UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




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




For
the quarterly period ended March 31, 2009




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




For
the transition period from 
to




333-64122


(Commission
file number)









Blast
Energy Services, Inc.


(Exact
name of registrant as specified in its charter)









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




14550
Torrey Chase Blvd, Suite 330


Houston,
Texas 77014


(Address
of principal executive offices)




(281)
453-2888


(Issuer’s
telephone number)







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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).   Yes   ̈    No   ̈





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


Large accelerated
filer   ̈                                                                                           Accelerated
filer    ̈


Non-accelerated filer   ̈                                                                                           Smaller
reporting company  x





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


Yes    ̈No   x




APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:


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





Yes   x No    ̈





The
number of shares of the issuer’s common stock outstanding of each of the
issuer’s classes of equity as of May 11, 2009 is 61,817,404 including 1,150,000
approved but unissued shares arising from the class action settlement from 2005
and 35,000 shares that are still outstanding as of the filing of this report,
but which shares the Issuer expects to cancel in the second quarter of
2009.








Blast
Energy Services, Inc.





For
the Quarter Ended March 31, 2009





INDEX










PART
      I – FINANCIAL INFORMATION
                                    PageItem
      1.
                                    Financial
      Statements
                                    2Unaudited
      Consolidated Balance Sheets as of March 31, 2009 and December 31,
      2008
                                    2Unaudited
      Consolidated Statements of Operations
                                      For
      the Three Months Ended March 31, 2009 and 2008
                                    3Unaudited
      Consolidated Statements of Cash Flows
                                      For the Three Months Ended March 31, 2009 and 2008
                                    4Notes
      to Unaudited Consolidated Financial Statements
                                    5Item
      2.
                                    Management’s
      Discussion and Analysis of Condition and Results of
    Operations
                                    10Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    12Item
      4.
                                    Controls
      and Procedures
                                    12PART
      II – OTHER INFORMATIONItem
      1.
                                    Legal
      Proceedings
                                    14Item
      1A.
                                    Risk
      Factors
                                    14Item
    2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    14Item
      5.
                                    Other
      Information
                                    15Item
      6.
                                    Exhibits
                                    15Signatures
                                    
                                    15


1





PART
I – FINANCIAL INFORMATION





Item 1.
Financial Statements


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)








March
      31,
                        2009
                      
                      
                      December
      31,
                        2008AssetsCurrent
      AssetsCash
                      
                      $
                      303,713
                      
                      
                      $
                      731,631Accounts
      receivable, net
                      
                      
                      79,088
                      
                      
                      
                      107,065Other
      assets
                      
                      
                      137,280
                      
                      
                      
                      53,254Current
      portion of long-term receivable
                      
                      
                      666,667
                      
                      
                      
                      666,667Total
      Current Assets
                      
                      
                      1,186,748
                      
                      
                      
                      1,558,617Equipment,
      net of accumulated depreciation of $82,917 and $68,282
                      
                      
                      1,238,394
                      
                      
                      
                      1,191,263Long
      term accounts receivable
                      
                      
                      2,933,333
                      
                      
                      
                      2,933,333Total
      Assets
                      
                      $
                      5,358,475
                      
                      
                      $
                      5,683,213Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesAccounts
      payable
                      
                      $
                      95,315
                      
                      
                      $
                      24,085Accrued
      expenses
                      
                      
                      243,622
                      
                      
                      
                      225,312Deferred
      revenue
                      
                      
                      8,581
                      
                      
                      
                      9,459Notes
      payable – other
                      
                      
                      67,087
                      
                      
                      
                      -Total
      Current Liabilities
                      
                      
                      414,605
                      
                      
                      
                      258,856Long
      Term LiabilitiesNotes
      Payable – Related Party
                      
                      
                      1,120,000
                      
                      
                      
                      1,120,000Total
      Liabilities
                      
                      
                      1,534,605
                      
                      
                      
                      1,378,856Commitments
      and Contingencies
                      
                      
                      -
                      
                      
                      
                      -Stockholders’
      Equity:Preferred
      stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and
      6,000,000 shares issued and outstanding
                      
                      
                      6,000
                      
                      
                      
                      6,000Common
      stock, $.001 par value, 180,000,000 shares authorized; 61,782,404 and
      6,432,404 shares issued and outstanding
                      
                      
                      61,782
                      
                      
                      
                      60,432Additional
      paid-in capital
                      
                      
                      75,109,385
                      
                      
                      
