**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





**(Mark
      One)**


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





**For
      the quarterly period ended September 30, 2006**





** ̈**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT**





**For
      the transition period from** **** **to** ****





**333-64122**


**(Commission
      file number)**





**Blast
      Energy Services, Inc.**


**(Exact
      name of small business issuer as specified in its charter)**





**California**
            **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)**





**(Former
      name, former address and former fiscal year, if changed since last
      report)**




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





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


**Yes** ** ̈** **No** **x** ****





The
      number of shares outstanding of each of the issuer’s classes of common equity as
      of September 30, 2006 - 66,722,904.





The
      common stock of Blast Energy Services, Inc. is traded on the OTC Bulletin Board
      under the symbol “BESV.”





**Transitional
      Small Business Disclosure Format (check
      one):     Yes** ** ̈** **No** **x** ****







1


**Blast
      Energy Services, Inc.**





**Index**





**Page
                Number**PART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements
            3Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Plan of
                Operation
            15Item
                3.
            Controls
                and Procedures
            19PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                6.
            Exhibits
                and Reports on Form 8-K
            21SIGNATURES
            21




2


**Blast
      Energy Services, Inc.**





**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. Financial Statements**





**Page
                Number**Balance
                Sheets as of September 30, 2006 and December 31, 2005
            4Statements
                of Operations, for the three and nine months ended September 30,
                2006 and
                2005
            5Statements
                of Cash Flows, for the three and nine months ended September 30,
                2006 and
                2005
            6Notes
                to Financial Statements
            8




3


**BLAST
      ENERGY SERVICES, INC.**


**BALANCE
      SHEETS**


**As
      of September**  **30,
      2006 and December 31, 2005**





**September****30,**
              **2006**
            
            **December
                31,**
              **2005****Assets**
            
            (Unaudited)
            
            (Restated)Current
                AssetsCash
            
            $
            3,869,534
            
            $
            835,978Restricted
                cash
            
            
            704,750
            
            
            -Accounts
                receivable
            
            
            181,978
            
            
            156,437Deferred
                consulting fees
            
            
            1,800,000
            
            
            -Other
                assets
            
            
            487,494
            
            
            231,413Total
                Current Assets
            
            
            7,043,756
            
            
            1,223,828Deferred
                financing costs
            
            
            1,430,277
            
            
            -Intellectual
                property, net of $90,536 and $27,857 accumulated
                amortization
            
            
            1,079,464
            
            
            1,142,143Equipment,
                net of $239,594 and $22,416 accumulated depreciation
            
            
            60,133,160
            
            
            977,269Deferred
                consulting fees, less current portion
            
            
            3,450,000
            
            
            -Total
                Assets
            
            $
            73,136,657
            
            $
            3,343,240**Liabilities
                and Stockholder’s Equity (Deficit)**Current
                LiabilitiesAccounts
                payable
            
            $
            831,354
            
            $
            622,396Accounts
                payable-related parties
            
            
            321,300
            
            
            -Accrued
                expenses
            
            
            845,132
            
            
            533,843Escrow
            
            
            704,750
            
            
            -Deferred
                revenue
            
            
            1,718,899
            
            
            131,425Advances-related
                parties
            
            
            1,000,000
            
            
            -Notes
                payable-related parties, net of unamortized discount of $-0- and
                $14,814
            
            
            -
            
            
            185,186Notes
                payable-other
            
            
            542,500
            
            
            395,000Current
                portion of long term payable
            
            
            1,800,000
            
            
            -Total
                Current Liabilities
            
            
            7,763,935
            
            
            1,867,850Long
                Term LiabilitiesAdvances-related
                parties
            
            
            -
            
            
            1,000,000Note
                payable-other
            
            
            -
            
            
            500,000Deferred
                revenue, less current portion
            
            
            -
            
            
            6,780Senior
                debt, net of unamortized discount of $12,387,189
            
            
            28,212,811
            
            
            -Long
                term payable
            
            
            3,450,000
            
            
            -Total
                Liabilities
            
            
            39,426,746
            
            
            3,374,630Commitments
                and Contingencies
            
            
            -
            
            
            -Stockholders’
                Equity/(Deficit)Common
                stock, $.001 par value, 100,000,000 shares authorized, 66,722,904
                and
                42,060,477 shares issued and outstanding
            
            
            66,723
            
            
            42,060Additional
                paid in capital
            
            
            68,711,526
            
            
            29,855,409Accumulated
                deficit
            
            
            (35,068,338
            )
            
            (29,928,859
            )Total
                Stockholders’ Equity (Deficit)
            
            
            33,709,911
            
            
            (31,390
            )Total
                Liabilities and Stockholders’ Equity (Deficit)
            
            $
            73,136,657
            
            $
            3,343,240





See
      accompanying notes to financial statements.


4


**BLAST
      ENERGY SERVICES, INC.**


**STATEMENTS
      OF OPERATIONS**


**Three
      and Nine Months Ended September**  **30,
      2006 and 2005**


**(Unaudited)**





**For
                the Three Months Ended**
            
            **For
                the Nine Months Ended****September
                30,**
            
            **September
                30,**2006
            
            2005
            
            2006
            
            2005(Restated)
            
            
            
            (Restated)Revenue:Drilling
                Services
            
            $
            158,296
            
            $
            -
            
            $
            158,296
            
            $
            -Down-hole
                Solutions
            
            
            -
            
            
            8,500
            
            
            14,150
            
            
            27,491Satellite
                Communications
            
            
            251,714
            
            
            293,937
            
            
            808,758
            
            
            802,712Total
                Revenue
            
            
            410,010
            
            
            302,437
            
            
            981,204
            
            
            830,203Cost
                of Services Provided:Drilling
                Services
            
            
            793,466
            
            
            -
            
            
            793,466
            
            
            -Down-hole
                Solutions
            
            
            326,686
            
            
            113,493
            
            
            759,533
            
            
            351,045Satellite
                Communications
            
            
            200,454
            
            
            217,979
            
            
            703,723
            
            
            603,097Total
                Cost of Services Provided
            
            
            1,320,606
            
            
            331,472
            
            
            2,256,722
            
            
            954,142Gross
                Margin (Deficit)
            
            
            (910,596
            )
            
            (29,035
            )
            
            (1,275,518
            )
            
            (123,939
            )Operating
                Expenses:Selling,
                general and administrative
            
            
            914,614
            
            
            963,581
            
            
            2,221,000
            
            
            2,485,545Depreciation
                and amortization
            
            
            227,235
            
            
            27,182
            
            
            279,857
            
            
            76,670Bad
                debts (recoveries)
            
            
            (10,290
            )
            
            -
            
            
            (10,290
            )
            
            10,000Operating
                Loss
            
            
            (2,042,155
            )
            
            (1,019,798
            )
            
            (3,766,085
            )
            
            (2,696,154
            )Other
                (Income) Expense:Other
                (income)
            
            
            (10,524
            )
            
            (350,000
            )
            
            (92,185
            )
            
            (350,000
            )Interest
                expense (net)
            
            
            1,130,132
            
            
            50,400
            
            
            1,203,579
            
            
            147,258Loss
                on extinguishment of debt
            
            
            -
            
            
            -
            
            
            262,000
            
            
            -Gain
                on sale
            
            
            -
            
            
            -
            
            
            -
            
            
            (971
            )Total
                other (income)/expense
            
            
            1,119,608
            
            
            (299,600
            )
            
            1,373,394
            
            
            (203,713
            )Net
                Loss
            
            $
            (3,161,763
            )
            $
            (720,198
            )
            $
            (5,139,479
            )
            $
            (2,492,441
            )Basic
                and diluted net loss per share
            
            $
            (0.06
            )
            $
            (0.02
            )
            $
            (0.11
            )
            $
            (0.07
            )Weighted
                average shares outstanding
            
            
            52,589,643
            
            
            38,034,048
            
            
            46,363,690
            
            
            36,309,792





See
      accompanying notes to financial statements.


