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 June 30, 2009




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




For
the transition period from 
to




000-53725


(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. YesxNo ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).   Yes   ̈    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 of the issuer’s common stock outstanding of each of the
issuer’s classes of equity as of August 14, 2009 is 61,817,404 including
1,150,000 approved but unissued shares arising from the class action settlement
from 2005 and 35,000 shares that are still outstanding as of the filing of this
report, but which shares the Issuer expects to cancel in the third quarter of
2009 and which are not shown as outstanding in the accompanying financial
statements.








Blast
Energy Services, Inc.





For
the Three and Six Months Ended June 30, 2009





INDEX










PART
      I – FINANCIAL INFORMATION
                      PageItem
      1.
                      Financial
      StatementsUnaudited
      Consolidated Balance Sheets as of June 30, 2009 and December 31,
      2008
                      2Unaudited
      Consolidated Statements of Operations
                        For
      the Three and Six Months Ended June 30, 2009 and 2008
                      3Unaudited
      Consolidated Statements of Cash Flows
                        For
      the Three and Six Months Ended June 30, 2009 and 2008
                      4Notes
      to Unaudited Consolidated Financial Statements
                      5Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      11Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      15Item
      4.
                      Controls
      and Procedures
                      15PART
      II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      16Item
      1A.
                      Risk
      Factors
                      17Item
    2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      17Item
      5.
                      Other
      Information
                      18Item
      6.
                      Exhibits
                      18Signatures
                      
                      18


1


PART
I – FINANCIAL INFORMATION





Item 1.
Financial Statements


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





June
      30,
                              2009
                            
                            
                            December
      31,
                              2008AssetsCurrent
      Assets:Cash
                            
                            $
                            27,075
                            
                            
                            $
                            731,631Accounts
      receivable
                            
                            
                            66,157
                            
                            
                            
                            107,065Other
      assets
                            
                            
                            147,364
                            
                            
                            
                            53,254Current
      portion of long-term receivable
                            
                            
                            666,667
                            
                            
                            
                            666,667Total
      Current Assets
                            
                            
                            907,263
                            
                            
                            
                            1,558,617Equipment,
      net of accumulated depreciation of $118,591 and $68,282
                            
                            
                            1,224,174
                            
                            
                            
                            1,191,263Long
      term receivable
                            
                            
                            2,933,333
                            
                            
                            
                            2,933,333Total
      Assets
                            
                            $
                            5,064,770
                            
                            
                            $
                            5,683,213Liabilities
      and Stockholders’ Equity (Deficit)Current
      Liabilities:Accounts
      payable
                            
                            $
                            184,691
                            
                            
                            $
                            24,085Accrued
      expenses
                            
                            
                            401,083
                            
                            
                            
                            225,312Deferred
      revenue
                            
                            
                            8,395
                            
                            
                            
                            9,459Notes
      payable – other
                            
                            
                            101,843
                            
                            
                            
                            -Total
      Current Liabilities
                            
                            
                            696,012
                            
                            
                            
                            258,856Long
      Term Liabilities:Notes
      payable – related party
                            
                            
                            1,120,000
                            
                            
                            
                            1,120,000Loan
      payable – long term portion
                            
                            
                            17,524
                            
                            
                            
                            -Total
      Liabilities
                            
                            
                            1,833,536
                            
                            
                            
                            1,378,856Stockholders’
      Equity (Deficit):Preferred
      stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and
      6,000,000 shares issued and outstanding
                            
                            
                            6,000
                            
                            
                            
                            6,000Common
      stock, $.001 par value, 180,000,000 shares authorized; 61,782,404 and
      60,432,404 shares issued and outstanding
                            
                            
                            61,782
                            
                            
                            
                            60,432Additional
      paid-in capital
                            
                            
                            75,110,431
                            
                            
                            
                            75,102,481Accumulated
      deficit
                            
                            
                            (71,946,979
                            )
                            
                            
                            (70,864,556
                            )Total
      Stockholders’ Equity
                            
                            
                            3,231,234
                            
                            
                            
                            4,304,357Total
      Liabilities and Stockholders’ Equity
                            
                            $
                            5,064,770
                            
                            
                            $
                            5,683,213








See
accompanying notes to unaudited consolidated financial statements






2




BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Three and Six Months Ended June 30, 2009 and 2008


(Unaudited)








For
      the Three Months Ended
                          June
      30,
                        
                        
                        For
      the Six Months Ended
                          June
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Revenue:
                        
                        $
                        84,319
                        
                        
                        $
                        79,973
                        
                        
                        $
                        202,332
                        
                        
                        $
                        151,625Operating
      expenses:Cost
      of sales
                        
                        
                        269,079
                        
                        
                        
                        197,547
                        
                        
                        
                        457,790
                        
                        
                        
                        317,668Selling,
      general and administrative
                        
                        
                        339,155
                        
                        
                        
                        876,409
                        
                        
                        
                        698,365
                        
                        
                        
                        1,462,356Depreciation
      and amortization
                        
                        
                        35,675
                        
                        
                        
                        2,467
                        
                        
                        
                        67,690
                        
                        
                        
                        4,617Bad
      debt expense
                        
                        
                        10,778
                        
                        
                        
                        -
                        
                        
                        
                        10,778
                        
                        
                        
                        -Loss
      on disposal of equipment
                        
                        
                        -
                        
                        
                        
                        1,270
                        
                        
                        
                        3,885
                        
                        
                        
                        1,270Total
      operating expenses
                        
                        
                        654,687
                        
                        
                        
                        1,077,693
                        
                        
                        
                        1,238,508
                        
                        
                        
