**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-KSB/A**
 **Amendment
No. 1**
  **[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
THE SECURITIES EXCHANGE ACT OF 1934**
 
 **For
the Fiscal Year Ended December 31, 2004**
 
 **[
] TRANSITION REPORT UNDER SECTION 13 OR 15(d)**
 **OF
THE SECURITIES EXCHANGE ACT OF 1934**
 
 For the
transition period from _________________ to __________________
 
 *Commission
File No. 000-27783*
 
 **NATHANIEL
ENERGY CORPORATION**
 
 (Exact
name of small business issuer as specified in its charter)
 
 Delaware
      (State
      or other jurisdiction of
      Incorporation
      or organization)
    84-1572525
      (I.R.S.
      Employer
      Identification
      No.)8001
      South InterPort Blvd. Suite 260, Englewood, Colorado
      (Address
      of Principal executive Offices)
    80112
      (Zip
      Code)
 
 (303)690-8300
 Issuer's
telephone number, including area code
 
 Securities
registered under Section 12(b) of the Exchange Act: None
 
 Securities
registered under Section 12(g) of the Exchange Act:
 
 Title of
class: Common Stock, $0.001 par value per share
 
 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. [X] Yes [ ] No
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
 
 Nathaniel
Energy's revenues for its most recent fiscal year (2004): $14,036,793
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of March 28, 2005 was $4,948,878.
 
 The
number of shares outstanding of each of the issuer's classes of common equity,
as of March 28, 2005 is 70,698,263 shares.
 
 **DOCUMENTS
INCORPORATED BY REFERENCE: None**
 
  
  **NATHANIEL
ENERGY CORPORATION**
 
 TABLE OF
CONTENTS
 PageExplanatory
      Note
    3Forward
      Looking Statements
    3PART
      IItem
      1.
    Description
      of Business
    4Item
      2.
    Description
      of Property
    11Item
      3.
    Legal
      Proceedings
    11Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    12PART
      IIItem
      5.
    Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      of Purchase of Equity Securities
    13Item
      6.
    Management's
      Discussion and Analysis or Plan of Operation
    19Item
      7.
    Financial
      Statements
    25Item
      8.
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
    25Item
      8A.
    Controls
      and Procedures
    25PART
      IIIItem
      9
    Directors
      and Executive Officers of the Registrant
    26Item
      10
    Executive
      Compensation
    27Item
      11
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    28Item
      12
    Certain
      Relationships and Related Transactions
    28Item
      13
    Exhibits
      List and Reports on Form 8-K
    30Item
      14
    Principal
      Accountant Fees and Services
    32
  2
  **EXPLANATORY
NOTE**
 
 The
amendments in this Amendment No. 1 to Nathaniel Energy Corporation’s Annual
Report on Form 10-KSB/A for the year ended December 31, 2004 includes Part III
(Items 9, 10, 11 and 12) to the Annual Report.
 
 **FORWARD
LOOKING STATEMENTS**
 
 Certain
information contained in this report may include "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
is subject to the safe harbor created by that act. The safe harbor created by
the Securities Litigation Reform Act will not apply to certain “forward looking
statements” because we issued “penny stock” (as defined in Section 3(a)(51) of
the Securities Exchange Act of 1934 and Rule 3a51-1 under the Exchange Act)
during the three year period preceding the date(s) on which those forward
looking statements were first made, except to the extent otherwise specifically
provided by rule, regulation or order of the Securities and Exchange Commission.
We caution readers that certain important factors may affect our actual results
and could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this information statement
or which are otherwise made by or on behalf of us. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may", "will", "expect", "believe", "explore",
"consider", "anticipate", "intend", "could", "estimate", "plan", or "continue"
or the negative variations of those words or comparable terminology are intended
to identify forward-looking statements. Factors that may affect our results
include, but are not limited to, the risks and uncertainties associated with:
 
 o Our
ability to raise capital necessary to implement our business plan.
 o Our
ability to finance and complete planned projects and facilities upgrades.
 o Our
ability to execute our business plan and commercialize the Thermal CombustorTM
technology, including building Thermal CombustorsTM that meet customers'
specifications and that meet local regulatory environmental and permit
requirements.
 o Risks
related to dependency on a small number of customers.
 o Our
ability to satisfy our customers' expectations.
 o Our
ability to employ and retain qualified management and employees.
 o Changes
in government regulations which are applicable to our business.
 o The
availability of a consistent, economically viable, and sustainable waste stream
supply to fuel the Thermal Combustor(TM) operations.
 o Changes
in the demand for our products and services, including the impact from changes
in governmental regulation and funding for alternative energy.
 o The
degree and nature of our competition, including the reliability and pricing of
traditional energy sources, economic viability of other alternative energy
sources such as wind and solar power.
 o Our
ability to pay debt service on loans as they come due.
 o Our
ability to generate sufficient cash to pay our creditors.
 o
Disruption in the economic and financial conditions primarily from the impact of
terrorist attacks in the United States and overseas, threats of future attacks,
police and military activities and other disruptive worldwide political events.
 
 We are
also subject to other risks detailed from time to time in other Securities and
Exchange Commission filings and elsewhere in this report. Any one or more of
these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us
ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
  3
   **PART
I**
 **Item
1. Description of Business.**
 
 **General**
 
 Nathaniel
Energy Corporation is a renewable energy company that provides industry with an
alternative energy comparable to that of fossil fuels. Our proprietary patented
technology, the Thermal Combustor(TM), is a 2-stage gasification system designed
to convert waste, biomass, tires and any other solid, hydrocarbon-based
materials into inexpensive electrical and thermal energy, while exceeding the
most stringent EPA and European Union regulations.
 
 We have
been in the fuel processing business, including used tire recycling and
collection services, since 1997. We have operated a 27 acre tire fuel processing
facility in Hutchins, Texas since 1999 and have operated a helium and gas
processing facility in Keyes, Oklahoma since April 2003. During the year ended
December 31, 2004, our helium and gas processing facility, and our tire fuel
processing business, have generated 96% and 4% of our total revenue,
respectively.
 
 We plan
to focus our patented technology, the Thermal CombustorTM in three main areas;
licensing, creating energy infrastructures and building, owning and operating
small power plants.
 
