5,300,034
              )
              
              
              (4,233,904
              )Other
      income (expense):Interest
      income
              
              
              2,740
              
              
              
              6,055Other
      income
              
              
              232,434
              
              
              
              91,804Interest
      expense
              
              
              (23,758
              )
              
              
              (114,699
              )Loss
      on extinguishment of debt
              
              
              –
              
              
              
              (262,000
              )Total
      other income (expense)
              
              
              211,416
              
              
              
              (261,828
              )Loss
      from continuing operations
              
              
              (5,088,618
              )
              
              
              (4,495,732
              )Discontinued
      operations:Loss
      from discontinued operations
              
              
              (2,751,840
              )
              
              
              (16,125,435
              )Asset
      impairment
              
              
              –
              
              
              
              (17,434,729
              )Loss
      on sale of equipment
              
              
              (2,033,714
              )
              
              
              –Loss
      from discontinued operations
              
              
              (4,785,554
              )
              
              
              (33,576,794
              )Net
      loss
              
              $
              (9,874,172
              )
              
              $
              (38,072,526
              )Basic
      and diluted net loss per shareContinuing
      operations
              
              $
              (0.08
              )
              
              $
              (0.09
              )Discontinued
      operations
              
              $
              (0.08
              )
              
              $
              (0.65
              )Net
      loss
              
              $
              (0.16
              )
              
              $
              (0.74
              )Weighted
      average shares outstanding
              
              
              61,680,431
              
              
              
              51,526,500
 
 
 
 See notes
to the consolidated financial statements
 
 
  44
 Blast
Energy Services, Inc. Annual Report
  BLAST
ENERGY SERVICES, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
 Years
Ended December 31, 2007 and 2006
 
 
 Preferred
      Stock
              
              
              Common
      StockShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBalances
      at December 31, 2005
              
              
              -
              
              
              
              -
              
              
              
              42,060,477
              
              
              $
              42,060Shares
      issued for:Cash,
      net of fundraising costs
              
              
              
              
              
              
              
              
              
              
              900,000
              
              
              
              900Services
              
              
              
              
              
              
              
              
              
              
              720,208
              
              
              
              720Land
      Drilling Rig acquisition
              
              
              
              
              
              
              
              
              
              
              17,400,000
              
              
              
              17,400Cash
      exercise of warrants and options
              
              
              
              
              
              
              
              
              
              
              5,805,707
              
              
              
              5,806Notes
      payable, accrued interest and salaries
              
              
              
              
              
              
              
              
              
              
              663,698
              
              
              
              664Reinstatement
              
              
              
              
              
              
              
              
              
              
              59,814
              
              
              
              60Option
      expenseWarrant
      expenseNet
      lossBalances
      at December 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              67,609,904
              
              
              $
              67,610Shares
      issued for:Cash
      exercise of warrants and options
              
              
              
              
              
              
              
              
              
              
              900,000
              
              
              
              900Cancellation
      of shares
              
              
              
              
              
              
              
              
              
              
              (16,482,500
              )
              
              
              (16,483
              )Option
      expenseNet
      lossBalances
      at December 31, 2007
              
              
              -
              
              
              
              -
              
              
              
              52,027,404
              
              
              $
              52,027
 
 
 See notes
to the consolidated financial statements
  45
  BLAST
ENERGY SERVICES, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
 Years
Ended December 31, 2007 and 2006
 
 
 
 Additional
                Paid-In
      Capital
              
              
              Accumulated
                Deficit
              
              
              TotalBalances
      at December 31, 2005
              
              $
              29,855,409
              
              
              $
              (29,928,858
              )
              
              $
              (31,389
              )Shares
      issued for:Cash,
      net of fundraising costs
              
              
              422,100
              
              
              
              
              
              
              
              423,000Services
              
              
              663,280
              
              
              
              
              
              
              
              664,000Land
      Drilling Rig acquisition
              
              
              18,102,600
              
              
              
              
              
              
              
              18,120,000Cash
      exercise of warrants and options
              
              
              220,241
              
              
              
              
              
              
              
              226,047Notes
      payable, accrued interest and salaries
              
              
              829,002
              
              
              
              
              
              
              
              829,666Reinstatement
              
              
              (60
              )
              
              
              
              
              
              
              -Option
      expense
              
              
              736,846
              
              
              
              
              
              
              
              736,846Warrant
      expense
              
              
              18,286,835
              
              
              
              
              
              
              
              18,286,835Net
      loss
              
              
              
              
              
              
              (38,072,526
              )
              
              
              (38,072,526
              )Balances
      at December 31, 2006
              
              $
              69,116,253
              
              
              $
              (68,001,384
              )
              
              $
              1,182,479Shares
      issued for:Cash
      exercise of warrants and options
              
              
              89,100
              
              
              
              
              
              
              
              90,000Cancellation
      of shares
              
              
              12,967
              
              
              
              
              
              
              
              (3,516
              )Option
      expense
              
              
              1,253,553
              
              
              
              
              
              
              
              1,253,553Net
      loss
              
              
              
              
              
              
              (9,874,172
              )
              
              
              (9,874,172
              )Balances
      at December 31, 2007
              
              $
              70,471,873
              
              
              $
              (77,875,556
              )
              
              $
              (7,351,656
              )
 
 
 See notes
to the consolidated financial statements
  
  46
  BLAST
ENERGY SERVICES, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended December 31, 2007 and 2006
 
 2007
              
              
              2006Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (9,874,172
              )
              
              $
              (38,072,526
              )Loss
      from discontinued operations
              
              
              (4,785,554
              )
              
              
              (33,576,794
              )Loss
      from continuing operations
              
              
              (5,088,621
              )
              
              
              (4,495,732
              )Adjustments
      to reconcile net loss to net cash from operating
    activities:Depreciation
      and amortization
              
              
              93,366
              
              
              
              103,602Impairment
      of intellectual property
              
              
              975,000
              
              
              
              -Option
      and warrant expense
              
              
              1,253,553
              
              
              
              19,023,681Loss
      on extinguishment of debt
              
              
              -
              
              
              
              262,00Stock
      issued for services
              
              
              -
              
              
              
              644,000Amortization
      of note discount
              
              
              -
              
              
              
              603,992Receivable
      from related party
              
              
              -
              
              
              
              3,600Bad
      debt provisions
              
              
              12,436
              
              
              
              (10,290
              )Change
      in:Accounts
      receivable
              
              
              56,182
              
              
              
              (272,570
              )Other
      current assets
              
              
              19,172
              
              
              
              524,643Accounts
      payable
              
              
              1,429,831
              
              
              
              609,903Accrued
      expenses
              
              
              192,195
              
              
              
              361,250Deferred
      revenue
              
              
              (40,413
              )
              
              
              (87,275
              )Net
      Cash Provided By (Used In) Operating Activities
              
              
              (1,097,296
              )
              
              
              17,270,804Cash
      Flows From Investing ActivitiesInvestment
      in restricted cash
              
              
              -
              
              
              
              (704,750
              )Proceeds
      from restricted cash
              
              
              30,000
              
              
              
              -Purchase
      of property and equipment
              
              
              (41,649
              )
              
              
              (300,163
              )Construction
      of equipment
              
              
              -
              
              
              
              (127,303
              )Net
      Cash Used In Investing Activities
              
              
              (11,649
              )
              
              
              (1,132,216
              )Cash
      Flows From Financing ActivitiesPurchase
      of treasury stock
              
              
              (16
              )
              
              
              -Proceeds
      from exercise of options and warrants
              
              
              90,000
              
              
              
              211,778Borrowings
      on debt
              
              
              700,000
              
              
              
              -Principal
      payments on long term debt
              
              
              -
              
              
              
              (2,500
              )Net
      Cash Provided By Financing Activities
              
              
              789,984
              
              
              
              209,278Discontinued
      OperationsDiscontinued
      operating activities
              
              
              (1,020,870
              )
              
              
              (21,660,362
              )Discontinued
      investing activities
              
              
              94,131
              
              
              
              (47,351,400
              )Discontinued
      financing activities
              
              
              (240,070
              )
              
              
              53,362,521Net
      Cash Provided By (Used In) Discontinued Operations
              
              
              (1,166,809
              )
              
              
              (15,649,241
              )Net
      change in cash
              
              
              (1,485,770
              )
              
              
              698,625Cash
      at beginning of period
              
              
              1,534,603
              
              
              
              835,978Cash
      at end of period
              
              $
              48,833
              
              
              $
              1,534,603Cash
      paid for:Interest
              
              $
              -
              
              
              $
              84,865Income
      taxes
              
              
              -
              
              
              
              -
  47
  
 Non-Cash
      Transactions:Shares
      issued for acquisition of Eagle
              
              $
              -
              
              
              $
              3,120,000Warrants
      issued for acquisition of Eagle
              
              
              -
              
              
              
              18,286,835Conversion
      of notes payable to common stock
              
              
              -
              
              
              
              550,000Additional
      shares issued for interest payable
              
              
              -
              
              
              
              17,666Shares
      issued for accounts payable
              
              
              -
              
              
              
              27,000Long-term
      payable for consulting agreement
              
              
              -
              
              
              
              5,400,000Shares
      issued for equipment
              
              
              -
              
              
              
              20,000Exchange
      of rigs for debt
              
              
              45,822,321
              
              
              
              -Prepaid
      insurance financed with note payable
              
              
              112,907
              
              
              
              -Cancellation
      of insurance finance note
              
              
              186,325
              
              
              
              -
 
 
 
 See notes
to the consolidated financial statements
  48
  BLAST
ENERGY SERVICES, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
 
 Business. Blast
Energy Services, Inc. was originally formed in California on April 7,
1999.  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 abrasive 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 also seek to maximize value from the customer
litigation (described in Note 15).
 
 On
February 26, 2008, the Bankruptcy Court entered an order confirming our Second
Amended Plan of Reorganization (the “Plan”).  This ruling allows 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.  Pursuant to the Plan, Blast was to re-domicile 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. Blast also
adopted a resolution providing for the issuance of a series of Eight Million
(8,000,000) shares of Series A Convertible Preferred Stock (described
above).
 
 Acquisition of
Eagle.  In August 2006, we acquired Eagle Domestic Drilling
Operations LLC (“Eagle”), a drilling contractor which at that time owned three
land rigs, and had three more under construction.   The
acquisition of Eagle added a major new segment to our business. As part o the
financial consideration for the purchase of Eagle, we entered into a Securities
Purchase Agreement (“SPA”) with Laurus Master Fund, Ltd. (“Laurus”) to finance
$40.6 million of the total purchase price of Eagle. Under the SPA, we issued a
Secured Term Note in the original principal amount of $40.6 million with a final
maturity in three years, with interest at prime plus 2.5%, with a minimum rate
of 9%, at the time equal to 10.75%., payable quarterly to Laurus. The principal
was to be repaid commencing April 1, 2007 at a rate of $800,000 per month for
the first twelve months from that date, $900,000 per month for the subsequent
twelve months and $1,000,000 per month until the Note matures. The remaining
balance of the Note was to be paid at maturity with any associated
interest.
 
 We had
used assumptions in the August 2006 acquisition of Eagle that included high
revenue and full utilization rate expectations based upon the five two-year term
drilling contracts Eagle had in place at the time.  The subsequent
cancellation of these contracts by Hallwood Energy/Hallwood Petroleum and
Quicksilver Resources in the fall of 2006 reduced our revenue expectations and
consequently our ability to meet the scheduled payments on the Laurus’ Note.
This cancellation was in violation of the terms of the drilling contracts and we
and Eagle have subsequently filed suit for breach of those
contracts.
 
 Restructuring.  On
January 19, 2007, Blast and Eagle, filed voluntary petitions with the US
Bankruptcy Court for the Southern District of Texas – Houston Division (the
“Court”) under Chapter 11 of Title 11 of the US Code in order that we may
dispose of burdensome and uneconomical assets and reorganize our financial
obligations and capital structure.
 
 In May
2007, Blast entered into a Settlement Agreement with Laurus on the terms of the
satisfaction of substantially all of its secured claims against Blast by virtue
of the implementation of an asset purchase agreement. The terms of the
Settlement, including the satisfaction of the remainder of the Laurus claims,
are to be implemented in the plan of reorganization. The Settlement and the
treatment of the Laurus secured claims provides for the transfer of five land
drilling rigs and associated spare parts to Laurus in settlement of Laurus’
note, accrued interest and default penalties on the note, save and except a
residual $2.1 million that will remain as a secured debt owed by Blast to Laurus
and which will be provided for in the plan of reorganization consistent with the
terms of the Settlement.
  49
  Our
consolidated financial statements have been prepared on a going concern basis in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”), including the provisions of AICPA Statement of Position 90-7,
“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”.
This contemplates the realization of assets and satisfaction of liabilities in
the ordinary course of business. Accordingly, our consolidated financial
statements do not include any adjustments relating to the recoverability of
assets and classification of liabilities that might be necessary should we be
unable to continue as a going concern.
  The
accompanying consolidated financial statements do not reflect or provide for the
consequences of the Chapter 11 proceedings. In particular, the financial
statements do not show (1) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (2) as to pre-petition
liabilities, the amounts that may be allowed for claims or contingencies, or
their status and priority; (3) as to shareowners’ equity accounts, the effect of
any changes that may be made in our capitalization; or (4) as to operations, the
effect of any changes that may be made in our business.
 
 Blast’s
consolidated financial statements include the accounts of Blast and it’s wholly
and majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
 Management
Estimates.  The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, as
well as certain financial statement disclosures.  While management
believes that the estimates and assumptions used in the preparation of the
financial statements are appropriate, actual results could differ from these
estimates.
 
 Fair Value of Financial
Instruments.  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.
 
 Revenue
Recognition.  All revenue is recognized when persuasive
evidence of an arrangement exists, the service or sale is complete, the price is
fixed or determinable and collectibility is reasonably
assured.  Revenue is derived from sales of satellite hardware,
satellite bandwidth, satellite service and lateral drilling
services.  Revenue from satellite hardware is recognized when the
hardware is installed.  Revenue from satellite bandwidth is recognized
evenly over the term of the contract.  Revenue from satellite service
is recognized when the services are performed.  Blast provides no
warranty but sells commercially obtained 3 to 12 month warranties for satellite
hardware.  Blast has a 30 day return policy.  Revenue for
lateral drilling services is recognized when the services are performed and
collectibility is reasonably assured and when collection is uncertain, revenue
is recognized when cash is collected.
 