                      75,102,481Accumulated
      deficit
                      
                      
                      (71,353,297
                      )
                      
                      
                      (70,864,556
                      )Total
      Stockholders’ Equity
                      
                      
                      3,823,870
                      
                      
                      
                      4,304,357Total
      Liabilities and Stockholders’ Equity
                      
                      $
                      5,358,475
                      
                      
                      $
                      5,683,213








See
accompanying notes to unaudited consolidated financial statements






2




BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Three Months Ended March 31, 2009 and 2008


(Unaudited)








2009
                  
                  
                  2008Revenue:
                  
                  $
                  118,013
                  
                  
                  $
                  71,652Operating
      expenses:Cost
      of sales
                  
                  
                  188,711
                  
                  
                  
                  120,121Selling,
      general and administrative
                  
                  
                  359,210
                  
                  
                  
                  585,947Depreciation
      and amortization
                  
                  
                  32,015
                  
                  
                  
                  2,150Loss
      on disposal of equipment
                  
                  
                  3,885
                  
                  
                  
                  -Total
      operating expenses
                  
                  
                  583,821
                  
                  
                  
                  708,218Operating
      loss
                  
                  
                  (465,808
                  )
                  
                  
                  (636,566
                  )Other
      income (expense):Other
      income
                  
                  
                  -
                  
                  
                  
                  8,000Interest
      income
                  
                  
                  101
                  
                  
                  
                  11,103Interest
      expense
                  
                  
                  (23,034
                  )
                  
                  
                  (42,493
                  )Total
      other income (expense)
                  
                  
                  (22,933
                  )
                  
                  
                  (23,390
                  )Loss
      from continuing operations
                  
                  
                  (488,741
                  )
                  
                  
                  (659,956
                  )Loss
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  (6,328
                  )Net
      loss
                  
                  $
                  (488,741
                  )
                  
                  $
                  (666,284
                  )Preferred
      dividends
                  
                  
                  59,178
                  
                  
                  
                  -Net
      loss attributable to common shareholders
                  
                  $
                  (547,919
                  )
                  
                  $
                  (666,284
                  )Basic
      and diluted income (loss) per common share:Continuing
      operations
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Weighted
      average common shares outstandingBasic
      and diluted
                  
                  
                  60,528,306
                  
                  
                  
                  53,448,942








See
accompanying notes to unaudited consolidated financial
statements.


3


BLAST
ENERGY SERVICES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Three Months Ended March 31, 2009 and 2008


(Unaudited)








2009
                
                
                2008Cash
      Flows From Operating Activities:Net
      loss
                
                $
                (488,741
                )
                
                $
                (666,284
                )Loss
      from discontinued operations
                
                
                -
                
                
                
                6,328Loss
      from continuing operations
                
                
                (488,741
                )
                
                
                (659,956
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                32,015
                
                
                
                2,150Option
      and warrant expense
                
                
                8,254
                
                
                
                51,723Loss
      on disposition of equipment
                
                
                3,885
                
                
                
                -Changes
      in:Accounts
    receivable
                
                
                27,977
                
                
                
                15,502Other current
    assets
                
                
                (16,940
                )
                
                
                7,166Accounts payable
                
                
                71,230
                
                
                
                (1,430,845
                )Accrued expenses
                
                
                18,311
                
                
                
                (11,160
                )Deferred revenue
                
                
                (878
                )
                
                
                (1,867
                )Net
      Cash Used In Operating Activities
                
                
                (344,887
                )
                
                
                (2,027,287
                )Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
                
                
                5,000
                
                
                
                -Cash
      paid for purchase of fixed assets
                
                
                (77,520
                )
                
                
                -Cash
      paid for construction of equipment
                
                
                (10,511
                )
                
                
                -Net
      Cash Used In Investing Activities
                
                
                (83,031
                )
                
                
                -Cash
      Flows From Financing Activities:Borrowings
      on debtor-in-possession financing
                
                
                -
                
                
                
                100,000Payments
      on short term debt
                
                
                -
                
                
                
                (552,570
                )Issuance
      of convertible preferred stock
                
                
                -
                
                
                
                4,000,000Common
      stock repurchased and cancelled
                
                
                -
                
                
                
                (900
                )Net
      Cash Provided By Financing Activities
                
                
                -
                
                
                
                3,546,530Discontinued
      operating activities
                
                
                -
                
                
                
                4,159Net
      Cash Provided By Discontinued Operations
                
                
                -
                
                
                