5


**BLAST
      ENERGY SERVICES, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**Nine
      Months Ended September 30, 2006 and 2005**


**(Unaudited)**


**For
                the Nine Months Ended****September
                30,****2006**
            
            **2005**(Restated)**Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (5,139,480
            )
            $
            (2,492,441
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Stock
                issued for services
            
            
            644,000
            
            
            1,066,761Option
                and warrant expense
            
            
            341,902
            
            
            75,000Amortization
                of note discount
            
            
            603,992
            
            
            91,235Depreciation
                and amortization
            
            
            279,857
            
            
            76,670Amortization
                of deferred financing costs
            
            
            68,029
            
            
            -Gain
                on sale of equipment
            
            
            -
            
            
            (971
            )Loss
                on extinguishment of debt
            
            
            262,000
            
            
            -Note
                payable issued for legal settlement
            
            
            -
            
            
            500,000Receivable
                from related party
            
            
            3,600
            
            
            -Bad
                debt provisions
            
            
            (10,290
            )
            
            10,000Change
                in working capital items
            
            
            891,762
            
            
            (139,301
            )Net
                Cash Used In Operating Activities
            
            
            (2,054,628
            )
            
            (813,047
            )**Cash
                Flows From Investing Activities:**Purchase
                of Eagle, net of cash received of $1,648,600
            
            
            (47,351,400
            )
            
            -Investment
                in restricted cash
            
            
            (704,750
            )
            
            -Construction
                of equipment
            
            
            (127,303
            )
            
            (812,955
            )Proceeds
                from sale of license
            
            
            -
            
            
            535,000Purchase
                of property and equipment
            
            
            (300,163
            )
            
            (1,000
            )Net
                Cash Used In Investing Activities
            
            
            (48,483,616
            )
            
            (278,955
            )**Cash
                Flows From Financing Activities:**Proceeds
                from sale of stock
            
            
            15,450,000
            
            
            241,500Proceeds
                from exercise of options and warrants
            
            
            211,778
            
            
            300Net
                proceeds from senior debt
            
            
            37,912,521
            
            
            -Advance
                on future financing
            
            
            -
            
            
            900,000Payments
                on note payable
            
            
            (2,500
            )
            
            (5,000
            )Net
                Cash Provided By Financing Activities
            
            
            53,571,799
            
            
            1,136,800Net
                change in cash
            
            
            3,033,555
            
            
            44,798Cash
                at beginning of period
            
            
            835,978
            
            
            266,917Cash
                at end of period
            
            $
            3,869,533
            
            $
            311,715**Cash
                paid for:**Interest
            
            $
            84,865
            
            $
            -Income
                taxes
            
            
            -
            
            
            -





See
      accompanying notes to financial statements.


6


**BLAST
      ENERGY SERVICES, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS (Continued)**


**Nine
      Months Ended September 30, 2006 and 2005**


**(Unaudited)**





**Non-Cash
                Transactions:**Shares
                issued for acquisition of Eagle
            
            $
            3,120,000
            
            $
            -Warrants
                issued for acquisition of Eagle
            
            
            18,286,835
            
            
            -Conversion
                of accounts payable to common stock
            
            
            -
            
            
            206,737Conversion
                of notes payable and interest payable to common stock
            
            
            550,000
            
            
            225,966Additional
                shares issued for interest payable
            
            
            17,666
            
            
            -Conversion
                of accrued bonuses to common stock
            
            
            -
            
            
            197,474Shares
                issued for extinguishment of debt and liabilities
            
            
            -
            
            
            253,287Exchange
                of equipment for customer deposit
            
            
            -
            
            
            175,000Exchange
                of equipment for accounts payable
            
            
            -
            
            
            3,883Exchange
                of intangible for 3 million shares of stock
            
            
            -
            
            
            1,170,000Shares
                issued for accounts payable
            
            
            27,000
            
            
            -Long-term
                payable for consulting agreement
            
            
            5,400,000
            
            
            -Shares
                issued for equipment
            
            
            20,000
            
            
            -





See
      accompanying notes to financial statements.


7


**BLAST
      ENERGY SERVICES, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





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 for interim financial
      information and with the instructions to Form 10-QSB. Accordingly, they do
      not
      include all of the information and footnotes required by generally accepted
      accounting principles for complete financial statements and should be read
      in
      conjunction with Management’s Discussion and Analysis and the audited financial
      statements and notes thereto contained in Blast’s 2005 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 the interim
      periods are not necessarily indicative of the results to be expected for the
      full year. Notes to the financial statements which would substantially duplicate
      disclosures contained in the audited financial statements for 2005 as reported
      in the 10-KSB have been omitted.





*Acquisitions* . On
      August
      25, 2006, Blast acquired Eagle Domestic Drilling Operations, LLC, (“Eagle”) a
      privately held drilling rig contractor for $50 million in cash and 1.5 million
      shares of Blast common stock. The acquisition of Eagle is being financed with
      senior debt from Laurus Master Fund Ltd. of $40.6 million and associated note
      and warrants, along with a private placement of common equity and associated
      warrants. See Note 11.





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





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, Blast incurred a net loss of $3.2
      million for the three months ended September 30, 2006, has an accumulated
      deficit of $35.1 million and a working capital deficit of $1.7 million as of
      September 30, 2006 and has several significant future financial obligations.
      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 an
      uncertainty as to Blast’s ability to continue as a going concern. Management is
      trying to raise additional capital but there are no assurances that such efforts
      will be successful.





**NOTE
      3 - STOCK OPTIONS AND WARRANTS**





On
      January 1, 2006, Blast adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS
      123(R)”). This replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
      123(R) requires all share-based payments to employees, including grants of
      employee stock options, to be recognized in the financial statements based
      on
      their fair values. The pro forma disclosures previously permitted under SFAS
      123
      are no longer an alternative to financial statement recognition. Blast adopted
      SFAS 123(R) using the modified prospective method which requires the application
      of the accounting standard as of January 1, 2006. The consolidated financial
      statements as of and for the quarter ended September 30, 2006 reflect the impact
      of adopting SFAS 123(R). In accordance with the modified prospective method,
      the
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123(R).