 Allowance for Doubtful
Accounts.  Bad debt expense is recognized based on management’s
estimate of likely losses per year, based on past experience and an estimate of
current year uncollectible amounts.
 
 Credit Risk Blast
does not require collateral from its customers with respect to accounts
receivable but performs periodic credit evaluations of such customer’s financial
condition. Blast determines any required allowance by considering a number of
factors including lengths of time accounts receivable are past due and Blast’s
previous loss history. Blast provides reserves for accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. As of December 31, 2007, Blast
has determined that no amount for 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.
 
  50
  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.
 
 During
the bankruptcy process, Blast suffered several legal attacks by Alberta Energy
Partners in their effort to rescind the AFJ Technology Purchase Agreement of
March 17, 2006, which sold 50% of the technology to Blast. Such adversarial
actions were defeated in Bankruptcy Court and are believed to be without merit
by Blast but are now subject to appeal in the US District Court. Also during
2007, Blast was prevented from developing the AFJ technology due to severe cash
constraints. Blast management continues to see market potential for the AFJ
technology and plans to develop the technology as and when cash and human
resources may be prudently applied to its commercialization. To this end, it has
entered into Repair and Revenue Sharing agreements with Reliance Oil and Gas, a
private operator.
 
 The
carrying value of IP is subject to the accounting doctrine of “lower of cost or
market”. The original cost of the AFJ technology was $1,170,000 and the
unamortized balance at December 31, 2007 was $975,000 but management has decided
to impair the carrying value to zero in order to reflect the uncertainty of the
valuation of the technology, which is not yet commercially proven and which
ownership is subject to dispute by its 50% owner, Alberta Energy Partners.
Accordingly an impairment of $975,000 was recognized at December 31, 2007 and
the AFJ technology is consequently being carried on the balance sheet at zero
value. Blast had also reduced the value of its Landers technology to zero
effective December 31, 2005.
 
 Stock Options and
Warrants.  Effective January 1, 2006, Blast began recording
compensation expense associated with stock options and other forms of equity
compensation is accordance with Statement of Financial Accounting Standards
(“SFAS”) No.123R, Share−Based
Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior
to January 1, 2006, Blast had accounted for stock options according to the
provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and therefore no related
compensation expense was recorded for awards granted with no intrinsic value.
Blast adopted the modified prospective transition method provided for under SFAS
No.123R, and, consequently, has not retroactively adjusted results from prior
periods.
 
 Blast did
not grant any options or warrants in 2007.  However, it did extend
750,000 warrants for three years to Edge Capital Group under an Agreement for
Settlement and Mutual Release. During the year ended December 31, 2006, Blast
granted 1,596,000 share options at exercise prices ranging from $ 0.61 to $1.30
per share for services rendered at the options’ fair value totaling $2,233,560.
Of this amount, $345,555 was recorded as compensation expense and $1,888,005 was
deferred to recognize over the future periods in which the services are being
performed. Variables used in the Black−Scholes option−pricing model included:
(1) 4.8 to 5.25% risk−free discount rate, (2) expected option life is the actual
remaining life of the options as of each period end, (3) expected volatility in
the range of 475% to 490%, and (4) zero expected dividends.
 
 Income
Taxes.  Blast utilizes the asset and liability method in
accounting for income taxes.  Under this method, deferred tax assets
and liabilities are recognized for operating loss and tax credit carryforwards
and for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the year
in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date.  A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless it is more likely
than not that the value of such assets will be realized.
 
 Earnings Per
Share.  Basic earnings per share equals net earnings divided by
weighted average shares outstanding during the year.  Diluted earnings
per share include the impact on dilution from all contingently issuable shares,
including options, warrants and convertible securities.  The common
stock equivalents from contingent shares are determined by the treasury stock
method.  Blast has incurred net losses for the years ended December
31, 2007 and 2006 and therefore, basic and diluted earnings per share are the
same as all potential common equivalent shares would be
anti-dilutive.
  51
  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.
 
 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.  Management is currently evaluating the impact SFAS
No. 157, but does not expect its implementation will 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.  Management is currently analyzing the effects of SFAS 159, but
does not expect its implementation will have a significant impact on Blast’s
financial condition or results of operations.
 
 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.
 
 Reclassifications.Certain amounts in the
financial statements of the prior year have been reclassified to conform to the
presentation of the current year for comparative purposes.
 
 NOTE
2 – GOING CONCERN
 
 As shown
in the accompanying consolidated financial statements, Blast incurred a net loss
of approximately $9.9 million for the year ended December 31, 2007, has an
accumulated deficit of $77.9 million and a working capital deficit of $8.3
million as of December 31, 2007 and has several significant future financial
obligations. These conditions raise substantial doubt as to Blast’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if Blast is unable to continue as a going
concern.
 
 The
accompanying consolidated financial statements do not reflect or provide for the
consequences of our Chapter 11 proceedings. In particular, the financial
statements do not show (1) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (2) as to pre−petition
liabilities, the amounts that may be allowed for claims or contingencies, or
their status and priority; (3) as to shareowners' equity accounts, the effect of
any changes that may be made in our capitalization; and (4) as to operations,
the effect of any changes that may be made to our business.
 
  52
  NOTE
3 – EQUIPMENT
 
 Equipment
consisted of the following at December 31, 2007:
 
 Description
              
              LifeAFJ
      Rig
              
              12
      years
              
              $
      1,066,678Computer
      equipment
              
              3
      years
              
              25,788Automobile
              
              4
      years
              
              21,883Service
      Trailer
              
              5
      years
              
              4,7841,119,133Less:  accumulated
      depreciation
              
              
              
              (35,488)$
      1,083,645
 
 NOTE
4 – INTELLECTUAL PROPERTY (“IP”)
 
 Effective
August 25, 2005, we entered into a definitive agreement to purchase from
Alberta Energy Partners (“Alberta”) an interest in the AFJ technology that
provides us the unrestricted right to use the technology and license the
technology worldwide to others. We expect to utilize the technology as the
foundation for our down-hole solutions business once it is
commercialized.
 
 As part
of the agreement, we issued Alberta 3,000,000 shares of restricted common stock,
with registration rights, and warrants to purchase 750,000 shares of our common
stock at an exercise price of $0.45 per share. The warrants have a three-year
term and vest when we receive $225,000 in revenue from our initial rig utilizing
the technology, which has not occurred to date. We also agreed to pay Alberta a
royalty payment of $2,000 per well bore or 2% of the gross revenues received in
connection with each well bore, whichever is greater, in connection with the
licensing of the technology. The parties also agreed to share any revenues
received by us from licensing the technology, with Alberta receiving 75% of
licensing revenues until it receives $2,000,000, at which time its proportion of
the licensing revenue shall decrease to 50%, thereafter. Our ownership interest
in the technology is 50%. Either party has a right of first refusal on any new
applications of the technology by the other party, or any sale of the other
party’s interest in the technology. However, in connection with our Chapter 11
restructuring, Alberta Energy Partners filed pleadings to rescind the Technology
Purchase Agreement, which is discussed in greater detail below in Note
15.   While these issues are under appeal by Alberta in District
court, we intend to vigorously defend our ownership rights to this technology in
any future legal actions in this matter.
 
 The
original cost of the AFJ technology was $1,170,000 and the unamortized balance
prior to the write down at December 31, 2007 was approximately $975,000.
Management has decided to impair the carrying value to zero in order to
reflect  the uncertainty of the valuation of the technology, which is
not yet commercially proven and which ownership has been subject to dispute by
its 50% owner, Alberta Energy Partners. Accordingly an impairment of $975,000
was recognized at December 31, 2007 and the AFJ technology is consequently being
carried on the Balance Sheet at zero value.
 
 NOTE
5 – ACCRUED EXPENSES
 
 Accrued
expenses at December 31, 2007 consisted of the following:
 
 Accrued
      payroll
              
              $
      25,708Director
      fees
              
              372,000Interest
              
              148,129Other
              
              66,639$
      612,476
 
 Substantial
amounts of the Accrued Expenses were paid or satisfied effective February 27,
2008.
 
 NOTE
6 – DEFERRED REVENUE
 
 Blast
bills some of its satellite bandwidth contracts in advance over periods ranging
from 3 to 36 months.  Blast recognizes revenue evenly over the
contract term.  Deferred revenue related to satellite services totaled
$10,517 at December 31, 2007, all of which is expected to be recognized in the
next twelve months.
  53
  NOTE
7 – ADVANCES – RELATED PARTIES
 
 Rig
Financing
 During
2005, under the agreement to develop its initial abrasive jetting rig with Berg
McAfee Companies, funded primarily by Eric McAfee and Clyde Berg, each of whom
are considered significant holders of Blast, $1 million rig funding was
received. These loans bear interest at an average rate of 7.4% and have been
accrued since the note’s inception. The loan matured on March 31, 2007 and was
not paid subject to the Chapter 11 proceedings.
 
 Debtor-in-Possession (DIP)
Loan
 The
Bankruptcy court approved Blast’s ability to draw $800,000 from Berg McAfee and
related entities to finance Blast on a temporary basis.  This loan is
interest-free and due on demand.  The Plan allows Berg McAfee to
convert the outstanding balance of the DIP loan into Company’s common stock on
the effective date of the Plan at the rate of one share of common stock for each
$0.20 of the DIP loan outstanding.  No amount of this loan has been
converted into stock to date.
 
 NOTE
8 - RELATED PARTY TRANSACTIONS
 
 On
February 26, 2008, the Bankruptcy Court entered an order confirming our Second
Amended Plan of Reorganization (the “Plan”).  This ruling allows 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.  The major components of
the Plan, which was overwhelmingly approved by creditors and shareholders, are
detailed in the following paragraphs.
 
 Under the
terms of this confirmed Plan, Blast has 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 will be 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.
 
 The sale
of the convertible preferred securities was conditioned on approval of the Plan
and as such, the securities can only be issued after the Merger (defined below)
is effected, which occurred in March 2008.  As such, we anticipate
issuing the convertible preferred securities shortly after the filing of this
report.
 
 Laurus
Settlement Agreement
 
 We
previously reached an agreement with Laurus, on the terms of an asset purchase
agreement intended to offset the full amount of the $40.6 million senior note,
accrued interest and default penalties owed to Laurus. Under the terms of this
agreement, only five land drilling rigs and associated spare parts were sold to
repay Laurus’ note, accrued interest and default penalties on the
note.  We had previously requested authority to consummate the
agreement with Laurus from Thornton as defined below, which proposed sale was
originally objected to by Thornton Oilfield Holdings LLC and various other
entities controlled by Rodney D. Thornton (collectively “Thornton Entities”), at
the time a significant shareholder of Blast.
 
 The
Settlement provided that Thornton Entities shall dismiss their lawsuits against
us in Oklahoma and New York, respectively, and they shall support the proposed
sale of our rigs to Laurus or its designee Boom Drilling LLC.  The
Settlement also provided that we agreed to pay Laurus $2.1 million as a
reimbursement which payment is secured by all of our assets which Laurus had
security interests in at the time we entered bankruptcy (the “Bankruptcy
Assets”), and that we and Laurus shall split the proceeds 35%/65%, respectively,
from the sale of any Bankruptcy Assets, and; that we would purchased 16,447,500
shares of common stock from Thornton Entities for $16.48.
 
 The
Settlement was approved by the Bankruptcy court on May 10, 2007 and the rig sale
was completed shortly thereafter.
 
  54
  Share
Repurchase
 
 On August
20, 2007, Blast Energy Services, Inc. (the “Company” or “Blast”) entered into a
Settlement Agreement and Mutual Release  (the “Release”) with the Thornton
Security Business Trust (the “Trust”) whereby Blast and the Trust agreed to
release, acquit and forever discharge each other, their current and former
agents, officers, directors, servants, attorneys, representatives, successors,
employees trustees, beneficiaries, accountants, and assigns (the “Parties”) from
any and all rights, obligations, claims, demands and causes of action, whether
in contract, tort, under state and/or federal law, or state and/or federal
securities regulations, whether asserted or unasserted, whether known or
unknown, suspected or unsuspected, for or by reason of any matter, cause or
thing whatsoever, including all obligations arising therefrom, and omissions
and/or conduct of each party, and/or each parties’ agents, attorneys, servants,
representatives, successors, employees, directors, officers, trustees,
beneficiaries, accountants and assigns, relating directly or indirectly thereto
(the “Release”).  Additionally, the Trust agreed to sell its entire share
ownership of Blast common stock (16,447,500 shares) to Blast in consideration
for the Release and $16.48 in cash.
 
 NOTE
9 - NOTES PAYABLE
 
 In
January 2006, Blast issued 13,783 shares of common stock in lieu of cash for the
payment of 4th
quarter, 2005 interest on Convertible Promissory Notes at $0.80 per share (the
average five-day closing price at year end).
 
 In
January 2006, holders of four Convertible Promissory Note Agreements dated July
23, 2004 totaling $350,000 converted their Note principal amounts which were due
on December 31, 2005, into shares of Company stock in lieu of cash payment. The
original conversion terms including warrants, but excluding 8% interest, would
equate to a $1.00 per share investment value. However, since the average market
prices of Blast’s common stock was trading below $1.00 at time of conversion, a
premium in the number of shares converted was added in order to lower the value
of the holder’s investment to $0.60 per share. Accordingly, 408,333 shares of
common stock were issued in the conversion of these notes, including 233,333
common shares for the conversion premium.
 
 In June
2006, related parties Eric McAfee and Clyde Berg, equal holders of two
Convertible Promissory Note Agreements dated October 26, 2004 totaling $200,000,
converted their Note principal amounts which were due on May 31, 2006, into
shares of Company stock in lieu of cash payment. The original conversion terms
including warrants, but excluding 8% interest, would equate to a $1.00 per share
investment value. The conversion includes a premium in the number of shares
converted in order to lower the value of the holder’s investment to $0.60 per
share. However, since the average market prices of Blast’s common stock was
trading below $1.00 at time of conversion, a premium in the number of shares
converted was added in order to lower the value of the holder’s investment to
$.60 per share. Accordingly, 333,430 shares of common stock were issued in the
conversion of these notes, including 133,430 common shares for the conversion
premium. Additionally in June 2006, Blast issued 6,666 shares of common stock in
lieu of cash for the payment of 1st and
2nd
quarter 2006 interest on these Convertible Promissory Notes.
 
 As a
result of the two conversions, a loss on the extinguishment of debt of $262,000
has been recorded as a component of interest expense.
 
