UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




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




For
the quarterly period ended September 30, 2008




 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For
the transition period from 
to




333-64122


(Commission
file number)









Blast
Energy Services, Inc.


(Exact
name of registrant as specified in its charter)









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




14550
Torrey Chase Blvd, Suite 330


Houston,
Texas 77014


(Address
of principal executive offices)




(281)
453-2888


(Issuer’s
telephone number)







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x    No   ̈




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


Large accelerated
filer   ̈                                                                                           Accelerated
filer    ̈


Non-accelerated filer   ̈                                                                                           Smaller
reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.


Yes    ̈No   x




APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:


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


Yes   x No    ̈





The
number of shares outstanding of each of the issuer’s classes of equity as of
November 13, 2008 is 60,354,904 including 1,150,000 approved but unissued shares
arising from the class action settlement from 2005.








Blast
Energy Services, Inc.





For
the Quarter Ended September 30, 2008





INDEX










PART
      I – FINANCIAL INFORMATION
            PageItem
      1.
            Financial
      StatementsUnaudited
      Consolidated Balance Sheets as of September 30, 2008 and December 31,
      2007
            2Unaudited
      Consolidated Statements of Operations
              For
      the Three and Nine Months Ended September 30, 2008 and
2007
            3Unaudited
      Consolidated Statements of Cash Flows
              For
      the Nine Months Ended September 30, 2008 and 2007
            4Notes
      to Unaudited Consolidated Financial Statements
            5Item
      2.
            Management’s
      Discussion and Analysis of Condition and Results of
    Operations
            13Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            19Item
      4.
            Controls
      and Procedures
            19PART
      II – OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            19Item
      1A.
            Risk
      Factors
            21Item
    2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      6.
            Exhibits
            25Signatures
            
            26


1





PART
I – FINANCIAL INFORMATION





Item 1.
Financial Statements





BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)








September
      30,
              2008
            
            
            December
      31,
              2007AssetsCurrent
      Assets:Cash
            
            $
            312,397
            
            
            $
            48,833Accounts
      receivable, net
            
            
            76,795
            
            
            
            46,292Other
      assets
            
            
            124,347
            
            
            
            57,409Total
      Current Assets
            
            
            513,539
            
            
            
            152,534Equipment,
      net of accumulated depreciation of $36,856 and $35,488
            
            
            1,221,376
            
            
            
            1,083,645Total
      Assets
            
            $
            1,734,915
            
            
            $
            1,236,179Liabilities
      and Stockholders’ DeficitCurrent
      Liabilities:Accounts
      payable
            
            $
            203,645
            
            
            $
            1,384,929Accrued
      expenses
            
            
            440,947
            
            
            
            612,476Deferred
      revenue
            
            
            10,341
            
            
            
            10,517Advances
      - related parties
            
            
            -
            
            
            
            1,700,000Notes
      payable – other
            
            
            36,384
            
            
            
            542,500Liabilities
      of discontinued operations
            
            
            125,000
            
            
            
            2,112,413Short
      term portion of senior debt
            
            
            2,100,000
            
            
            
            -Total
      Current Liabilities
            
            
            2,916,317
            
            
            
            6,362,835Long
      Term Liabilities:Senior
      debt
            
            
            -
            
            
            
            2,100,000Notes
      payable – related party
            
            
            1,120,000
            
            
            
            -Liabilities
      of discontinued operations
            
            
            -
            
            
            
            125,000Total
      Liabilities
            
            
            4,036,317
            
            
            
            8,587,835Stockholders’
      Deficit:Preferred
      stock, $.001 par value, 20,000,000 shares authorized; 8,000,000 and –0–
      shares issued and outstanding
            
            
            8,000
            
            
            
            -Common
      stock, $.001 par value, 180,000,000 shares authorized; 59,364,904 and
      52,027,404 shares issued and outstanding
            
            
            59,365
            
            
            
            52,027Additional
      paid-in capital
            
            
            75,879,794
            
            
            
            70,471,873Accumulated
      deficit
            
            
            (78,248,561
            )
            
            
            (77,875,556
            )Total
      Stockholders’ Deficit
            
            
            (2,301,402
            )
            
            
            (7,351,656
            )Total
      Liabilities and Stockholders’ Deficit
            
            $
            1,734,915
            
            
            $
            1,236,179











See
accompanying notes to unaudited consolidated financial statements




2




BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            135,925
            
            
            $
            80,151
            
            
            $
            287,550
            
            
            $
            353,759Operating
      Expenses:Cost
      of sales
            
            
            128,772
            
            
            
            103,267
            
            
            
            446,440
            
            
            
            331,990Selling,
      general and administrative
            
            
            364,909
            
            
            
            602,839
            
            
            
            1,827,265
            
            
            
            3,482,606Depreciation
      and amortization
            
            
            2,416
            
            
            
            22,995
            
            
            
            7,033
            
            
            
            70,322Total
      Operating Expenses
            
            
            496,097
            
            
            
            729,101
            
            
            
            2,280,738
            
            
            
            3,884,918Operating
      Loss
            
            
            (360,172
            )
            
            
            (648,950
            )
            
            
            (1,993,188
            )
            
            
            (3,531,159
            )Other
      Income (Expense):Other
      income
            
            
            -
            
            
            
            47,541
            
            
            
            8,158
            
            
            
            83,086Interest
      income
            
            
            614
            
            
            
            -
            
            
            
            13,742
            
            
            
            -Interest
      expense
            
            
            (23,486
            )
            
            
            (2,375
            )
            
            
            (89,464
            )
            
            
            (97,957
            )Loss
      on extinguishment of debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,970
            )Loss
      on disposal of equipment
            
            
            -
            
            
            
            -
            
            
            
            (1,270
            )
            
            
            -Total
      other income (expense)
            
            
            (22,872
            )
            
            
            45,166
            
            
            
            (68,834
            )
            
            
            (32,841
            )Loss
      from continuing operations
            
            
            (383,044
            )
            
            
            (603,784
            )
            
            
            (2,062,022
            )
            
            
            (3,564,000
            )Income
      (loss) from discontinued operations
            
            
            (325
            )
            
            
            (2,163
            )
            
            
            1,689,017
            
            
            
            (3,907,991
            )Net
      loss
            
            $
            (383,369
            )
            
            $
            (605,947
            )
            
            $
            (373,005
            )
            
            $
            (7,471,991
            )Preferred
      dividends
            
            
            80,658
            
            
            
            -
            
            
            
            189,370
            
            
            
            -Net
      loss attributable to common shareholders
            
            $
            (464,027
            )
            
            $
            (605,947
            )
            
            $
            (562,375
            )
            
            $
            (7,471,991
            )Basic
      income (loss) per common share:Continuing
      operations
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.04
            )
            
            $
            (0.05
            )Discontinued
      operations
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            0.03
            
            
            $
            (
      0.06
            )Total
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.11
            )Diluted
      net income (loss) per common share:Continuing
      operations
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.04
            )
            
            $
            (0.05
            )Discontinued
      operations
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            0.03
            
            
            $
            (0.06
            )Total
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.11
            )Weighted
      average common stock shares outstandingBasic
            
            
            59,323,002
            
            
            
            60,245,040
            
            
            
            56,863,198
            
            
            
            65,127,972Diluted
            
            
            59,323,002
            
            
            
            60,245,040
            
            
            
            56,863,198
            
            
            
            65,127,972





See
accompanying notes to unaudited consolidated financial
statements.