                        1,785,911Operating
      loss
                        
                        
                        (570,368
                        )
                        
                        
                        (997,720
                        )
                        
                        
                        (1,036,176
                        )
                        
                        
                        (1,634,286
                        )Other
      income (expense):Other
      income
                        
                        
                        -
                        
                        
                        
                        158
                        
                        
                        
                        -
                        
                        
                        
                        8,158Interest
      income
                        
                        
                        30
                        
                        
                        
                        2,025
                        
                        
                        
                        131
                        
                        
                        
                        13,128Interest
      expense
                        
                        
                        (23,344
                        )
                        
                        
                        (23,485
                        )
                        
                        
                        (46,378
                        )
                        
                        
                        (65,978
                        )Total
      other income (expense)
                        
                        
                        (23,314
                        )
                        
                        
                        (21,302
                        )
                        
                        
                        (46,247
                        )
                        
                        
                        (44,692
                        )Loss
      from continuing operations
                        
                        
                        (593,682
                        )
                        
                        
                        (1,019,022
                        )
                        
                        
                        (1,082,423
                        )
                        
                        
                        (1,678,978
                        )Income
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        1,695,670
                        
                        
                        
                        -
                        
                        
                        
                        1,689,342Net
      income (loss)
                        
                        $
                        (593,682
                        )
                        
                        $
                        676,648
                        
                        
                        $
                        (1,082,423
                        )
                        
                        $
                        10,364Preferred
      dividends
                        
                        
                        59,836
                        
                        
                        
                        78,904
                        
                        
                        
                        119,014
                        
                        
                        
                        108,712Net
      income (loss) attributable to common shareholders
                        
                        $
                        (653,518
                        )
                        
                        $
                        597,744
                        
                        
                        $
                        (1,201,437
                        )
                        
                        $
                        (98,348
                        )Basic
      income (loss) per common share:Continuing
      operations
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.03
                        )Discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        0.03
                        
                        
                        
                        -
                        
                        
                        
                        0.03Net
      income (loss)
                        
                        $
                        (0.01
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        (0.02
                        )
                        
                        $
                        0.00Diluted
      income (loss) per common share:Continuing
      operations
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.03
                        )Discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        0.02
                        
                        
                        
                        -
                        
                        
                        
                        0.03Net
      income (loss)
                        
                        $
                        (0.01
                        )
                        
                        $
                        0.00
                        
                        
                        $
                        (0.02
                        )
                        
                        $
                        0.00Weighted
      average common stock shares outstandingBasic
                        
                        
                        61,782,404
                        
                        
                        
                        57,790,618
                        
                        
                        
                        61,245,387
                        
                        
                        
                        55,619,780Diluted
                        
                        
                        61,782,404
                        
                        
                        
                        70,796,686
                        
                        
                        
                        61,245,387
                        
                        
                        
                        65,707,716










See
accompanying notes to unaudited consolidated financial
statements.


3


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Three and Six Months Ended June 30, 2009 and 2008


(Unaudited)





2009
                
                
                2008Cash
      Flows From Operating Activities:Net
      loss
                
                $
                (1,082,423
                )
                
                $
                10,364Income
      from discontinued operations
                
                
                -
                
                
                
                (1,689,342
                )Loss
      from continuing operations
                
                
                (1,082,423
                )
                
                
                (1,678,978
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                67,690
                
                
                
                4,617Bad
      debt expense
                
                
                10,778
                
                
                
                -Option
      and warrant expense
                
                
                9,300
                
                
                
                360,111Loss
      on disposition of equipment
                
                
                3,885
                
                
                
                1,270Stock
      issued for services
                
                
                -
                
                
                
                42,500Changes
      in:Accounts
    receivable
                
                
                30,130
                
                
                
                (12,767
                )Other current
    assets
                
                
                16,949
                
                
                
                4,392Accounts payable
                
                
                160,607
                
                
                
                (1,615,839
                )Accrued expenses
                
                
                175,770
                
                
                
                9,149Deferred revenue
                
                
                (1,064
                )
                
                
                143,921Net
      Cash Used In Operating Activities
                
                
                (608,378
                )
                
                
                (2,741,624
                )Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
                
                
                5,000
                
                
                
                -Cash
      paid for purchase of fixed assets
                
                
                (77,520
                )
                
                
                (6,528
                )Cash
      paid for construction of equipment
                
                
                (10,511
                )
                
                
                (75,778
                )Net
      Cash Used In Investing Activities
                
                
                (83,031
                )
                
                
                (82,306
                )Cash
      Flows From Financing Activities:Borrowings
      on debtor-in-possession financing
                
                
                -
                
                
                
                100,000Payments
      on short term debt
                
                
                (13,147
                )
                
                
                (582,781
                )Issuance
      of convertible preferred stock
                
                
                -
                
                
                
                4,000,000Common
      stock repurchased and cancelled
                
                
                -
                
                
                
                (900
                )Net
      Cash Provided By Financing Activities
                
                
                (13,147
                )
                
                
                3,516,319Discontinued
      operating activities
                
                
                -
                
                
                
                -Net
      Cash Provided By Discontinued Operations
                
                
                -
                
                
                
                -Net
      change in cash
                
                
                (704,556
                )
                
                
                692,389Cash
      at beginning of period
                
                
                731,631
                
                
                
                48,833Cash
      at end of period
                
                $
                27,075
                
                
                $
                741,222Cash
      paid for:Interest
                
                $
                970
                
                
                $
                31,589Income
      taxes
                
                
                -
                
                
                
                -Non-Cash
      Transactions:Conversion
      of deferred board compensation to common stock
                
                
                -
                
                
                
                161,000Conversion
      of related party interest to common stock
                
                
                -
                
                
                
                31,794Conversion
      of related party advances to common shares
                
                
                -
                
                
                
                800,000Issuance
      of note payable for related party debt and accrued
interest
                
                
                -
                
                
                
                1,120,000Cashless
      exercise of warrants
                
                
                1,350
                
                
                
                2,900Prepaid
      insurance financed with note payable
                
                
                111,059
                
                
                
                106,875Property
      financed with note payable
                
                
                21,455
                
                
                
                -






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-K. 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-K, 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 (i) Satellite
Communications Services and (ii) Down-hole Solutions, such as our AFJ
technology.