                4,159Net
      change in cash
                
                
                (427,918
                )
                
                
                1,523,402Cash
      at beginning of period
                
                
                731,631
                
                
                
                48,833Cash
      at end of period
                
                $
                303,713
                
                
                $
                1,572,235Cash
      paid for:Interest
                
                $
                521
                
                
                $
                30,615Income
      taxes
                
                
                -
                
                
                
                -Non-Cash
      Transactions:Conversion
      of deferred board compensation to common shares
                
                
                -
                
                
                
                161,000Conversion
      of related party advances to common shares
                
                
                -
                
                
                
                800,000Issuance
      of note payable for related party debt and accrued
interest
                
                
                -
                
                
                
                1,120,000Prepaid
      insurance financed with note payable
                
                
                67,088
                
                
                
                106,875Cashless
      exercise of warrants
                
                
                1,350
                
                
                
                -








See
accompanying notes to unaudited consolidated financial
statements.


4


BLAST
ENERGY SERVICES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION





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





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




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





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





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





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





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





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





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


5


Earnings
Per Share.  Basic earnings per share equals net earnings
divided by weighted average shares outstanding during the
year.  Diluted earnings per share include the impact on dilution from
all contingently issuable shares, including options, warrants and convertible
securities.  The common stock equivalents from contingent shares are
determined by the treasury stock method.  Blast incurred a net loss
for the three month periods ended March 31, 2009 and 2008 and therefore, basic
and diluted earnings per share for those periods are the same as all potential
common equivalent shares would be anti-dilutive.





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





NOTE
2 – GOING CONCERN





Blast has
a cash balance of $304,000, current assets of $1.2 million and stockholders
equity of $3.8 million as of March 31, 2009. However, Blast had a loss from
continuing operations of approximately $489,000 for the three months ended March
31, 2009 and an accumulated deficit at March 31, 2009 of approximately
$71,353,000. The financial statements do not include any adjustments that might
be necessary if Blast is unable to continue as a going concern. These conditions
create uncertainty as to Blast’s ability to continue as a going concern.
Management is trying to grow the existing businesses but may need to raise
additional capital through sales of common stock or convertible instruments as
well as obtain financing from third parties.





NOTE
3 – EQUIPMENT





Equipment
consists of the following:





Description
                
                Life
                
                March
      31,
                  2009
                
                December
      31,
                  2008Computer
      equipment
                
                3
      years
                
                $
      22,313
                
                $
      22,313Automobile/Trucks
                
                4
      years
                
                77,520
                
                26,265Service
      Trailer
                
                5
      years
                
                4,784
                
                4,784Remote
      Sensor Unit, in progress
                
                3
      years
                
                50,479
                
                50,479AFJ
      Rig
                
                10
      years
                
                1,166,215
                
                1,155,7041,321,311
                
                1,259,545Less:  accumulated
      depreciation
                
                
                
                (82,917)
                
                (68,282)$
      1,238,394
                
                $
      1,191,263








NOTE
4 – PREFERRED STOCK





Related Party
Transactions





In
January 2008, Blast sold the rights to an aggregate of 2,000,000 units each
consisting of four shares of Series A Convertible Preferred Stock, and one three
year warrant to purchase one share of common stock with an exercise price of
$0.10 per share (the “Units”), for an aggregate of $4,000,000 or $2.00 per Unit,
to Clyde Berg and to McAfee Capital LLC, two parties related to Blast’s largest
shareholder, Berg McAfee Companies.  The shares of common stock
issuable in connection with the exercise of the warrants and in connection with
the conversion of the Preferred Stock were granted registration rights in
connection with the sale of the Units.  The proceeds from the sale of
the Units were used to satisfy creditor claims of about $2.4 million under the
terms of our Second Amended Plan of Reorganization allowing Blast to emerge from
Chapter 11 bankruptcy and provided working capital of $1.6 million.





In
October 2008 Blast agreed to redeem 2,000,000 shares of Blast’s Series A
Preferred Stock held by Clyde Berg and McAfee Capital, LLC at the face value of
the Preferred shares, $0.50 per share, and paid $1,000,000 to redeem the
Preferred shares.  The Preferred shares have a dividend rate of 8% per
annum until paid or converted.  In connection with the Redemption,
Blast cancelled the 1,000,000 Preferred shares each held by Clyde Berg and
McAfee Capital, LLC, and consequently only 6,000,000 Preferred Shares remain
outstanding as of March 31, 2009. As of March 31, 2009, the aggregate and per
share arrearages were $312,329 and $0.05, respectively.