 We plan
to license the Thermal CombustorTM technology to qualified companies, joint
venture partners, and distributorships. We plan to build energy infrastructures
for certain industries that have a need to dispose of hydrocarbon based
materials and seek an independent source of energy in the form of heat, steam or
electricity. These energy infrastructures would be built on the businesses'
premises ("inside the fence") and can reduce the dependence a business has on
fossil fuels and power from the local utility. In some cases, the energy
infrastructures can become a business' self sustaining utility. We plan to
identify new and existing sites where we can build, own and operate small power
plants through our own resources or in conjunction with joint venture
partners.
 
 Our short
term objective is to complete the start up and testing of our two Thermal
CombustorsTM recently constructed in Cologna Veneta, Italy. We plan to utilize
the operating Thermal CombustorTM units in Italy in our sales, marketing and
research efforts during 2005. Upon completion and acceptance of the second of
two Thermal CombustorsTM and payment by our customer in Italy, we will recognize
revenue on those units. We have recognized no revenue from the sale or delivery
of our Thermal CombustorTM through our year ended December 31, 2004.
 
 **Description
of Thermal Combustor** TM **Technology**
 
 The
Thermal CombustorTM uses waste, such as waste tires (tire-derived fuel - TDF),
fuel derived from municipal and industrial waste streams (refuse-derived fuel -
RDF), wood waste and agricultural waste (biomass). Fuel for the Thermal
CombustorTM is placed on a moving grate in a chamber where it is subjected to
high temperatures and gasified. The resulting gas is withdrawn into a separate
chamber where it is combusted at temperatures of approximately three thousand
degrees Fahrenheit, and produces heat, elemental carbon, carbon dioxide, low
levels of carbon monoxide, sulfur dioxide, and nitrogen oxides. The process also
generates two forms of ash. The first is bottom ash, the unburnable solids
remaining in the fuel, such as metals, rock and sand. The second is fly ash,
small particles commonly known as particulate, which is captured in filters.
 
 As a
result of the pre-combustion gasification and high temperatures achieved in the
Thermal CombustorTM, pollutants are in very small quantities, well below current
EPA environmental standards. The Thermal Combustor'sTM high temperatures destroy
99.9% of hazardous air pollutants emitted from refuse-derived fuel and
tire-derived-fuel, including PCBs, dioxins, and furans. Most gaseous pollutants
are captured by scrubbers or catalytic converters and the remaining pollutants
fall well below EPA standards.
 
 The
construction of the Thermal CombustorTM is relatively straight forward and, our
process control system features modern computer technology. The process control
system monitors and controls all aspects of fuel and air volume to maintain
optimal combustion. This system provides for semi-automated functionality
lessening the manpower needed to supervise the Thermal Combustor’s TM operation.
The process control system features self-diagnostic and corrective action
functions prompting the operator to take action if a problem occurs which is
beyond the ability of the computer system to correct. The Predictive Failure
Analysis function pinpoints potential weak spots that can be dealt with as a
preventative maintenance item before a more costly failure occurs.
  4
  While the
Thermal CombustorTM is adaptable to any combustible material, the Rubber
Manufacturers Association has reported that tire-derived-fuel has a higher heat
energy by weight than most types of coal, with lower moisture content, more
combustible matter and less fixed carbon as compared to most types of coal. We
believe that the abundance of discarded tires in the United States and the
resulting environmental hazard they represent provides an opportunity to expand
our collection and shredding of waste tires, useable as fuel for the Thermal
CombustorTM.
 
 **Environmental
Testing**
 
 In May
2000 Bord Na Mona Environmental Limited, an environmental management company
conducted a comprehensive environmental test on our behalf of a Thermal
CombustorTM temporarily installed at a facility in County Louth, Ireland. During
this testing the Thermal CombustorTM was fueled with refuse-derived fuel. Testing
was conducted for more than 50 different chemical pollutants, including dioxins
and PCBs, many of which are extremely hazardous. The report concludes that the
Thermal CombustorTM was within then and pending European directive limits.
Management believes it is significant that the tests show extremely toxic
substances in emissions, including dioxins, furans, chlorophenols,
chlorobenzenes, and polycyclic aromatic hydrocarbons are significantly below the
allowable European limits, less than 10% of standard in all cases, with many
compounds completely absent.
 
 **Marketable
Byproducts**
 
 Most
byproducts of the Thermal CombustorTM can be marketable.
 
 Primary
byproducts include:
 ·
    Heat
      - useable for heating purposes, such as heating and cooling adjacent
      facilities, or for steam generation.
 ·
    Electricity
      - produced by the addition of steam turbines and generators, for use in a
      companion project or for sale to the local utility.
 
 Secondary
byproducts include:
 ·
    Carbon
      black, which can be sold for tire manufacturing, water filtration, and for
      use in the cosmetics industries.
 ·
    Carbon
      dioxide, which can be sold to greenhouse operators for use in growth
      enhancement or for other industrial processes involving carbonation.
 ·
    Sulfur
      dioxide, which can be sold in the form of
gypsum.
 ·
    Nitrogen,
      which can be sold for industrial and cryogenic uses.
 
 Our
ability to market any of these secondary byproducts is dependent upon the demand
for those byproducts in the local business community and our ability to produce
and distribute them at competitive prices.
 
 We
believe the marketable byproducts produced by the Thermal CombustorTM are ideally
suited for use in proximity with a variety of industrial operations, such as gas
pipelines, chemical plants, printing facilities, industrial parks, and
designated "clean energy" generation sites, especially in colder climates where
heat is used for heating adjacent structures or for co-generation of
electricity. We have generated no revenue from the sale of Thermal CombustorsTM
or any byproducts from the operation of a Thermal CombustorTM to
date.
 
 **Business
Model**
 
 We focus
our patented technology in three main areas: licensing, creating energy
infrastructures and building, owning and operating small power plants.
 