 In May
2007, Blast entered into a Settlement Agreement with Laurus on the terms of the
satisfaction of substantially all of its secured claims against Blast by virtue
of the implementation of an asset purchase agreement. The terms of the
Settlement, including the satisfaction of the remainder of the Laurus claims,
are to be implemented in the plan of reorganization. The Settlement and the
treatment of the Laurus secured claims provides for the transfer of five land
drilling rigs and associated spare parts to Laurus in settlement of Laurus’
note, accrued interest and default penalties on the note, except for a residual
$2.1 million that will remain as a secured debt owed by Blast to Laurus and
which will be provided for in the plan of reorganization consistent with the
terms of the Settlement.
 
 Other
notes payable at December 31, 2007 consisted of the following:
 
 Steinberger
      settlement
              $
      500,000Note
      payable, individual, 10%, due on demand
              42,500Total
              $
      542,500
 
  55
  Under the
terms of the Plan of Reorganization both note holders scheduled above were paid
in full.  After February 27, 2008, Blast will carry three secured
obligations:
 
 ·
              A
      $2.1 million interest-free senior obligation with Laurus Master Fund,
      Ltd., which is secured by the assets of Blast and is payable only by way
      of a 65% portion of the proceeds that may be received for the customer
      litigation lawsuits or any asset sales that may occur in the
      future;
 
 ·
              A
      $125,000 note to McClain County, Oklahoma for property taxes, which can
      also be paid from the receipt of litigation proceeds, or if not paid, it
      will convert into a six and one half percent interest bearing note due
      February 27, 2010, and due in twelve monthly installments of
      $10,417;  and
 
 ·
              A
      pre-existing secured $1.12 million note with Berg McAfee Companies has
      been extended for an additional three years from the effective date of the
      Plan, February 27, 2008 at eight-percent (8%) interest, 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.
 
 No other
claims exist on the future operating cash flows of Blast.
 
 NOTE
10 - INCOME TAXES
 
 As of
December 31, 2007, Blast has an accumulated deficit, 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 $30,200,000 at December 31, 2007, and will
expire in the years 2019 through 2027.
 
 At
December 31, 2007, the deferred tax assets consisted of the
following:
 
 Deferred
      tax assetsNet
      operating losses
              $10,560,000Less:  valuation
      allowance
              (10,560,000)Net
      deferred tax asset
              $              –
 
 The
change in the valuation allowance for the years ended December 31, 2007 and 2006
totaled approximately $2,700,000 and $ 2,000,000, respectively.
 
 NOTE
11 – COMMON STOCK
 
 During
2006, Blast issued 25,549,427 shares of common stock as follows:
 ·
              900,000
      shares issued in a private placement offering for total proceeds of
      $423,000.
 ·
              720,208
      shares issued in payment for consulting services valued at
      $664,000.
 ·
              17,400,000
      shares issued in connection with the acquisition of Eagle valued at
      $18,120,000.
 ·
              5,805,707
      shares issued as a result of cash exercise of warrants and options valued
      at $226,047.
 ·
              663,698
      shares issued in repayment of notes payable and accrued interest valued at
      $829,666.
 ·
              59,814
      shares were reinstated with no value
assigned.
 
 During
2007, Blast issued 900,000 shares of common stock as a result of cash exercise
of options valued at $90,000.
 
 NOTE
12 - STOCK OPTIONS AND WARRANTS
 
 Options
 
 During
2006, Blast issued 1,596,000 options as follows:
 ·
              96,000
      ten-year options, vesting over 12 months, issued to non-employee directors
      at market with an exercise price of
$0.61.
 ·
              1,500,000
      ten-year options, vesting quarterly over 36 months, issued to an employee
      at market with an exercise price of
$1.30.
 
 No new
options were issued or awarded in 2007.
  56
  Warrants
 
 Blast
issues warrants to non-employees from time to time.  The board of
directors has discretion as to the terms under which the warrants are
issued.  All warrants vest immediately unless specifically noted in
warrant agreements.
 
 During
2006, Blast issued warrants to purchase 17,962,671 shares of common stock as
follows:
 
 ·
              6,090,000
      warrants, with an exercise price of $0.01 and a seven year term, were
      issued in connection with the Laurus note payable totaling
      $40,600,000.  The notes have been discounted for the relative
      fair value of the warrants.
 ·
              6,090,000warrants,
      with an exercise price of $1.44 and a seven year term, were issued in
      connection with the Laurus note payable totaling
      $40,600,000.  The notes have been discounted for the relative
      fair value of the warrants.
 ·
              450,000
      warrants, with an exercise price of $0.55 and a two-year term, were issued
      in connection with the raise of funds in a private placement offering that
      raised $450,000.  The warrants were recorded as part of the
      offering costs of the private
placement.
 ·
              304,500
      warrants, with an exercise price of $0.01 and a two-year term, were issued
      to the broker in connection with Laurus note payable totaling
      $40,600,000.  The fair value of the warrants have been added to
      the deferred financing costs.
 ·
              5,000,000
      warrants, with an exercise price of $0.01 and a two-year term, were issued
      to members of Eagle in connection with the acquisition of
      Eagle.  The fair value of the warrants was considered as part of
      the purchase price of Eagle.
 
 No
warrants were issued or awarded in 2007. However, 750,000 warrants with Edge
Capital were extended three years as part of an Agreement for Settlement and
Mutual Release.
  57
  Effective
February 27, 2008, 4,000,000 Management Warrants were created for a term of five
years and an exercise price of $0.20 per share. None had been awarded at March
31, 2008.
 
 Summary
information regarding options and warrants is as follows:
 
 Options
              
              
              Weighted
      Average Share Price
              
              
              Warrants
              
              
              Weighted
      Average Share PriceOutstanding
      at December 31, 2004
              
              
              2,413,680
              
              
              $
              1.67
              
              
              
              3,794,219
              
              
              $
              0.49Year
      ended December 31, 2005:Granted
              
              
              1,512,000
              
              
              
              0.71
              
              
              
              2,348,800
              
              
              
              0.48Exercised
              
              
              -
              
              
              
              -
              
              
              
              (675,000
              )
              
              
              0.10Reinstated
              
              
              900,000
              
              
              
              0.56
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (386,888
              )
              
              
              0.12
              
              
              
              (1,647,833
              )
              
              
              0.18Outstanding
      at December 31, 2005
              
              
              4,438,792
              
              
              
              1.36
              
              
              
              3,820,186
              
              
              
              0.90Year
      ended December 31, 2006:Granted
              
              
              1,596,000
              
              
              
              1.26
              
              
              
              17,962,671
              
              
              
              0.51Exercised
              
              
              -
              
              
              
              -
              
              
              
              (5,805,707
              )
              
              
              0.09Reinstated
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              (835,515
              )
              
              
              0.92Outstanding
      at December 31, 2006
              
              
              6,034,792
              
              
              $
              0.89
              
              
              
              15,141,635
              
              
              $
              0.74Year
      ended December 31, 2007:Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              (900,000
              )
              
              
              0.10
              
              
              
              -
              
              
              
              -Reinstated
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (2,562,000
              )
              
              
              1.31
              
              
              
              (668,800
              )
              
              
              0.81Outstanding
      at December 31, 2007
              
              
              2,572,792
              
              
              $
              0.77
              
              
              
              14,472,835
              
              
              $
              0.74
 
 
  58
  Options
outstanding and exercisable as of December 31, 2007:
 - -
      Outstanding - -Exercise
      Price
              
              Number
                of
      Shares
              
              Weighted
      Average Remaining Life
              
              Exercisable
      Number
                of
      Shares$
      0.10
              
              954,792
              
              6
      years
              
              954,7924.28
              
              160,000
              
              6
      years
              
              160,0002.20
              
              60,000
              
              6
      years
              
              60,0000.38
              
              72,000
              
              7
      years
              
              72,0000.90
              
              420,000
              
              7
      years
              
              420,0000.40
              
              140,000
              
              8
      years
              
              140,0000.61
              
              96,000
              
              8
      years
              
              96,0000.80
              
              670,000
              
              8
      years
              
              421,3332,572,792
              
              
              
              2,324,125
 
 Warrants
outstanding and exercisable as of December 31, 2007:
 - -
      Outstanding - -Exercise
      Price
              
              Number
                of
      Shares
              
              Weighted
      Average Remaining Life
              
              Exercisable
      Number
                of
      Shares$
      0.01 – 0.50
              
              7,090,000
              
              4.6
      years
              
              7,090,0000.55
              
              450,000
              
              0.4
      years
              
              450,0001.00
              
              750,000
              
              0.1
      years
              
              750,0001.44
              
              6,090,000
              
              5.7
      years
              
              6,090,0002.00
              
              9,501
              
              0.7
      years
              
              9,5016.00
              
              83,334
              
              0.8
      years
              
              83,33414,472,835
              
              
              
              14,472,835
 
 NOTE
13 – CONCENTRATIONS & CREDIT RISKS
 
 One
customer accounted for 40% and 32% of total revenues in 2007 and 2006,
respectively.  There were no related party revenues in 2007 and 2006,
respectively
 
 Blast at
times has cash in banks in excess of Federal Deposit Insurance Corporation
(“FDIC”) insurance limits.  At December 31, 2007, 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
14 – COMMITMENTS & CONTINGENCIES
 
 Under the
terms of the Landers lateral drilling license, Blast is obligated to pay a
royalty of $500 for every well in which that technology is
utilized.  The Landers license expires upon the expiration of the
underlying patents, the earliest date being October 2013.
 
 Three of
Blast’s employees are under employment agreements with base salaries of
$200,000, $175,000 and $150,000 per annum plus bonus potential up to 50% of the
base.
 
 In
November 2004, Blast entered into a worldwide licensing agreement with Alberta.
The licensing agreement was replaced in its entirety in August 2005 when Alberta
sold up to 50% of its interest in the AFJ technology.  In return,
Blast agreed to award 3 million shares of Blast stock to Alberta and to fix the
price of the 1 million previously awarded warrants. Blast also agreed to pay a
royalty to Alberta based on the greater of 2% of gross revenues or $2,000 per
well. The agreement awarded Blast 20% ownership but this was increased to
50%on  March 17, 2006. (See Note 4 above)
  59
  NOTE
15 – LITIGATION
 
 Chapter 11
Proceedings
 
 On
January 19, 2007, Blast Energy Services, Inc. and its wholly owned subsidiary,
Eagle Domestic Drilling Operations LLC, the (“Debtors”), filed voluntary
petitions with the US Bankruptcy Court for the Southern District of Texas -
Houston Division under Chapter 11 of Title 11 of the US Code (the “Bankruptcy
cases”). The Debtors continued to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.
 
 As of the
date of the filing, then pending litigation against the Debtors was
automatically stayed pursuant to 11 USC§ 362. Absent termination or
modification of the automatic stay by order of the Bankruptcy Court, litigants
may not take any action to recover on pre-petition claims against the Debtors.
These stayed lawsuits include: (i) a state court suit filed by Second Bridge LLC
in Cleveland County, Oklahoma (“Oklahoma State Court Suit”) claiming breach of
contract under a consulting services agreement signed on August 25, 2006,
asserting a personal property lien and claiming damages of $4.8 million; and
(ii) a complaint in Franklin County, Arkansas filed by Chrisman Ready Mix
claiming approximately $126,000 for drilling rig transportation expenses
incurred on behalf of the Debtors. All such pre-petition claims were resolved in
the Bankruptcy Cases.
 
 The
Debtors were also involved with the following additional disputes filed in the
Bankruptcy Cases, which are separate and distinct from proofs of claim filed in
the cases:
 
 (a) the
Debtors filed an adversary proceeding against Second Bridge LLC seeking to
invalidate the personal property lien asserted by Second Bridge, to recover
preferences and fraudulent transfers and to avoid the consulting services
agreement as a fraudulent conveyance. Second Bridge filed a second suit in the
form of an adversary proceeding essentially alleging the same claims asserted in
the Oklahoma State Court Suit.   Second Bridge and numerous other
Thornton entities also filed objections to the debtors planned rig sale
referenced below, but all parties entered into a settlement agreement approved
on May 14, 2007 and all claims, including this suit and the Oklahoma State Court
Suit, were mutually released.
 
 (b) the
Debtors requested authority to sell the Eagle drilling rigs to their senior
secured lender Laurus for a consideration equal to the outstanding debt
obligations owed to Laurus. The Debtors’ efforts to complete this transaction
were objected to by various entities controlled by Rodney D. Thornton. On May
14, 2007, the Court approved a settlement agreement between Thornton entities
and the Debtors. Laurus and the Debtors signed an Asset Purchase Agreement May
17, 2007 to sell the rigs to Boom Drilling LLC, a designee of
Laurus.
 
 (c) the
Debtors sued Saddle Creek Energy Development, a Texas joint venture, for
non-payment of work performed under an IADC drilling contract that provided for
the drilling of three initial wells, and which was subsequently amended to
provide for the drilling of an additional three wells as well as providing labor
and materials to operate a Saddle Creek rig. Eagle also filed liens on certain
leases and on the Saddle Creek rig and initiated a foreclosure action in the
Court. On April 23, 2007, Saddle Creek and Eagle entered into a mediated
settlement whereby Saddle Creek would pay Eagle $475,000 and $200,000 on May
15th
and June 1st,
respectively.  In return, Eagle would release all liens filed on
Saddle Creek’s assets. On May 15, 2007, Saddle Creek failed to perform its
obligations and Eagle has continued its litigation claims against Saddle Creek
for an amount in excess of $3.4 million. Saddle Creek filed bankruptcy itself in
the US Bankruptcy Court for the Northern District of Texas, which case is still
pending.
 
 (d)
Alberta Energy Partners filed pleadings in the nature of contested matters
asserting that Blast cannot retain its interests under that certain Technology
Purchase Agreement entered into by Blast in August, 2005. Blast has vigorously
defended itself against such action, and asserted the rights available to it
under the Bankruptcy Code. At the Bankruptcy Court level all issues have been
resolved in favor of Blast. Alberta continues to appeal the Court’s decisions in
the District Court for the Southern District and Blast plans to vigorously
defend itself.
 