3


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)




For
      the Nine Months Ended
              September
      30,2008
            
            
            2007Cash
      Flows from Operating Activities:Net
      loss
            
            $
            (373,005
            )
            
            $
            (7,471,991
            )(Income)
      loss from discontinued operations
            
            
            (1,689,017
            )
            
            
            3,907,991Loss
      from continuing operations
            
            
            (2,062,022
            )
            
            
            (3,564,000
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            7,033
            
            
            
            70,322Share
      – based compensation
            
            
            421,365
            
            
            
            1,230,649Loss
      on extinguishment of debt
            
            
            -
            
            
            
            17,970Loss
      on disposition of equipment
            
            
            1,270
            
            
            
            -Change
      in:Accounts
      receivable
            
            
            (453,899
            )
            
            
            24,537Other
      current assets
            
            
            39,937
            
            
            
            83,280Accounts
      payable
            
            
            (1,181,285
            )
            
            
            575,068Deferred
      revenue
            
            
            (176
            )
            
            
            (39,850
            )Accrued
      expenses
            
            
            141,265
            
            
            
            423,321Net
      Cash Used in Operating Activities
            
            
            (3,086,512
            )
            
            
            (1,178,703
            )Cash
      Flows From Investing Activities:Proceeds
      from restricted cash
            
            
            -
            
            
            
            46,489Cash
      paid for purchase of fixed assets
            
            
            (6,528
            )
            
            
            (1,634
            )Cash
      paid for construction of equipment
            
            
            (139,505
            )
            
            
            -Net
      Cash (Used in) Provided by Investing Activities
            
            
            (146,033
            )
            
            
            44,855Cash
      Flows From Financing Activities:Borrowings
      on debtor-in-possession financing
            
            
            100,000
            
            
            
            300,000Payments
      on short term debt
            
            
            (612,991
            )
            
            
            -Principal
      payments on long term debt
            
            
            -
            
            
            
            (82,114
            )Issuance
      of convertible preferred stock
            
            
            4,000,000
            
            
            
            -Proceeds
      from exercise of options
            
            
            10,000
            
            
            
            -Common
      stock repurchased and cancelled
            
            
            (900
            )
            
            
            -Purchase
      of treasury stock
            
            
            -
            
            
            
            (16
            )Net
      Cash Provided by Financing Activities
            
            
            3,496,109
            
            
            
            217,870Discontinued
      operating activities
            
            
            -
            
            
            
            (328,104
            )Discontinued
      investing activities
            
            
            -
            
            
            
            67,500Discontinued
      financing activities
            
            
            -
            
            
            
            (285,303
            )Net
      Cash Used in Discontinued Operations
            
            
            -
            
            
            
            (545,907
            )Net
      change in cash
            
            
            263,564
            
            
            
            (1,461,885
            )Cash
      at beginning of period
            
            
            48,833
            
            
            
            1,534,603Cash
      at end of period
            
            $
            312,397
            
            
            $
            72,718Cash
      paid for:Interest
            
            $
            32,563
            
            
            $
            -Income
      taxes
            
            
            -
            
            
            
            -Non-Cash
      Transactions:Conversion
      of deferred board compensation to common stock
            
            $
            161,000
            
            
            $
            -Conversion
      of related party interest to common stock
            
            
            31,794
            
            
            
            -Conversion
      of related party advances to common shares
            
            
            800,000
            
            
            
            -Cashless
      exercise of warrants
            
            
            2,900
            
            
            
            -Issuance
      of  note payable for related party debt and accrued
      interest
            
            
            1,120,000
            
            
            
            -Exchange
      of rigs for debt
            
            
            -
            
            
            
            45,822,321Prepaid
      insurance financed with note payable
            
            
            106,875
            
            
            
            112,907Cancellation
      of insurance finance note
            
            
            -
            
            
            
            186,325





See
accompanying notes to unaudited consolidated financial
statements.


4


BLAST
ENERGY SERVICES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION





The
accompanying unaudited interim financial statements of Blast Energy Services,
Inc. (“Blast”), have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission and should be read in conjunction with the
audited financial statements and notes thereto contained in Blast’s latest
Annual Report filed with the SEC on Form 10-KSB. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of financial position and the results of operations for the
interim periods presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year.  Notes to the financial statements that would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year as reported in the Form 10-KSB, have
been omitted.





Blast’s
consolidated financial statements have been prepared on a going concern basis in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”). This contemplates the realization of assets and satisfaction
of liabilities in the ordinary course of business. Accordingly, Blast’s
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should Blast be unable to continue as a going concern.




Business


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




·
            Satellite
      Communications 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 acquisitions and new technology opportunities in the energy service
sector. In the near term, we will also seek to maximize value from the customer
litigation proceedings described below.





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





Amendments to Articles of
Incorporation


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





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.





5


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 length of time accounts receivable are past due and Blast’s
previous loss history. Blast provides reserves for accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. As of September 30, 2008, Blast
has determined that no allowance for doubtful accounts is required.





Earnings Per
Share


Basic
earnings per share equals net earnings divided by weighted average shares
outstanding during the year. Diluted earnings per share calculations include the
impact of 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 all periods in 2007 and
therefore, basic and diluted earnings per share are the same for those periods
as all potential common equivalent shares would be anti-dilutive.





Reclassifications


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





NOTE
2 – GOING CONCERN





As shown
in the accompanying financial statements, Blast incurred a loss from continuing
operations of $2,062,022 for the nine months ended September 30, 2008, has an
accumulated deficit of $78,248,561 and a working capital deficit of $2,402,778
as of September 30, 2008 and has several significant future financial
obligations.  The consolidated financial statements do not include any
adjustments that might be necessary if Blast is unable to continue as a going
concern.  These conditions create an uncertainty as to Blast’s ability
to continue as a going concern.





However,
subsequent to the end of the third quarter 2008, the settlement of customer
lawsuits has provided Blast with cash, other assets and reductions in
liabilities that dramatically improved Blast’s financial position (See Note 11 –
Subsequent Events).





NOTE
3 – EQUIPMENT





Equipment
consists of the following:





September
      30,
            
            December
      31,Description
            
            Life
            2008
            
            2007Computer
      equipment
            
            3
      years
            $        21,000
            
            $        25,788Remote
      Sensor Unit, in progress
            
            3
      years
            50,479
            
            -Automobile
            
            4
      years
            26,265
            
            21,883Service
      Trailer
            
            5
      years
            4,784
            
            4,784AFJ
      Rig, in progress
            
            12
      years
            1,155,704
            
            1,066,6781,258,232
            
            1,119,133Less:  accumulated
      depreciation
            
            
            (36,856)
            
            (35,488)$
      1,221,376
            
            $
      1,083,645





NOTE
4 – RELATED PARTY TRANSACTIONS





Convertible Preferred
Stock


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








6


Note
Extension


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





Debtor-in-Possession (“DIP”)
Loan


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





Director Fees
Conversions


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





NOTE
5 – NOTES PAYABLE





In
accordance with the terms of the Plan, Blast maintains the following three
secured obligations:





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





·
            A
      $125,000 note to McClain County, Oklahoma for property taxes, which must
      be paid from any receipts of litigation proceeds from Quicksilver, or if
      not paid, it will convert into a 6.5% 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 as
      described in Note 4 under Note
Extension.





During
September 2008, gross cash proceeds of $7.0 million were deposited into an
escrow account for the benefit of Blast under the terms of the settlement
agreements in the Hallwood Energy / Hallwood Petroleum and Quicksilver Resources
lawsuits (see Note 8). Accordingly, Blast has reclassified the $1,883,332
long-term portion of interest-free senior obligation and $125,000 note to
McClain County, Oklahoma to current liabilities at September 30, 2008 (see Note
11 - Subsequent Events).





NOTE
6 – PREFERRED STOCK





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





Series A Convertible
Preferred Stock


The
8,000,000 shares of Series A Preferred Stock (the “Preferred Stock”) accrue
dividends at the rate of 8% per annum, in arrears for each month that the
Preferred Stock is outstanding.  Blast has the right to 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 Hallwood and 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. As of September 30, 2008, the aggregate and per share arrearages were
$189,370 and $0.024, respectively.


7


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





The
Preferred Stockholder has the right to vote 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
into shares of Blast’s common stock.