 We plan
to license the Thermal CombustorTM technology to qualified companies, joint
venture partners, and distributorships. Our primary plan is to seek qualified
joint venture partners to build, own and operate small power plants or utilize
our technology under a license where we will become a participant in the
project. Our joint venture percentage ownership will vary with each joint
venture. We are focused on forming joint ventures with partners who possess one
or more of the following attributes: financial capability, governmental
resources, technical expertise, and host business applications that will support
a successful operation. We have not generated any revenue from licensing or
joint ventures to date.
 
 We intend
to increase the processing capability of our tire fuel processing business
during 2005, and are currently negotiating new contracts that will justify
planned financing arrangements for capital improvements and operations. We are
also seeking additional contracts. Should we be successful in increasing our
operating capacity and improving the quality of the tire-derived-fuel with the
addition of new equipment , we would expect to increase the volume of waste
tires we accept, the resultant tipping fee revenue (fee paid per tire received)
and improve the pricing for and volume of processed tire-derived-fuel sold.
  **Proposed
Expansion of Business**
 
 We plan
to complete the start up and testing of our two Thermal CombustorsTM installed in
Cologna Veneta, Italy and obtain our customer’s acceptance of these units. We
plan to utilize our relationship with our customer and the operating Thermal
CombustorTM units in our sales, marketing and research efforts during 2005.
 
 5
 We have a
contract to supply two MFC-1800 BHP Thermal CombustorsTM for a Refuse Derived
Fuel (RDF) project in Cologna Veneta, Italy. The Thermal CombustorsTM are to be
used in a co-generation waste-to-energy plant. Our contracts for this project
have been amended several times. We have one agreement with L & R Energy Co.
LLC, who is the equipment supply contractor for the Thermal CombustorsTM and the
boilers for the project. L & R has assigned to us the right to receive
proceeds under a letter of credit in the amount of the compensation due to us
under the contract.
 
 We also
have a contract with EcoIdea s.r.l., L&R and others for our work on the
project. Under the terms of the agreement, we are required to have both Thermal
CombustorsTM operating on RDF and capable of producing 19,240 Kilograms of steam
per hour, by June 30, 2005.
 
 Our
responsibilities to perform our obligations under the new agreement were subject
to other parties involved in the project fulfilling their respective
obligations, which need to be completed before we can perform certain aspects of
our obligations. The June 30, 2005 completion date will be further extended if
conditions to our performance are not fulfilled by the other parties to the
contract.
 
 Our
compensation under the agreement is $2,100,000. We are also entitled to
reimbursement of approximately $275,000 for costs incurred for shipping,
transport and packaging costs, and monthly payments of $40,000 to provide
technical support for the final start up testing and training of the Thermal
CombustorsTM.
 
 The
contract also provides for financial penalties if the performance of the Thermal
CombustorsTM do not meet performance output guarantees specified in the
agreement. These penalties reduce our payments by $11,000 for each tenth of a
percentage point if the unit’s steam output is less than the output indicated in
the agreement up to $649,000. If the steam output deficiency is greater than
15%, there is an additional penalty of $14,510 for each 1% deficiency in output
below 15%. These penalties apply unless our inability to perform is related to
another party’s performance, specifically, delivery of fuel in accordance with
specifications which have a direct relationship to the Thermal CombustorTM steam
output. We have the right to test fuels provided to determine whether such fuels
meet the contracted fuel specification.
 
 Under the
contract, any intellectual property and know-how related to any change or update
to any part of the Thermal CombustorTM is owned and retained by us and we will
have future access to the facility for demonstration, marketing and research
purposes, including access to operating data, fuel samples and other information
related to the operation of the facility.
 
 We have
accomplished the following milestones in the Cologna Veneta
project:
 
 ·
    On
      July 29, 2004 we placed one Thermal CombustorTM in service with natural gas
      and the plant provided at least one kilowatt of
    electricity.
 
 ·
    In
      November 2004 one Thermal CombustorTM was successfully gasifying using RDF
      producing one megawatt of electricity. Management believes that this
      proved our technology is viable for commercialization in the 1-50 megawatt
      markets.
 
 As of
March 28, 2005, we have been paid a total of $300,000 toward the contract price.
 
 Although
we believe we have performed in accordance with our contract and are working to
collect the full contract price, the amount of payment, other than those
received, and date of collection is uncertain at this time.
 
 **Tire
Fuel Processing Operation**
 
 Since
1999 we have operated a tire fuel processing facility in Hutchins, Texas. Under
Texas State regulations we are licensed as a tire processor and tire storage
facility. We are paid a tipping fee (fee paid per tire received) for accepting
waste tires. We sell the output of our tire fuel processing operation to two
major users. One is a large cement company located in Texas, which uses the
tire-derived-fuel for firing its kilns, thereby displacing equal amounts of
coal. The other is a national broker, which has an agreement with us to purchase
tire-derived fuel on an as-needed basis, primarily for use by paper mill plants.
We expect to increase the volume of waste tires we accept, the resultant tipping
fees, and the volume of output of our tire-derived-fuel during 2005, if we are
successful in obtaining financing for our planned capital improvements and for
operating capital. We expect revenue to increase proportionately to the
increased volume of tire-derived-fuel we produce and believe there is a market
for the increase in production.
 
 **Intellectual
Property**
 
 We own
three U.S. patents, the latest issued in March 2003, and have two U.S. and two
European patents pending.
 
 Our two
initial patents apply to the construction methodology and design of our Thermal
CombustorTM biomass burner and were issued in 1993 and 1994. These patents expire
in 2011 and 2012, respectively. One additional patent for our gasifier system
and method of gasification was issued in 2003 and expires in 2018. Our patents
cover the design of a fuel efficient dual combustion chamber and a unique
computerized method of mixing air with combustible gas.
 
 6
 We also
have two US patent applications pending, one filed during 2002 related to
improvements in our gasifier system which reduces air and water pollutants and
the second, filed in 2004, related to our oxygen-based biomass combustion system
and controls. In addition, two European patent applications are currently
pending on our gasifier system and method of gasification and our oxygen based
biomass combustion system.
 