 (e) On
August 20, 2007, the Debtors entered into an Agreement and Mutual Release with
the Thornton Security Business Trust (the “Trust”) whereby the Debtors and the
Trust agreed to release, acquit and forever discharge each other, their current
and former agents, officers, directors, servants, attorneys, representatives,
successors, employees, trustees, beneficiaries, accountants, and assigns from
any and all rights, obligations, claims, demands and causes of action, whether
in contract, tort, under state and/or federal law, or state and/or federal
securities regulations, whether asserted or unasserted, whether known or
unknown, suspected or unsuspected, for or by reason
of any matter, cause or thing whatsoever, including all obligations arising
therefrom, and omissions and/or conduct of each party, and/or each parties’
agents, attorneys, servants, representatives, successors, employees, directors,
officers, trustees, beneficiaries, accountants and assigns, relating directly or
indirectly thereto (the “Release”).  Additionally, the Trust agreed to
sell its entire share ownership of Blast common stock (16,477,500 shares) to
Blast in consideration for the Release and $16.48 in cash. The Release and the
stock repurchase were approved by the Bankruptcy Court.  As a result,
the Trust, no longer owns any Blast securities resulting in the number of
outstanding Blast shares being reduced by approximately
24%.
  60
 
 (f) On
August 21, 2007, the Debtors entered into an Agreement and Mutual Release with
Edge Capital and the Frazier Entities (collectively “Edge”). Edge had made a
claim against the Debtors for about $2.4 million for allegedly failing to
register stock on their behalf. The Agreement and Mutual Release included
provisions that Edge withdraw their claims, that Edge confirm and ratify the
stipulation entered by the Court, that Edge sign a mutual release in exchange
for the Debtors entering into a revised Warrant Agreement with Edge that
extended the term of 750,000 preexisting warrants by three years to January 19,
2011, for the Debtors agreeing to not require return of a certain Landers rig
and for the Debtors waiving a royalty fee on any operations performed with said
Landers rig.
 
 Emergence from
Bankruptcy
 
 On
November 28, 2007 Blast entered into an agreement with Eric McAfee, a major
shareholder to guarantee $4 million of funding to Blast in exchange for certain
Convertible Preferred shares, to provide additional DIP financing and a
commitment to pay all unsecured creditors in full. On February 26, 2008, the
Court entered an order confirming our Second Amended Plan of Reorganization (the
“Plan”).  This ruling allows the Debtors to emerge from Chapter 11
bankruptcy, which became effective February 27, 2008.
 
 The
overall impact of the confirmed Plan was for Blast to emerge with allowed
unsecured claims fully paid, have no debt service scheduled for at least two
years, and to keep equity shareholders’ interests intact.  The major
components of the Plan, which was overwhelmingly approved by creditors and
shareholders, are detailed below.
 
 Under the
terms of this confirmed Plan, Blast has 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 (unless a contrary
agreement was reached), for a total amount of approximately $2.4
million.  The remaining $1.6 million will be 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.
 
 The sale
of the convertible preferred securities was conditioned on approval of the Plan
and as such, the securities will be issued after Blast successfully merges with
its wholly owned subsidiary, Blast Energy Services, Inc., a Texas corporation,
whereby Blast re-domiciles in the State of Texas
 
 This Plan
also preserves the equity interests of our existing shareholders. Furthermore,
Blast will continue to prosecute the litigation against Quicksilver and
Hallwood, if they are unable to meet the terms of the settlement agreement..
Blast has previously estimated these legal recoveries to be in the range of $15
million to $45 million (gross). Blast can make no assurances as to the outcome
or success of the Quicksilver litigation or that Hallwood can complete their
major financing and satisfy the terms of their settlement
agreement.
 
 Under the
terms of the Plan, Blast will carry three secured obligations:
 
 ·
              A
      $2.1 million interest-free senior obligation with Laurus, that is secured
      by the assets of Blast and is payable only by way of a 65% portion of the
      proceeds that may be received for the customer litigation lawsuits or any
      asset sales that may occur in the future;
and
 
 ·
              A
      $125,000 note to McClain County, Oklahoma for property taxes, which can
      also be paid from the receipt of litigation proceeds from Quicksilver, or
      if not paid, it will convert into a six and one half percent interest
      bearing note in February 27, 2010, and due in twelve monthly installments
      of $10,417;  and
 
 ·
              A
      pre-existing secured $1.12 million eight-percent (8%) note with Berg
      McAfee Companies has been extended for an additional three years from
      February 27, 2008 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.
  61
  
 No other
claims exist on the future operating cash flows of Blast except for ongoing
ordinary operating expenses.
 
 Non-Bankruptcy Related
Litigation Matters
 
 Hallwood Energy/Hallwood
Petroleum Lawsuit
 On
September 1, 2006, Hallwood Petroleum, LLC and Hallwood Energy, LP (“Hallwood”)
filed suit in the state district court of Tarrant County, Texas, against Eagle
Domestic Drilling Operations, LLC (“Eagle”), a wholly owned subsidiary of Blast,
and a separate company, Eagle Drilling, LLC. The lawsuit seeks to rescind two
IADC two-year term day rate drilling contracts between Eagle Drilling and
Hallwood, which had been assigned to Eagle by Eagle Drilling prior to Blast’s
acquisition of the membership interests of Eagle.  Hallwood alleged Eagle
Drilling and Eagle were in breach of the IADC contracts and it ceased
performance under the contracts.  Hallwood claimed that the rigs provided
for use under the IADC contracts did not meet contract specifications and that
the failures to meet such specifications are material breaches of the
contracts.  In addition, Hallwood has demanded that the remaining balance
of funds advanced under the contracts, in the amount of $1.65 million, be
returned. The Hallwood suit pending in Tarrant County, Texas is currently stayed
by operation of the automatic stay provided for in the US Bankruptcy Code as a
result of the Chapter 11 filing of Blast and its subsidiary, Eagle. Eagle
vigorously contests the claims by Hallwood and has instituted proceedings (“the
Adversary Proceeding”) to prosecute causes of action for breach of contract,
tortious interference and business disparagement against Hallwood in the US
Bankruptcy Court for the Southern District of Texas in
Houston.  Hallwood filed its counterclaim in the Adversary Proceeding,
largely mirroring the claim that was filed in the Tarrant County
litigation.  Eagle and Hallwood have discussed potential settlements
to this litigation; however, there can be no assurance that any settlement will
be reached, or that it will be on favorable terms to Eagle.  The
parties’ have agreed to try the case in the US Bankruptcy Court for the Southern
District of Texas in Houston.  This agreement was approved by the US
Bankruptcy Court and a trial date has been scheduled for May 20,
2008.
 
 On April
3, 2008, Eagle and Hallwood signed an agreement to settle the litigation between
them for a total settlement amount of approximately $6.4 million. Under the
terms of this agreement, Hallwood will pay to Eagle $2.0 million in cash, issue
$2.75 million in equity from a pending major financing and has agreed to
irrevocably forgive approximately $1.65 million in Eagle payment obligations
effective immediately. In return, Eagle has agreed to suspend its legal actions
against Hallwood for approximately  six
months.  Additionally, in the event Hallwood is able to secure an
aggregate of $20 million in bridge financing prior to June 30, 2008, Hallwood
will pay Eagle a $500,000 advance on its cash obligation. Should Hallwood be
unable to complete their major financing by September 30, 2008, Eagle will
immediately resume its legal actions against Hallwood and the $500,000 advance
will not be credited against any future judgment or settlement
amounts.  Upon receipt of the entire settlement amount by Eagle, the
parties and their affiliates will be fully and mutually released from all and
any claims between them. This settlement agreement has been approved by both
companies’ boards of directors but is subject to the approval of the Bankruptcy
Court.
 
 Quicksilver Resources
Lawsuit
 On
October 13, 2006, Quicksilver Resources, Inc. (“Quicksilver”) filed suit in the
state district court of Tarrant County, Texas against Eagle and a separate
company, Eagle Drilling, LLC. The lawsuit seeks to rescind three IADC two-year
term day rate contracts between Eagle Drilling and Quicksilver, which had been
assigned to Eagle by Eagle Drilling prior to Blast’s acquisition of the
membership interests of Eagle.  The lawsuit includes further allegations of
other material breaches of the contracts and negligent operation by Eagle and
Eagle Drilling under the contracts. Quicksilver asserts that performance under
one of the contracts was not timely and that mechanical problems of the rig
provided under the contract caused delays in its drilling
operations.  Quicksilver repudiated the remaining two contracts prior
to the time for performance set forth in each respective contract.  After
Blast and Eagle filed their petition for reorganization in the US Bankruptcy
Court for the Southern District of Texas in Houston, Quicksilver removed the
lawsuit to the US Bankruptcy Court for the Northern District of
Texas.  On May 7, 2007, the US Bankruptcy Court for the Northern
District of Texas approved the motion filed by Eagle seeking to have the lawsuit
transferred to the US Bankruptcy Court for the Southern District of Texas in
Houston where its petition for reorganization under Chapter 11 of the US
Bankruptcy Code was pending.  Subsequent to the transfer, Eagle and
Quicksilver entered into a stipulation that the lawsuit would be tried in the
Bankruptcy Court before a jury and the case was set for a jury trial in
September 2008.  On motion filed by Eagle Drilling, the US Bankruptcy
Court for the Southern District of Texas in Houston recommended that the US
District Court for the Southern District of Texas withdraw its reference of the
adversary proceeding to the Bankruptcy Court.  The District Court has
not yet acted on the Bankruptcy Court’s recommendation.  It is unknown
what, if any, affect the Bankruptcy Court’s recommendation will have on the date
for the trial of this matter.
  62
  Steinberger Derivative
Lawsuit (Settled)
 Blast
entered into a settlement agreement with Mr. Steinberger in August 2005 in full
settlement of a lawsuit for wrongful dismissal between the parties. Such
settlement resulted in the creation of a $500,000 interest free note being made
in favor of Mr. Steinberger on Blast’s books payable at June 30, 2007.
Subsequently, Blast was named as a party in the derivative lawsuit between Mr.
Steinberger and his attorney, Mr. Sessions but this case has now been settled
and Mr. Steinberger was paid $500,000 in full February 27, 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
16 – 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.
 
 Blast
evaluates performance and allocates resources based on profit or loss from
operations before other income or expense and income taxes.  The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.  The table below
reports certain financial information by reportable segment:
 
 For
      the Years Ended December 31,2007
              
              2006Revenues
      from external customersSatellite
      Communication
              
              $
      418,468
              
              $
      1,035,712Down-hole
      Solutions
              
              -
              
              14,150$
      418,468
              
              $
      1,049,862Operating
      profit (loss) 1Satellite
      Communication
              
              $
      (39,028)
              
              $
      108,084Down-hole
      Solutions
              
              (1,067,365)
              
              (1,079,356)Corporate
              
              (4,195,642)
              
              (3,262,632)$
      (5,302,035)
              
              $
      (4,233,904)1 –
      Operating profit/(loss) is total operating revenue less operating
      expenses, selling, general & administrative expenses, impairment of
      intellectual property, depreciation and amortization and bad
      debts.  It does not include other income and expense or income
      taxes.
 
 Blast
assets at December 31, 2007 were as follows:
 
 Satellite
      Communications
              
              $                -Down-hole
      Solutions
              
              1,080,313Corporate
              
              3,332$
      1,083,645
 
 All of
Blast‘s long-term assets are attributable to North America.
  63
  NOTE
17 – 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.  Assets and liabilities of the discontinued operations are as
follows:
 
 
 December
      31,2007
              
              
              2006Assets:Current
      AssetsAccounts
      receivable
              
              $
              -
              
              
              $
              59,327Deferred
      consulting fees
              
              
              -
              
              
              
              1,800,000Prepaid
      expenses
              
              
              -
              
              
              
              745,299Advance
      on property lease
              
              
              -
              
              
              
              7,500Total
      Current Assets
              
              
              -
              
              
              
              2,612,126Equipment
              
              
              -
              
              
              
              41,098,565Deferred
      consulting fees – long term
              
              
              -
              
              
              
              3,000,000Deferred
      financing costs
              
              
              -
              
              
              
              1,264,801Total
      Assets
              
              $
              -
              
              
              $
              47,975,492Liabilities:Current
      Liabilities:Accounts
      payable
              
              $
              -
              
              
              $
              273,582Accrued
      expenses
              
              
              -
              
              
              
              337,996Senior
      Debt
              
              
              -
              
              
              
              40,600,000Escrow
              
              
              -
              
              
              
              56,631Short
      term debt
              
              
              -
              
              
              
              471,627Accrued
      liabilities
              
              
              1,783,557
              
              
              
              -Accounts
      payable
              
              
              328,856
              
              
              
              -Current
      portion of long term consulting agreement
              
              
              -
              
              
              
              1,800,000Total
      Current Liabilities
              
              
              2,112,413
              
              
              
              43,539,836Long
      Term Liabilities:Notes
      payable
              
              
              125,000
              
              
              
              -Long
      term consulting agreement
              
              
              -
              
              
              
              3,000,000Deferred
      revenue
              
              
              -
              
              
              
              1,692,750Total
      Liabilities
              
              $
              2,237,413
              
              
              $
              48,232,586
 
  64
  Loss from
the discontinuance of drilling operations for the years ended December 31, 2007
and 2006 are as follows:
 
 2007
              
              
              2006Revenue:Drilling
      Services
              
              $
              419,650
              
              
              $
              2,193,625Cost
      of services provided:Drilling
      Services
              
              
              1,600,093
              
              
              
              2,589,660Total
      Cost of Services Provided
              
              
              (1,180,443
              )
              
              
              (396,035
              )Depreciation
      and amortization
              
              
              95,196
              
              
              
              613,400Gross
      (deficit)
              
              
              (1,275,639
              )
              
              
              (1,009,435
              )Operating
      expenses:Selling,
      general and administrative
              
              
              142,543
              
              
              
              6,746Bad
      debts expense
              
              
              -
              
              
              
              261,560Interest
      expense
              
              
              1,264,801
              
              
              
              14,864,324Total
      operating expenses
              
              
              1,407,344
              
              
              
              15,132,630Loss
      from discontinued operations
              
              
              (2,682,983
              )
              
              
              (16,142,065
              )Asset
      impairment
              
              
              -
              
              
              
              (17,434,729
              )Loss
      on sale of equipment
              
              
              (2,033,714
              )
              
              
              -Net
      loss from discontinued operations
              
              $
              (4,716,697
              )
              
              $
              (33,576,794
              )
 
 NOTE
18 – OTHER SUBSEQUENT EVENTS
 
 Hallwood
Settlement
 
 On April
3, 2008, Eagle and Hallwood signed an agreement to settle the litigation between
them for a total settlement amount of approximately $6.5 million. Under the
terms of this agreement, Hallwood will pay to Eagle $2.0 million in cash, issue
$2.75 million in equity from a pending major financing and has agreed to
irrevocably forgive approximately $1.65 million in Eagle payment obligations
effective immediately. In return, Eagle has agreed to suspend its legal actions
against Hallwood for approximately  six
months.  Additionally, in the event Hallwood is able to secure an
aggregate of $20 million in bridge financing prior to June 30, 2008, Hallwood
will pay Eagle a $500,000 advance on their cash obligation. Should Hallwood be
unable to complete their major financing by September 30, 2008, Eagle will
immediately resume their legal actions against Hallwood and the $500,000 advance
will not be credited against any future judgment or settlement
amounts.  Upon receipt of the entire settlement amount by Eagle, the
parties and their affiliates will be fully and mutually released from all and
any claims between them. This settlement agreement has been approved by both
companies’ boards of directors but is subject to the approval of the Bankruptcy
Court.
 