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





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





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





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





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





Allowance
for Doubtful Accounts.  Blast does not require collateral from
its customers with respect to accounts receivable but performs periodic credit
evaluations of such customer’s financial condition. Blast determines any
required allowance by considering a number of factors including length of time
accounts receivable are past due and Blast’s previous loss history. Blast
provides reserves for accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. As of June 30, 2009 and December 31, 2008, Blast has
determined that no allowance for doubtful accounts is required.


5


Earnings
Per Share.  Basic earnings per share equals net earnings
divided by weighted average shares outstanding during the
year.  Diluted earnings per share include the impact on dilution from
all contingently issuable shares, including options, warrants and convertible
securities.  The common stock equivalents from contingent shares are
determined by the treasury stock method.  Blast incurred a net loss
for the three and six month periods ended June 30, 2009 and therefore, basic and
diluted earnings per share for those periods are the same as all potential
common equivalent shares would be anti-dilutive.





New
Accounting Pronouncements. We have adopted recently
issued accounting pronouncements and have determined that they have no material
effect on our results of operations, financial position, or cash
flow.





NOTE
2 – GOING CONCERN





Blast has
a cash balance of $27,000, current assets of $0.9 million and stockholders’
equity of $3.2 million as of June 30, 2009. Blast had a loss from continuing
operations of approximately $1.1 million for the six months ended June 30, 2009
and an accumulated deficit at June 30, 2009 of approximately $71.9 million. The
financial statements do not include any adjustments that might be necessary if
Blast is unable to continue as a going concern. These conditions create
uncertainty as to Blast’s ability to continue as a going concern. Management is
trying to grow the existing businesses but may need to raise additional capital
through sales of common stock or convertible instruments as well as obtain
financing from third parties.





NOTE
3 – EQUIPMENT





Equipment
consists of the following:





Description
                
                Life
                
                March
      31,
                  2009
                
                December
      31,
                  2008Computer
      equipment
                
                3
      years
                
                $
      22,313
                
                $
      22,313Automobile/Trucks
                
                4
      years
                
                98,975
                
                26,265Service
      Trailer
                
                5
      years
                
                4,784
                
                4,784Remote
      Sensor Unit, in progress
                
                3
      years
                
                50,479
                
                50,479AFJ
      Rig
                
                10
      years
                
                1,166,215
                
                1,155,7041,342,765
                
                1,259,545Less:  accumulated
      depreciation
                
                
                
                (118,591)
                
                (68,282)$
      1,224,174
                
                $
      1,191,263








NOTE
4 – COMMITMENTS AND CONTINGENCIES





On June
12, 2009, the Company’s board of directors implemented cost cutting measures to
reduce overhead costs and conserve cash, including partial and full furloughs of
management and staff with reduced or no pay, respectively.   As
such, John O’Keefe, our then President and CEO, was furloughed without pay,
effective June 15, 2009, and therefore will not serve as President or CEO until
such time as he returns to the Company.  John MacDonald, CFO and Corporate
Secretary, and Andrew Wilson, VP Business Development (a non-executive position)
were reduced to half pay until October 2009 at which time payment is expected to
be received from Quicksilver (as defined below). The Blast board of directors
has appointed Michael L. Peterson, a current member of the board, to serve as
interim President and CEO in the absence of Mr. O’Keefe. If Mr. O’Keefe is not
retained after the furlough period, the Company will recognize a $100,000
employment severance liability under the terms of Mr. O’Keefe’s employment
contract.








6


NOTE
5 – PREFERRED STOCK





Related Party
Transactions





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 to purchase one share of common stock 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, two parties related to Blast’s largest
shareholder, Berg McAfee Companies.  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 our Second Amended Plan of Reorganization allowing Blast to emerge from
Chapter 11 bankruptcy and provided working capital of $1.6 million.





In
October 2008 Blast agreed to redeem 2,000,000 shares of Blast’s Series A
Preferred Stock held by Clyde Berg and McAfee Capital, LLC at the face value of
the Preferred shares, $0.50 per share, and paid $1,000,000 to redeem the
Preferred shares.  The Preferred shares have a dividend rate of 8% per
annum until paid or converted.  In connection with the Redemption,
Blast cancelled the 1,000,000 Preferred shares each held by Clyde Berg and
McAfee Capital, LLC, and consequently only 6,000,000 Preferred Shares remain
outstanding as of June 30, 2009. As of June 30, 2009, the aggregate and per
share dividend arrearages were $372,165 and $0.06, respectively.





NOTE
6 - OPTIONS AND WARRANTS





In March
2009, under the terms of the $0.01 warrants granted to Laurus Master Fund, Ltd.
(“Laurus”), in August 2006, Laurus elected to make a cashless warrant exercise
equivalent to 1,508,824 shares of common stock using a fair market value of
$0.095 per share.  This resulted in 1,350,000 shares being issued to
Laurus and 158,824 shares being cancelled under the cash-less exercise formula.
Of the 6,090,000 $0.01 warrants originally granted to Laurus, 1,713,913 warrants
remain unexercised as of June 30, 2009.