 **Government
Approval / Environmental Laws and Regulation**
 
 Operation
of a Thermal CombustorTM, a tire fuel processing facility and gas processing
facility are subject to a variety of federal, state, and local laws and
regulations, including those relating to the discharge of material into the
environment and protection of the environment. The governmental authorities
primarily responsible for regulating our environmental compliance are the U.S.
Environmental Protection Agency (EPA), Department of Environmental Quality and
comparable regulatory agencies and departments in the states where we establish
operations. We are subject to the air quality programs under federal and state
law.
 
 Our
helium and gas processing operations in Keyes, Oklahoma are subject to EPA rules
and regulations regarding air, water and soil quality which are administered by
the Oklahoma Department of Environmental Quality (DEQ). DEQ personnel inspect
our operations annually, perform quarterly reviews, and occasionally perform
unannounced spot checks. We maintain records of all DEQ matters. Our current
operating permit requires inspection of emissions for each individual piece of
equipment in our Keyes, Oklahoma operation, however, we have applied for a
permit which would consolidate all of our equipment within one operating permit.
We have engaged a consulting firm, expert in dealing with EPA and DEQ filings
and permits, to manage the permit process on our behalf. In addition, the
Occupational Safety and Health Administration, OSHA, periodically inspects our
facility for compliance with worker safety and training programs. We maintain
records on our compliance with OSHA regulations at the Keyes, Oklahoma facility.
We believe that the Keyes, Oklahoma operation is in compliance with the EPA, DEQ
and OSHA rules and regulations.
 
 Our tire
fuel processing operation in Texas is subject to regulation by the Texas
Commission of Environmental Quality. We are registered with the Texas Commission
on Environmental Quality which allows us to receive, store, transport and
process used or waste tires. Our registration expires December 20, 2007 and is
renewable based upon our compliance with the Texas Commission’s rules governing
waste tire management. While we have been cited for certain compliance issues
during the year, we believe the tire fuel processing operation is now in
compliance with those rules. We continually maintain our fuel processing
facility to meet the requirements of the Texas Commission of Environmental
Quality’s regulations, however, should we be unable to continue to fund our
compliance, we could loose our permit to operate the facility. During 2004, we
incurred approximately $3,700 of expense related to disposal of un-salable tire
shreds.
 
 Before we
can begin any Thermal CombustorTM or tire fuel processing operations at any
location, we are required to obtain air emission permits, as well as, obtain
appropriate construction and other necessary permits.
 
 Failure
to comply with the laws promulgated by these authorities could result in
monetary sanctions, liability for environmental clean up, and other remedies. To
maintain our compliance, we may make occasional changes in the Company's waste
generation and disposal procedures, Thermal CombustorTM operation or other
operations. We believe these laws and regulations will not have a material
adverse effect on our capital expenditures or competitive position. We believe
that our technology complies, in all material respects, with the various
federal, state, and local regulations that apply to its current and proposed
operations.
 
 **Research
and Development**
 
 During
2004, we spent $68,729 for research and development related to our Thermal
CombustorTM technology, which is expensed as operating expense. In addition, we
capitalized $13,410 of patent related costs and $299,339 of cost related to
technical documentation, drawings, design engineering on our Thermal CombustorTM
technology. We have also spent over $100,000 in engineering salaries dedicated
to internal product development in each of our years ended December 31, 2004 and
2003, included as operating expense. During 2003 we spent $37,409 on outside
resources for research and development, included as operating expense. We plan
to continue increasing internal product research and development with a goal of
offering our customers the best and most efficient product opportunities.
 
 **Market
Opportunity**
 
 Demand
for licensing the Thermal CombustorTM technology and creating energy
infrastructures or small power plants using the Thermal CombustorTM, all increase
as the cost of traditional energy costs rise. In industries with high energy
demands such as chemical plants or
 newspaper
operations, grid blackouts or other service interruptions also drive the need
for more reliable "inside the fence" energy source infrastructures that can be
provided utilizing the Thermal CombustorTM.
 
 According
to the Rubber Manufacturers Association (RMA), there are up to 275 million waste
tires in stockpiles in the United States. The RMA estimates that in 2003 alone,
290 million tires were scrapped. Of these 290 million tires, about 130 million
were used as fuel, 123 million were recycled, and 57 million were disposed of or
buried in landfills.
 
 The use
of waste tires for fuel is currently the largest single use of waste tires.
Tire-to-energy technology preserves natural resources by utilizing the stored
energy in petroleum-based tires. Tires have a heating value of 12,000 to 15,000
BTUs per pound (6,668 to 8,335 kilo calories per kilogram). Each twenty pound
(nine kilogram) car tire is equivalent to about twenty-five pounds (11.4
kilograms) of bituminous coal. Tires contain less ash than most types of coal
and less sulfur than bituminous coals. Tires are shredded into pieces as
tire-derived-fuel. In 2003, cement kilns, pulp and paper mills, electric
utilities, waste-to-energy plants, and industrial boilers burned approximately
130 million tires. However, management expects new regulations will be enacted
which will reduce the percentage of waste tires used to fuel cement kilns due to
issues over emissions. Although only a select few facilities use whole tires
and/or tire-derived-fuel as the only fuel, most mix or "co-fire" the
tires/tire-derived-fuel with other fuels, such as coal.
 
 7
 Our
Thermal CombustorTM technology provides a viable method of utilizing waste tires,
reducing landfill and stockpile accumulations while generating clean dependable
energy and other marketable byproducts in an environmentally friendly manner.
 
 **Competition**
 
 The
expanding alternative fuel industry is a rapidly changing field of technology.
We compete within a broad spectrum of products as this industry continues to
expand including: traditional solid waste burners, fluidized bed boilers, wind
and solar technology and various forms of gasification technologies. We
recognize that to be competitive, we must continue to expand the application and
utilization of the Thermal CombustorTM. Our management believes that the
modularity, flexibility of multi-fuel capability, associated low emissions, the
advanced state of our development and competitive pricing for the manufacture
and installation of the Thermal CombustorTM, positions us to capture a share of
the waste-to-energy market.
 
 There are
numerous examples of laboratory scale and pilot plant operations, however, very
few successful commercial scale facilities have been constructed to extract the
energy contained in solid waste materials. The technologies that attempt to do
so fall within a few basic categories.
 