 
 Directors
Fees Conversion
 
 Blast’s
Directors will convert their unsecured claims for unpaid directors fees totaling
approximately $164,000, into 820,000 shares of Blast’s common stock at the rate
of one share of common stock for each $0.20 of the deferred amount
owed.
 
 Management
Warrants
 
 Under the
Plan, Blast’s Board of Directors was given the authority to enter into long-term
warrant agreements with Blast’s senior management, and grant such senior
management the right to purchase up to 4,000,000 warrants to purchase shares of
Blast’s common stock at $0.20 per share, for a period of five
years.  No warrant grants have been issued to date.
  65
  Unregistered
Sales of Equity Securities
 
 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, which
Preferred Stock is explained in greater detail below, 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 and an equal amount
to McAfee capital LLC, a limited liability company.  The sale of the
Units was conditioned on approval of the Plan and as such, the Units will be
issued after the Merger is affected, Blast is re-domiciled (as described below)
and the Preferred Stock is 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 registration rights in
connection with the sale of the Units.
 
 Series A Convertible
Preferred Stock
 The
8,000,000 shares of Series A Preferred Stock of Blast (the “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 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 either (or both) of Blast’s pending litigation
proceedings with (i) Hallwood Petroleum, LLC and Hallwood Energy, LP (Adversary
Proceeding No. 07-03282 in the US Bankruptcy Court in Houston); and/or (ii)
Quicksilver Resources, Inc (Adversary Proceeding No. 07-03292 in the US
Bankruptcy Court in Houston), in excess of $4,000,000, Blast is required to pay
any and all 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.
 
 Additionally,
the Preferred Stock (and any accrued and unpaid dividends on such Preferred
Stock) have 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 into shares of Blast’s
common stock at a conversion price of $0.50 per share, if Blast’s common stock
trades for a period of more than twenty consecutive trading days at greater than
$3.00 per share and the average trading volume of Blast’s common stock exceeds
50,000 shares per day.
 
 The
Preferred Stock has the right to vote at any shareholder 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 pending litigation in excess of $7,500,000,
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.
 
 Amendments
to Articles of Incorporation
 
 In
connection with the approval of the Plan, the Bankruptcy Court, and the Board of
Directors of Blast approved a change in domicile of Blast from California to
Texas.  This will be implemented by Blast creating a wholly owned
subsidiary, Blast Energy Services, Inc., in the State of Texas, which Blast will
merge with and into, the result of which will be that Blast will become a Texas
corporation (the “Merger”).  Following the Merger, Blast will have
200,000,000 authorized shares of stock, of which 180,000,000 shares will be
common stock, $0.001 par value per share, and 20,000,000 shares will be
preferred stock, $0.001 par value per share.  The Certificate of
Formation of the resulting Texas corporation will also allow Blast’s Board of
Director 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 in connection with the Merger. In connection with
the Merger, Blast adopted new Bylaws.
  66
  Item
8. Changes In / 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 Blast.
Effective February 27, 2008, Blast 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 Blast's Board of Directors effective
February 27, 2008.
 
 Malone's
report on the financial statements of Blast 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 Blast's ability to continue as a going
concern.
 
 In
connection with the audit of Blast'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 Blast 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 Blast's financial statements.
 
 There
have been no reportable events as provided in Item 304(a)(iv) of Regulation S-B
during Blast'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.
 
 Blast has
authorized Malone to respond fully to any inquiries of any new auditors hired by
Blast relating to their engagement as Blast's independent accountant. Blast has
requested that Malone review the disclosure and Malone has been given an
opportunity to furnish Blast with a letter addressed to the Commission
containing any new information, clarification of Blast's expression of its
views, or the respect in which it does not agree with the statements made by
Blast herein. Such letter is incorporated by reference as an exhibit to this
report.
 
 Blast has
not previously consulted 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 Blast's financial
statements; or (iii) a reportable event (as provided in Item 304(a)(iv)(B) of
Regulation S-B) during Blast'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. GBH has reviewed the
disclosure required by Item 304 (a) before it was filed with the Commission and
has been provided an opportunity to furnish Blast with a letter addressed to the
Commission containing any new information, clarification of Blast's expression
of its views, or the respects in which it does not agree with the statements
made by Blast in response to Item 304 (a). GBH did not furnish a letter to the
Commission.
 
 Item
8A. Controls and Procedures
 
 As of
December 31, 2007, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. This evaluation was done under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer. Based on their evaluation of our disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15e), our Chief
Executive Officer and Chief Financial Officer have concluded that as of December
31, 2007 such disclosure controls and procedures were effective.
 
  67
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary for preparation of our financial statements; provide
reasonable assurance that receipts and expenditures of company assets are made
in accordance with management authorization; and provide reasonable assurance
that unauthorized acquisition, use or disposition of company assets that could
have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide absolute assurance
that a misstatement of our financial statements would be prevented or
detected.
 
 Pursuant
to Rule 13a-15d of the Exchange Act, management conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the
framework inInternal Control
- Integrated Framework (1992) and Internal Control Over Financial
Reporting - Guidance for Smaller Public Companies (2006), issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2007.
  This
annual report does not include an attestation report of Blast's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by Blast's registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit Blast to provide only management's report in this 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.
 
 The Audit
Committee, along with management, has reinforced internal controls and has
implemented stringent policies regarding business engagements and
activities.  These policies and procedures cover the areas of approval
and authority limits, segregation of duties, internal audit procedures, revenue
recognition, contractual commitments, documentation and customer acceptance, and
staggered levels of internal checks and balances.  Operating documents,
such as the “Blast Energy Accounting Operations Manual,” “Employee Handbook” and
“Approval Authorities” have been revised and adopted to describe such policies
and train personnel.  Since an earnings restatement in November 2003, the
Committee has increased the frequency of its meetings and has directly reviewed
and approved internal policies and procedures.  They have also been
directly involved in recruiting key personnel, namely a new Chief Financial
Officer and meeting with our auditors.
 
 Audit
Committee Report
 
 The Audit
Committee has reviewed and discussed the audited financial statements with
management. The Audit Committee has received the written disclosures and the
letter from the independent accountants required by ISB Standard No. 1, as may
be modified or supplemented, and has discussed with the independent accountant
their independence.  Based on the review and discussions conducted by the
Audit Committee, they have recommended to the Board of Directors that the
audited financial statements be included in our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2007 for filing with the SEC.
 
 Joseph J.
Penbera, PhD - Chairman
 John R.
Block
 Roger P.
(Pat) Herbert
 
 Item
8B. Other Information
 
 None.
 
  68
  Part
III
 
 Item
9. Directors and Executive Officers
 
 The names
of our directors and executive officers as of the filing of this report, and
certain additional information with respect to each of them are set forth below.
The dates set forth under “Year First Became Director” below indicate the year
in which our directors first became a director of us or our predecessor in
interest, Verdisys, Inc.
 
 Name
              Age
              Current
      Position
              Year
      First Became DirectorJohn
      O’Keefe
              59
              CEO
              N/AJohn
      MacDonald
              49
              CFO
      & Corp. Secretary
              N/AJohn
      R. Block
              73
              Director*
              2000Roger
      P. (Pat) Herbert
              61
              Chairman
      of the Board*Director
              2005Joseph
      J. Penbera, Ph.D.
              60
              Director*
              1999Jeffery
      R. Pendergraft
              60
              Director
              2006
 
 *Member
of Audit Committee
 
 Statements
below pertaining to the time at which an individual became one of our directors,
executive officers or founders refers to the time at which the respective
individual achieved his respective status with us, or our predecessor in
interest, Verdisys, Inc.
 
 John
O’Keefe, has served as our Executive Vice President from January 2004
through May 2004, at which time he became our Co-Chief Executive Officer, which
position he held until March 2007, when he became our sole Chief Executive
Officer.  From January 2004, until March 2007, Mr. O’Keefe served as
our Chief Financial Officer. From 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 CFO of Ivanhoe Energy. Mr. O’Keefe has a B.A. in Business
from the University of Portsmouth, is a Chartered Accountant and graduated from
the Program for Management Development (PMD) from the Harvard Graduate School of
Business in 1985 under sponsorship of Sun Oil Company.
 
 John
MacDonald, has served as our Chief Financial Officer since April 2007.
From March 2004 until March of 2007, Mr. MacDonald served as Vice President of
Investor Relations and Corporate Secretary. He retains the title of Corporate
Secretary.  From January 2004 until March 2004, Mr. MacDonald served
as an Investor Relations consultant. Prior to that Mr. MacDonald was Vice
President of Investor Relations for Ivanhoe Energy from June 2001 until December
2003.  He has also held investor relations and financial analysis
positions with EEX Corporation and Oryx Energy from 1980 to 2001.  Mr.
MacDonald received his MBA from Southern Methodist University in 1994 and his
B.A. from Oklahoma State University in 1980.
 
 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. Mr. Block has held this position since
January 2005. From January 2002 until January 2005, he served as Executive Vice
President at the Food Marketing Institute.  From February 1986 until
January 2002, Mr. Block served as President of Food Distributors
International.  Prior to that, Mr. Block served as Secretary of
Agriculture for the US Department of Agriculture from 1981 to 1986. He currently
serves as a director of John Deere and Co. and Hormel Foods Corp.  Mr.
Block received his B.A. from the US Military Academy.
  69
  Roger P. (Pat)
Herbert,was elected to the Board at the 2005 Annual Meeting held
June 6, 2005. He has worked in the energy services business for nearly 30
years. He is currently serving as a Director and CEO for JDR Cable Systems
(Holdings) Ltd – a position he has held since July 2002.  Prior to
that, he was the Chairman and CEO of GeoNet Energy Services, a company he
founded in September 2000. Prior to that Mr. Herbert had worked with
International Energy Services, Baker Hughes and Smith
International.  Mr. Herbert has served on the board as audit
committee chairman for Scorpion Offshore, a publicly traded Norwegian energy
services company since August 2007. Herbert received his M.B.A. from Pepperdine
University, his B.S.E. from California State University-Northridge and is a
registered professional engineer in the State of Texas.
 
 Joseph J.
Penbera, Ph.D., co-founded our company and has served as a director since
its inception in April 1999. Since 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 M.P.A. from Bernard Baruch School and his B.A. from Rutgers
University.
 
 Jeffrey R.
Pendergraft, has served as a director since June,
2006.  Hecurrently serves as
Chairman and CEO of HNNG Development, a company focused on commercialization of
low BTU natural gas, and has served in those positions since November 2004. In
addition, he is the founder and principal of the Wind Rose Group, an energy
investment and advisory firm, which he has served as Chairman of since January
2001. His broad background includes private investments, financings, mergers and
acquisitions. He has been recognized for achievements in change management,
corporate governance, finance, and legal affairs. Prior to forming Wind Rose in
2001, he was EVP and Chief Administrative Officer at Lyondell Chemical and prior
to that he served as staff counsel for ARCO.  Mr. Pendergraft received
his Bachelor of Arts from Stanford University, and his Juris Doctor from
Stanford University School of Law.
 
 Messrs
Johnson, Ruiz and Woodward resigned from their director positions effective
February 27, 2008 when Blast emerged from bankruptcy. Mr. Herbert became
Chairman of the Board.
 
 The
officers serve at the discretion of our directors. There are no familial
relationships among the our officers and directors, nor are there any
arrangements or understanding between any of our directors or officers or any
other person pursuant to which any officer or director was or is to be selected
as an officer or director.
 
 We have
group life, health, hospitalization, medical reimbursement or relocation plans
in effect. Further, we have a 401(k) savings plan in effect and agreements which
provide compensation in the event of termination of employment or change in
control of us.
 
 No
non-compete or non-disclosure agreements exist between our management and any
prior or current employer. All key personnel are employees or under contracts
with us.
 
 Our
directors are aware of no petitions or receivership actions having been filed or
court appointed as to our business activities, officers, directors, or key
personnel, other than those described above under “Legal
Proceedings.”
 
 We have
not, nor anticipate making loans to any of our officers, directors, key
personnel, 10% stockholders, relatives thereof, or controllable
entities.
 
 None of
our officers, directors, key personnel, or 10% stockholders has guaranteed or
co-signed any bank debt, obligation, or any other indebtedness pertaining to
us.
 
  70
  Audit
Committee
 
 Our Board
of Directors has established an Audit Committee. The Audit Committee meets with
management and our independent auditors to determine the adequacy of internal
controls and other financial reporting matters. In addition, the committee
provides an avenue for communication between the independent auditors, financial
management and the Board. Our Board of Directors have determined that for the
purpose of and pursuant to the instructions of item 401(e) of regulation S-B
titled Audit Committee Financial Expert, Dr. Joseph Penbera possesses the
attributes of an audit committee financial expert. Mr. Penbera is one of our
Board members and is the Chairman of the Audit Committee. Dr. Penbera is
independent as defined by item 401(e)(ii) of regulation S-B. He receives
compensation for board service only and is not otherwise an affiliated
person.
 
 Code
of Ethics
 
 We have
adopted a code of ethics that applies to our senior officers such as the
principal executive officer, principal financial officer, principal accounting
officer and persons performing similar functions. A code of ethics relates to
written standards that are reasonably designed to deter wrongdoing and to
promote:
 
 ·
              Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;
 
 ·
              Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that are filed with, or submitted to, the SEC and in other
      public communications made by an
issuer;
 
 ·
              Compliance
      with applicable governmental laws, rules and
  regulations;
 
 ·
              The
      prompt internal reporting of violations of the code to an appropriate
      person or persons identified by the code;
and
 
 ·
              Accountability
      for adherence to the code.
 
 Our code
of ethics was filed as Exhibit 14.1 of our Form 10-KSB for the year ended
December 31, 2003. Our code of ethics is posted on our website at
www.blastenergyservices.com. We will provide to any person without charge, upon
written request to our corporate secretary at our principal executive office, a
copy of our code of ethics.
 