Share-based
Compensation





The
Company accounts for share-based compensation, including options, warrants and
nonvested shares, according to the provisions of SFAS No. 123R, "Share
Based Payment". During the six months ended June 30, 2009, the Company
recognized share-based compensation expense of $9,300. The remaining amount of
unamortized options expense at June 30, 2009 is $32,517.





Activity
in options during the six months ended June 30, 2009 and related balances
outstanding as of that date are reflected below. No options were issued during
the six months ended June 30, 2009. There were 3,032,792 options outstanding at
June 30, 2009. The intrinsic value of the exercisable options at June 30, 2009
was -0-.








Number
      of Shares
                
                Weighted
      Average Exercise Price
                
                Weighted
      Average Remaining Contract Term (# years)Outstanding
      at January 1, 2009
                3,032,792
                
                $
      0.59Granted
                -
                
                -Exercised
                -
                
                -Forfeited
      and canceled
                -
                
                -Outstanding
      at June 30, 2009
                3,032,792
                
                $
      0.59
                
                6.0Exercisable
      at June 30, 2009
                2,866,125
                
                $
      0.62
                
                5.8








7


Activity
in warrants during the six months ended June 30, 2009 and related balances
outstanding as of that date are reflected below. No warrants were issued during
the six months ended June 30, 2009. There were 11,995,089 warrants outstanding
at June 30, 2009. The intrinsic value of the exercisable warrants at June 30,
2009 was $139,958.








Number
      of Shares
                
                Weighted
      Average Exercise Price
                
                Weighted
      Average Remaining Contract Term (# years)Outstanding
      at January 1, 2009
                13,503,913
                
                $
      0.76Granted
                -
                
                -Exercised
                (1,350,000)
                
                0.01Forfeited
      and canceled
                (158,824)
                
                0.01Outstanding
      at June 30, 2009
                11,995,089
                
                $
      0.84
                
                3.4Exercisable
      at June 30, 2009
                11,995,089
                
                $
      0.84
                
                3.4











NOTE
7 – LITIGATION





Hallwood Energy/Hallwood
Petroleum Lawsuit


In
April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned
subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP
(collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5
million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million
in cash, issue $2.75 million in equity and irrevocably forgave $1.65 million in
deposits paid to Eagle.  The parties were fully and mutually released
from any and all claims between them.  The terms of the settlement
were approved by the board of each company and were confirmed by the Court.
Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September
2008.  Payments received from Hallwood were distributed in October
2008.





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





On March
2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for
the Northern District of Texas under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code in order that it could dispose of burdensome and uneconomical
assets and reorganize its financial obligations and capital
structure.





Subsequently,
the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in
this matter which transferred the control of Hallwood to the third party. We
believe this action will result in the elimination of any existing equity
position held in Hallwood, including Blast’s, so we will continue to recognize a
zero carrying value in our financial statements for our Hallwood equity
interests until the matter is fully resolved.





Quicksilver Resources
Lawsuit


In
September 2008, Blast and Eagle entered into a Compromise Settlement and Release
Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to
resolve the pending litigation.  Blast and Quicksilver also agreed to
release all the claims against each other and certain related parties.
Quicksilver agreed to pay Eagle a total of $10 million, as follows:





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


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


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


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





8


In the
event any fees are not paid on their due date and Quicksilver’s failure to pay
is not cured within 10 days after written notice, then all of the remaining
payments immediately become due and payable. Quicksilver made the first payment
of $5 million in October 2008. The remaining amounts due from Quicksilver are
shown as a current and long term receivable in the balance sheet, net of
contingent legal fees.





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 deem rejected the
Technology Purchase Agreement (the “Agreement”) between Alberta and Blast. That
motion was denied, and Alberta appealed the bankruptcy court’s rulings. However,
the District Court has ordered that the consolidated appeal is stayed and
administratively closed until Alberta has exhausted its appeal of the
confirmation order. Alberta objected to the confirmation of Blast’s plan of
reorganization. That objection was overruled by the bankruptcy court, and
Alberta appealed. This appeal was dismissed by the district court as moot.
Alberta filed a motion for reconsideration and rehearing of the District Court’s
order. That matter is presently pending and the Fifth District Court of Appeals
has scheduled to hear oral arguments on this matter on September 1, 2009. Blast
believes that the rulings made by the district court were correct and expects
the appeal process to concur with the district judge’s rulings.





General


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





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





NOTE
8 – BUSINESS SEGMENTS





Blast has
two reportable segments: (1) Satellite Communications Services and (2) Down-hole
Solutions.  A reportable segment is a business unit that has a
distinct type of business based upon the type and nature of services and
products offered.  Blast evaluates performance and allocates resources
based on profit or loss from operations before other income or expense and
income taxes.  The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting
policies.  The table below reports certain financial information by
reportable segment for the three and six months ended June 30, 2009 and
2008:








For
      the Three Months Ended
                  June
      30,
                
                
                For
      the Six Months Ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues:Satellite
      Communications
                
                $
                84,319
                
                
                $
                79,973
                
                
                $
                182,332
                
                
                $
                151,625Down-hole
      Solutions
                
                
                -
                
                
                
                -
                
                
                
                20,000
                
                
                
                -Total
      Revenue
                
                $
                84,319
                
                
                $
                79,973
                
                
                $
                202,332
                
                
                $
                151,625Costs
      of Goods Sold:Satellite
      Communications
                
                $
                74,370
                
                
                $
                96,935
                
                
                $
                163,365
                
                
                $
                193,235Down-hole
      Solutions
                
                
                194,709
                
                
                