 Mass
Burners/Incinerators
 
 These
represent more than 95% of the installed base of energy extraction facilities.
These facilities take the solid material and burn it in a heated air stream. The
primary purpose of these facilities is to reduce the volume of the solid
material prior to disposal or to render the solid material less hazardous. Heat
produced by this burning may be extracted by a boiler or it may be released
directly into the environment. Most of the installed facilities are nearing the
end of their useful lives and are not considered for replacement primarily due
to the emission of air pollution associated with this equipment. To our
knowledge, no new mass burner facilities are proposed or are being
constructed.
 
 Gasifiers
 
 Gasifiers
represent the next generation in the evolution of mass burners and incinerators.
The solid material is heated in an oxygen-starved gas stream where the gaseous
components of the solid material are released. These gaseous components or fuel
gases retain the heat producing qualities of the solid material. The fuel gases
are used to heat a boiler for steam, power an internal combustion engine or
power a gas turbine. The only successful commercial gasifiers use the heat to
produce steam in a boiler. There have been laboratory and pilot plant scale
examples of gasifiers that collect the fuel gases to power internal combustion
engines or turbines which require further engineering and development to prove
economical to use. Currently there are approximately 12 companies investigating
gasifier technology that have laboratory scale or pilot plant models.
 
 Plasma
Conversion
 
 Plasma
conversion uses electrically generated plasma to produce temperatures high
enough to gasify solid fuels. The most successful version uses plasma to
maintain a bath of molten iron in which the solid fuel is added. The fuel then
gasifies and the fuel gases are withdrawn to extract the heat energy. Plasma
conversion has the potential to become a successful commercial technology and
represents potential competition for our technology. Capital costs for plasma
conversion are competitive, however, the operating costs are significantly
higher than our operating costs.
 
 Fluidized
Bed Reactors
 
 Fluidized
bed reactors function by injecting the solid fuel into a bed of heated sand that
is fluidized with air or a non-reactive gas. The heated fluidized sand and solid
fuel releases the fuel gases for extraction of the heat energy. Fluidized bed
reactors have been used for many decades but have not gained recognition as a
viable solid fuel conversion technology due to the myriad of engineering
difficulties that have not been solved. We do not believe that fluidized bed
reactors will play an important role in the solid fuel energy extraction
field.
 
 Retorts
 
 Retorts
are vessels in which the solid fuel is placed. The vessel is then heated until
the fuel gases are released and collected. The vessel is cooled, the remaining
solid debris is removed and the process repeated. Retorts have been used in a
number of industrial-scale applications and all have proved economically,
environmentally and technically unworkable for energy extraction from solid
fuels. To our knowledge, no new installations of retorts are proposed or are
being constructed.
  8
  
 The
following table shows the state of the market at the end of 2004.
 
 **Solid
      Fuel Conversion Technology**Technology
    Installed
      Base (MW)(1)
    %
      Change from 2003 Increase    (Decrease)Mass
      Burners/Incinerators
    795
    (87)Gasifiers
    175
    15Plasma
      Conversion
    15
    8Fluidized
      Bed Reactors
    280
    (30)Retorts
    50
    (90)
 *Source:
National Renewable Energy Laboratory, 2005*
 *(1)
Total megawatts produced.*
 
 We are
not aware of any gasifier technology companies marketing equipment for the 1 -
50 megawatt power market. We do compete for waste-to-energy business with
different competitors in each addressed market. Our competitors, however, may
have financial and marketing resources far greater than those available to us
and may have greater application for large waste streams, such as municipal
waste from large cities.
 
 In
industries with high energy demands, such as specialty gas plants, chemical
manufacturing or newspaper productions, we compete with the local utility which
provides traditional electrical power, in addition to alternate power sources
such as solar or wind power.
 
 In
industries with regulated waste disposal, we compete with incinerators and waste
management companies. In some cases these solutions may provide lower cost waste
disposal, but do not remove the emissions and/or pollutants from the
environment.
 
 For
municipalities, we may compete against other alternative energy sources,
especially if the municipality seeks to meet their regulated percentage of
alternative or "green" energy sources. In this market, we may also compete
against the local utility, incinerators or waste management companies, depending
on the municipality, regulatory environment and political pressures to employ
alternative energy sources.
 
 **Helium
Production Operation**
 
 We have a
51% ownership interest in a helium and gas processing facility in Keyes,
Oklahoma. This facility processes approximately 2,100,000 Mcf (thousand cubic
feet) of natural gas annually, 5,700 Mcf of natural gas daily and 5,900 gallons
of natural gas liquids daily. A more detailed ownership description of our Keyes
operation is contained under the heading "Corporate History" below. We also own
130 miles of pipeline that collects natural gas for the plant from over 50 gas
wells. We have a take-and-pay contract with Air Products and Chemicals, Inc. for
the helium production. We also have an operating agreement with Colorado
Interstate Gas Company to provide blending services using our processed natural
gas through 2006. The natural gas liquids recovered by the plant are sold to
various parties.
 
 We have
an agreement with Nexus Energy Company, a third party producer, for the
gathering and processing of new volumes of natural gas from additional wells and
gathering fields. The increased gas flow contributed to our increase in gross
profit from our helium operations during 2004.
 
 **Major
Suppliers**
 
 We
currently have four main suppliers in our helium and gas processing operations
which account for approximately 96% of our sales. Nexus Energy Company supplies
us with natural gas under a 10-year agreement, executed January 9, 2004, which
renews for an additional 10-year term if Nexus can produce commercial quantities
of natural gas. Additionally, Nexus pays us fees for transporting the natural
gas from a central delivery point to the Keyes helium plant and a fee for
compressing the gas at the central delivery point. We have a life of lease
contract with EOG Resources, Inc. (EOG) for all gas produced. Regency Gas
Services, LLC supplies us with crude helium under an agreement which requires us
to purchase all crude helium produced from the Lakin Processing Plant until 2021
at which time either party may terminate the agreement. If it is not terminated
at that time, it may be terminated subsequently at any time upon two years’
advance notice by either party. This contract can be terminated in 2008 and 2015
if either party requests pricing that is not agreed to by the other party. We
have an operating agreement with Colorado Interstate Gas Company which has a
term that expires in December 2006, to provide blending services and as part of
that agreement, they provide the helium and gas operations with fuel gas and we
supply natural gas containing nitrogen. Either Nathaniel Energy as CIG may
terminate this agreement upon six months notice if Nathaniel deems the continued
operation of its helium plant to be uneconomical. Alternatively in this case,
CIG can choose to assume the operation of our helium plant at CIG’s cost, upon
six months notice. CIG also has the right to terminate the agreement upon three
months notice if the volume of gas which we supply to CIG under this agreement
falls below specified standards for a period of 90 days.
 