Prior
      to
      2006, compensation was recorded for stock-based compensation grants based on
      the
      excess of the estimated fair value of the common stock on the measurement date
      over the exercise price.





**For
                the Three Months Ended September****30,
                2005**
            
            **For
                the Nine Months Ended September****30,
                2005**Net
                loss as reported
            
            $
            (720,198
            )
            $
            (2,492,441
            )Less: 
                stock based compensation determinedUnder
                fair value based method
            
            
            (93,113
            )
            
            (258,917
            )Pro
                forma net loss
            
            $
            (813,311
            )
            $
            (2,751,358
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (.02
            )
            $
            (.07
            )Pro
                forma
            
            $
            (.02
            )
            $
            (.08
            )




8


The
      weighted average fair value of the stock options granted during the three months
      ended September 30, 2006 and 2005 was $1.45 and $.35 per share, respectively.
      Variables used in the Black-Scholes option-pricing model include (1) 2%
      risk-free interest rate, (2) expected option life is the actual remaining life
      of the options as of each period end, (3) expected volatility is 151% and 133%,
      respectively, and (4) zero expected dividends.





**NOTE
      4 - INTELLECTUAL PROPERTY**





On
      March
      17, 2006 Blast replaced in their entirety both its August 25, 2005 purchase
      agreement and October 2004 licensing agreement with a revised Technology
      Purchase Agreement with Alberta Energy Partners (“Alberta”) to purchase a
      one-half interest in Alberta’s Abrasive Fluid Jet (“AFJ”) cutting technology.
      Blast issued to Alberta 3,000,000 common shares and 750,000 warrants exercisable
      at $.45 per common share. The warrants are exercisable at such time as a minimum
      of $225,000 in revenue has been received by operation of Blast Rig #1, and
      expire three years from date of issuance. The fair value of the award will
      be
      measured and recognized at which time Blast achieves the $225,000 revenue mark.
      In addition, one-half of Blast’s 50% share of the revenue stream from licensing
      of the technology shall be paid to Alberta, in addition to Alberta’s own
      one-half, until Alberta has received $2 million. Thereafter, Blast and Alberta
      will share licensing revenue equally. Royalties are payable to Alberta at the
      rate of $2,000 per well or 2% of gross revenues received, whichever is greater,
      for each well bore in which Blast uses the technology. The agreement shall
      remain in effect for the commercial life of the technology.





At
      September 30, 2006 the total cost of the Intellectual Property (“IP”) was
      $1,170,000 with $90,536 of accumulated amortization. The patent-pending IP,
      composed of the 50% ownership in the Alberta technology, is being amortized
      on a
      straight-line method over the life of the patent, which is 14 years.





**NOTE
      5 - STOCKHOLDERS EQUITY**





In
      the
      first quarter of 2006, Blast issued a total of 994,030 shares of common stock
      as
      follows:


-
              135,000
                  shares valued at $202,500 were issued to a
                  consultant.
 -
              377,100
                  shares were issued pursuant to warrants exercised for $74,710
                  cash.
 -
              175,000
                  shares were issued for the payment of $350,000 of notes payable
                  that
                  matured on 12/31/05.
 -
              233,333
                  shares were issued as a premium on the conversion of notes payable
                  that
                  matured on 12/31/05.
 -
              13,783
                  shares were issued for the payment of 4thquarter 2005 accrued interest on convertible promissory
                  notes.
 -
              59,814
                  shares of common stock were reinstated to an existing
                  shareholder.


In
      the
      second quarter of 2006, Blast issued a total of 1,735,897 shares of common
      stock
      as follows:


-
            33,333
                shares valued at $20,000 were issued in exchange for
                services.


-
            159,375
                shares were issued for the payment of 2005 deferred director
                fees.


-
            392,500
                shares were issued in payment of 2005 executive performance
                bonus.


-
            600,000
                shares were issued pursuant to a private placement resulting in gross
                cash
                proceeds in the amount of $300,000.


-
            309,107
                shares were issued pursuant to warrants exercised for $94,275
                cash.


-
            100,000
                shares were issued for the payment of $200,000 of notes payable that
                matured on 05/31/06.


-
            133,430
                shares were issued as a premium on the conversion of notes payable
                that
                matured on 05/31/06.


-
            8,152
                shares were issued for the payment of 2006 accrued interest on notes
                payable that matured on 05/31/06.




In
      the
      third quarter of 2006, Blast issued a total of 21,932,500 shares of common
      stock
      as follows:


-
            17,400,000
                shares were issued in connection with financing the acquisition of
                Eagle.


-
            300,000
                shares were issued pursuant to a private placement resulting in gross
                cash
                proceeds in the amount of $150,000.


-
            4,232,500
                shares were issued pursuant to warrants exercised for $46,392
                cash.





**NOTE
      6 -NOTES PAYABLE**





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





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


9


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





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





**NOTE
      7 -** **RELATED
      PARTY TRANSACTIONS**





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





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





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





On
      July
      15, 2005, Blast entered into an agreement to develop its initial abrasive
      jetting rig with Berg McAfee Companies, LLC (“BMC”), a major shareholder. The
      arrangement involves two loans for a total of $1 million to fund the completion
      of the initial rig and sharing in the expected rig revenues for a ten-year
      period. As of December 31, 2005, Blast had received $1 million in funding under
      this agreement. Under the terms of the loan agreement with BMC, cash revenues
      will be shared on the basis of allocating 90% to Blast and 10% to BMC for a
      ten-year period following repayment. After ten years, Blast will receive all
      of
      the revenue from the rig. The loan, secured by the value of the rig, which
      carries an average interest rate of 7.4%, has a senior and subordinated
      structure due September 15, 2006 and September 30, 2006, respectively. In
      February 2006, Blast and Berg McAfee Companies, our major shareholder, mutually
      agreed to extend the Maturity Date of the AFJ Rig Loans from September 2006
      to
      March 31, 2007. In consideration for the extension, BMC will earn additional
      interest during the extended loan period. BMC also has the option to fund an
      additional three rigs under these commercial terms. As part of the Laurus
      transaction, BMC agreed to subordinate the loan to Laurus’ senior
      indebtedness.


10


**NOTE
      8 - BUSINESS SEGMENTS**





Blast
      has
      three reportable segments: (1) Drilling Services, (2) Down-hole Solutions,
      and
      (3) Satellite Communications. 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 table below reports certain financial information by reportable
      segment:





**For
                the Three Months Ended**
              **September
                30,**
            
            **For
                the Nine Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues
                from external customersDrilling
                services
            
            $
            158,296
            
            $
            -
            
            $
            158,296
            
            $
            -Down-hole
                solutions
            
            
            -
            
            
            8,500
            
            
            14,150
            
            
            27,491Satellite
                communications
            
            
            251,714
            
            
            293,937
            
            
            808,758
            
            
            802,712$
            410,010
            
            $
            302,437
            
            $
            981,204
            
            $
            830,203Operating
                profit/(loss)1Drilling
                services
            
            $
            (835,846
            )
            $
            -
            
            $
            (835,846
            )
            $
            -Down-hole
                solutions
            
            
            (381,348
            )
            
            (212,359
            )
            
            (897,134
            )
            
            (669,023
            )Satellite
                communications
            
            
            56,816
            
            
            65,821
            
            
            94,535
            
            
            137,918Corporate
            
            
            (881,777
            )
            
            (573,660
            )
            
            (2,127,640
            )
            
            (1,961,336
            )$
            (2,042,155
            )
            $
            (1,019,798
            )
            $
            (3,766,085
            )
            $
            (2,696,154
            )





1-
            Operating
                profit/(loss) is total operating revenue less operating expenses,
                selling,
                general and administrative expenses, depreciation and amortization
                and bad
                debts. It does not include other income and expense or income
                taxes.