 Item
10. Executive Compensation
 
 Compensation of Executive
Officers
 
 Other
than Mr. O’Keefe and Mr. MacDonald, we have no other person that is a named
executive officer of Blast.
 
 Compensation
Summary
 
 The
following table provides certain summary information concerning compensation for
the last three fiscal years earned by or paid to our CEOs and each of our other
executive officers who had compensation in excess of $100,000 during the last
fiscal year (collectively the “Named Executive Officers”).
 
  71
  SUMMARY
COMPENSATION TABLE
 
 Annual
      Compensation
              Award(s)
              PayoutsPosition
              Year
              Salary
                ($)
              Bonus
                ($)
              Other
      Annual Compensation
                ($)
              Restricted
      Stock Award(s)
                ($)
              Securities Underlying
      Options/SARs(12)
                ($)
              LTIP
      Payouts
                ($)
              All
      Other Compensation
                ($)
              Total
      Compensation
                ($)David
      M. Adams
              2007
              70,000
              0
              130,000(13)
              0
              0
              0
              0
              200,000Former
      President
              2006
              200,000(1)
              84,000(4)
              0
              0
              0
              0
              0
              284,0002005
              200,000(2)
              70,000(3)
              0
              0
              0
              0
              0
              270,000John
      O’Keefe
              2007
              200,000
              0
              0
              0
              0
              0
              0
              200,000CEO
              2006
              200,000(1)
              84,000(4)
              0
              0
              0
              0
              0
              284,0002005
              172,500(2)
              70,000(3)
              0
              0
              0
              0
              0
              212,500John
      MacDonald
              2007
              105,000
              0
              0
              0
              0
              0
              0
              105,000CFO
              2006
              105,000(1)
              25,000(4)
              0
              0
              0
              0
              0
              130,0002005
              79,167
              10,500(3)
              0
              0
              0
              0
              0
              89,667John
      R. Block
              2007
              0
              0
              17,000(5)
              0
              0
              0
              0
              17,000Director
              2006
              0
              0
              18,500(5)
              0
              7,320
              0
              0
              25,820Roger
      P. (Pat) Herbert
              2007
              0
              0
              29,000(6)
              0
              0
              0
              0
              29,000Chairman
              2006
              0
              0
              24,000(6)
              0
              7,320
              0
              0
              31,320Scott
      W. Johnson
              2007
              0
              0
              41,000(7)
              0
              0
              0
              0
              41,000Former
      Director
              2006
              0
              0
              14,500(7)
              0
              7,320
              0
              0
              21,820Joseph J. Penbera, Ph. D.
              2007
              0
              0
              17,000(8)
              0
              0
              0
              0
              17,000Director
              2006
              0
              0
              40,500(8)
              0
              7,320
              0
              0
              47,820Jeffrey
      R. Pendergraft
              2007
              0
              0
              29,000(9)
              0
              0
              0
              0
              29,000Director
              2006
              0
              0
              11,000(9)
              0
              7,320
              0
              0
              18,320Frederick
      R. Ruiz
              2007
              0
              0
              17,000(10)
              0
              0
              0
              0
              17,000Former
      Director
              2006
              0
              0
              20,000(10)
              0
              7,320
              0
              0
              27,320O.
      James Woodward, III
              2007
              0
              0
              53,000(11)
              0
              0
              0
              0
              53,000Former
      Chairman
              2006
              0
              0
              66,500(11)
              0
              14,640
              0
              0
              81,140
 
 During
the periods indicated, perquisites for each individual named in the Summary
Compensation Table aggregated less than 10% of the total annual salary and bonus
reported for such individual in the Summary Compensation Table. Accordingly, no
such amounts are included in the Summary Compensation Table.
 
 (1)
Includes $8,333 deferred each by Mr. O’Keefe and Mr. Adams and $1,750 by Mr.
MacDonald into 2007. Upon the confirmation of the Plan of Reorganization on
February 27, 2008 these amounts were paid as priority claims under the
Plan.
 (2)
Includes $15,000 deferred each by Mr. O’Keefe and Mr. Adams into
2006.
 (3) Paid
in shares of common stock valued at $0.35 per share.
 (4) Paid
in shares of common stock valued at $0.80 per share
 (5) The
entire amount of Mr. Block’s salary for the years ended December 31, 2006 and
2007, were accrued.
 (6) The
entire amount of Mr. Herbert’s salary for the years ended December 31, 2006 and
2007, were accrued.
 (7) The
entire amount of Mr. Johnson’s salary for the years ended December 31, 2006 and
2007, were accrued.
 (8) The
entire amount of Dr. Penbera’s salary for the year ended December 31, 2006, was
accrued.
 (9) The
entire amount of Mr. Pendergraft’s salary for the year ended December 31, 2006,
was accrued.
 (10) The
entire amount of Mr. Ruiz’s salary for the year ended December 31, 2006, was
accrued.
  72
  (11) The
entire amount of Mr. Woodward’s salary for the year ended December 31, 2007, was
accrued. All but $34,000 of Mr. Woodward’s salary for the year ended December
31, 2006, was accrued.
 (12) In
May 2006 the Members of the Board were awarded 12,000 ten-year options (24,000
for the Chairman) with an exercise price of $0.61, vesting monthly over one
year.
 (13)
Represents accrued severance pay related to the terms of Mr. Adam’s employment
contract following his resignation on June 30, 2007.  Under Chapter 11
this amount was considered an allowed unsecured claim and was paid upon the
confirmation of the Plan of Reorganization on February 27, 2008.
 
 Option
Grants
 
 No
options were issued to Named Executive Officers in 2007.
 
 
 AGGREGATED
OPTION EXERCISES IN 2007
 AND
OPTION VALUES AT DECEMBER 31, 2007
 
 Name
              Shares
      Acquired on Exercise
              Value
      Realized
              Number
      of Securities Underlying Unexercised Options Held at December 31,
      2007
              Value
      of Unexercised In The Money Options Held at December 31,
    2007Exercisable
              Unexercisable
              Exercisable
              UnexercisableJohn
      O’Keefe
              None
              -
              900,000
              -
              $
      0
              $
      0John
      MacDonald
              None
              -
              141,667
              8,333
              $
      0
              $
      0
 
 Note:
 Value of
Unexercised In-The-Money Options Held at December 31, 2007 computed based on the
difference between aggregate fair market value and aggregate exercise price. The
fair market value of our common stock on December 31, 2007 was $0.16, based on
the closing price on the OTC Bulletin Board.
 
 Employment
Agreements
 
 John
O’Keefe
 
 In
January 2004, Blast entered into an employment agreement with John O’Keefe. The
term of the agreement was for one year, and it may be renewed at the option of
both parties. Pursuant to the agreement, Mr. O’Keefe served in the position
of Executive Vice President and CFO until March 2007, when he resigned these
positions and assumed the title of CEO. Mr. O’Keefe received an annual base
salary of $175,000 for the first year of his employment, $195,000 for the second
year of employment and $215,000 for the third year of employment. This base
salary has since been amended to $200,000 per year. Mr. O’Keefe also
received an option to purchase 80,000 shares of common stock to vest quarterly
over the initial term of the employment agreement and with and exercise price of
$4.28. Mr., O’Keefe received a one time payment of $40,000 as a sign-on bonus
and is entitled to participate in our annual compensation program with a
potential bonus of up to fifty percent of his base salary. Effective March 31,
2007 Mr. O’Keefe assumed the title of CEO.
 
 John
MacDonald
 
 Effective
March 31, 2007, Mr. MacDonald assumed the title of Executive Vice President and
CFO. He also retains the title of Corporate Secretary. Also on that effective
date we entered into an employment agreement with Mr. MacDonald. The term of the
agreement is for one year, and it may be renewed at the option of both parties.
Pursuant to the agreement, Mr. MacDonald serves in the position of Executive
Vice President and CFO in exchange for a base annual salary of $150,000. He is
entitled to participate in our annual compensation program with a potential
bonus being up to fifty percent of his base salary. Mr. MacDonald has been our
Vice President of Investor Relations and Corporate Secretary since March
2004.
 
  73
  
 OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END (1)OPTION
      AWARDSName
              Number
      of Securities Underlying Unexercised Options (Exercisible)
              Number
      of Securities Underlying Unexercised Options
    (Unexercisible)
              Option
      Exercise Price ($)
              Option
      Expiration DateJohn
      O'Keefe
              80,000
              -
              $4.28
              01/21/14CEO
              420,000
              -
              $0.90
              07/29/14400,000
              -
              $0.80
              12/31/15John
      MacDonald
              100,000
              -
              $0.40
              03/14/15CFO
              41,667
              8,333
              $0.80
              12/31/15John
      R. Block
              50,000
              -
              $0.10
              04/15/13Director
              20,000
              -
              $4.28
              01/21/1412,000
              -
              $2.20
              05/27/1412,000
              -
              $0.38
              06/06/1512,000
              -
              $0.61
              05/11/16Roger
      P. (Pat) Herbert
              12,000
              -
              $0.38
              06/06/15Director
              12,000
              -
              $0.61
              05/11/16Scott
      J. Johnson
              12,000
              -
              $0.61
              08/27/08Former
      DirectorJoseph
      J. Penbera Ph.D.
              50,000
              -
              $0.10
              04/15/13Director
              20,000
              -
              $4.28
              01/21/1412,000
              -
              $2.20
              05/27/1412,000
              -
              $0.38
              06/06/1512,000
              -
              $0.61
              05/11/16Jeffrey
      R. Pendergraft
              12,000
              -
              $0.61
              05/11/16DirectorFrederick
      R. Ruiz
              50,000
              -
              $0.10
              08/27/08Former
      Director
              20,000
              -
              $4.28
              08/27/0812,000
              -
              $2.20
              08/27/0812,000
              -
              $0.38
              08/27/0812,000
              -
              $0.61
              08/27/08O.James
      Woodward, III
              50,000
              -
              $0.10
              08/27/08Former
      Director
              20,000
              -
              $4.28
              08/27/0824,000
              -
              $2.20
              08/27/0824,000
              -
              $0.38
              08/27/0824,000
              -
              $0.61
              08/27/08
 (1) There
are no options awarded that are unearned and there are no shares of stock
awarded under an equity incentive plan.  The table above does not
include the 4,000,000 warrants which the Board of Directors was given authority
to issue pursuant to the Plan, as described above, which were not outstanding as
of the end of December 31, 2007, and had not been granted as of the date of this
filing.
  74
  COMPENSATION
DISCUSSION AND ANALYSIS
 
 Director
Compensation
 
 We pay
members of our Board of Directors fees for attendance at Board and other
committee meetings in the form of cash compensation or similar remuneration, and
reimburse them for any out-of-pocket expenses incurred in connection with our
business. Currently, each independent director earns compensation of $1,000 per
month with an additional $1,000 per month for chairing a committee with the
exception of the audit committee chair who receives an additional $2,000 per
month and the Chairman of the Board who receives an additional $3,000 per month.
Meeting fees are earned at a rate of $1,000 per day for regularly scheduled
Board meetings and $500 per day for committee meetings. To date, with the
exception of the Chairman’s fees, all compensation amounts for 2006 remain
deferred and amounts prior to 2006 have been paid in common stock in lieu of
cash.  Additionally, the Chairman receives options to purchase 24,000
shares of our common stock per year and all other independent directors receive
options to purchase 12,000 shares per year.
 
 The Board
of Directors reserves the right in the future to award the members of the Board
of Directors additional cash or stock based consideration for their services to
Blast, which awards, if granted shall be in the sole determination of the Board
of Directors.
 
 Executive
Compensation Philosophy
 
 Our
Compensation Committee, consisting of Mr. Pendergraft, the chair of the
Committee, Dr. Penbera and Mr. Block, all Directors of Blast, determine the
compensation paid to our executives and Directors. Our executive compensation
program is designed to attract and retain talented executives to meet our
short-term and long-term business objectives. In doing so, we attempt to align
our executives’ interests with the interests of our shareholders by providing an
adequate compensation package to such executives. This compensation package
includes a base salary, which we believe is competitive with other companies of
our relative size. In addition we also, from time-to-time, award incentive
bonuses which are linked to our performance, as well as to the individual
executive officer’s performance. Our executive compensation packages may also
include long-term, stock based compensation to certain executives which is
intended to align the performance of our executives with our long-term business
strategies. The Compensation Committee reserves the right to grant such options
in the future, if the Committee in its sole determination believes such grants
would be in the best interests of Blast.
 
 Base
Salary
 
 The base
salary of our executive officers, are provided in their employment agreements,
in the case of Mr. O’Keefe and Mr. MacDonald in consultation with the
Compensation Committee.  The base salaries were established by
evaluating the range of responsibilities of their positions, as well as the
anticipated impact such individuals could have in meeting our strategic
objectives. Base salaries are adjusted to reflect the varying levels of position
responsibilities and individual executive performance.
 
 Incentive
Bonus
 
 The
Compensation Committee reserves the right to provide our executives incentive
bonuses, which bonuses the Committee may grant in its sole discretion, if the
Committee believes such bonuses are in Blast’s best interest, after analyzing
our current business objectives and growth, if any, and the amount of revenue we
are able to generate each month, which revenue is a direct result of the actions
and ability of those executives.
 
 Long-term,
Stock Based Compensation
 
 In order
to attract, retain and motivate executive talent necessary to support Blast’s
long-term business strategy we may award certain executives with long-term,
stock based compensation in the future, in the sole discretion of our Board of
Directors, which we do not currently have any immediate plans to
award.
 
 Criteria
for Compensation Levels
 
 Blast has
always sought to attract and retain qualified executives and employees able to
positively contribute to the success of Blast for the benefit of its various
stakeholders, the most important of which is its shareholders, but also
including its customers, its employees, and the communities in which Blast
operates.
  75
  
 The
Compensation Committee (in establishing compensation levels for the Chief
Executive Officer, President and Chief Financial Officer) may consider many
factors, including, but not limited to, the individual’s abilities and executed
performance that results in: the advancement of corporate goals of Blast,
execution of Blast’s business strategies, contributions to positive financial
results, and contributions to the development of the management team and other
employees. An officer must demonstrate his or her ability to deliver results in
his or her areas of responsibility, which can include, among other things:
business development with new and existing customers, development of new
products, efficient management of operations and systems, implementation of
appropriate changes and improvements to operations and systems, personnel
management, financial management, and strategic decision making. In determining
compensation levels, the Compensation Committee also considers: competitiveness
of compensation packages relative to other comparable companies, and the
experience level of each particular individual.
 