 9
 If we
lose any or a combination of these contracts, it could substantially affect our
ability to continue the operations of our natural gas and crude helium business.
Additionally, a loss of any of these contracts could substantially affect the
volume of helium and liquid gas products which we are able to produce for our
own account. However, if this occurred, existing contracts provide for
processing crude helium for third parties to the capacity of the helium plant
(which is known as toll processing). Although we anticipate that toll processing
operations would keep our processing operations at capacity, it could have a
substantial adverse effect on our profit margins.
 **Major
Customers**
 
 As noted
above, approximately 96% of our sales stem from helium, natural gas liquids and
natural gas sales. We currently do most of our business with three major
customers. Because we offer several different products, we have reduced
dependency on any one customer. Air Products and Chemicals, Inc. purchases all
of the helium produced under contract through 2021 at which time either party
may terminate the agreement. If it is not terminated at that time, it may be
terminated subsequently at any time upon two years' advance notice by either
party. This contract can be terminated in 2008 and 2015 if either party requests
pricing that is not agreed to by the other party. Should this contract expire or
be terminated early, we believe there are other major companies which have a
stated interest in purchasing the helium. We have short term agreements with
Tenaska Marketing, Inc. for the sale of processed natural gas. Additionally, we
have a month-to-month agreement with Koch Hydrocarbon, LP for the sale of
natural gas liquids. Our top three customers accounted for 74% of our total
revenue in 2004. We believe that the loss of any of these customers would not
cause a material disruption to our overall sales volume because we believe we
would be able to replace them in a relatively short time, however, we can not
guarantee that we will be able to replace those contracts with contracts whose
terms will generate revenue equivalent to revenue we currently recognize.
 
 **Personnel**
 
 We have
31 full time employees, with eight located in Englewood, Colorado, 11 in
Hutchins, Texas and 12 in Keyes, Oklahoma. We believe that we will need to add
one full time employee, a senior engineer, for our energy infrastructure or
small power plant business and one full time senior sales person for the tire
fuel processing business. We anticipate that significant personnel additions
will be required if we conclude project related contracts and obtain additional
project funding for the energy infrastructure or small power plant business.
  **Corporate
History**
 
 Nathaniel
Energy Corporation was incorporated in Delaware in 1996 under the name of Ajax
Reinsurance Limited. Ajax had no active trade or business on or subsequent to
its date of incorporation. Nathaniel, Ltd. was incorporated in Colorado in 1992.
Nathaniel, Ltd. started its waste tire recycling business in 1997. In 1998,
Nathaniel, Ltd. agreed to merge with G-VII Energy Corp. ("G-VII") which had been
incorporated in Delaware in 1987. G-VII had no active trade or business at the
time of the merger. In July 1998, G-VII changed its name to "Nathaniel Energy
Corporation" and in December 1998, it agreed to merge into Ajax. In 1999, Ajax
changed its name to Nathaniel Energy Corporation.
 
 From 1997
to 2002, Nathaniel Energy's operations were limited to a tire fuel processing
facility which sells its output of shredded rubber to others primarily for use
as an alternative fuel. On August 26, 2002, Nathaniel Energy acquired MCNIC
Rodeo Gathering, Inc. which owned 18.55% of Keyes Helium Company, LLC. On April
3, 2003 Nathaniel Energy acquired the remaining 81.45% interest in Keyes Helium
Company, LLC from CIG Resources Company through our subsidiary, Nathaniel Energy
Oklahoma Holdings Corporation. Nathaniel Energy transferred all of the stock in
MCNIC to Nathaniel Energy Oklahoma Holdings. Also on April 3, 2003, Nathaniel
Energy Oklahoma Holdings acquired the Keyes gathering system and Sturgis gas
plant and compressor station from CIG Field Services Company. These facilities
are located on a 15 acre site in Keyes, Oklahoma. These facilities receive and
process natural gas, remove liquid gases and helium, and then send the natural
gas into a natural gas pipeline.
 
 In
connection with approximately $11,997,500 in debt financing for these
acquisitions, 49% of Nathaniel Energy Oklahoma Holdings Corporation's common
stock was issued to Richard Strain. Accordingly, Nathaniel Energy owns 51% of
Nathaniel Energy Oklahoma Holdings.
 
 On
December 31, 2002, MNS Eagle Equity Group IV, Inc. (MNS) and its stockholders
entered into a Stock Exchange Agreement with Nathaniel Energy Corporation
pursuant to which Nathaniel Energy acquired all of MNS's outstanding common
stock for $20,750 in cash and 50,000 shares of Nathaniel Energy's common stock.
MNS, a reporting company under Section 12(g) of the Securities Exchange Act of
1934, became a wholly owned subsidiary of Nathaniel Energy. The purpose of this
transaction was for Nathaniel Energy to succeed to the registration status of
MNS under the Exchange Act in reliance upon Rule 12g-3 of the Securities
Exchange Act of 1934. Currently MNS is not engaged in any business.
 
 **Change
in Control**
 
 Effective
October 3, 2003, a company change in control occurred as a result of the closing
of a conversion agreement between Nathaniel Energy and Richard Strain. Pursuant
to the conversion agreement, $10 million dollars of our indebtedness to Mr.
Strain converted into an aggregate of 50,000,000 shares of our common stock to
be issued to NEC Energy, LLC, a designee of Mr. Strain.
 