**NOTE
      9 - RESTATEMENT**





On
      March
      30, 2006, Blast restated its 2004 financial statements included in its 2004
      Annual Report on Form 10-KSB and the 2005 financial statements included in
      its
      three 2005 Quarterly Reports on Form 10-QSB. These financial statements
      originally included the value of our Intellectual Property asset at cost since
      the independent valuation of the net present value of the future cash flows
      exceeded the acquisition cost. During 2005, Blast sold its lateral drilling
      license for $1.3 million over a period of time. Subsequently, it was determined
      that our asset valuation conclusions were incorrect and that the license sales
      agreement thereby established the asset value of the IP. Consequently, the
      value
      of the lateral drilling license was written down with a non-cash impairment
      charge of $3.2 million as of December 31, 2004 and the financial statements
      were
      restated.





During
      2005, Blast sold its lateral drilling license for $1.3 million in cash plus
      delinquency payments over a period of time, including $885,000 received during
      the first nine months of 2005. Subsequently, we determined that these proceeds
      should have been classified as “Cash from Investing Activities” rather than
      included in “Cash from Operations.” Consequently, the statement of cash flows
      for 2005 was restated for the line items shown below. The net increase in cash
      during the period of $44,798 remained unchanged.


11





**For
                the Nine Months**
              **Ended
                September 30,****2005**
            
            **2005**(as
                Originally Filed)
            
            (Restated)**Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (3,086,833
            )
            $
            (2,492,441
            )Depreciation
                and amortization
            
            
            321,062
            
            
            76,670Net
                Cash Used In Operating Activities
            
            
            (1,163,047
            )
            
            (813,047
            )**Cash
                Flows From Investing Activities:**Proceeds
                from sale of license
            
            
            885,000
            
            
            535,000Net
                Cash Used In Investing Activities
            
            
            71,045
            
            
            (278,955
            )





**NOTE
      10 - LITIGATION**





*SEC
      Settlement*


On
      July
      26, 2006, Blast reported that the SEC, as part of an agreed resolution of claims
      against the Company, has filed a civil complaint, consents, and proposed
      judgments against the company and two individuals in the US District Court
      for
      the Southern District of Texas. The complaint and proposed judgments resolve
      the
      SEC’s formal investigation relating to the Company’s reporting practices and
      public statements made in 2003. Without admitting or denying the allegations
      in
      the complaint, Blast agreed to a proposed final judgment that includes a
      permanent injunction against the Company from violating Section 10(b) of the
      Exchange Act of 1934 and Rule 10b-5 thereunder. The proposed final judgment
      does
      not assess any civil penalties against the Company. This settlement is subject
      to the approval of the court.





*Hallwood
      Energy/Hallwood Petroleum Lawsuit*


Following
      the acquisition of Eagle, we learned of a dispute pertaining to two IADC
      two-year term drilling contracts between Eagle and Hallwood Energy/Hallwood
      Petroleum (Hallwood). Hallwood alleged that the rigs did not satisfy the weight
      capacity requirements under the contracts, and it ceased performance under
      the
      contracts. Following several attempts to resolve the dispute, Hallwood filed
      a
      lawsuit against Eagle in September 2006 in district court in Fort Worth, Texas
      alleging breach of contract by Eagle and Eagle Drilling LLC. Hallwood has
      claimed that the derrick on Rig #12 was not up to contract capacity and that
      the
      alleged undercapacity resulted in unsafe conditions and damage to the rig.
      In
      addition, Hallwood has demanded that a prepayment of approximately $1.7 million
      under the contracts be returned to Hallwood. Eagle also plans to vigorously
      contest the claims by Hallwood. Eagle has filed a claim for breach of contract
      by Hallwood and plans to pursue its case for recovery of rig damage costs on
      Rig
      #12 and damages for early termination and loss of revenues under the two IADC
      contracts for Rigs #11 & #12. Blast has engaged counsel to pursue the
      lawsuit on a contingent fee basis. Under this arrangement, the law firm will
      be
      entitled to one-third of any final settlement or recovery. Blast has recorded
      deferred revenue of $1,648,600 from Hallwood at September 30, 2006.





*Quicksilver
      Resources Lawsuit*


Also
      after the acquisition of Eagle, we learned of a dispute pertaining to three
      other two-year IADC contracts with Quicksilver Resources (“Quicksilver”).
      Quicksilver asserted that the rig was not timely delivered and that it
      experienced mechanical problems which caused delays in a drilling operation.
      Following attempts to resolve the dispute, Quicksilver has filed a lawsuit
      in
      district court in Fort Worth, Texas asking for rescission of the contracts,
      requesting a declaratory judgment that the contracts are void, and asserting
      claims of negligence and breach of contract, among other claims, against Eagle
      and Eagle Drilling LLC. Eagle intends to vigorously defend itself in this
      proceeding and has filed a countersuit asserting breach of contract, among
      other
      claims, against Quicksilver. Blast has engaged counsel to pursue the lawsuit
      on
      a contingent fee basis. Under this arrangement, the law firm will be entitled
      to
      one-third of any final settlement or recovery.





**NOTE
      11 - ACQUISITION OF EAGLE**





On
      August
      25, 2006, Blast acquired Eagle Domestic Drilling Operations, LLC. Eagle owns
      drilling equipment for the extraction of oil and gas. The purchase price was
      $50
      million and 1.5 million shares of Blast common stock. The acquisition of Eagle
      was financed through senior debt of $40,600,000 and a private placement of
      15
      million shares of Blast common stock at a price of $1.00 per share. The lender
      of the senior debt received warrants to purchase 6,090,000 shares of common
      stock at an exercise price of $1.44 per share and an additional 6,090,000 shares
      of common stock at an exercise price of $0.01. These warrants have a seven-year
      term. The broker received warrants to purchase 304,500 shares of common stock
      at
      an exercise price of $0.01 with a two-year term. In connection with the private
      placement, Blast issued warrants to purchase 5,000,000 shares of common stock
      at
      an exercise price of $0.01 with a two-year term. Blast issued 900,000 shares
      to
      Second Bridge LLC for consulting services to complete construction of a sixth
      drilling rig. The acquisition was recorded using purchase method of accounting
      in accordance with SFAS No. 141, Business Combination. $1,000,000 of the
      purchase price has been retained by Blast contingent upon the costs incurred
      while completing the construction of rigs #14 & #15.


12


The
      statements of operations reflect Eagle's operations for the period from
      August 25, 2006 to September 30, 2006.