                100,612
                
                
                
                294,425
                
                
                
                124,433Corporate
                
                
                385,608
                
                
                
                880,146
                
                
                
                780,718
                
                
                
                1,468,243Total
      Costs of Goods Sold
                
                $
                654,687
                
                
                $
                1,077,693
                
                
                $
                1,238,508
                
                
                $
                1,785,911Operating
      profit (loss):Satellite
      Communications
                
                $
                9,949
                
                
                $
                (16,962
                )
                
                $
                18,967
                
                
                $
                (41,610
                )Down-hole
      Solutions
                
                
                (194,709
                )
                
                
                (100,612
                )
                
                
                (274,425
                )
                
                
                (124,433
                )Corporate
                
                
                (385,608
                )
                
                
                (880,146
                )
                
                
                (780,718
                )
                
                
                (1,468,243
                )Operating
      Loss
                
                $
                (570,368
                )
                
                $
                (997,720
                )
                
                $
                (1,036,176
                )
                
                $
                (1,634,286
                )





9


NOTE
9 – DISCONTINUED OPERATIONS





There are
no assets or liabilities associated with the discontinued operations at June 30,
2009 and December 31, 2008.





Net
income from the discontinuance of drilling operations for the three and six
months ended June 30, 2009 and 2008 are as follows:








For
      the Three Months Ended
                  June
      30,
                
                
                For
      the Six Months Ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      Expenses:Cost
      of sales
                
                
                -
                
                
                
                (47,070
                )
                
                
                -
                
                
                
                (43,403
                )Selling,
      general and administrative
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                644Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,047Total
      operating expenses
                
                
                -
                
                
                
                (47,070
                )
                
                
                
                
                
                
                (41,712
                )Gain
      from discontinued operations
                
                
                -
                
                
                
                47,070
                
                
                
                -
                
                
                
                41,712Other
      income (expense)Gain
      on forgiveness of debt
                
                
                -
                
                
                
                1,648,600
                
                
                
                -
                
                
                
                1,648,600Other
      expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,007
                )Interest
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                37Total
      other income (expense)
                
                
                -
                
                
                
                1,648,600
                
                
                
                -
                
                
                
                1,647,630Net
      loss from discontinued operations
                
                $
                -
                
                
                $
                1,695,670
                
                
                $
                -
                
                
                $
                1,689,342








NOTE
10 – SUBSEQUENT EVENTS





In August
2009, Blast entered into a Demand Promissory Note (“Note”) with a third-party
individual (“Lender”), pursuant to which the Lender loaned Blast $60,000. 
The Note is due and payable on the earlier to occur of (a) August 10, 2010, or
(b) any time after October 10, 2009, if the Lender declares all or a portion of
the loan due and payable on such date (the “Due Date”). The Note bears
interest at the rate of 8% per annum, with interest and principal payable on the
Due Date.  Blast has the right to repay the Note at any time without
penalty.  In connection with and as consideration for the Note, Blast
granted the Lender warrants to purchase 250,000 shares of its common
stock.  The warrants have an exercise price of $0.10 per share, contain a
cashless exercise provision, and are exercisable for three years from the grant
date (August 10, 2009).








10


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 March 31, 2009 and incorporated herein by reference. The use of the term
“Blast” or the “Company” herein refers to Blast Energy Services, Inc. and its
wholly-owned subsidiary, Eagle Domestic Drilling Operations LLC.





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





During
the next twelve months, Blast plans to attempt to expand its Satellite
Communications Services and Down-hole Solutions businesses. Blast may choose to
raise funds through the sale of debt and/or equity in order to expand its
current lateral jetting rig fleet and/or to support its operations. The sale of
additional equity securities, if undertaken by Blast and if accomplished, may
result in dilution to our shareholders. Blast cannot assure you, however, that
future financing will be available in amounts or on terms acceptable to Blast,
or at all.





Three
Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008




Satellite Communications
Services





Satellite
Communications Services’ revenues increased by $4,000 to $84,000 for the three
months ended June 30, 2009 compared to $80,000 for the three months ended June
30, 2008. The increase was the result of new business and customer renewals. The
operating margin from Satellite Communications Services increased by $27,000 to
an operating profit of $10,000 for the three months ended June 30, 2009 compared
to an operating loss of $17,000 for the three months ended June 30,
2008.





Down-hole
Solutions





Down-hole
Solutions’ revenues were $-0- for the three months ended June 30, 2009 and 2008.
The Company has resumed field testing of this technology and unsuccessfully
attempted to drill laterals on several wells during the quarter. The loss
generated increased $94,000 to $195,000 for the three months endedJune 30, 2009 compared
to a loss of $101,000 during the three months ended June 30, 2008. This increase
is primarily due to rig crew, repairs, and maintenance costs associated with rig
deployment compared with certain pre-deployment fabrication costs and rig
repairs incurred in 2008.





Depreciation and
Amortization





Depreciation
and amortization expense increased by $34,000 to $36,000 for the three months
ended June 30, 2009 compared to $2,000 for the three months ended June 30,
2008.  This increase is primarily related to the depreciation of the
AFJ rig which was brought into service in October 2008.





Selling,
General and Administrative




Selling,
general and administrative (“SG&A”) expenses decreased by $537,000 to
$339,000 for the three months ended June 30, 2009 compared to $876,000 for the
three months ended June 30, 2008.