6


NOTE
5 - OPTIONS AND WARRANTS





In March
2009, under the terms of the $0.01 warrants granted to Laurus Master Fund, Ltd.
(“Laurus”), in August 2006, Laurus elected to make a cash-less exercise of
1,508,824 shares of common stock using a fair market value of $0.095 per
share.  This resulted in 1,350,000 shares being issued to Laurus and
158,824 shares being cancelled under the cash-less exercise formula. Of the
6,090,000 penny warrants originally granted to Laurus, only 1,555,089 remain
unexercised as of March 31, 2009.





Share-based
Compensation





The
Company accounts for share-based compensation, including options, warrants and
nonvested shares, according to the provisions of SFAS No. 123R, "Share
Based Payment". During the three month period ended March 31, 2009, the
Company recognized share-based compensation expense of approximately $8,254. The
remaining value of unamortized options remaining at March 31, 2009 is
$37,167.





Activity
in options during the three month period ended March 31, 2009 and related
balances outstanding as of that date are reflected below. No options were issued
during the three month period ended March 31, 2009. At March 31, 2009,
3,032,792 options were outstanding. The intrinsic value of the exercisable
options at March 31, 2009 was $0.40.





Number
      of Options
                
                Weighted
      Average Exercise Price
                
                Weighted
      Average Remaining Contract Term (# years)Outstanding
      at January 1, 2009
                3,032,792
                
                $
      0.59Granted
                -
                
                -Exercised
                -
                
                -Forfeited
      and canceled
                -
                
                -Outstanding
      at March 31, 2009
                3,032,792
                
                $
      0.59
                
                6.3Exercisable
      at March 31, 2009
                2,845,292
                
                $
      0.62
                
                6.1





Activity
in warrants during the three month period ended March 31, 2009 and related
balances outstanding as of that date are reflected below. No warrants were
issued during the three month period ended March 31, 2009. At March 31,
2009, 12,153,913 warrants were outstanding. The intrinsic value of the
exercisable warrants at March 31, 2009 was $0.29.





Number
      of Warrants
                
                Weighted
      Average Exercise Price
                
                Weighted
      Average Remaining Contract Term (# years)Outstanding
      at January 1, 2009
                13,503,913
                
                $
      0.76Granted
                -
                
                -Exercised
                (1,350,000)
                
                0.01Forfeited
      and canceled
                -
                
                -Outstanding
      at March 31, 2009
                12,153,913
                
                $
      0.84
                
                3.6Exercisable
      at March 31, 2009
                12,153,913
                
                $
      0.84
                
                3.6








7


NOTE
6 – LITIGATION





Hallwood Energy/Hallwood
Petroleum Lawsuit


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





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





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





Quicksilver Resources
Lawsuit


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





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


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


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


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





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





General


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





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





8


NOTE
6 – BUSINESS SEGMENTS





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





For
      the Three Months Ended
                          March
      31,2009
                        
                        
                        2008Revenues:Satellite
      Communications
                        
                        $
                        98,013
                        
                        
                        $
                        71,652Down-hole
      Solutions
                        
                        
                        20,000
                        
                        
                        
                        -Total
      Revenue
                        
                        $
                        118,013
                        
                        
                        $
                        71,652Costs
      of Goods Sold:Satellite
      Communications
                        
                        $
                        88,995
                        
                        
                        $
                        96,300Down-hole
      Solutions
                        
                        
                        99,716
                        
                        
                        
                        23,821Corporate
                        
                        
                        395,110
                        
                        
                        
                        588,097Total
      Costs of Good Sold
                        
                        $
                        583,821
                        
                        
                        $
                        708,218Operating
      profit (loss):Satellite
      Communications
                        
                        $
                        9,018
                        
                        
                        $
                        (24,648
                        )Down-hole
      Solutions
                        
                        
                        (79,716
                        )
                        
                        
                        (23,821
                        )Corporate
                        
                        
                        (395,110
                        )
                        
                        
                        (588,097
                        )Operating
      Loss
                        
                        $
                        (465,808
                        )
                        
                        $
                        (636,566
                        )





NOTE
7 – DISCONTINUED OPERATIONS





There are
no assets or liabilities associated with the discontinued operations at March
31, 2009.