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





Warrants


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





NOTE
7 – BUSINESS SEGMENTS





Blast has
two reportable segments: Satellite Communications and Down-hole Solutions. 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 three and
nine months ended September 30, 2008 and 2007:





For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesSatellite
      Communications
            
            $
            115,925
            
            
            $
            80,151
            
            
            $
            267,550
            
            
            $
            353,759Down-hole
      Solutions
            
            
            20,000
            
            
            
            -
            
            
            
            20,000
            
            
            
            -Total
      Revenue
            
            $
            135,925
            
            
            $
            80,151
            
            
            $
            287,550
            
            
            $
            353,759Operating
      profit (loss):Satellite
      Communications
            
            $
            11,559
            
            
            $
            (23,116
            )
            
            $
            (30,051
            )
            
            $
            28,562Down-hole
      Solutions
            
            
            (4,406
            )
            
            
            -
            
            
            
            (128,839
            )
            
            
            (6,793
            )Corporate
            
            
            (367,325
            )
            
            
            (625,834
            )
            
            
            (1,834,298
            )
            
            
            (3,552,928
            )Operating
      Loss
            
            $
            (360,172
            )
            
            $
            (648,950
            )
            
            $
            (1,993,188
            )
            
            $
            (3,531,159
            )





8


NOTE
8 - LITIGATION





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 (“EDDO”), a wholly owned subsidiary of Blast,
and a separate company, Eagle Drilling, LLC. The lawsuit sought to rescind two
IADC two-year term day rate drilling contracts between Eagle Drilling and
Hallwood, which had been assigned to EDDO by Eagle Drilling prior to Blast’s
acquisition of the membership interests of EDDO.  Hallwood alleged Eagle
Drilling and EDDO were in breach of the IADC contracts.  Hallwood
purported to terminate the two IADC day rate drilling contracts on September 6,
2006.  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 demanded that the remaining balance of funds advanced under the
contracts, in the amount of approximately $1.65 million, be returned. EDDO
vigorously contested the claims by Hallwood and instituted a proceeding (“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.





On April
3, 2008, EDDO and Hallwood signed an agreement to settle the litigation between
them for a total amount of approximately $6.5 million. Under the terms, Hallwood
agreed to pay $2.0 million in cash, of which $500,000 was paid
in  July 2008, issue $2.75 million in equity and has irrevocably
forgiven $1.65 million in deposits paid to Eagle.  In return, EDDO
agreed to suspend its legal actions against Hallwood for approximately six
months. Upon receipt of the entire settlement amount, the parties and their
affiliates will be fully and mutually released from any and all claims between
them. This settlement agreement was approved by both companies’ boards but is
subject to certain conditions set forth in the Blast Plan of Reorganization, as
amended and confirmed by the Bankruptcy Court.





On July
7, 2008, Hallwood paid $500,000 as an advance on its $2.0 million cash
obligation under the terms of the settlement agreement. On September 30, 2008,
Hallwood paid the remaining cash balance owed of $1.5 million under the terms of
the settlement agreement.  However, the determination of the Hallwood
equity value needed to satisfy the $2,750,000 equity component of the settlement
agreement are in dispute.  Therefore, the parties have not been fully
or mutually released from any and all claims between them. Payments received
from Hallwood were funded into an escrow account for the benefit of EDDO. The
escrow account was distributed to EDDO during October 2008.





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, seeking 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 Eagle. 
The lawsuit included further allegations of other material breaches of the
contracts and negligent operation by Eagle and Eagle Drilling under the
contracts. Quicksilver asserted 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.





On
September 17, 2008, Blast and EDDO entered into a Compromise Settlement and
Release Agreement  with Quicksilver in the US District Court for the
Southern District of Texas in connection with the pending litigation with
Quicksilver.





Pursuant
to the settlement, Blast and Quicksilver agreed to release all the claims
against each other and certain related parties.  The settlement also
required that both we and Quicksilver use our best efforts to dismiss all
pending claims and the lawsuit we have against each other with
prejudice.





Quicksilver
agreed to the terms and conditions of the Settlement and agreed to pay EDDO a
total of $10,000,000 (the “Settlement Fees”), as follows:





·
            $5,000,000
      payable upon the parties’ entry into the settlement, which funds EDDO
      received in September 2008;





·
            $1,000,000
      payable on or before the first anniversary date of the execution of the
      settlement;





·
            $2,000,000
      payable on or before the second anniversary date of the execution of the
      settlement; and





·
            $2,000,000
      payable on or before the third anniversary date of the execution of the
      settlement.


9


In the
event any Settlement Fees are not paid on their due date and Quicksilver’s
failure to pay such Settlement Fees are not cured within 10 days after written
notice of such failure is communicated by EDDO to Quicksilver, then all of the
remaining payments are accelerated and are immediately due and payable. The
first payment of $5.0 million was funded to an escrow account in September 2008
and was distributed during October 2008.





Alberta Energy
Partners




Alberta
Energy Partners (“Alberta”) took a number of actions adverse to Blast during the
course of the Chapter 11 case. Alberta filed a motion to appoint a trustee. That
motion was denied. Alberta filed a motion to deem rejected the TechnologyPurchase
Agreement (the “Agreement”) between Alberta and Blast. That motion was denied.
Alberta filed a motion torequire Blast
to reject the Agreement. That motion was denied, and Alberta appealed the
bankruptcy court’s rulings to the United States District Court and the two
appeals were consolidated (the “Consolidated Appeals”).




Alberta
objected to the confirmation of Blast’s plan of reorganization. That objection
was overruled by the bankruptcy court,and Alberta
appealed (the “Confirmation Appeal”). The Confirmation Appeal was dismissed by
the District Court as moot. Alberta filed a motion for reconsideration and
rehearing of the district court’s order dismissing the Confirmation
Appeal.




The
district court denied the motion to reconsider the order dismissing the
Confirmation Appeal, and the district court dismissed as moot the Consolidated
Appeals. Alberta has filed a notice of appeal to the United States Court of
Appeals for the Fifth Circuit of both of the orders related to the Confirmation
Appeal and the Consolidated Appeals. The two appeals have been consolidated by
the Fifth Circuit Court of Appeals, and they are presently pending.




Blast
objected to the proof of claim filed by Albertaseeking
rescission of the Agreement. Blast’s objection to the proof of claim was
sustained, and Alberta’s claim for rescissionwas
disallowed by the bankruptcy court. Alberta appealed the ruling on its claim,
but that appeal has subsequently beenwithdrawn by
Alberta.




General




As part
of its regular operations, Blast may become a 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
9 – STOCK OPTIONS AND WARRANTS





Under the
Plan, Blast’s Board was given the authority to enter into long-term warrant
agreements with Blast’s management, and grant 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.  In April 2008, the Board awarded 900,000 warrants to
management. These warrants were determined to have a fair value of $143,802 by
using the Black-Scholes pricing model.  Variables used in the
Black-Scholes pricing model for warrants issued during the quarter included (1)
a discount rate of 2.70%, (2) an expected life of 3 years, (3) an expected
volatility of 131.82% and (4) no expected dividends. The total fair value was
recorded as a current period expense.


During
May 2008, options to purchase 750,000 shares of common stock were granted by
Blast to its directors at an exercise price of $0.20 per share.  These
options have a term of ten years of which 500,000 shares vested immediately on
the date of grant and the remainder vest 1/12th per quarter
thereafter.  These options were determined to have a fair value of
$167,266 by using the Black-Scholes pricing model.  Variables used in
the Black-Scholes pricing model for options issued during the quarter included
(1) a discount rate range of 3.14% to 3.36%, (2) an expected life of 6 years,
(3) an expected volatility of 150% and (4) no expected dividends. The expense
recorded for the three months and nine months ended September 30, 2008 was
$4,650 and $120,800, respectively.





In July
2008, Blast’s former Director, Frederick R. Ruiz exercised options granted in
April 2003, pursuant to Blast’s 2003 stock option plan and purchased 50,000
shares of common stock. In August 2008, Blast’s former Director, O. James
Woodward III exercised options granted in April 2003, pursuant to Blast’s 2003
stock option plan and purchased 50,000 shares of common stock. The options had
an exercise price of $0.10 per share and Mr. Ruiz and Mr. Woodward each paid
Blast $5,000 in connection with his exercise.





No
options or warrants were issued during the third quarter of
2008.