11







For
      the Three Months Ended June 30,
                Increase
                  (Decrease)(in
      thousands)
                2009
                2008Payroll
      and related costs
                $
      111
                $
      122
                $
      (11)Option
      and warrant expense
                1
                308
                (307)Legal
      fees & settlements
                62
                234
                (172)External
      services
                81
                150
                (69)Insurance
                50
                32
                18Travel
      & entertainment
                15
                17
                (2)Office
      rent, communications,  misc.
                19
                13
                6$
      339
                $
      876
                $
      (537)








Significantly
lower administrative costs were primarily a result of lower payroll costs
related to an increase in the allocation to the Down-hole Services business,
lower legal fees following the emergence from bankruptcy and lower non-cash
charges associated with the lack of grants of warrants and options during the
three month ended June 30, 2009, compared to the three months ended June 30,
2008.





Interest
Expense





Interest
expense was $23,000 for the three months ended June 30, 2009 and 2008. During
the three months ended June 30, 2009 and 2008, interest expense included accrued
interest on the $1.1 million related party note related to the fabrication of
the AFJ rig.





Loss from Continuing
Operations





Loss from
continuing operations improved by $425,000 to $594,000 for the three months
ended June 30, 2009 compared to $1,019,000 for the three months ended June 30,
2008, primarily due to significantly lower administrative costs partially offset
by higher costs of services from the Down-hole Solutions business.





Income  from
Discontinued Operations





Income
from discontinued operations was $-0- for the three months ended June 30, 2009
compared to a gain of $1.7 million for the three months ended June 30,
2008. These operations relating to our prior rig acquisition and related
oil drilling operations continue to have no activity, having been discontinued
since mid 2007. The gain in 2008 was primarily due to the April 2008 settlement
with Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”)
which irrevocably forgave an accumulated liability of $1,648,600 previously
accrued to cover an advance made by Hallwood.





Net Income
(Loss )





Net loss
increased by $1,271,000 to a loss of $594,000 for the three months ended June
30, 2009 compared to a net gain of $677,000 for the three months ended June 30,
2008, primarily due to the gain from the April 2008 settlement whereby Hallwood
irrevocably forgave an accumulated liability of $1,648,600 previously accrued to
cover an advance made by Hallwood. The loss in 2009 was primarily due to higher
costs of services from Down-hole Solutions business partially offset by lower
administrative costs.





Six
Months Ended June 30, 2009 Compared to the Six Months Ended June 30,
2008





Satellite Communications
Services





Satellite
Communications Services’ revenues increased by $30,000 to $182,000 for the six
months ended June 30, 2009 compared to $152,000 for the six months ended June
30, 2008. The increase was the result of new business and customer renewals,
including the new systems sold to a major pipeline company. The operating margin
from Satellite Communications Services increased by $61,000 to a gross profit of
$19,000 for the six months ended June 30, 2009 compared to a gross loss of
$42,000 for the six months ended June 30, 2008.


12


Down-hole
Solutions





Down-hole
Solutions’ revenues for the six months ended June 30, 2009 increased to $20,000
compared to $-0- revenue for the six months ended June 30, 2008. The Company
resumed field testing of this Applied Fluid Jetting (“AFJ”) technology in fiscal
2009, and the lateral jetting rig successfully drilled laterals on one well in
January 2009 but has not been successful on laterals attempted in the second
quarter of 2009. The loss generated increased $150,000 to $274,000 for the six
months endedJune
30, 2009 compared to $124,000 during the six months ended June 30, 2008. This
increase represents rig crew, repairs, and maintenance costs associated with rig
deployment in 2009 compared with certain pre-deployment fabrication costs and
rig repairs incurred in 2008.





Depreciation and
Amortization





Depreciation
and amortization expense increased by $63,000 to $68,000 for the six months
ended June 30, 2009 compared to $5,000 for the six months ended June 30,
2008.  This increase is primarily related to the depreciation of the
AFJ rig which was brought into service in October 2008.





Selling,
General and Administrative




Selling,
general and administrative (“SG&A”) expenses decreased by $764,000 to
$698,000 for the six months ended June 30, 2009 compared to $1,462,000 for the
six months ended June 30, 2008.








For
      the Six Months Ended June 30,
                Increase
                  (Decrease)(in
      thousands)
                2009
                2008Payroll
      and related costs
                $
      226
                $
      291
                $
      (65)Option
      and warrant expense
                9
                360
                (351)Legal
      fees & settlements
                72
                461
                (389)External
      services
                240
                221
                19Insurance
                79
                63
                16Travel
      & entertainment
                33
                30
                3Office
      rent, communications,  misc.
                39
                36
                3$
      698
                $
      1,462
                $
      (764)








Significantly
lower administrative costs were primarily a result of lower payroll costs
related to deferred salaries being paid upon emergence from bankruptcy in 2008
and increase in the allocation to the Down-hole Services business, lower legal
fees following the emergence from bankruptcy and lower non-cash charges
associated with the lack of any grant of warrants or options during the six
months ended June 30, 2009.





Interest
Expense





Interest
expense decreased by $20,000 to $46,000 for the six months ended June 30, 2009
compared to $66,000 for the six months ended June 30, 2008. During the six
months ended June 30, 2009 and 2008, interest expense included accrued interest
on the $1.1 million related party note related to the fabrication of the AFJ
rig. The higher interest expense in 2008 is related to the payment of interest
on the Debtor-in-Possession loan that was paid off in April 2008.





Loss from Continuing
Operations





Loss from
continuing operations improved by $0.6 million to $1.1 million for the six
months ended June 30, 2009 compared to $1.7 million for the six months ended
June 30, 2008, primarily due to lower administrative costs partially offset by
higher costs of services from Down-hole Solutions business.