Net
income (loss) from the discontinuance of drilling operations for the three
months ended March 31, 2009 and 2008 are as follows:





March
      31,
                      2009
                    
                    
                    March
      31, 2008Revenues
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      Expenses:Cost
      of sales
                    
                    
                    -
                    
                    
                    
                    3,667Selling,
      general and administrative
                    
                    
                    -
                    
                    
                    
                    644Interest
      expense
                    
                    
                    -
                    
                    
                    
                    1,047Total
      operating expenses
                    
                    
                    -
                    
                    
                    
                    5,358Loss
      from discontinued operations
                    
                    
                    -
                    
                    
                    
                    (5,358
                    )Other
      income (expense)Other
      expenses
                    
                    
                    -
                    
                    
                    
                    (1,007
                    )Interest
      income
                    
                    
                    -
                    
                    
                    
                    37Total
      other income (expense)
                    
                    
                    -
                    
                    
                    
                    (970
                    )Net
      loss from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    (6,328
                    )





9


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




Forward-Looking
Statements




All
statements that are included in this Quarterly Report, other than statements of
historical fact, are forward-looking statements. You can identify
forward-looking statements by words such as “anticipate”, “believe” and similar
expressions and statements regarding our business strategy, plans and objectives
for future operations. Although management believes that the expectations
reflected in these forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. The
forward-looking statements in this filing involve known risks and uncertainties,
which may cause our actual results in future periods to be materially different
from any future performance suggested in this report. Such factors may include,
but are not limited to, such risk factors as: changes in technology, reservoir
or sub-surface conditions, the introduction of new services, commercial
acceptance and viability of new services, fluctuations in customer demand and
commitments, pricing and competition, reliance upon subcontractors, the ability
of our customers to pay for our services, together with such other risk factors
as may be included in our Annual Report on Form 10-K filed with the Commission
on March 31, 2009 and incorporated herein by reference. The use of the term
“Blast” or the “Company” herein refers to Blast Energy Services, Inc. and its
wholly-owned subsidiary, Eagle Domestic Drilling Operations LLC.





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




Plan
of Operations





During
the next twelve months, Blast plans to attempt to expand its Satellite
Communications Services and Down-hole Solutions businesses. Blast may choose to
raise funds through the sale of debt and/or equity in order to expand its
current lateral jetting rig fleet and/or to support its operations. Such funding
may not be available and/or may be available on unfavorable terms.





Three
Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
2008




Satellite Communications
Services





Satellite
Communications Services’ revenues increased by $26,000 to $98,000 for the three
months ended March 31, 2009 compared to $72,000 for the three months ended March
31, 2008. The increase was the result of new business and customer renewals,
including the new systems sold to a major pipeline company. The operating margin
from Satellite Communications Services increased by $34,000 to a gross profit of
$9,000 for the three months ended March 31, 2009 compared to a deficit of
$25,000 for the three months ended March 31, 2008.





Down-hole
Solutions





Down-hole
Solutions’ revenues for the three months ended March 31, 2009 increased to
$20,000 compared to zero revenue for the three months ended March 31, 2008. The
Company has resumed field testing of this technology and the lateral jetting rig
successfully drilled laterals on one well in January 2009. The loss generated
increased $56,000 to $80,000 for the three months endedMarch 31, 2009 compared
to $24,000 during the three months ended March 31, 2008. Cost of services
provided for the three months ended March 31, 2009 increased by $76,000 to
$100,000 compared to $24,000 for the three months ended March 31, 2008. This
increase represents rig crew, repairs, and maintenance costs associated with rig
deployment in 2009 compared with certain pre-deployment fabrication costs and
rig repairs incurred in 2008.




Depreciation and
Amortization





Depreciation
and amortization expense increased by $30,000 to $32,000 for the three months
ended March 31, 2009 compared to $2,000 for the three months ended March 31,
2008.  This increase is primarily related to the depreciation of the
AFJ rig which was brought into service in October 2008.





Selling,
General and Administrative




Selling,
general and administrative (“SG&A”) expenses decreased by $227,000 to
$359,000 for the three months ended March 31, 2009 compared to $586,000 for the
three months ended March 31, 2008.


10








For
      the Three Months Ended March 31,
                Increase
                  (Decrease)(in
      thousands)
                2009
                2008Payroll
      and related costs
                $
      115
                $
      169
                $
      (54)Option
      and warrant expense
                8
                52
                (44)Legal
      fees
                10
                227
                (217)External
      services
                156
                71
                85Insurance
                29
                31
                (2)Travel
      & entertainment
                18
                13
                5Office
      rent, communications,  misc.
                23
                23
                -$
      359
                $
      586
                $
      (227)








Lower
administrative costs were primarily a result of lower payroll costs,
significantly lower legal fees following the emergence from bankruptcy and lower
non-cash charges associated with the lack of any grant of warrants or options
during the three month ended March 31, 2009. These lower costs were partially
offset by higher external services costs related to new business development
activities.