 10
 We have
75,000,000 shares of common stock authorized for issuance. Prior to the
conversion transaction, we had 38,262,664 shares of common stock issued and
outstanding. Accordingly, we did not have a sufficient number of shares of
common stock authorized for issuance to issue all of the shares of common stock
in the conversion. The conversion agreement provided that to the extent that we
did not have sufficient shares of common stock authorized to issue all of the
shares in the conversion, NEC Energy has the irrevocable right to the shares
that could not be issued. We have issued 30,000,000 shares of common stock to
NEC Energy, and NEC Energy has the irrevocable right to an additional 20,000,000
shares of common stock. In the conversion agreement, we agreed to take all
required corporate action to seek the stockholders' approval
to increase the number of authorized shares to a number which is at least
sufficient for the Company to deliver all of the shares of common stock issuable
to NEC Energy pursuant to the conversion agreement.
 
 NEC
Energy owns 42.7% of our issued and outstanding shares of common stock without
the issuance of the additional 20,000,000 shares of common stock. Giving effect
to the issuance of all of the shares of common stock under the conversion
agreement, NEC Energy will own 55.4% of the issued and outstanding shares of our
common stock.
 
 In
connection with the conversion, NEC Energy received the right to demand
registration of the resale of the shares at any time after January 3, 2004.
Additionally, NEC was granted piggyback registration rights relating to certain
registration statements which we file after January 3, 2004, if any.
 
 At the
time of the conversion of the debt into common stock, our stock price was very
volatile. We used a three-day average price of $1.05 per share in the
transaction. The closing prices of our common stock on the OTC Bulletin Board on
October 2, October 3 and October 6, 2003 were $1.10, $0.80 and $1.25
respectively. Therefore, the value attributed to the 50,000,000 shares to be
issued in the conversion was $52,500,000. The $42,500,000 difference between
this value and the $10,000,000 of debt which was converted was recorded as a
non-cash financing expense.
 
 **Subsidiaries**
 
 We have
two wholly owned subsidiaries:
 ·
    MNS
      Eagle Equity Group IV, Inc., which currently has no operations,
      and
 ·
    Cleanergy,
      Inc. which was formed for the purposes of entering into a joint venture
      agreement with Mandala Energy International, LLC for a proposed Thermal
      CombustorTM joint venture project which is currently in the pre-development
      planning stages.
 
 We have
one 51% owned subsidiary; Nathaniel Energy Oklahoma Holdings Corporation, which
beneficially owns all of Keyes Helium Company, LLC and the Keyes gathering
system and Sturgis gas processing plant and compressor station. Nathaniel Energy
Oklahoma Holdings Corporation also owns all of MCNIC Rodeo Gathering
Corporation, its sole asset being an 18.55% interest in Keyes Helium Company,
LLC.
 
 **Available
Information**
 
 The SEC
maintains an internet site at www.sec.gov that contains the reports, proxy and
information statements, and other information regarding us. In addition, we
provide easy access to these reports free of charge via our internet website,
www.nathanielenergy.com. Information on our website is not part of this report.
 
 We
maintain a codes and policies page on our website. This page includes, among
other items, the Nathaniel Energy Code of Business Conduct and Ethics for
Officers (Vice President and Senior) and Directors, and the Nathaniel Energy
Code of Business Conduct and Ethics for Employees and Officers (other than Vice
President and Senior).
 
 **Item
2. Description of Property.**
 
 We own
approximately 27 acres of property in Hutchins, Texas and a 10,000 square foot
covered structure located on the property where we operate the tire fuel
processing division. The structure is approximately 13 years old and has been
maintained in good condition. We believe it is suitable for its existing waste
tire reclamation and processing operations at that location. This property has a
mortgage loan, secured by a certificate of deposit, which has a principal
balance of $227,310 and bears interest at an annual rate of 3.85%.
 
 We lease
3,815 square feet of Class A office facility for our corporate offices in
Englewood, Colorado and believe this space will meet our corporate business
needs in 2005.
 
 We
beneficially own a 51% interest in approximately 15 acres of land in Keyes,
Oklahoma on which the Keyes helium plant and Sturgis gas processing plant and
compressor station is located. The facility includes a gas processing,
compression and helium refining plant, along with an associated 130 miles of gas
gathering pipelines and two delivery pipelines.
 
 We
beneficially own a 51% interest in approximately 190 acres in Keyes, Oklahoma,
adjacent to the Helium plant. Pursuant to an agreement with the seller of the
property, the Cimarron Industrial Park Authority. We are required to commence
development of this site by June 20, 2006. If we do not meet this deadline, the
seller may elect to have the property revert back to their ownership. At this
time we have not commenced any development of the property.
  11
 **Item
3. Legal Proceedings.**
 
 We are
involved in routine litigation which is incidental to our business, none of
which is anticipated to have a material adverse effect on our financial
condition, operations or prospects.
 
 **Item
4. Submission of Matters to a Vote of Security Holders.**
 
 None
  12
  
 **PART
II**
 
 **Item
5. Market for Common Equity and Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities.**
 
 Our
common stock is presently quoted on the Over-the-Counter Bulletin Board (OTCBB)
under the symbol NECX. The following table sets forth, for the fiscal quarters
indicated, the high and low close price quotations for our common stock as
reported on the OTCBB. The quotations reflect inter-dealer quotations without
retail markup, markdown or commission, and may not represent actual
transactions.
 
  High
      ________
    Low
      ________Fiscal
      Year Ended December 31, 2003:First
      Quarter
    $2.45
    $1.75Second
      Quarter
    $2.05
    $0.85Third
      Quarter
    $1.80
    $0.70Fourth
      Quarter
    $2.55
    $0.80Fiscal
      Year Ended December 31, 2004:First
      Quarter
    $1.15
    $0.65Second
      Quarter
    $0.55
    $0.30Third
      Quarter
    $0.45
    $0.14Fourth
      Quarter
    $0.24
    $0.10
 
 **Stockholders
of Record**
 
 As of
March 28, 2005, we had approximately 1,023 stockholders of record.
 
 **Dividends**
 
 We have
never declared or paid any dividends on its common stock. We currently intend to
retain any earnings for use in the business and therefore do not anticipate
paying any dividends in the near future. Dividends on our common stock can be
paid lawfully only out of current and retained earnings and surplus of the
company, when, and if, declared by the Board of Directors. We have not declared
or paid any dividends on the common stock and there is no assurance dividends
will be paid in the foreseeable future. The payment of dividends in the future
rests within the discretion of the Board of Directors and will depend, among
other things, upon our earnings, our capital requirements and our financial
condition, as well as other factors, which the Board of Directors deems
relevant.
 