Income from Discontinued
Operations





Income
from discontinued operations was $-0- for the six months ended June 30, 2009
compared to a gain of $1.7 million for the six months ended June 30,
2008. These operations continue to have no activity, having been
discontinued since mid 2007. The gain from in 2008 was primarily due to the
April 2008 settlement with Hallwood which irrevocably forgave an accumulated
liability of $1,648,600 previously accrued to cover an advance made by
Hallwood.


13


Net
Loss





The net
loss increased by $1.0 million to $1,1 million for the six months ended June 30,
2009 compared to a gain of $10,000 for the six months ended June 30, 2008,
primarily due to the gain from the April 2008 settlement whereby Hallwood
irrevocably forgave an accumulated liability of $1,648,600 previously accrued to
cover an advance made by Hallwood. The loss in 2009 was primarily due to higher
costs of services from Down-hole Solutions business partially offset by lower
administrative costs.





Liquidity
and Capital Resources




Blast had
total current assets of $0.9 million as of June 30, 2009, including a cash
balance of $27,000, compared to total current assets of $1.6 million as of
December 31, 2008, including a cash balance of $732,000.  The decrease
in current assets is primarily related to the cash costs expended to field test
and deploy the AFJ rig.





Blast had
total assets as of June 30, 2009 of $5.1 million compared to total assets of
$5.7 million as of December 31, 2008.  This decrease is primarily due
to cash expenditures related to the costs of deploying the AFJ rig as described
above.





Blast had
total liabilities of $1.8 million as of June 30, 2009, including current
liabilities of $0.7 million compared to total liabilities of $1.4 million as of
December 31, 2008, including current liabilities of $0.3 million.  The
increase in current liabilities is related to the financing of insurance
policies covering the AFJ rig and its workers, increase in accounts payable, and
the deferral of officers’ salaries. Blast also had net working capital of $0.2
million and stockholders’ equity of $3.2 million as of June 30,
2009.





On June
12, 2009, the Company’s board of directors implemented cost cutting measures to
reduce overhead costs and conserve cash, including partial and full furloughs of
management and staff with reduced or no pay, respectively.   As
such, John O’Keefe, our then President and CEO, was furloughed without pay,
effective June 15, 2009, and therefore will not serve as President or CEO until
such time as he returns to the Company.  John MacDonald, CFO and Corporate
Secretary, and Andrew Wilson, VP Business Development (a non-executive position)
were reduced to half pay until October 2009 at which time payment is expected to
be received from Quicksilver (as defined below). The Blast Board of directors
has appointed Michael L. Peterson, a current member of the board, to serve as
interim President and CEO in the absence of Mr. O’Keefe.





On or
around August 10, 2009, Blast entered into a Demand Promissory Note with a
third-party individual (“Lender”), pursuant to which Lender loaned Blast
$60,000, which amount bears interest at the rate of 8% per annum, with interest
and principal payable on the Due Date (as described below).  The loan is
due and payable on the earlier to occur of (a) August 10, 2010, and (b) any time
after October 10, 2009, if Lender declares all or a portion of the loan due and
payable on such date (the “Due Date”).  Blast has the right to repay the
loan at any time without penalty.  In connection with and consideration for
the loan, Blast granted the Lender warrants to purchase 250,000 shares of
Blast’s common stock, which warrants have an exercise price of $0.10 per share,
contain a cashless exercise provision, and are exercisable for three years from
the grant date (August 10, 2009).





Cash Flows from Operating
Activities





Blast had
net cash used in operating activities of approximately $608,000 for the six
months ended June 30, 2009, which was mainly due to the loss from continuing
operations of $1,082,000.





Cash Flows used in Investing
Activities





Blast had
net cash used in investing activities of $83,000 for the six months ended June
30, 2009, which primarily consisted of capitalized improvements to the AFJ rig
and the purchase of a crane truck to support field operations.





Cash Flows from Financing
Activities





Blast had
net cash used in financing activities of $13,000 for the six months ended June
30, 2009.





14


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. 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.





Off-Balance Sheet
Arrangements





As of
June 30, 2009, we had no off-balance sheet arrangements.




Recent Accounting
Pronouncements





For the
period ended June 30, 2009, there were no significant changes to our critical
accounting policies as identified in our Annual Report on Form 10-K for the year
ended December 31, 2008.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
Applicable.





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





Our
management, with the participation of our Principal Executive Officer and
Principal Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered
by this Quarterly Report on Form 10-Q. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative
to their costs.





Based on
our evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.





Changes in Internal Control
Over Financial Reporting





We
regularly review our system of internal control over financial reporting to
ensure we maintain an effective internal control environment.





There
were no changes in our internal control over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





15


Part
II. OTHER INFORMATION




Item
1. Legal Proceedings





Hallwood Energy/Hallwood
Petroleum Lawsuit


In
April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned
subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP
(collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5
million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million
in cash, issue $2.75 million in equity and irrevocably forgave $1.65 million in
deposits paid to Eagle.  The parties were fully and mutually released
from any and all claims between them.  The terms of the settlement
were approved by the board of each company and were confirmed by the Court.
Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September
2008.  Payments received from Hallwood were distributed in October
2008.





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





On March
2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for
the Northern District of Texas under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code in order that it could dispose of burdensome and uneconomical
assets and reorganize its financial obligations and capital
structure.





Subsequently
the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in
this matter which transferred the control of Hallwood to the third party. We
believe this action will result in the elimination of any existing equity
position held in Hallwood, so we will continue to recognize a zero carrying
value in our financial statements until the matter is fully
resolved.