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





Current
                assets
            
            $
            1,648,600Property
                and equipment, net
            
            
            58,449,641Total
                assets
            
            
            60,098,241Less:Total
                liabilities
            
            
            (1,648,600
            )Total
                purchase price
            
            $
            58,449,641





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





**PRO
      FORMA STATEMENTS OF OPERATIONS**


**Three
      Months Ended September**  **30,
      2006**


**(Unaudited)**





Blast
            
            Eagle
            
            Pro
                Forma Adjustments
            
            
            
            Pro
                FormaTotal
                Revenue
            
            $
            410,010
            
            
            2,751,309
            
            $
            -
            
            
            
            
            $
            3,161,319Total
                Cost of Services Provided
            
            
            1,320,606
            
            
            2,037,093
            
            
            -
            
            
            
            
            
            3,357,699Gross
                Margin (Deficit)
            
            
            (910,596
            )
            
            714,216
            
            
            -
            
            
            
            
            
            (196,380
            )Operating
                Expenses:Selling,
                general and administrative
            
            
            914,614
            
            
            -
            
            
            372,900
            
            
            (a)
            
            
            1,287,514Depreciation,
                amortization & other
            
            
            227,235
            
            
            175,530
            
            
            787,182
            
            
            (d)
            
            
            1,189,947Bad
                debts
            
            
            (10,290
            )
            
            -
            
            
            -
            
            
            
            
            
            (10,290
            )Operating
                Loss
            
            
            (2,042,155
            )
            
            538,686
            
            
            (1,160,082
            )
            
            
            
            
            (2,663,551
            )Other
                (Income) Expense:Other
                (income)
            
            
            (10,524
            )
            
            -
            
            
            -
            
            
            
            
            
            (10,524
            )Interest
                expense (net)
            
            
            1,130,132
            
            
            -
            
            
            666,798
            
            
            (b)
            
            
            2,530,885733,955
            
            
            (c)Loss
                on extinguishment of debt
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Gain
                on sale
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Total
                other (income)/expense
            
            
            1,119,608
            
            
            -
            
            
            1,400,753
            
            
            
            
            
            2,520,361Net
                Income/(Loss)
            
            $
            (3,161,763
            )
            $
            538,686
            
            $
            (2,560,835
            )
            
            
            
            $
            (5,183,912
            )Basic
                and diluted net loss per share
            
            $
            (0.06
            )
            
            N/A
            
            
            N/A
            
            
            
            
            $
            (0.08
            )Weighted
                average shares outstanding
            
            
            52,589,643
            
            
            N/A
            
            
            10,402,174
            
            
            
            
            
            62,991,817




13


**PRO
      FORMA STATEMENTS OF OPERATIONS**


**Nine
      Months Ended September**  **30,
      2006**


**(Unaudited)**





Blast
            
            Eagle
            
            Pro
                Forma Adjustments
            
            
            
            Pro
                FormaTotal
                Revenue
            
            
            981,204
            
            
            5,351,913
            
            
            
            
            
            
            
            
            6,333,117Total
                Cost of Services Provided
            
            
            2,256,722
            
            
            2,846,969
            
            
            
            
            
            
            
            
            5,103,691Gross
                Margin (Deficit)
            
            
            (1,275,518
            )
            
            2,504,944
            
            
            
            
            
            
            
            
            1,229,426Operating
                Expenses:Selling,
                general and administrative
            
            
            2,221,000
            
            
            
            
            
            1,593,200
            
            
            (a)
            
            
            3,814,200Depreciation,
                amortization & other
            
            
            279,857
            
            
            315,951
            
            
            1,028,424
            
            
            (d)
            
            
            1,624,232Bad
                debts
            
            
            (10,290
            )
            
            
            
            
            
            
            
            
            
            
            (10,290
            )Operating
                Loss
            
            
            (3,766,085
            )
            
            2,188,993
            
            
            (2,621,624
            )
            
            
            
            
            (4,198,716
            )Other
                (Income) Expense:Other
                (income)
            
            
            (92,185
            )
            
            
            
            
            
            
            
            
            
            
            (92,185
            )Interest
                expense (net)
            
            
            1,203,580
            
            
            
            
            
            2,849,048
            
            
            (b)
            
            
            7,188,6153,135,987
            
            
            (c)Loss
                on extinguishment of debt
            
            
            262,000
            
            
            -
            
            
            
            
            
            
            
            
            262,000Gain
                on sale
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            -Total
                other (income)/expense
            
            
            1,373,395
            
            
            -
            
            
            5,985,035
            
            
            
            
            
            7,358,430Net
                income/(Loss)
            
            $
            (5,139,480
            )
            $
            2,188,993
            
            $
            (8,606,659
            )
            
            
            
            $
            (11,557,146
            )Basic
                and diluted net loss per share
            
            $
            (0.11
            )
            
            N/A
            
            
            N/A
            
            
            
            
            $
            (0.19
            )Weighted
                average shares outstanding
            
            
            46,363,690
            
            
            N/A
            
            
            15,041,758
            
            
            
            
            
            61,405,448





**Pro
      Forma Adjustments**





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


(b)
            Record
                interest expense on the senior debt


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


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


14


**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Plan of
                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-KSB.





**Background**





The
      three
      segments of our business are contract land drilling services, down-hole
      solutions, and satellite communications. Our strategy is to grow our businesses
      by maximizing our equipment capacity and controlling costs while analyzing
      potential acquisition and new technology opportunities in the energy service
      sector. We plan to make our primary focus in the near term our contract land
      drilling business.





On
      August
      25, 2006, Blast acquired Eagle
      Domestic Drilling Operations, LLC, a Texas limited liability company (“Eagle”),
      a privately held Texas based land drilling contractor. The aggregate purchase
      price was $50 million and 1.5 million shares of Blast common stock. As part
      of
      the acquisition, Eagle owned three drilling rigs, two more which were under
      construction, and the rights to a sixth rig to be constructed. The acquisition
      of Eagle was financed with an investment made by Laurus Master Fund Ltd. of
      $40.6 million and associated senior secured note and warrants, along with a
      private placement of common equity and associated warrants, to the former
      members of Eagle. As a result of the acquisition of Eagle, Blast entered into
      the drilling service contracting business.





We
      generate revenue from our contract land drilling business by contracting with
      customers to utilize our rigs under day rate contracts. Due to the leverage
      associated with the acquisition of Eagle, we need to generate revenue and cash
      flow from customer contracts. We believe we need to fully deploy at least five
      of our rigs in the near term at current market rates to satisfy our principal
      and interest obligations to our senior lender and meet our other obligations.
      We
      presently have two of our rigs under contract which are presently being utilized
      by customers, with a third rig under contract to be deployed. We are continuing
      to market our remaining rigs to prospective customers. For a discussion of
      these
      obligations and the liquidity obligations facing us, please see “Management
      Discussion and Analysis-Liquidity and Capital Resources.”





**Three
      Months Ended September 30, 2006 Compared to Three Months Ended September 30,
      2005**





*Drilling
      Services*




Drilling
      services’ revenues were $158,000 for the quarter ended September 30, 2006, which
      was generated by only one rig in operation for a partial month.