 Compensation
levels for executive officers are generally reviewed upon the expiration of such
executive’s employment agreement (if any), or annually, but may be reviewed more
often as deemed appropriate.
  Compensation
Philosophy and Strategy
 
 In
addition to the “Criteria for Compensation Levels” set forth above, Blast has a
“Compensation Philosophy” for all employees of Blast (set forth below), and a
“Compensation Strategy for Key Management Personnel” (set forth below), a
substantial portion of which also applies to all employees of
Blast.
 
 Compensation
Philosophy
 
 Blast’s
compensation philosophy is as follows:
 
 ·
              Blast
      believes that compensation is an integral component of its overall
      business and human resource strategies. Blast’s compensation plans will
      strive to promote the hiring and retention of personnel necessary to
      execute Blast’s business strategies and achieve its business objectives
      subject to its financial ability.
 
 ·
              Blast’s
      compensation plans will be strategy-focused, competitive, and recognize
      and reward individual and group contributions and results. Blast’s
      compensation plans will strive to promote an alignment of the interests of
      employees with the interests of the shareholders by having a portion of
      compensation based on financial results and actions that will generate
      future shareholder value.
 
 ·
              In
      order to reward financial performance over time, Blast’s compensation
      programs generally will consist of: base compensation, and may also
      consist of short-term variable incentives and long-term variable
      incentives, as appropriate.
 
 ·
              Blast’s
      compensation plans will be administered consistently and fairly to promote
      equal opportunities for Blast’s
employees.
  Compensation Strategy for
Key Management Personnel
  Blast’s
compensation strategy for its key management personnel is as
follows:
 
 ·
              Total
      compensation will include base salary and short-term and long-term
      variable incentives based on annual performance, and long-term variable
      incentives, in each case, where
appropriate.
 
 ·
              Compensation
      will be comparable to general and industry-specific compensation
      practices.
 
 ·
              Generally,
      base compensation, and targeted short and long-term variable compensation,
      if any, will be established within the range of compensation of similarly
      situated companies. Blast’s organization size and complexity will be taken
      into account, and therefore similarly situated companies includes
      companies of similar size and complexity whether or not such companies are
      in Blast’s industry or not.
  76
  ·           When
determining compensation for officers and managers, Blast takes into account the
employee’s knowledge and experience, including industry specific knowledge and
experience, to the extent such knowledge and experience contributes to Blast’s
ability to achieve its business objectives.
 
 ·
              Blast
      reserves the right to adjust annual base salaries of employees if
      individual performance is at or above pre-established performance
      expectations.
  
 Item
11. Security Ownership of Certain Beneficial Owners and Management
 
 The
following table presents certain information regarding the beneficial ownership
of our common stock as of March 31, 2008, by (i) each person who is known
by us to own beneficially more than 5% of the outstanding shares of our common
stock, (ii) each of our directors, (iii) our Named Executive Officers,
and (iv) all directors and executive officers as a group. Each of the
persons listed in the table has sole voting and investment power with respect to
the shares listed.
 
 Common
Stock
 
 Name
      and Address of Beneficial Owner
              Amount
      and Nature of Beneficial Owner
              Percentage
      of Class (1)Laurus
      Master Fund Ltd.
                335 Madison Ave.
                New York, New
      York  10017
              12,180,000(3)
              19.2%Berg
      McAfee Companies LLC (2)
                10600 N. De Anza Blvd.,
      #250
                Cupertino,
      California  95014
              9,035,745
              17.7%Eric
      A. McAfee
                10600 N. De Anza Blvd.,
      #250
                Cupertino,
      California  95014
              17,248,844(4)
              29.7%Clyde
      Berg
                10600 N. De Anza Blvd.,
      #250
                Cupertino,
      California  95014
              16,410,745(5)
              28.2%John
      O’Keefe (16)
                CEO
              1,343,334(6)
              2.6%John
      A. MacDonald (16)
                CFO
              213,117(7)
              *John
      R. Block (16)
                Director
              366,750(8)
              *Roger
      P. (Pat) Herbert (16)
                Chairman
              156,500(9)
              *Scott
      W. Johnson
                Former Director
                1301 McKinney, Suite
      2810
                Houston, Texas
      77010
              234,500(10)
              *Joseph
      J. Penbera (16)
                Director
              1,359,952(11)
              2.6%
  77
  
 Frederick
      R. Ruiz
                Former Director
                P.O. Box 37
                Dinuba, California
      93618
              646,132(12)
              1.3%Jeffrey
      R. Pendergraft (16)
                Director
              72,000(13)
              *O.
      James Woodward III
                Former Chairman
                5260 N. Palm Ave., Suite
      421
                Fresno, California
      93704
              466,375(14)
              *Total
      Shares of 5% or more Beneficial Ownership
              36,803,844(15)
              47.6%Total
      Shares of Officers and Directors as a group (6 persons)
              4,858,660
              6.6%
 
 * Less
than 1%
 
 Notes:
 
 (1)
              Each beneficial owner’s
      percentage ownership is based upon 51,162,404 shares of common stock
      outstanding as of March 31, 2008, including 1,150,000 approved shares
      arising from the class action settlement,900,000 shares,
      that  are still outstanding as of the filing of this report, but
      which shares Blast plans to cancel in the second quarter 2008, and assumes
      the exercise or conversion ofalloptions, warrants and other
      convertible securities held by such person and that are exercisable or
      convertible within 60 days after March 31,
  2008.
 
 (2)
              Berg
      McAfee Companies is controlled by Clyde Berg and Eric McAfee.
      Eric McAfee is our former
Vice-Chairman.
 
 (3)
              Shares
      issuable upon exercise of Warrants held by Laurus, of which 6,090,000
      Warrants are exercisable at an exercise price of $1.44 per share and
      6,090,000 Warrants are exercisable at an exercise price of $0.001 per
      share..Under the terms of the Warrants, Laurus is prohibited from
      exercising the Warrants in an amount which would cause it and its
      affiliates to beneficially own more than 4.99% of the common stock of
      Blast.  This provision may be waived by Laurus with 61 days
      prior written notice to Blast and becomes null and void following notice
      of an Event of Default under the Note issued to Laurus, which Event of
      Default has previously occurred to date, and as such, the ownership
      limitation no longer applied to
Laurus.
 
 (4)
              Includes
      90,000 shares held by members of Mr. McAfee’s household, which Mr. McAfee
      is deemed to beneficially own,  the 9,035,745 shares of common
      stock which are held by Berg McAfee Companies LLC, which Mr. McAfee is
      deemed to beneficially own, 2,000,000 shares to be issued upon the
      conversion of the DIP financing under the terms of the confirmed Plan of
      Reorganization and 4,000,000 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 (as
      described herein).
 
 (5)
              Includes
      the 9,035,745 shares of common stock which are held by Berg McAfee
      Companies LLC, which Mr. Berg is deemed to beneficially own, 2,000,000
      shares to be issued upon the conversion of the DIP financing under the
      terms of the confirmed Plan of Reorganization and 4,000,000 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 (as described
herein).
 
 (6)
              Includes
      900,000 shares issuable upon exercise of options held by Mr.
      O’Keefe.  Also includes 105,000 shares of common stock held by
      O’Keefe Capital Partners, LP, which is controlled by Mr. O’Keefe, and
      338,334 shares of common stock held by O’Keefe Management LLC, which is
      controlled by Mr. O’Keefe, which shares Mr. O’Keefe is deemed to
      beneficially own.
 
 (7)
              Includes
      141,667 shares issuable upon exercise of options held by Mr.
      MacDonald.
  78
  
 (8)
              Includes
      106,000 shares issuable upon exercise of options held by Mr. Block and
      92,500 shares issuable to Mr. Block in consideration for services to the
      Company during the year ended December 31, 2006, which shares were
      approved by the Plan, but have not been officially issued to
      date.
 
 (9)
              Includes
      24,000 shares issuable upon exercise of options held by Mr. Herbert and
      120,000 shares issuable to Mr. Herbert in consideration for services to
      the Company during the year ended December 31, 2006, which shares were
      approved by the Plan, but have not been officially issued to
      date
 
 (10)
              Includes
      12,000 shares issuable upon exercise of options held by Mr. Johnson and
      72,500 shares issuable to Mr. Johnson in consideration for services to the
      Company during the year ended December 31, 2006, which shares were
      approved by the Plan, but have not been officially issued to
      date.
 
 (11)
              Includes
      106,000 shares issuable upon exercise of option held by Mr.
      Penbera.  Also includes 20,000 shares of common stock held by
      members of Mr. Penbera’s household, which shares Mr. Penbera is deemed to
      beneficially own. Also includes 202,500 shares issuable to Mr. Penbera in
      consideration for services to the Company during the year ended December
      31, 2006, which shares were approved by the Plan, but have not been
      officially issued to date.
 
 (12)
              Includes
      106,000 shares issuable upon exercise of options held by Mr.
      Ruiz.  Also includes 21,048 shares of common stock held by
      members of Mr. Ruiz’s household, which shares Mr. Ruiz is deemed to
      beneficially own. Also includes 100,000 shares issuable to Mr. Ruiz in
      consideration for services to the Company during the year ended December
      31, 2006, which shares were approved by the Plan, but have not been
      officially issued to date.
 
 (13)
              Includes
      12,000 shares issuable upon exercise of options held by Mr. Pendergraft
      and 50,000 shares issuable to Mr. Penderfraft in consideration for
      services to the Company during the year ended December 31, 2006, which
      shares were approved by the Plan, but have not been officially issued to
      date
 
 (14)
              Includes
      142,000 shares issuable upon exercise of options held by Mr. Woodward and
      177,500 shares issuable to Mr. Woodward in consideration for services to
      the Company during the year ended December 31, 2006, which shares were
      approved by the Plan, but have not been officially issued to
      date.
 
 (15)
              Includes
      shares beneficially owned by Laurus Master Fund, Ltd., Berg McAfee
      Companies LLC, Eric McAfee and Clyde Berg (except those shares which are
      owned by Berg McAfee Companies LLC, which are already included in the
      shares beneficially owned by Mr. McAfee and Mr.
  Berg).
 
 (16)
              Blast
      offices are located at 14550 Torrey Chase Blvd., Suite 330, Houston, Texas
      77014.
 
 Holders
 
 As of
March 30, 2008, we had 51,162,404shares of common stock
issued and outstanding held by approximately 370 shareholders of record,
including 1,150,000 approved shares arising from the class action settlement .It
also includes 900,000 shares, that are still outstanding as of the filing of
this report, but which shares Blast plans to cancel in the second quarter
2008.
 
 
 Item
12. Certain Relationships and Related Transactions
 
 Berg McAfee
Companies
 
 In
January of 2008, as part of the bankruptcy emergence, Clyde Berg and McAfee
Capital invested $2 million to purchase Blast Series A Convertible Preferred
Stock. This transaction with McAfee Capital is described in greater detail under
“Recent Sales of Unregistered Securities” in Item 5 of this annual
report.  Also Berg McAfee Companies, LLC (“BMC”) extended the term for
the $1 million Note secured on the Abrasive Jetting rig 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.
 
  79
  The
Bankruptcy court approved Blast’s ability to draw $800,000 from Berg McAfee and
related entities to finance Blast on a temporary basis.  The Plan
allows Berg McAfee to convert the outstanding balance of the DIP loan into
Company’s common stock on the effective date of the Plan at the rate of one
share of common stock for each $0.20 of the DIP loan outstanding.  No
amount of this loan has been converted into stock to date.
 
 On
July 15, 2005, Blast entered into an agreement to develop its initial
abrasive jetting rig with Berg McAfee Companies, LLC (“BMC”), a major
shareholder. The arrangement involves two loans for a total of $1 million to
fund the completion of the initial rig and sharing in the expected rig revenues
for a ten-year period.  Under the terms of the loan agreement with
BMC, cash revenues will be shared on the basis of allocating 90 percent to Blast
and 10 percent to BMC for a ten-year period following repayment. After ten
years, Blast will receive all of the revenue from the rig. The loan, secured by
the rig, has a senior and subordinated structure, carries an average interest
rate of 7.4 %, and is due June 30, 2006. BMC also has the option to fund an
additional three rigs under these commercial terms.  In February 2006,
BMC mutually agreed to extend the Maturity Date of the AFJ Rig Loans from
September 2006 to March 31, 2007.  No additional consideration was
paid by Blast to BMC for the extension.  BMC will be entitled to
receive the additional interest which accrues during the extended loan
period.
 
 Clyde
Berg
 
 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 sale of the Units was conditioned on approval of the
Plan and as such, the Units will be issued after the Merger is effected, Blast
is re-domiciled and the Preferred Stock is 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 registration
rights in connection with the sale of the Units. Mr. Berg holds more than 5% of
the outstanding shares of common stock of Blast.
 
 Eric
McAfee
 
 In
January 2008, Blast sold the rights to an aggregate of 1,000,000 Units, for an
aggregate of $2,000,000 or $2.00 per Unit, to McAfee Capital, LLC, a limited
liability company.  The sale of the Units was conditioned on approval
of the Plan and as such, the Units will be issued after the Merger is effected,
Blast is re-domiciled  and the Preferred Stock is
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 registration rights in connection with the sale of
the Units. Mr. McAfee holds more than 5% of the outstanding shares of common
stock of Blast.
 
 Directors and
Officers
 
 In May
2006, we granted options to purchase 12,000 shares of our common stock to each
of the following directors: John A. Block, Scott W. Johnson, Robert P. Herbert,
Joseph J. Penbera, Jeffery Pendergraft and Frederick R. Ruiz. We also granted
options to purchase 24,000 shares of our common stock to O. James Woodward III,
Chairman of the Board. The options have a ten-year term and are exercisable at
$0.61 per share, the market price at the date of grant. The options vest
quarterly over 12 months.
 
 Effective
February 27, 2008, as part of the bankruptcy emergence, we entered into new
Employment Agreements with Mr. O’Keefe and MacDonald. These agreements included
base salaries of $200,000 for Mr. O’Keefe and $150,000 for Mr. MacDonald. Four
million Management Warrants were created in the Plan of Reorganization to
incentivize management but none have been awarded at March 31, 2008. Such
warrants have a term of five years commencing February 27, 2008 and an exercise
price of $0.20 per share.
 