Interest
Expense





Interest
expense decreased by $19,000 to $23,000 for the three months ended March 31,
2009 compared to $42,000 for the three months ended March 31, 2008. During the
three months ended March 31, 2008, interest expense included accrued interest on
the debtor-in-possession note that was converted to common stock after our
emergence from bankruptcy in March 2008.





Loss from Continuing
Operations





Loss from
continuing operations improved by $171,000 to $489,000 for the three months
ended March 31, 2009 compared to $660,000 for the three months ended March 31,
2008, primarily relating to lower administrative costs partially offset by
higher costs of services from Down-hole Solutions business.





Income (Loss) from
Discontinued Operations





Income
from discontinued operations was $-0- for the three months ended March 31, 2009
compared to a loss of $6,000 for the three months ended March 31,
2008. These operations continue to have no activity, having been
discontinued since mid-2007.





Net
Loss





The net
loss improved by $177,000 to $489,000 for the three months ended March 31, 2009
compared to $666,000 for the three months ended March 31, 2008, primarily
relating to lower administrative costs partially offset by higher costs of
services from Down-hole Solutions business.





Liquidity
and Capital Resources




Blast had
total current assets of $1.2 million as of March 31, 2009, including a cash
balance of $304,000, compared to total current assets of $1.6 million as of
December 31, 2008, including a cash balance of $732,000.  The decrease
in current assets is primarily related to the cash costs expended to field test
and deploy the AFJ rig.





Blast had
total assets as of March 31, 2009 of $5.4 million compared to total assets of
$5.7 million as of December 31, 2008.  This decrease is primarily
related to the costs of deploying the AFJ rig as described
above.


11


Blast had
total liabilities of $1.5 million as of March 31, 2009, consisting of current
liabilities of $0.4 million compared to total liabilities of $1.4 million as of
December 31, 2008, consisting of current liabilities of $0.3
million.  The slight increase in current liabilities is related to the
financing of insurance policies covering the AFJ rig and its workers. Blast also
had net working capital of $0.8 million and stockholders’ equity of $3.8 million
as of March 31, 2009.





Cash Flows from Operating
Activities





Blast had
net cash used in operating activities of approximately $345,000 for the three
months ended March 31, 2009, which was mainly due to the loss from continuing
operations of $489,000 partially offset by a $99,000 favorable change in working
capital.





Cash Flows used for
Investing Activities





Blast had
net cash used in investing activities of $83,000 for the three months ended
March 31, 2009, which primarily consisted of capitalized improvements to the AFJ
rig and the purchase of a crane truck to support field operations.





Cash Flows from Financing
Activities





Blast had
no cash provided by financing activities for the three months ended March 31,
2009.





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





Off-Balance Sheet
Arrangements





As of
March 31, 2009, we had no off-balance sheet arrangements.




Recent Accounting
Pronouncements





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





Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
Applicable.





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





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





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


12


Changes in Internal Control
Over Financial Reporting





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





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





13


Part
II. OTHER INFORMATION




Item
1. Legal Proceedings





Hallwood Energy/Hallwood
Petroleum Lawsuit


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





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





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





Quicksilver Resources
Lawsuit


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





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


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


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


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





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





General


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





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





Item
1A. Risk Factors





There
have been no material changes from the risk factors previously disclosed in the
registrant’s Form 10-K, filed with the Commission on March 31,
2009.





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





None.


14


Item
5. Other Information.





None.





Item
6. Exhibits





Exhibit
      31.1*
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      31.2*
              
              Certification
      of Principal Accounting Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      32.1*
              
              Certification
      of Principal Executive Officer pursuant to Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002Exhibit
      32.2*
              
              Certification
      of Principal Accounting Officer pursuant to Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





*Filed
herewith





SIGNATURES




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





Blast Energy Services,
  Inc.By:
            /s/ John O’Keefe, CEOJohn
      O’KeefeChief
      Executive Officer(Principal
      Executive Officer)Date:  May
      11, 2009By:
            /s/ John MacDonald, CFOJohn
      MacDonaldChief
      Financial Officer(Principal
      Accounting Officer)Date:  May
      11, 2009