The
      operating margin from Drilling Services was a loss of $635,000 for the quarter
      ended September 30, 2006. The expenses were primarily labor and material related
      associated with operating and repair of the drilling rigs and running the
      fabrication yard.





Our
      revenues are dependent on our ability to enter into day rate contracts with
      customers for the utilization of our rigs. During the first quarter, we only
      had
      one rig in operation for part of the quarter under a day rate
      contract.





*Down-hole
      Solutions*





Although
      our primary business in the near term is our contract land drilling business,
      we
      have been striving to develop a commercially viable lateral drilling technology
      with the potential to penetrate through well casing and into reservoir
      formations to stimulate oil and gas production. In 2003, with the acquisition
      of
      exclusive rights to a proprietary horizontal drilling process we began to deploy
      lateral drilling services in the field. In mid 2004, it became apparent that
      this process was limited in its application to a wide variety of oil and gas
      formations. After redesigning and improving the existing process and designing
      and testing some new capabilities, we now believe that we can deliver a valuable
      and cost effective production enhancement service to onshore oil and gas
      producers, particularly operators of marginal wells. The goal is to make this
      new service reliably predictable and consistently dependable for our customers.
      We have completed repairs and are currently deploying our first new generation
      lateral drilling rig with the capability of abrasive fluid jetting by use of
      much higher hydraulic horsepower. Following favorable results and customer
      acceptance of this initial rig’s capabilities, we plan to order the construction
      of additional rigs and significantly grow the deployment of our abrasive jetting
      service.


15


During
      March 2006, Blast was on location with its first field test using its new
      abrasive fluid jetting (AFJ) technology on a well for Oracle Operating located
      in Many, Louisiana. In July 2006, with repairs to the coil tubing unit
      completed, the Blast Rig #1 resumed operations that include demonstrating the
      ability to cut through the steel well casing at approximately 3,000 feet of
      vertical depth and attempted to jet large bore perforations though the window
      cut in the casing.





This
      new
      generation rig has recently completed developmental tests with the U.S.
      Department of Energy Rocky Mountain Oilfield Testing Center at their facility
      outside Casper, Wyoming. After the initial rig establishes a reliable and
      commercial oilfield service, we intend to begin construction of additional
      rigs
      with similar capabilities as the market demands.





Funding
      for developing this abrasive cutting capability into commercial operation is
      expected to come from future capital commitments. No assurances can be given
      that such capital will be available or adequate. If this is the case, we will
      be
      required to obtain additional capital from equity markets. No assurances can
      be
      given that such capital will be available or that the terms will be
      acceptable.





Down-hole
      Solutions’ revenues were zero for the quarter ended September 30, 2006 compared
      to $8,500 for the quarter ended September 30, 2005. The revenue in 2005 was
      generated from the direct financing lease of one of our Lander’s rigs.





The
      operating margin from Down-hole Solutions decreased by $222,000 to a margin
      of
      $327,000 for the quarter ended September 30, 2006 compared to a loss of $105,000
      for the quarter ended September 30, 2005. The expenses in 2006 have been
      primarily the result of additional costs associated with the field testing
      activities conducted in Many, Louisiana compared to primarily labor related
      costs in 2005 associated with designing and construction of the abrasive fluid
      jetting unit.





*Satellite
      Communications Services*





Satellite
      Communication Services’ revenues decreased by $42,000 to $252,000 for the
      quarter ended September 30, 2006 compared to $294,000 for the quarter ended
      September 30, 2005. The decrease in revenue can be attributed to fewer services
      being delivered to customers. The operating margin from Satellite Communication
      Services decreased by $24,000 to a margin of $52,000 for the quarter ended
      September 30, 2006 compared to a margin of $76,000 for the quarter ended
      September 30, 2005. As this segment of our business grows, it benefits from
      economies of scale.





As
      hardware is sold, we recognize the revenue in the period it is delivered to
      the
      customer. There were no significant hardware sales during the quarters ended
      September 30, 2006 and 2005. We bill some of our bandwidth contracts in advance,
      but recognize the revenue over the period benefited.





*Selling,
      General and Administrative*





Selling,
      general and administrative expenses decreased $49,000 to $915,000 for the
      quarter ended September 30, 2006 compared to $964,000 for the quarter ended
      September 30, 2005. The following table details major components of expense
      over
      the periods.





**For
                the Three Months Ended September 30,**
            
            **Increase**
              **(Decrease)****2006**
            
            **2005**Payroll
                and related costs
            
            $
            69
            
            $
            104
            
            $
            (35
            )Option
                and warrant expense
            
            
            168
            
            
            25
            
            
            143Legal
                & settlement costs
            
            
            493
            
            
            618
            
            
            (125
            )External
                services
            
            
            114
            
            
            135
            
            
            (21
            )Insurance
            
            
            24
            
            
            49
            
            
            (25
            )Travel
                & entertainment
            
            
            29
            
            
            10
            
            
            19Office
                rent, communications, misc.
            
            
            18
            
            
            23
            
            
            (5
            )$
            915
            
            $
            964
            
            $
            (49
            )




16


During
      the quarter we continued to focus on acquiring the land rig drilling business,
      AFJ technology development and lowering our controllable overhead, which has
      resulted in a lower overhead expense compared to the third quarter of 2005.





*Net
      Loss*





The
      net
      loss for the third quarter of 2006 increased to $3,162,000 from a loss of
      $720,000 for the corresponding period in 2005. The increase is primarily
      attributable to the negative contributions from our drilling and down-hole
      solutions business lines. 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.





**Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005**





*Drilling
      Services*





Drilling
      services’ revenues and operating margin were the same as the quarterly results
      ending September 30, 2006, since the acquisition of that business occurred
      during the third quarter.





*Satellite
      Communications Services*





Satellite
      Communication Services’ revenues increased by $6,000 to $809,000 for the nine
      months ended September 30, 2006 compared to $803,000 for the nine months ended
      September 30, 2005. The increase in revenue can be attributed to an increase
      in
      service provided to existing customers. The operating margin from Satellite
      Communication Services decreased $95,000 to $105,000 for the nine months ended
      September 30, 2006 compared to a margin of $200,000 for the nine months ended
      September 30, 2005.





As
      hardware is sold, we recognize the revenue in the period it is delivered to
      the
      customer. There were no significant hardware sales during the quarters ended
      September 30, 2006 and 2005. We bill some of our bandwidth contracts in advance,
      but recognize the revenue over the period benefited.





*Down-hole
      Solutions*





Down-hole
      Solutions’ revenues were $14,000 for the nine months ended September 30, 2006
      compared to $27,000 for the nine months ended September 30, 2005. The revenue
      in
      2006 was related to the initial deployment of the AFJ rig to Many, Louisiana
      for
      Oracle Operating compared with the revenue in 2005 which was generated from
      the
      direct financing lease of one of our Lander’s rigs.