10


NOTE
10 – DISCONTINUED OPERATIONS





There are
no assets associated with the discontinued operations.  The
liabilities of the discontinued operations of Eagle are presented separately
under the captions “Current liabilities of discontinued operations” and
“Long-term liabilities” in the accompanying balance sheet and are represented by
the following:





September
      30,
              2008
            
            
            December
      31,
              2007Liabilities:Current
      Liabilities:Accrued
      liabilities
            
            $
            -
            
            
            $
            1,783,557Accounts
      payable
            
            
            -
            
            
            
            328,856Notes
      payable
            
            
            125,000
            
            
            
            -Total
      Current Liabilities
            
            $
            125,000
            
            
            $
            2,112,413Long
      Term Liabilities:Notes
      payable
            
            
            -
            
            
            
            125,000Total
      Liabilities
            
            $
            125,000
            
            
            $
            2,237,413





Loss from
the discontinuance of drilling operations for the three and nine months ended
September 30, 2008 and 2007 are as follows:





For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,102,150Operating
      Expenses:Cost
      of sales
            
            
            -
            
            
            
            2,025
            
            
            
            (43,403
            )
            
            
            1,598,893Selling,
      general and administrative
            
            
            325
            
            
            
            138
            
            
            
            969
            
            
            
            17,537Depreciation
      and amortization
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            95,196Total
      operating expenses
            
            
            325
            
            
            
            2,163
            
            
            
            (42,434
            )
            
            
            1,711626Gain
      (loss) from discontinued operations
            
            
            (325
            )
            
            
            (2,163
            )
            
            
            42,434
            
            
            
            (609,476
            )Other
      income (expense):Other
      income
            
            
            -
            
            
            
            -
            
            
            
            1,648,600
            
            
            
            -Other
      expenses
            
            
            -
            
            
            
            -
            
            
            
            (1,007
            )
            
            
            -Interest
      income
            
            
            -
            
            
            
            -
            
            
            
            37
            
            
            
            -Interest
      expense
            
            
            -
            
            
            
            -
            
            
            
            (1,047
            )
            
            
            (1,264,801
            )Loss
      on sale of equipment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,033,714
            )Total
      other income (expense)
            
            
            -
            
            
            
            -
            
            
            
            1,646,583
            
            
            
            (3,298,515
            )Net
      income (loss) from discontinued operations
            
            $
            (325
            )
            
            $
            (2,163
            )
            
            $
            1,689,017
            
            
            $
            (3,907,991
            )





NOTE
11 – SUBSEQUENT EVENTS





On
October 16, 2008, Blast fully repaid its $2.1 million Senior Lien with Laurus
Master Fund, Ltd. and a $125,000 Note with McClain County, Oklahoma as a result
of favorably settling certain lawsuits with former customers.





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


11


Furthermore,
an obligation for $191,000 owed to certain of Blast’s board of directors for
deferred compensation for the 2007 fiscal year and through September 30, 2008,
was converted into stock in October 2008. The stock conversion was made at $0.20
per share per the terms of the Plan. Also in October 2008, $155,000 owed to
certain other directors was paid in cash.





Blast
believes that these events represent significant benefits to Blast and help to
reduce Blast’s outstanding liabilities, as reflected in the September 30, 2008
Pro Forma Balance Sheet shown below.





Pro
Forma Balance Sheet





The
Pro-Forma Balance Sheet as of September 30, 2008 is presented with a series of
explanations of the significant changes that have occurred subsequent to the
quarter end, including the value of certain legal settlements, the
extinguishment of debt, and redemption of preferred stock. The net impact
resulting from the subsequent events are to improve Shareholders Equity from a
deficit of $2.3 million (reported) to a positive balance of $6.6 million (pro
forma) and to improve working capital from a deficit of  $2.4 million
(reported) to a positive balance of $1.9 million (pro forma).





Reported
                September
      30,
                2008
              
              
              Pro
      Forma
                Adjustments
              
              Explanations
              
              Pro
      Forma
                September
      30,
                2008AssetsCurrent
      Assets:Cash
              
              $
              312,397
              
              
              
              855,540
              
              (a)(b)(c)(d)(e)(f)
              
              
              1,167,937Accounts
      receivable, net
              
              
              76,795
              
              
              
              720,000
              
              (a)
              
              
              796,795Other
      assets
              
              
              124,347
              
              
              
              -
              
              
              
              
              124,347Total
      Current Assets
              
              
              513,539
              
              
              
              1,575,540
              
              
              
              
              2,089,079Long-term
      Receivable
              
              
              
              
              
              
              2,880,000
              
              (a)
              
              
              2,880,000Other
      Asset – Equity interest in Hallwood Energy
              
              
              
              
              
              
              1,833,333
              
              (b)
              
              
              1,833,333Equipment,
      net of accumulated depreciation of $36,856
              
              
              1,221,376
              
              
              
              -
              
              
              
              
              1,221,376Total
      Assets
              
              $
              1,734,915
              
              
              
              6,228,873
              
              
              
              
              8,023,788Liabilities
      and Stockholders’ Equity (Deficit)Current
      Liabilities:Accounts
      payable
              
              $
              203,645
              
              
              
              (144,312
              )
              (e)
              
              
              59,333Accrued
      expenses
              
              
              440,947
              
              
              
              (305,000
              )
              (d)(e)
              
              
              135,947Deferred
      revenue
              
              
              10,341
              
              
              
              -
              
              
              
              
              10,341Notes
      payable – other
              
              
              36,384
              
              
              
              -
              
              
              
              
              36,384Liabilities
      of discontinued operations
              
              
              125,000
              
              
              
              (125,000
              )
              (c)
              
              
              -Short
      term portion of senior debt
              
              
              2,100,000
              
              
              
              (2,100,000
              )
              (c)
              
              
              -Total
      Current Liabilities
              
              
              2,916,317
              
              
              
              (2,674,312
              )
              
              
              
              242,005Long
      Term Liabilities:Notes
      payable – related party
              
              
              1,120,000
              
              
              
              -
              
              
              
              
              1,120,000Total
      Liabilities
              
              
              4,036,317
              
              
              
              (2,674,312
              )
              
              
              
              1,362,005Stockholders’
      Equity (Deficit):Preferred
      stock, $.001 par value, 20,000,000 shares authorized; 8,000,000 shares
      issued and outstanding
              
              
              8,000
              
              
              
              (2,000
              )
              (f)
              
              
              6,000Common
      stock, $.001 par value, 180,000,000 shares authorized; 59,364,904 shares
      issued and outstanding
              
              
              59,364
              
              
              
              191
              
              (d)
              
              
              59,555Additional
      paid-in capital
              
              
              75,879,795
              
              
              
              (807,191
              )
              (d)(f)
              
              
              75,072,604Accumulated
      deficit
              
              
              (78,248,561
              )
              
              
              9,772,185
              
              (a)(b)(e)
              
              
              (68,476,376
              )Total
      Stockholders’ Deficit
              
              
              (2,301,402
              )
              
              
              8,963,185
              
              
              
              
              6,661,783Total
      Liabilities and Stockholders’ Deficit
              
              $
              1,734,915
              
              
              
              6,288,873
              
              
              
              
              8,023,788


12





Notes:


(a)
            Impact
      of lawsuit settlement with Quicksilver Resources resulting in net cash
      proceeds after contingency legal fees of $3,600,000 in 2008, $720,000 in
      2009 and $1,440,000 in 2010 and
2011.


(b)
            Impact
      of lawsuit settlement with Hallwood Energy resulting in net cash proceeds
      of $779,852 and equity interest in Hallwood equal to a value of $1,833,333
      after contingency legal fees.


(c)
            Payment
      of $2.1 million and $125,000 triggered by the lawsuit settlements to
      Laurus Master Fund and McClain County, Oklahoma,
    respectively.


(d)
            Payment
      of deferred compensation to Directors triggered by the lawsuit settlements
      - $191,000 converted into common stock and $155,000 paid in
      cash.


(e)
            Payment
      of $144,312 in deferred cash legal expenses incurred by litigation
      counsel, including a $41,000 accrual pending final
  invoice.


(f)
            Redemption
      of 2,000,000 shares of preferred stock for
  $1,000,000.











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




Forward-Looking
Statements




All
statements that are included in this Quarterly Report, other than statements of
historical fact, are forward-looking statements. You can identify
forward-looking statements by words such as “anticipate”, “believe” 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 our Annual Report on Form 10-K filed with the Commission
on April 7, 2008 and incorporated herein by reference.





All
dollar amounts discussed in “Item 2” are rounded to the nearest $1,000, or for
larger numbers, to the nearest tenth of a million.  Please consult the
financial statements in “Item 1” for exact dollar amounts.