 
  80
  Item
13. Exhibits and Reports on Form 10-KSB
 
 (a)
Exhibits
 Index of
Exhibits
 
 Blast
Energy, Inc. includes by reference, unless otherwise indicated, the following
exhibits:
 
 Number
              
              Description2.1
              
              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-K*2.2
              
              Articles
      of Merger (California and Texas)
                Filed
      Herewith3.1
              
              Restated
      Articles of Incorporation dated July 15, 2003
                Filed
      June 29, 2004 with the SEC, Form SB-23.2
              
              Bylaws,
      as amended September 25, 2003
                Filed
      June 29, 2004 with the SEC, Form SB-23.3
              
              Certificate
      of Formation Texas
                Filed
      March 6, 2008 with the SEC, Form 8-K3.4
              
              Certificate
      of Designation of Series A Preferred Stock
                Filed
      March 6, 2008 with the SEC, Form 8-K3.5
              
              Bylaws
      of Blast Energy Services, Inc., Texas
                Filed
      March 6, 2008 with the SEC, Form 8-K4.1
              
              Form
      of Subscription Agreement
                Filed
      August 11, 2004 with the SEC, Form 10-QSB4.2
              
              Form
      of Warrant Agreement
                Filed
      August 11, 2004 with the SEC, Form 10-QSB4.3
              
              Form
      of Promissory Note
                Filed
      August 11, 2004 with the SEC, Form 10-QSB4.4
              
              Form
      of Convertible Promissory Note
                Filed
      August 11, 2004 with the SEC, Form 10-QSB4.5
              
              Form
      of Registration Rights Agreement
                Filed
      August 11, 2004 with the SEC, Form 10-QSB4.6
              
              $800,000
      Secured Promissory Note dated July 15, 2005 by and among Blast Energy
      Services, Inc. and Berg McAfee Companies, LLC
                Filed
      July 26, 2005 with the SEC, Form 8-K4.7
              
              $200,000
      Secured Subordinated Promissory Note dated July 15, 2005 by and among
      Blast Energy Services, Inc. and Berg McAfee Companies, LLC
                Filed
      July 26, 2005 with the SEC, Form 8-K10.1
              
              Employment
      Agreement – John O’Keefe, dated January 6, 2004
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.2
              
              Employment
      Agreement – David Adams, dated December 31, 2003
                Filed
      April 15, 2004 with the SEC, Form 10-KSB
  81
  
 10.3
              
              Advisor
      Agreement – Dr. Ron Robinson, amended December 11, 2003
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.4
              
              Employment
      Agreement – Andrew Wilson, dated June 2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.5
              
              Amendment
      to License Agreement – Carl W. Landers, dated September 4,
      2003;
                Filed
      October 6, 2003 with the SEC, Report on Form 8-K10.6
              
              Second
      Amendment to License Agreement – Carl W. Landers, dated February 28,
      2004;
                Filed
      February 28, 2004 with the SEC, Report on Form 8-K10.7
              
              Technology
      Report, “Landers Technology”, dated October 13, 2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.8
              
              Subscription
      Agreement, Gryphon Master Fund, L.P., dated October 23, 2003 and
      Registration Rights Agreement dated October 24, 2003
                Filed
      October 27, 2003 with the SEC, Report on Form 8-K10.9
              
              Form
      of Registration Rights Agreement, re: Private Placement Offering
      July/August 2003
                Filed
      December 3, 2003 with the SEC, Form 10-QSB, as amended10.10
              
              Alternative
      Form of Registration Rights Agreement, re: Offering July/August
      2003
                Filed
      December 3, 2003 with the SEC, Form 10-QSB, as amended10.11
              
              Placement
      Agency Agreement, Stonegate Securities, Inc., dated August 26,
      2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.12
              
              Independent
      Contractor Agreement, Terronne Petroleum Corporation, dated August 1,
      2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.13
              
              Master
      Services Contract, Esperada Energy Partners, L.L.C., dated March
      2004
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.14
              
              Services
      Contract, Maxim Energy, Inc., dated March 2004
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.15
              
              Services
      Contract, Natural Gas Systems, dated January 2004
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.16
              
              Contract
      – Natural Gas Systems, “Delhi Field”, dated September 22,
      2003;
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.17
              
              Services
      Contract, Amvest Osage, Inc.; dated January 2004
                Filed
      April 15, 2004 with the SEC, Form 10-KSB10.18
              
              Acknowledge
      of amounts owed at September 30, 2003
                re.
      Edge Capital Group contract dated June 16, 2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.19
              
              Contract
      – Edge Capital Group, “Franklin Field”, dated September 27,
      2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.20
              
              Contract
      – Edge Capital Group, “Monroe Field”, dated June 16, 2003
                Filed
      August 20, 2003 with the SEC, Form 10-QSB, as amended10.21
              
              Addendum
      to Contract, Edge Capital Group, “Monroe Field”, dated November 19,
      2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as
  amended
  82
  
 10.22
              
              Contract
      – Noble Energy, re: Satellite Services, dated September 17,
      2003
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.23
              
              Contract
      – Apache Corp., re: Satellite Services, dated September 11,
      2002
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.24
              
              Contract
      – Energy 2000 NGC, “Monroe Field”, dated April 30, 2000
                Filed
      August 20, 2003 with the SEC, Form 10-QSB, as amended10.25
              
              Blast
      Energy, Inc. 2003 Stock Option Plan;
                Filed
      November 20, 2003 with the SEC, Form 10-QSB, as amended10.26
              
              Master
      Service Contract – BlueRidge Gas Partners, LLC – June 23,
2004
                Filed
      August 11, 2004 with the SEC, Form 10-QSB10.27
              
              Master
      Service Contract – VJI Natural Resources, LLC – July 20, 2004
                Filed
      August 11, 2004 with the SEC, Form 10-QSB10.28
              
              Contract/Order
      – US Department of Energy dated June 4, 2004 and Letter of Intent, Radial
      Drilling Optimization Services dated April 14, 2004
                Filed
      August 11, 2004 with the SEC, Form 10-QSB10.29
              
              License
      Agreement – Carl W. Landers, dated April 24, 2003;
                Filed
      October 6, 2003 with the SEC, Report on Form 8-K10.30
              
              License
      Agreement between Alberta Energy Holdings, Inc. and Verdisys, Inc. for
      Abrasive Fluid Jet Technology, dated October 27, 2004
                Filed
      November 15, 2004 with the SEC, Form 10-QSB10.31
              
              Agreement
      between Verdisys, Berg McAfee Companies, Energy 2000 NGC, and Eric
      McAfee
                Filed
      November 15, 2004 with the SEC, Form 10-QSB10.32
              
              Settlement
      Agreement and Mutual Release dated January 19, 2005 by and among Verdisys,
      Inc., Eric McAfee, Edge Capital Group, Inc. and certain entities
      affiliated with Robert Frazier, Sr.
                Filed
      February 4, 2005 with the SEC, Form 8-K10.33
              
              Assignment
      of License Agreement dated March 8, 2005 by and among Verdisys, Inc. and
      Maxim TEP, Inc.
                Filed
      March 14, 2005 with the SEC, Form 8-K10.34
              
              License
      Agreement dated March 15, 2005, by and among Edge Capital Group, Inc. or
      its assignee and Verdisys, Inc.
                Filed
      May 5, 2005 with the SEC, Form 10-QSB10.35
              
              Abrasive
      Fluid Jet Rig Construction Agreement dated March 17, 2005, by and among
      Verdisys, Inc. and Alberta Energy Holding, Inc.
                Filed
      May 5, 2005 with the SEC, Form 10-QSB10.36
              
              Drilling
      Rig Development and Management Agreement dated April 12, 2005, by and
      between Verdisys, Inc. and Advanced Drilling Services, LLC
                Filed
      May 5, 2005 with the SEC, Form 10-QSB10.37
              
              Service
      Proposal Apache Corporation and Verdisys, Inc. dated May 16,
      2005
                Filed
      August 11, 2005 with the SEC, Form 10-QSB
  83
  
 10.38
              
              First
      Amendment to the Assignment of License Agreement dated July 18, 2005 by
      and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      July 26, 2005 with the SEC, Form 8-K10.39
              
              Second
      Amendment to the Assignment of License Agreement dated July 21, 2005 by
      and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      July 26, 2005 with the SEC, Form 8-K10.40
              
              Third
      Amendment to the Assignment of License Agreement dated July 25, 2005 by
      and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      July 26, 2005 with the SEC, Form 8-K10.41
              
              Fourth
      Amendment to the Assignment of License Agreement dated July 29, 2005 by
      and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      August 12, 2005 with the SEC, Form 10--QSB10.42
              
              Fifth
      Amendment to the Assignment of License Agreement dated August 5, 2005 by
      and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      August 12, 2005 with the SEC, Form 10-QSB10.43
              
              Letter
      of Intent dated August 5, 2005 by and between Blast Energy Services, Inc.
      and RadTech North America10.44
              
              Abrasive
      Fluid Jet Technology Purchase Agreement among Blast Energy Services, Inc.
      and Alberta Energy Holding, Inc.
                Filed
      August 31, 2005 with the SEC, Form 8-K10.45
              
              Amendment
      #1 to the Construction Agreement among Blast Energy Services, Inc. and
      Alberta Energy Holding, Inc.
                Filed
      August 31, 2005 with the SEC, Form 8-K10.46
              
              Amendments
      Six through Ten to the Assignment of License Agreement dated August and
      September 205 by and among Blast Energy Services, Inc. and Maxim TEP,
      Inc.
                Filed
      September 29. 2005 with the SEC, Registration Statement on Form
      SB-2.10.47
              
              Amendment
      eleven to the Assignment of License Agreement dated September 28, 2005 and
      Demand letters dated October 13th
      and 18th
      by and among Blast Energy Services, Inc. and Maxim TEP, Inc.
                Filed
      November 14, 2005 with the SEC, Form 10-QSB10.48
              
              Amended
      Technology Purchase Agreement with Alberta Energy Partners dated August
      31, 2005. Filed March 27, 2006 with the SEC, Form 8K10.49
              
              Second
      Amended Plan of Reorganization
                Filed
      March 6, 2008 with the SEC, Form 8-K10.50
              
              First
      Amended Plan of Reorganization
                Filed
      March 6, 2008 with the SEC, Form 8-K10.51
              
              Subscription
      Agreement and Related Exhibits with Clyde Berg
                Filed
      March 6, 2008 with the SEC, Form 8-K10.52
              
              Subscription
      Agreement and Related Exhibits with McAfee Capital, LLC
                Filed
      March 6, 2008 with the SEC, Form 8-K10.53
              
              Laurus
      Master Fund, Ltd. $2.1 million Security Agreement
                Filed
      March 6, 2008 with the SEC, Form 8-K
  84
  
 10.54
              
              Berg
      McAfee Companies $1.12 million Note
                Filed
      March 6, 2008 with the SEC, Form 8-K10.55
              
              Settlement
      Agreement
                Filed
      on May 14, 2007 with the SEC, Form 8-K*10.56
              
              Eagle
      Domestic Drilling Operations LLC and Hallwood Energy, LP and Hallwood
      Petroleum LLC  Settlement Agreement
                Filed
      Herewith16.1
              
              Letter
      from Malone & Bailey, PC
                Filed
      on March 5, 2008 with the SEC, Form 8-K*31.1
              
              Certification
      of Principal Executive Officer pursuant to Section 302*31.2
              
              Certification
      of Principal Accounting Officer pursuant to Section 302*32.1
              
              Certification
      of Principal Executive Officer pursuant to Section 1350*32.2
              
              Certification
      of Principal Accounting Officer pursuant to Section
  1350
 
 *Filed
herewith
 
 
 (b) Reports on Form
8-K
  During
the quarter ended December 31, 2007, we filed the following report on Form
8-K:
 
 December
      3, 2007
              To
      report a continuance of the confirmation hearing for the approval of our
      First Amended Joint Plan of
Bankruptcy.
 
  Subsequent
to the quarter ended December 31, 2007, we filed the following reports on Form
8-K:
  
 March
      5, 2008
              To
      report our change in auditors from Malone & Bailey, PC, to GBH CPAs,
      PC.March
      6, 2008
              To
      report the approval of our bankruptcy plan, the sale of shares of our
      Series A Convertible Preferred Stock, and information on our then planned
      Merger into our yet to be formed Texas
  subsidiary.
  
 85
   Item
14. Principal Accountants Fees and Services
  Audit
Fees
 
 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, 2007 and 2006 and Malone & Bailey, PC for the audit of
our annual financial statements for the year ended December 31, 2006 and
quarterly reviews for the years ended December 31, 2007 and 2006 and fees billed
for other services rendered by it during those periods.
 
 2007
                
                2006GBH
      CPAs, PCAudit
      fees
                $  24,000
                
                $
      -Other
      non-audit fees
                -
                
                -Tax
      related fees
                -
                
                -Malone
      & Bailey, PCAudit
      fees
                42,046
                
                65,630Other
      non-audit fees
                10,368
                
                14,610Tax
      related fees
                -
                
                3,400Total
                $  76,414
                
                $  83,640
  86
  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 Fees
consists of fees billed for professional services for tax compliance, tax advice
and tax planning. The services include assistance regarding federal and state
tax compliance, tax audit defense, customs and duties, and mergers and
acquisitions.
 
 Other
Fees
 
 All Other
Fees consist of fees billed for products and services provided by the principal
accountants, other than those services described above.
 
 Our Audit
Committee Charter requires the prior approval of all audit and non−audit
services provided by our independent auditors, subject to certain de 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.
  87
  Signatures
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Blast
      Energy Services, Inc.(Registrant)By:
              /s/
      John O’KeefeJohn
      O’Keefe
                Chief
      Executive Officer
                Principal
      Executive OfficerBy:
              /s/
      John MacDonaldJohn
      MacDonald
                Chief
      Financial Officer, Principal
                Accounting
      Officer and SecretaryDate:
              April
      7, 2008
 
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 
 By:
              /s/
      John O’Keefe
              
              By:
              /s/
      John A. MacDonaldJohn
      O’Keefe
                Chief
      Executive Officer
                Principal
      Executive Officer
              
              
              John
      A. MacDonald
                Chief
      Financial Officer
                Principal
      Accounting Officer, and
                SecretaryDate:
              April
      7, 2008
              
              Date:
              April
      7, 2008By:
              /s/
      John R. Block
              
              By:
              /s/
      Joseph J. Penbera, Ph.D.John
      R. Block
                Director
              
              
              Joseph
      J. Penbera, Ph.D.
                DirectorDate:
              April
      7, 2008
              
              Date:
              April
      7, 2008By:
              /s/
      Roger P. Herbert
              
              By:
              /s/
      Jeffrey R. PendergraftRoger
      P. Herbert
                Chairman
              
              
              Jeffrey
      R. Pendergraft
                DirectorDate:
              April 7,
      2008
              
              Date:
              April
      7, 2008