The
      operating margin from Down-hole Solutions decreased by $421,000 to a loss of
      $745,000 for the nine months ended September 30, 2006 compared to a loss of
      $324,000 for the nine months ended September 30, 2005. The expenses for both
      periods were primarily labor related associated with designing, testing and
      repairing the new abrasive fluid jetting process.





*Selling,
      General and Administrative*





Selling,
      general and administrative expenses decreased by $265,000 to $2,221,000 for
      the
      nine months ended September 30, 2006 compared to $2,486,000 for the nine months
      ended September 30, 2005. The following table details major components of
      expense over the periods.


17





**For
                the Nine Months Ended September 30,**
            
            **Increase**
              **(Decrease)****2006**
            
            **2005**Payroll
                and related costs
            
            $
            433
            
            $
            530
            
            $
            (97
            )Option
                and warrant expense
            
            
            342
            
            
            75
            
            
            267Legal
                & settlement costs
            
            
            628
            
            
            1,302
            
            
            (674
            )External
                services
            
            
            528
            
            
            327
            
            
            201Insurance
            
            
            165
            
            
            141
            
            
            24Travel
                & entertainment
            
            
            49
            
            
            29
            
            
            20Office
                rent, communications, misc.
            
            
            76
            
            
            82
            
            
            (6
            )$
            2,221
            
            $
            2,486
            
            $
            (265
            )





Due
      to
      the lack of down-hole activity during the first nine months of 2006, we focused
      on technology development and lowering our controllable overhead. Payroll,
      legal
      and office rent had net reductions of cost but these were partially offset
      by
      option and warrant expense, external services, insurance and travel costs.
      Legal
      and settlement expenses decreased significantly as the prior year’s period
      included $503,000 for the value of the 1,150,000 shares of our common stock
      to
      be issued to settle the class action lawsuit and $55,000 of associated
      expenses .





*Net
      Loss*





The
      net
      loss for the first nine months of 2006 increased to $5,139,000 from a loss
      of
      $2,492,000 for the corresponding period in 2005. The increase is primarily
      attributable to the negative contributions from our drilling and down-hole
      solutions business lines. 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.





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2006, our cash and restricted cash balance was $4,574,000 compared
      to a cash balance of $836,000 at December 31, 2005 and $312,000 for the period
      ended September 30, 2005. As of November 13, 2006, our cash balance is
      $2,734,000. The cash balances were impacted by the acquisition of Eagle and
      associated financing liquidity in 2006 as compared to the sale of a license
      and
      private placement of stock in 2005. We continue to utilize cash, stock, and
      notes to fund operations. We have used these proceeds to fund the construction
      of our new generation abrasive drilling unit and to complete construction of
      the
      Eagle rigs during September 2006. As of September 30, 2006, we had expended
      approximately $1.2 million to construct and outfit the AFJ tractor/trailer
      rig
      as well as support truck and trailers.





Our
      future liquidity will be significantly affected by our obligations to the holder
      of our senior indebtedness incurred to finance the acquisition of Eagle. As
      previously disclosed, the senior debt has an original principal amount of $40.6
      million, with a final maturity in three years, with interest accruing at prime
      plus 2.5%, with a minimum rate of 9%, payable monthly. The debt is secured
      by
      substantially all of our assets. The interest payments are presently $375,000
      for a 31 day month. The principal is to be repaid commencing on April 1, 2007
      at
      the rate of $800,000 per month for the first twelve months after that date,
      $900,000 per month for the subsequent twelve months, and $1,000,000 per month
      until the note matures. The remaining balance of the note is to be repaid at
      maturity, plus accrued interest.





In
      order
      to satisfy the principal and interest payment obligations to our senior lender,
      we have assumed the full utilization at current market rates of five of our
      drilling rigs. We presently have two of the rigs deployed under contract at
      market rates, a third rig under contract to be deployed, and are actively
      marketing the other two rigs. If we are unable to timely secure contracts at
      market rates for our remaining rigs, if any of the rates we secure are not
      current market rates, or if any of the contracts we require expire or terminate,
      and we are unable to replace such contracts, we will not be able to satisfy
      the
      obligations to our senior lender. In such an event, we would be forced to
      restructure our debt obligations, or absent that, might be forced to seek
      creditor protection.





As
      part
      of the Eagle acquisition, we entered into a consulting agreement with Second
      Bridge LLC for the completion of a sixth rig. This contract calls for an
      estimated payment of $2.4 million to vendors for parts and labor, and the
      issuance of 900,000 shares of Blast common stock to Second Bridge. In addition,
      Blast entered into a consulting contract with Second Bridge for a period of
      three years at the rate of $150,000 per month to provide such services as agreed
      between the parties, including operational, construction, and business
      development advisory services. Subsequent to the Eagle acquisition, Blast has
      experienced a lack of expected revenues from the contracts with Hallwood
      Petroleum and Quicksilver Resources, two of its former customers, the contracts
      of which are now in dispute. Accordingly Blast has decided not to build out
      Rig
      #17 in early 2007, as earlier projected, until such time as the rig may be
      contracted to a new customer.


18


The
      Company is also subject to certain contingent liabilities relating to litigation
      matters, including the disputes with Hallwood Petroleum and Quicksilver
      Resources and the pending court approval of our SEC settlement. An adverse
      determination in any of these matters could have a material adverse effect
      on
      the Company. See “Subsequent Events” and “Legal Proceedings” for more
      information.





We
      have a
      $42,500 note that is due on demand, a $1,000,000 note with accrued interest
      due
      on March 31, 2007 and a $500,000 note due on June 30, 2007. In connection with
      the financing with the senior lender, the holder of these notes agreed to
      subordinate its right of payment and its liens to the rights of the senior
      lender. Convertible notes with related parties for $200,000 matured on May
      31,
      2006 and were converted into common stock in June 2006.





Our
      continued operating losses raise substantial doubt as to our ability to continue
      as a going concern. We are in an early stage of development, have just completed
      a major acquisition, are highly leveraged, and are rapidly depleting our cash
      resources, therefore we have determined that we may need to raise additional
      financing in the short term to continue in operation and fund future growth.
      We
      currently plan to raise additional financing if we are not able to generate
      cash
      flow from operations in the near term. The use of stock for currency in
      financing or making acquisitions has been negatively impacted while we have
      been
      under SEC investigation (see Financial Note 16 to the December 31, 2005
      Financial Statements). If we are unable to arrange new financing or generate
      sufficient revenue from new business arrangements, we will be unable to continue
      in our current form and will be forced to restructure or seek creditor
      protection.





For
      the
      nine months ended September 30, 2006 we had capital expenditures of $127,000,
      as
      compared to capital expenditures of $814,000 for the nine months ended September
      30, 2005. Prior to the acquisition of Eagle in August 2006, substantially all
      of
      the above expenditures were attributable to the Company’s AFJ drilling
      technology. With respect to our contract land drilling business, our main
      capital expenditures were anticipated to relate to the construction of our
      sixth
      rig, which is being delayed until that rig is committed under contract with
      a
      customer.  The estimated expenditures to complete that rig would be
      approximately $2.4 million under current market conditions.