Plan
of Operations





Blast
currently believes that it can operate for approximately twelve months with its
current cash on hand and the income it receives from its ongoing satellite
operations.  Pursuant to Blast’s current projections, which Blast can
provide no assurances are accurate and/or will come to fruition, Blast will
become cash-flow neutral during the first quarter of 2009, based on increased
revenues it anticipates receiving from its Down-hole Solutions
business.  However, in the future Blast may choose to raise funds
through the sale of debt and/or equity in order to expand its current lateral
drilling rig fleet and/or to support its operations. Such funding may not be
available and/or may be available on unfavorable terms.  During the
next twelve months, Blast plans to work to expand its Satellite Communications
Services and Down-hole Solutions businesses.





Three
Months Ended September 30, 2008 Compared to the Three Months Ended September 30,
2007




Satellite Communications
Services





Satellite
Communications Services’ revenues increased by $36,000 to $116,000 for the three
months ended September 30, 2008 compared to $80,000 for the three months ended
September 30, 2007. The increase was the result of new business and customer
renewals, including the initial partial delivery of 35 new systems sold to a
major pipeline company. The operating margin from Satellite Communications
Services increased by $35,000 to a gross profit of $12,000 for the three months
ended September 30, 2008 compared to a gross deficit of $23,000 for the three
months ended September 30, 2007.





As
hardware is sold, we recognize the revenue in the period it is delivered to the
customer. There were significantly more hardware sales during the three months
ended September 30, 2008 as compared to the same period in 2007. We bill some of
our bandwidth contracts in advance, but recognize the revenue over the period
benefited.


13


Down-hole
Solutions





Down-hole
Solutions’ revenues for the three months ended September 30, 2008 increased to
$20,000 compared to no revenue for the three months ended September30, 2007. The Company
resumed the development of this technology during the three months ended
September 30, 2008, and the lateral jetting rig successfully drilled laterals on
two wells in September 2008. The gross deficit increased to $4,000 for the three
months endedSeptember30, 2008 compared to no
activity during the three months ended September30, 2007. Cost of
services provided for the three months ended September30, 2008 represents
fabrication costs of certain down-hole equipment used in the lateral jetting
process.  We had no costs of services for the three months ended
September 30, 2007, as we had no revenues associated with our Down-hole solution
technology during that period.





Depreciation and
Amortization





Depreciation
and amortization expense decreased by $21,000 to $2,000 for the three months
ended September30,
2008 compared to $23,000 for the three months ended September30, 2007 due to the
impairment of our abrasive fluid jetting (“AFJ”) related intellectual property
in December 2007, which in turn lowered our depreciation expense for the three
months ended September 30, 2008, compared to the three months ended September
30, 2007.





Selling,
General and Administrative




Selling,
general and administrative (“SG&A”) expenses decreased by $238,000 to
$365,000 for the three months ended September30, 2008 compared to
$603,000 for the three months ended September30, 2007.





For
      the Three Months Ended September 30,
            Increase
              (Decrease)(in
      thousands)
            2008
            2007Payroll
      and related costs
            $
      117
            $
      84
            $
      33Option
      and warrant expense
            9
            79
            (70)Legal
      fees & settlements
            84
            312
            (228)External
      services
            75
            66
            9Insurance
            42
            37
            5Travel
      & entertainment
            14
            14
            0Office
      rent, communications,  misc.
            24
            11
            13$
      365
            $
      603
            $
      (238)








Lower
administrative costs were primarily a result of significantly lower legal fees
following the Company’s emergence from bankruptcy in February 2008.





Interest
Expense





Interest
expense increased by $21,000 to $23,000 for the three months ended September 30,
2008 compared to $2,000 for the three months ended September 30, 2007 due to the
accrued interest on the note payable – related party (the AFJ note, as described
in Note 4 to the financial statements included herein, “Note
Extension”).





Loss from Continuing
Operations





Loss from
continuing operations decreased by $221,000 to $383,000 for the three months
ended September 30, 2008 compared to $604,000 for the three months ended
September 30, 2007, primarily relating to lower administrative costs, as
described above.





Income (Loss) from
Discontinued Operations





The
results from discontinued operations improved by $2,000 to a loss of $-0- for
the three months ended September 30, 2008 compared to a loss of $2,000 for the
three months ended September 30, 2007. These operations have virtually no
activity having been discontinued in mid-2007.


14


Net
Loss





The net
loss for the three months ended September 30, 2008 decreased by $223,000 to a
net loss of $383,000 compared to a loss of $606,000 for the corresponding period
in 2007. This decrease is primarily related to lower administrative
costs.








Nine Months Ended September
30, 2008 Compared to the Nine
Months Ended September 30, 2007





Satellite Communications
Services





Satellite
Communications Services’ revenues decreased by $86,000 to $268,000 for the nine
months ended September 30, 2008 compared to $354,000 for the nine months ended
September 30, 2007. The decrease can be attributed to the decline in new
business and customer renewals during the time the Company was in Chapter 11.
The operating margin decreased by $59,000 to a gross deficit of $30,000 for the
nine months ended September 30, 2008 compared to a gross margin of $29,000 for
the nine months ended September 30, 2007.





As
hardware is sold, we recognize the revenue in the period it is delivered to the
customer. We experienced increased hardware sales during the nine months ended
September 30, 2008 as compared to the same period in 2007. We bill some of our
bandwidth contracts in advance, but recognize the revenue over the period
benefited.





Down-hole
Solutions





Down-hole
Solutions’ revenues for the nine months ended September 30, 2008 were $20,000
compared to $-0- revenues for the nine months ended September 30, 2007. The
Company resumed the development of this technology during the nine months ended
September 30, 2008, and the lateral jetting rig successfully drilled laterals on
two wells in September 2008.  The gross deficit increased by $122,000
to a loss of $129,000 for the nine months ended September 30, 2008 compared to a
loss of $7,000 for the nine months ended September 30, 2007. Cost of services
provided for the nine months ended September 30, 2008 represents repair and
maintenance costs being spent to bring the AFJ rig back into good operating
condition and the fabrication of certain down-hole equipment used in the lateral
jetting process.





Depreciation and
Amortization





Depreciation
and amortization expense decreased by $63,000 to $7,000 for the nine months
ended September 30, 2008 compared to $70,000 for the nine months ended September
30, 2007 due to the impairment of AFJ related intellectual property in December
2007.





Selling,
General and Administrative




Selling,
general and administrative (“SG&A”) expenses decreased by $1,656,000 to
$1,827,000 for the nine months ended September 30, 2008 compared to $3,483,000
for the nine months ended September 30, 2007.




For
      the Nine Months Ended September 30,
            Increase
              (Decrease)(in
      thousands)
            2008
            2007Payroll
      and related costs
            $
      408
            $
      274
            $
      134Option
      and warrant expense
            369
            1,231
            (862)Legal
      fees & settlements
            544
            1,511
            (967)External
      services
            292
            296
            (4)Insurance
            105
            108
            (3)Travel
      & entertainment
            40
            56
            (16)Office
      rent, communications,  misc.
            69
            7
            62$
      1,827
            $
      3,483
            $
      (1,656)





Lower
administrative costs were primarily a result of significantly lower legal fees
following the Company’s emergence from bankruptcy in February 2008.
Additionally, the administrative costs in 2007 included the one-time impact from
the non-cash expense associated with employee options issued with the
acquisition of Eagle Domestic Drilling Operations, LLC.





15


Other
Income





Other
income decreased $75,000 to $8,000 for the nine months ended September 30, 2008,
compared to $83,000 for the nine months ended September 30,
2007.  During the nine months ended September 30, 2007, Blast earned a
one-time commission of $75,000 for a referral provided to a third-party oil and
gas operator which resulted in the sale of their interest in a natural gas
producing property.





Interest
Expense





Interest
expense decreased by $9,000 to $89,000 for the nine months ended September 30,
2008 compared to $98,000 for the nine months ended September 30,
2007.





Loss from Continuing
Operations





Loss from
continuing operations decreased by $1.5 million to $2.1 million for the nine
months ended September 30, 2008 compared to $3.6 million for the nine months
ended September 30, 2007 primarily due to lower administrative
expenses.