Quicksilver Resources
Lawsuit


In
September 2008, Blast and Eagle entered into a Compromise Settlement and Release
Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to
resolve the pending litigation.  Blast and Quicksilver also agreed to
release all the claims against each other and certain related parties.
Quicksilver agreed to pay Eagle a total of $10 million, as follows:





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


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


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


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





In the
event any fees are not paid on their due date and Quicksilver’s failure to pay
is not cured within 10 days after written notice, then all of the remaining
payments immediately become due and payable. Quicksilver made the first payment
of $5 million in October 2008. The remaining amounts due from Quicksilver are
shown as a receivable on the balance sheet, net of contingent legal
fees.





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 deem rejected the
Technology Purchase Agreement (the “Agreement”) between Alberta and Blast. That
motion was denied, and Alberta appealed the bankruptcy court’s rulings. However,
the District Court has ordered that the consolidated appeal is stayed and
administratively closed until Alberta has exhausted its appeal of the
confirmation order. Alberta objected to the confirmation of Blast’s plan of
reorganization. That objection was overruled by the bankruptcy court, and
Alberta appealed. This appeal was dismissed by the district court as moot.
Alberta filed a motion for reconsideration and rehearing of the District Court’s
order. That matter is presently pending and the Fifth District Court of Appeals
has scheduled to hear oral arguments on this matter on September 1, 2009. Blast
believes that the rulings made by the district court were correct and expects
the appeal process to concur with the district judge’s rulings.





General


Other
than the aforementioned 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.


16


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 provide no assurance about the
outcome of these or any other pending legal and administrative proceedings and
the effect such outcomes may have on Blast, except as described above, 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 Annual Report on Form 10-K for the year ended December 31, 2008,
filed with the Commission on March 31, 2009.





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





None.





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





Our Annual Meeting of stockholders was
held on May 27, 2009, which meeting had a record date of April 9, 2009, and
disclosed herein are the final voting results of such meeting:





NUMBER
      OF VOTES CAST:YES(1)
                    WITHHELD
      AUTHORITYProposal One - Election
      of Directors (all of which were Directors prior to the meeting, and whose
      term continued after the meeting):John
      R. Block,
                    54,762,962
                    2,850,820Roger
      P. (Pat) Herbert,
                    56,657,987
                    955,795Joseph
      J. Penbera, Ph.D.,
                    54,531,597
                    3,082,185Jeffrey
      R. Pendergraft (2), and
                    56,669,987
                    943,795Michael
      L. Peterson
                    57,401,034
                    1,888,415YES(1)
                    NO
                    ABSTAINProposal Two – Approval
      of Independent Public Accountant (GBH CPAs, PC):
                    57,401,034
                    146,041
                    66,708Proposal Three –
      Approval of the Company’s 2009 Stock Incentive Plan and the cancellation
      of the Company’s previously adopted 2003 Employee Stock Option
      Plan:
                    32,539,618
                    850,113
                    257,150





(1)
Includes the vote of all 6,000,000 shares of Blast’s Series A Preferred Stock,
which are each able to vote the number of shares of common stock such shares are
convertible into, and therefore each vote one voting share or 6,000,000 voting
shares total.





(2)
Resigned effective July 13, 2009.





As a
result of the voting described above, all of our director nominees were
re-elected as directors of Blast, GBH CPAs, PC, was approved as Blast’s
independent auditors for the fiscal year ended December 31, 2009, and Blast’s
2009 Stock Incentive Plan, and the cancellation of the 2003 Employee Stock
Option Plan (without affecting the validity of any securities granted pursuant
to such plan) were approved at the meeting.





Blast’s
2009 Stock Incentive Plan:





The 2009
Stock Incentive Plan (the “Plan”) is intended to secure for the Company the
benefits arising from ownership of the Company's common stock by the employees,
officers, directors and consultants of the Company, all of whom are and will be
responsible for the Company's future growth.  The Plan is designed to
help attract and retain for the Company and its affiliates personnel of superior
ability for positions of exceptional responsibility, to reward employees,
officers, directors and consultants for their services and to motivate such
individuals through added incentives to further contribute to the success of the
Company and its affiliates.


17


Pursuant
to the Plan, the Board of Directors (or a committee thereof) has the ability to
award grants of incentive or non-qualified options, restricted stock awards,
performance shares and other securities as described in greater detail in the
Plan to the Company’s employees, officers, directors and
consultants.  The number of securities issuable pursuant to the Plan
is initially 5,000,000, provided that the number of shares available for
issuance under the Plan will be increased on the first day of each Fiscal Year
(as defined below) beginning with the Company’s 2011 Fiscal Year, in an amount
equal to the greater of (i) 2,000,000 shares; or (ii) three percent (3%) of the
number of issued and outstanding shares of the Company on the first day of such
Fiscal Year.  The Company’s “Fiscal Year” shall be defined as the
twelve month accounting period which the Company has designated for its public
accounting purposes, which shall initially be the period from January 1 to
December 31, and shall thereafter be such Fiscal Year as the Company shall adopt
from time to time.





Item
5. Other Information.





None.





Item
6. Exhibits





Exhibit
      4.1*
              
              Blast
      Energy Services, Inc. 2009 Stock Incentive PlanExhibit
      31.1*
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      31.2*
              
              Certification
      of Principal Accounting Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      32.1*
              
              Certification
      of Principal Executive Officer pursuant to Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002Exhibit
      32.2*
              
              Certification
      of Principal Accounting Officer pursuant to Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





*Filed
herewith














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/ Michael PetersonMichael
      PetersonInterim
      President and CEO(Principal
      Executive Officer)Date:  August
      14, 2009By:
            /s/ John MacDonald, CFOJohn
      MacDonaldChief
      Financial Officer(Principal
      Accounting Officer)Date:  August
      14, 2009