**Subsequent
      Events**





*Hallwood
      Energy/Hallwood Petroleum Lawsuit*


Following
      the acquisition of Eagle Domestic Drilling Operations (“Eagle”), Blast learned
      of a dispute pertaining to two IADC two-year term drilling contracts between
      Eagle and Hallwood Energy/Hallwood Petroleum (Hallwood). Hallwood alleged that
      the rigs did not satisfy the weight capacity requirements under the contracts,
      and it ceased performance under the contracts. Following several attempts to
      resolve the dispute, Hallwood filed a lawsuit against Eagle in September 2006
      in
      district court in Fort Worth, Texas alleging breach of contract by Eagle and
      Eagle Drilling LLC. Hallwood has claimed that the derrick on Rig #12 was not
      up
      to contract capacity and that the alleged undercapacity resulted in unsafe
      conditions and damage to the rig. In addition, Hallwood has demanded that a
      prepayment of approximately $1.7 million under the contracts be returned to
      Hallwood. Eagle plans to vigorously contest the claims by Hallwood. Eagle has
      filed a claim for breach of contract by Hallwood and plans to pursue its case
      for recovery of rig damage costs on Rig #12 and damages for early termination
      and loss of revenues under the two IADC contracts for Rigs #11 & #12. Blast
      has engaged counsel to pursue the lawsuit on a contingent fee basis. Under
      this
      arrangement, the law firm will be entitled to one-third of any final settlement
      or recovery.





*Quicksilver
      Resources Lawsuit*


Also
      after the acquisition of Eagle, Blast learned of a dispute pertaining to three
      other two year IADC contracts with Quicksilver Resources (“Quicksilver”).
      Quicksilver asserted that the rig was not timely delivered and that it
      experienced mechanical problems which caused delays in a drilling operation.
      Following attempts to resolve the dispute, Quicksilver has filed a lawsuit
      in
      state district court in Fort Worth, Texas asking for rescission of the
      contracts, requesting a declaratory judgment that the contracts are void, and
      asserting claims of negligence and breach of contract, among other claims,
      against Eagle and Eagle Drilling LLC. Eagle intends to vigorously defend itself
      in this proceeding and has filed a countersuit asserting breach of contract,
      among other claims, against Quicksilver. Blast has engaged counsel to pursue
      the
      lawsuit on a contingent fee basis. Under this arrangement, the law firm will
      be
      entitled to one-third of any final settlement or recovery.


**Item
                  3.**
              **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.


19


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**





Full
      disclosure of prior or other legal activities may be found in the audited
      financial statements and notes thereto contained in our 2005 Annual Report
      filed
      with the SEC on Form 10-KSB.





*SEC
      Settlement*


On
      July
      26, 2006, Blast reported that the SEC, as part of an agreed resolution of claims
      against the Company, has filed a civil complaint, consents, and proposed
      judgments against the company and two individuals in the US District Court
      for
      the Southern District of Texas. The complaint and proposed judgments resolve
      the
      SEC’s formal investigation relating to the Company’s reporting practices and
      public statements made in 2003. Without admitting or denying the allegations
      in
      the complaint, Blast agreed to a proposed final judgment that includes a
      permanent injunction against the Company from violating Section 10(b) of the
      Exchange Act of 1934 and Rule 10b-5 thereunder. The proposed final judgment
      does
      not assess any civil penalties against the Company. This settlement is subject
      to the approval of the court.





*Hallwood
      Energy/Hallwood Petroleum Lawsuit*


Following
      the acquisition of Eagle Domestic Drilling Operations (“Eagle”), Blast learned
      of a dispute pertaining to two IADC two-year term drilling contracts between
      Eagle and Hallwood Energy/Hallwood Petroleum (Hallwood). Hallwood alleged that
      the rigs did not satisfy the weight capacity requirements under the contracts,
      and it ceased performance under the contracts. Following several attempts to
      resolve the dispute, Hallwood filed a lawsuit against Eagle in September 2006
      in
      district court in Fort Worth, Texas alleging breach of contract by Eagle and
      Eagle Drilling LLC. Hallwood has claimed that the derrick on Rig #12 was not
      up
      to contract capacity and that the alleged undercapacity resulted in unsafe
      conditions and damage to the rig. In addition, Hallwood has demanded that a
      prepayment of approximately $1.7 million under the contracts be returned to
      Hallwood. Eagle plans to vigorously contest the claims by Hallwood. Eagle has
      filed a claim for breach of contract by Hallwood and plans to pursue its case
      for recovery of rig damage costs on Rig #12 and damages for early termination
      and loss of revenues under the two IADC contracts for Rigs #11 & #12. Blast
      has engaged counsel to pursue the lawsuit on a contingent fee basis. Under
      this
      arrangement, the law firm will be entitled to one-third of any final settlement
      or recovery.





*Quicksilver
      Resources Lawsuit*


Also
      after the acquisition of Eagle, Blast learned of a dispute pertaining to three
      other two year IADC contracts with Quicksilver Resources (“Quicksilver”).
      Quicksilver asserted that the rig was not timely delivered and that it
      experienced mechanical problems which caused delays in a drilling operation.
      Following attempts to resolve the dispute, Quicksilver has filed a lawsuit
      in
      state district court in Fort Worth, Texas asking for rescission of the
      contracts, requesting a declaratory judgment that the contracts are void, and
      asserting claims of negligence and breach of contract, among other claims,
      against Eagle and Eagle Drilling LLC. Eagle intends to vigorously defend itself
      in this proceeding and has filed a countersuit asserting breach of contract,
      among other claims, against Quicksilver. Blast has engaged counsel to pursue
      the
      lawsuit on a contingent fee basis. Under this arrangement, the law firm will
      be
      entitled to one-third of any final settlement or recovery.





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





As
      previously disclosed on our Form 8-K dated August 25, 2006, Blast issued a
      total
      of 21,932,500 shares of common stock in the third quarter of 2006 as
      follows:





-
            17,400,000
                shares were issued in connection with the acquisition of Eagle.


-
            300,000
                shares were issued pursuant to a private placement resulting in gross
                cash
                proceeds in the amount of $150,000.


-
            4,232,500
                shares were issued pursuant to warrants exercised for $46,392
                cash.





Each
      of
      the above shares were issued pursuant to the exemption from registration under
      the Securities Act of 1933 under the exemption afforded by Rule 506 as
      promulgated under Regulation D.


20


**Item
                6.**
            **Exhibits**





Exhibits





31.1
            Certification
                of Principal Executive Officer pursuant to Section 30231.2
            Certification
                of Principal Accounting Officer pursuant to Section 30232.1
            Certification
                of Principal Executive Officer pursuant to Section 135032.2
            Certification
                of Principal Accounting Officer pursuant to Section
                1350








**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.








**Blast
                Energy Services, Inc.**By:
            /s/
                David M. Adams, COODavid
                M. AdamsChief
                Operating OfficerPrincipal
                Executive OfficerDate:
            November
                17, 2006By:
            /s/
                John O’Keefe, CFOJohn
                O’KeefeChief
                Financial OfficerPrincipal
                Accounting OfficerDate:
            November
                17, 2006






21