Income (Loss) from
Discontinued Operations





The
results from discontinued operations improved by $5.6 million to income of $1.7
million for the nine months ended September 30, 2008 compared to a loss of $3.9
million for the nine months ended September 30, 2007.  This
improvement is primarily due to the significant reduction in operational
activity resulting from operations being discontinued during the second quarter
of 2007 and the April 2008 settlement with Hallwood which included a provision
that irrevocably forgave an accumulated liability of $1.6 million previously
accrued to cover an advance made by Hallwood (see Note 8 to the financial
statements).





Net Income
(Loss)




The net
loss for the nine months ended September 30, 2008 decreased by $7.1 million to a
net loss of $0.4 million compared to a loss of $7.5 million for the
corresponding period in 2007. The decrease is primarily related to the lower
loss from discontinued operations arising from the sale of our contract drilling
business during 2007, reduced administrative costs and the benefit of the April
2008 settlement with Hallwood which irrevocably forgave indebtedness of $1.6
million. 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 the tax benefits
will not be realized. The cumulative net operating loss carry-forward is
approximately $30 million at December 31, 2007, and will expire in the years
2019 through 2027.





Liquidity
and Capital Resources




Blast had
total current assets of $514,000 as of September 30, 2008, including a cash
balance of $312,000, compared to total current assets of $153,000 as of December
31, 2007, including a cash balance of $49,000.  The increase in
current assets is principally due to the $4.0 million cash infusion from the
sale of convertible preferred securities in March 2008, offset by payments of
$2.4 million which were made to creditors and legal professionals following our
exit from Chapter 11.





Blast had
total assets as of September 30, 2008 of $1.7 million compared to total assets
of $1.2 million as of December 31, 2007.  This increase is primarily
related to the increase in current assets as described above.





Blast had
total liabilities of $4.0 million as of September 30, 2008, consisting of
current liabilities of $2.9 million compared to total liabilities of $8.6
million as of December 31, 2007, consisting of current liabilities of $6.4
million.  The decrease in liabilities is principally due to the
reduction in accrued liabilities and accounts payable from payments made to
creditors and legal professionals following confirmation of the Plan and the
provision in the Hallwood Settlement that irrevocably forgave an accumulated
liability of $1.6 million. Blast had a net working capital deficit of $2.4
million and a total accumulated deficit of $78 million as of September 30,
2008.


16


Included
in current liabilities as of September 30, 2008 were the following notes, which
have since been repaid with funds received in connection with the Hallwood
Settlement and the Quicksilver Settlement:





·
            A
      $2.1 million interest-free senior obligation with Laurus Master Fund,
      Ltd., secured by the assets of Blast and 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 Quicksilver litigation proceeds, or if
      not paid, it will convert into a 6.5% interest bearing note due February
      27, 2010, and due in twelve monthly installments of
    $10,417.





During
July 2008, Blast received a $500,000 cash payment under the terms of the
settlement agreement in the Hallwood Energy / Hallwood Petroleum lawsuit (see
Note 8 to the financial statements). Accordingly, Blast reclassified the entire
$2.1 million interest-free senior obligation to short term liabilities at
September 30, 2008.





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





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





Furthermore,
an obligation for $191,000 owed to certain members of Blast’s Board of Directors
for deferred compensation for the 2007 fiscal year and through September 30,
2008, was converted into stock in October 2008. The stock conversion was made at
$0.20 per share and accordingly shares will be issued to those Board members in
exchange for the forgiveness of debt subsequent to the filing of this
report.





Blast
believes that these events represent significant benefits to Blast and help to
reduce Blast’s outstanding liabilities, as reflected in the improved September
30, 2008 Pro Forma Balance Sheet shown above in Note 11 – Subsequent Events. The
net impact resulting from the subsequent events are to improve Shareholders
Equity from a deficit of $2.3 million (reported) to a positive balance of $6.6
million (pro forma) and to improve working capital from a deficit
of  $2.4 million (reported) to a positive balance of $1.9 million (pro
forma).





Cash Flows from Operating
Activities





Blast had
net cash used in operating activities of approximately $3.1 million for the nine
months ended September 30, 2008, which was mainly due to the loss from
continuing operations of $2.1 million and a $1.0 million decrease in accounts
payable to pay creditors and professionals in Blast’s emergence from bankruptcy
and a $0.5 million increase in accounts receivable.





Cash Flows used for
Investing Activities





Blast had
net cash used in investing activities of $146,000 for the nine months ended
September 30, 2008, which primarily consisted of capitalized improvements to
bring the AFJ rig back into good operating condition and the fabrication cost of
its intelligent petroleum services module for the Satellite Communications
business.





Cash Flows from Financing
Activities





Blast had
net cash provided by financing activities of $3.5 million for the nine months
ended September 30, 2008, which included $4,000,000 from the sale of convertible
preferred stock (as described below) and $100,000 of borrowings under our Debtor
in Possession (“DIP”) loan facility, which has since been fully converted into
shares of our common stock (as described in greater detail below under “Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds”, offset by $613,000
of payments applied to short term debt.





17


In
connection with the approval of the 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 is being used to execute an
operational plan including, but not limited to, reinvesting in the Down-hole
Solutions and Satellite Communications businesses and pursuing an emerging
remote monitoring and control business.





The April
2008 settlement with Hallwood had several provisions, one of which had immediate
effect, namely to reverse an accumulated debt of $1,648,600 previously accrued
to cover an advance of costs made by Hallwood when rigs 11 and 12 were
originally constructed.





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. Blast
believes that the benefit of recent customer lawsuit settlements represent
significant benefits to Blast and help to reduce Blast’s outstanding
liabilities, as reflected in the September 30, 2008 Pro Forma Balance Sheet
shown above in the attached financial statements under Note 11 – Subsequent
Events.  However, in the future, 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.





Cash Flows from Discontinued
Operations





Approximately
$-0- and $0.5 million of net cash was provided by discontinued operations for
the nine months ended September 30, 2008 and 2007, respectively in connection
with our discontinued rig operations.





Off-Balance Sheet
Arrangements





As of
September 30, 2008, we had no off-balance sheet arrangements.




Recent Accounting
Pronouncements





For the
period ended September 30, 2008, there were no other changes to our critical
accounting policies as identified in our annual report on Form 10-KSB for the
year ended December 31, 2007.





Material
Agreements





Management
Employment Agreements





As a
condition of the Plan confirmation, the Company’s CEO, John O’Keefe, entered
into a new employment agreement with Blast (the “O’Keefe Agreement”), which was
substantially the same as the prior contract.  Mr. O’Keefe will serve
as CEO on an “at will” basis for a term of one year from the agreement’s
effective date of February 27, 2008, and his employment shall automatically
renew each year unless terminated in writing by either party at least sixty (60)
days prior to the anniversary.  Mr. O’Keefe is to receive a gross
annual salary of $200,000, a car allowance of $1,000 per month, and is eligible
to receive annual bonuses of up to 50% of his salary.  Further, Mr.
O’Keefe is eligible to receive stock options under Blast’s annual stock option
award program.  Blast also agreed to cover Mr. O’Keefe’s business
expenses and up to $422 per month of medical insurance
reimbursement.  Blast or Mr. O’Keefe may terminate the agreement at
any time for any reason or no reason or with or without cause.  If
Blast terminates Mr. O’Keefe for any reasons other than Cause or disability, or
if Mr. O’Keefe resigns and such resignation qualifies as a Constructive
Termination, then Blast shall pay  severance pay equal to his base
compensation and COBRA or equivalent health insurance for the remaining period
of the then current term, but not in excess of 6 months.  If Mr.
O’Keefe’s employment is terminated by disability, he is entitled to a cash
payment of the prorated portion of his base salary for the year in which such
termination occurs.


18


John
MacDonald, the Company’s Chief Financial Officer entered into an Employment
Agreement with Blast with substantially similar terms and conditions as the
O’Keefe Agreement, except for the fact that Mr. MacDonald will receive a base
salary of $150,000 per year and is eligible to receive annual bonuses of up to
50% of his salary, a car allowance of $1,000 per month, and is entitled to
receive up to $224 per month of medical insurance reimbursement.




Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
Applicable.





Item
4. Controls and Procedures





Disclosure
Controls and Procedures





Based on
management’s evaluation as of the end of the period covered by this report, our
Principal Executive Officer and Principal Financial Officer have participated in
the evaluation and concluded that our disclosure controls and procedures were
effective to ensure that information we are required to disclose in reports
filed or submitted under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized, and reported within the periods specified and
in accordance with the SEC’s rules and forms.





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





Part
II. OTHER INFORMATION




Item
1. Legal Proceedings





Emergence from
Bankruptcy





On
February 26, 2008, the Court entered an order confirming our Second Amended Plan
of Reorganization (the “Plan”).  This ruling allowed Blast to emerge
from Chapter 11 bankruptcy, which became effective February 27,
2008.





The
overall impact of the confirmed Plan was for Blast to emerge from Chapter 11
bankruptcy, with unsecured claims fully paid, having no debt service scheduled
for at least two years, and to keep equity shareholders’ interests
intact.





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





19


Other 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 (“EDDO”), a wholly owned subsidiary of Blast,
and a separate company, Eagle Drilling, LLC. The lawsuit sought to rescind two
IADC two-year term day rate drilling contracts between Eagle Drilling and
Hallwood, which had been assigned to EDDO by Eagle Drilling prior to Blast’s
acquisition of the membership interests of Eagle.  Hallwood alleged Eagle
Drilling and EDDO were in breach of the IADC contracts.  Hallwood
purported to terminate the two IADC day rate drilling contracts on September 6,
2006.  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 demanded that the remaining balance of funds advanced under the
contracts, in the amount of approximately $1.65 million, be returned. Eagle
vigorously contested the claims by Hallwood and instituted a proceeding (“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.





On April
3, 2008, EDDO 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 EDDO $2.0 million in cash, of
which $500,000 was paid to Blast in July 2008, issue $2.75 million in
equity and has irrevocably forgiven approximately $1.65 million in deposits paid
to Eagle effective immediately.  In return, Eagle agreed to suspend
its legal actions against Hallwood for approximately six months. Upon
receipt of the entire settlement amount by Eagle, the parties and their
affiliates will be fully and mutually released from any and all claims between
them. This settlement agreement was approved by both companies’ boards but is
subject to certain conditions set forth in the Blast Plan of Reorganization, as
amended and confirmed by the Bankruptcy Court. On July 7, 2008, Hallwood
paid $500,000 as an advance on its cash obligation under the terms of the
settlement agreement, which amount is being held in trust pending full
settlement.





On
September 30, 2008, Hallwood paid the remaining cash balance owed of $1.5
million under the terms of the settlement agreement.  However, the
determination of the Hallwood equity value needed to satisfy the $2,750,000
equity component of the settlement agreement are still a matter for
negotiation.  Therefore, the parties have not been fully or mutually
released from any and all claims between them.





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 (“Eagle Drilling”), sought 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 Eagle.  The lawsuit included further allegations of other material
breaches of the contracts and negligent operation by Eagle and Eagle Drilling
under the contracts. Quicksilver asserted 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.





On
September 17, 2008, Blast Energy Services, Inc. (“Blast”) and its wholly owned
subsidiary Eagle Domestic Drilling Operations LLC (“EDDO”) and collectively with
Blast, entered into a Compromise Settlement and Release Agreement with
Quicksilver in the US District Court for the Southern District of Texas in
connection with our pending litigation with Quicksilver.





Pursuant
to the settlement, we and Quicksilver agreed to release all the claims we had
against each other and certain related parties.  The settlement also
required that both we and Quicksilver use our best efforts to dismiss all
pending claims and the lawsuit we have against each other with
prejudice.





20


Quicksilver
agreed to the terms and conditions of the Settlement and agreed to pay EDDO a
total of $10,000,000 (the “Settlement Fees”), as follows:





·
            $5,000,000
      payable upon the parties’ entry into the settlement, which funds EDDO
      received in September 2008;





·
            $1,000,000
      payable on or before the first anniversary date of the execution of the
      settlement;





·
            $2,000,000
      payable on or before the second anniversary date of the execution of the
      settlement; and





·
            $2,000,000
      payable on or before the third anniversary date of the execution of the
      settlement.





In the
event any Settlement Fees are not paid on their due date and Quicksilver’s
failure to pay such Settlement Fees are not cured within 10 days after written
notice of such failure is communicated by EDDO to Quicksilver, then all of the
remaining payments are accelerated and are immediately due and payable. The
first payment of $5.0 million was funded to an escrow account in September 2008
and was distributed during October 2008.





Alberta Energy
Partners




Alberta
Energy Partners (“Alberta”) took a number of actions adverse to Blast during the
course of the Chapter 11 case. Alberta filed a motion to appoint a trustee. That
motion was denied. Alberta filed a motion to deem rejected the TechnologyPurchase
Agreement (the “Agreement”) between Alberta and Blast. That motion was denied.
Alberta filed a motion torequire Blast
to reject the Agreement. That motion was denied, and Alberta appealed the
bankruptcy court’s rulings to the United States District Court and the two
appeals were consolidated (the “Consolidated Appeals”).






Alberta
objected to the confirmation of Blast’s plan of reorganization. That objection
was overruled by the bankruptcy court,and Alberta
appealed (the “Confirmation Appeal”). The Confirmation Appeal was dismissed by
the District Court as moot. Alberta filed a motion for reconsideration and
rehearing of the district court’s order dismissing the Confirmation
Appeal.






The
district court denied the motion to reconsider the order dismissing the
Confirmation Appeal, and the district court dismissed as moot the Consolidated
Appeals. Alberta has filed a notice of appeal to the United States Court of
Appeals for the Fifth Circuit of both of the orders related to the Confirmation
Appeal and the Consolidated Appeals. The two appeals have been consolidated by
the Fifth Circuit Court of Appeals, and they are presently pending.




Blast
objected to the proof of claim filed by Albertaseeking
rescission of the Agreement. Blast’s objection to the proof of claim was
sustained, and Alberta’s claim for rescissionwas
disallowed by the bankruptcy court. Alberta appealed the ruling on its claim,
but that appeal has subsequently beenwithdrawn by
Alberta.





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.








Item
1A. Risk Factors





There
have been no material changes from the risk factors previously disclosed in the
registrant’s Form 10-KSB, filed with the Commission on April 7,
2008.


21




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds


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 (collectively with the
Series A Convertible Preferred Stock, the “Units”), for an aggregate of
$4,000,000 or $2.00 per Unit, to Clyde Berg, an individual and to McAfee Capital
LLC.  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.  The proceeds from the sale of the Units were used to satisfy
creditor claims of approximately $2.4 million under the terms of the Plan and
provide working capital of $1.6 million.





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.





Series A Convertible
Preferred Stock


The
8,000,000 shares of Series A Preferred Stock (the “Preferred Stock”) accrue
dividends at the rate of 8% per annum, in arrears for each month that the
Preferred Stock is outstanding.  Blast has the right to 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 Hallwood and 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. As of September 30, 2008, the aggregate and per share arrearages were
$189,370 and $0.024, respectively.





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





The
Preferred Stockholder has the right to vote 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 common stock.





On or
about October 16, 2008, Blast agreed to redeem 2,000,000 shares of Blast’s
Series A Preferred Stock, 1,000,000 shares each held by Clyde Berg and McAfee
Capital, LLC, at the face value of $0.50 per share, and paid $1,000,000 to
redeem the Preferred Shares.  The Preferred Shares have a dividend
rate of 8% per annum until paid or converted.   Blast cancelled
the 1,000,000 Preferred Shares each held by Clyde Berg and McAfee Capital, LLC,
and consequently only 6,000,000 Preferred Shares remain outstanding as of the
date of this filing.





Warrants


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





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
securities for investment and not resale and we took appropriate measures to
restrict transfer.





22


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
allowed Berg McAfee to convert the outstanding balance of the DIP loan and
accrued interest into Company common stock at the rate of one share of common
stock for each $0.20 outstanding.  In March 2008 after the Merger
became effective, 4,000,000 shares of common stock were issued in full payment
of the principal on this loan, and 160,000 shares of common stock were issued
for the accrued interest on the obligation.  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 issuances and no
underwriting discounts or commissions were paid by us.





2006 Director Fees
Conversion




Also
under the Plan, in April 2008, Blast’s Directors converted unsecured claims for
unpaid directors’ fees from 2006 totaling $164,000, into 820,000 shares of
Blast’s common stock at the rate of one share for each $0.20 of the deferred
amount owed as follows:




Roger
      P. Herbert
            120,000
      sharesO.
      James Woodward III
            177,500
      sharesJoseph
      J. Penbera
            202,500
      sharesFrederick
      R. Ruiz
            100,000
      sharesJohn
      Block
            92,500
      sharesScott
      W. Johnson
            72,500
      sharesJeffery
      R. Pendergraft
            55,000
      shares





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
issuances and no underwriting discounts or commissions were paid by
us.





Additionally,
under the Plan, Blast’s Board was given the authority to enter into long-term
warrant agreements with management, and grant them 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.  During May 2008, five year
warrants to purchase 900,000 shares of common stock were granted to the
following executives, Directors and employees at an exercise price of $0.20 per
share:





John
      O’Keefe
            Chief
      Executive Officer
            400,000
      warrantsJohn
      MacDonald
            Chief
      Financial Officer
            200,000
      warrantsAndrew
      Wilson
            GM
      Satellite Division
            200,000
      warrantsCara
      Phelps
            Office
      Manager
            50,000
      warrants





50,000
warrants previously awarded to Charley Gallo, Satellite Technician, have expired
following his resignation in August 2008.





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
warrants 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.





Laurus Warrant
Exercise


On or
around May 9, 2008, Laurus Master Fund, Ltd. (“Laurus”) effected a cashless
exercise of certain of its outstanding warrants, and exercised 3,026,087 of such
warrants for 2,900,000 shares of our restricted common stock (with 126,087
exercised shares being used in the cashless exercise to effectively purchase
such exercised shares).  We claim an exemption from registration
afforded by Section 4(2) of the Act since the foregoing issuance did not involve
a public offering, the recipient took the shares for investment and not resale
and we took appropriate measures to restrict transfer. No underwriters or agents
were involved in the foregoing issuance and no underwriting discounts or
commissions were paid by us.





Second Bridge Share
Cancellation


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




23




Shares Issued for Services
Rendered


In April
and May 2008, the Board of Directors approved the issuance of 45,000 and 62,500
shares of common stock, respectively, in partial consideration of technical
consulting services. Also in May 2008, the Board of Directors approved the
issuance of up to 300,000 shares of Blast’s common stock to a consultant in
consideration for market surveillance and financial consulting services
provided.  The shares will be earned by the consultant as follows:
150,000 shares immediately and 37,500 shares at the end of each quarter for the
one year period of the engagement. The issuances described above were issued in
July 2008.





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.





Director
Options


In May
2008, the Board of Directors approved compensation of $2,500 per month for each
Director of Blast and an additional $2,500 for the Chairman, as well as $1,500
per month for the Audit Committee Chair and $1,000 additional per month for the
Chairman of each additional committee. However, the Board elected to defer the
payment of any cash compensation pending a favorable resolution of the
Quicksilver litigation. If cash proceeds are not received from the Quicksilver
matter by July 1, 2009, each member will then have the option to convert the
amount owed to them into shares of common stock at a rate of $0.20 per share.
 Additionally, the Board approved the grant of 100,000 options to each
Director which would vest immediately and additional compensation of 50,000
warrants for each quarter vesting over the next three years as described in Note
9 to the Financial Statements above.





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





In July
2008, Blast’s former Director, Frederick R. Ruiz exercised options granted in
April 2003, pursuant to Blast’s 2003 stock option plan and purchased 50,000
shares of common stock. In August 2008, Blast’s former Director, O. James
Woodward III exercised options granted in April 2003, pursuant to Blast’s 2003
stock option plan and purchased 50,000 shares of common stock. The options had
an exercise price of $0.10 per share and Mr. Ruiz and Mr. Woodward each paid
Blast $5,000 in connection with his exercise.





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





Jack
      Block
            182,500
      sharesRoger
      (Pat) Herbert
            340,000
      sharesJeffrey
      Pendergraft
            287,500
      sharesMichael
      Peterson
            50,000
      sharesFred
      Ruiz (retired)
            95,000
      shares





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





Item
5. Other Information.





In
October 2008, Michael Peterson, Blast’s Director, was appointed to Blast’s Audit
Committee.





In
October 2008, Jack Block, Blast’s Director, accepted the position as Chairman of
Blast’s Nominating and Corporate Governance Committee, who took over the
position from Roger (Pat) Herbert, the Chairman of Blast, who will remain on the
Governance Committee.





Also in
October 2008, Mr. Block was appointed to the board of directors for AE Biofuels,
a California-based vertically integrated biofuels company.  The
Chairman and CEO of AE Biofuels is Eric McAfee. Mr. McAfee is also the managing
partner for McAfee Capital LLC and president of BergMcAfee Companies LLC, both
of whom are significant shareholders of Blast. Also, as previously reported in
May 2008 when he joined the Blast board, Michael Peterson is also a director of
AE Biofuels.


24


Item
6. Exhibits





2.1
            
            Agreement
      and Plan of Reorganization, dated April 24, 2003, as amended June 30,
      2003;
              Filed
      July 18, 2003 with the SEC, Report on Form 8-K2.2
            
            Articles
      of Merger (California and Texas)
              Filed
      on April 7, 2008, as an Exhibit to our Form 10-KSB
  filing3.1
            
            Certificate
      of Formation Texas
              Filed
      March 6, 2008 with the SEC, Form 8-K3.2
            
            Certificate
      of Designation of Series A Preferred Stock
              Filed
      March 6, 2008 with the SEC, Form 8-K3.3
            
            Bylaws
      of Blast Energy Services, Inc., Texas
              Filed
      March 6, 2008 with the SEC, Form 8-K4.1
            
            $800,000
      Secured Promissory Note dated July 15, 2005 by and among Blast Energy
      Services, Inc. and Berg McAfee Companies, LLC
              Filed
      July 26, 2005 with the SEC, Form 8-K4.2
            
            $200,000
      Secured Subordinated Promissory Note dated July 15, 2005 by and among
      Blast Energy Services, Inc. and Berg McAfee Companies, LLC
              Filed
      July 26, 2005 with the SEC, Form 8-K10.1
            
            Second
      Amended Plan of Reorganization
              Filed
      March 6, 2008 with the SEC, Form 8-K10.2
            
            First
      Amended Plan of Reorganization
              Filed
      March 6, 2008 with the SEC, Form 8-K10.3
            
            Subscription
      Agreement and Related Exhibits with Clyde Berg
              Filed
      March 6, 2008 with the SEC, Form 8-K10.4
            
            Subscription
      Agreement and Related Exhibits with McAfee Capital, LLC
              Filed
      March 6, 2008 with the SEC, Form 8-K10.5
            
            Laurus
      Master Fund, Ltd. $2.1 million Security Agreement
              Filed
      March 6, 2008 with the SEC, Form 8-K10.6
            
            Berg
      McAfee Companies $1.12 million Note
              Filed
      March 6, 2008 with the SEC, Form 8-K10.7
            
            Settlement
      Agreement
              Filed
      on May 14, 2007 with the SEC, Form 8-K10.8
            
            Eagle
      Domestic Drilling Operations LLC and Hallwood Energy, LP and Hallwood
      Petroleum LLC  Settlement Agreement
              Filed
      on April 7, 2008, as an Exhibit to our Form 10-KSB
  filing*10.9
            
            Employment
      Agreement with John O’Keefe*10.10
            
            Employment
      Agreement with John MacDonald*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


25





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




Blast Energy Services,
  Inc.By:
            /s/
      John O’Keefe, CEOJohn
      O’KeefeChief
      Executive OfficerPrincipal
      Executive OfficerDate:
      November 13, 2008By:
            /s/
      John MacDonald, CFOJohn
      MacDonaldChief
      Financial OfficerPrincipal
      Accounting OfficerDate:
      November 13, 2008