 **Equity
Compensation Plan Information**
 
 At the
end of the fiscal year 2004 our 2003 Equity Compensation Plan was in effect.
This plan was not approved by our stockholders. No options, rights or other
securities were granted or issued under this plan. In March 2004 we cancelled
this plan and adopted our 2005 Equity Participation Plan. No option, rights or
other securities have been or issued under this plan. We plan to seek
stockholder approval of this plan as reflected in our Preliminary Information
Statement which we held with the Securities and Exchange Commission on March 11,
2005.
 
 The
material features of our 2005 Equity Compensation Plan are as
follows:
 
 *General
Information*
 
 The plan
provides for the granting of restricted stock and options to purchase up to a
maximum of 40,000,000 shares of Nathaniel Energy. The plan provides that no
shares of common stock may be issued unless there are a sufficient number of
shares of common stock authorized and reserved for such issuance. We anticipate
that we will have a sufficient number of shares available for issuance under the
plan as a result of a proposed increase in the number of shares of our common
stock or as a result of other actions which we could take. The plan was adopted
by our Board of Directors on March 1, 2005.
 
 13
 The plan
is not subject to any of the provisions of the Employee Retirement Income
Security Act of 1974, nor is it a “qualified” plan under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the “Code”). The plan provides for
appropriate adjustments in the number of reserved shares in the event of stock
dividends, stock splits, recapitalizations and other changes in our capital
structure. The plan also provides for reload options (which are described below
under the heading “Reload Feature”) and alternate stock appreciation
rights.
 
 *Purpose*
 
 The
purpose of the plan is to advance the interests of Nathaniel Energy by inducing
individuals or entities of outstanding ability and potential to join and remain
with, or provide consulting or advisory services to, us and our subsidiaries, by
encouraging and enabling eligible employees, non-employee directors, consultants
and advisors, and non-employees to whom an offer of employment has been
extended, to acquire proprietary interests in Nathaniel Energy, and by providing
such employees, non-employee directors, consultants, advisors, and non-employees
with an additional incentive to promote the success of Nathaniel
Energy.
 
 *Administration*
 
 The plan
provides for its administration by the Board or by a committee consisting of at
least two individuals chosen by the Board. The Board or the committee has
authority (subject to the provisions of the plan) to select from the group of
eligible employees, non-employees to whom an offer of employment has been
extended, non-employee directors, consultants and advisors the individuals or
entities to whom restricted stock or options will be granted, and to determine
the times at which and the exercise price for which options will be granted. The
Board or the committee is authorized to interpret the plan and the
interpretation and construction by the Board or the committee of any provision
of the plan or of any option granted thereunder shall be final and conclusive.
The receipt of options or restricted stock by directors or any members of the
committee shall not preclude their vote on any matters in connection with the
administration or interpretation of the plan. We currently do not have a
committee to administer the plan. Accordingly the Board administers the plan at
this time.
 
 *Eligibility
- Generally*
 
 Subject
to certain limitations and conditions in the plan, restricted stock and options
to purchase shares may be granted to persons who, in the case of incentive stock
options, are employees of, either Nathaniel Energy or any parent or subsidiary
of Nathaniel Energy including directors and officers of Nathaniel Energy and
non-employees to whom an offer of employment has been extended, or in the case
of nonstatutory stock options and restricted stock grants, are employees
including directors and officers or non-employee directors or certain
consultants or advisors to, either Nathaniel Energy or any parent or subsidiary
of Nathaniel Energy and non-employees to whom an offer of employment has been
extended. At March 28, 2005, 31 employees were eligible to receive options or
restricted stock grants under the plan.
 
 *Stock
Options*
  *Nature
of Options*
 
 The Board
or the committee may grant options under the plan which are intended to meet the
requirements of Section 422 of the Code relating to “incentive stock options.”
The Board or committee may also grant option under the plan that do not so
qualify which we refer to as “nonstatutory stock options”. The federal income
tax consequences of the grant and exercise of incentive stock options and
nonstatutory stock options are described below under “Federal Income Tax
Consequences.”
 
 *Reload
Feature*
 
 The Board
or the committee may grant options with a reload feature subject to the terms of
the plan, applicable only when options being exercised by a holder are paid by
delivery of shares of common stock or by having Nathaniel Energy reduce the
number of shares otherwise issuable to a holder (“Net Exercise”). The reload
stock option allows the holder to exercise an option (the “First Option”) and to
receive another option (the “Reload Option”) for
 
 ·
    the
      number of shares of common stock used to pay for the First Option (or not
      issued in the case of Net Exercise), and
 
 ·
    with
      respect to nonstatutory stock options, the number of shares of common
      stock used to satisfy any tax withholding requirement incident to the
      exercise of those nonstatutory stock options.
 
 A Reload
Option may also have a reload feature. The reload feature must be included in
the stock option agreement entered into by Nathaniel Energy and the holder of
the option. The term of the Reload Option shall be equal to the remaining option
term of the First Option.
 
 *Option
Price*
 
 The
option price of the shares underlying an incentive stock option may not be less
than the fair market value (as such term is defined in the plan) of the shares
of common stock on the date upon which the option is granted. In addition, in
the case of a recipient of an incentive stock option who, at the time the option
is granted, owns more than 10% of the total combined voting power of all classes
of stock of Nathaniel Energy or of a parent or subsidiary corporation of
Nathaniel Energy (a “10% Stockholder”), the option price of the shares subject
to that option must be at least 110% of the fair market value of the shares of
common stock on the date upon which that option was granted.
 
 14
 The
option price of shares of common stock underlying nonstatutory stock options
will be determined by the Board or the committee, in its discretion, at the time
of grant and need not be equal to or greater than the fair market value for
shares of our common stock.
 
 *Exercise
of Options*
 
 Option
holders may exercise options granted under the plan by delivering a written
notice to Nathaniel Energy indicating of the number of shares of common stock
with respect to which the option is being exercised. The notice shall be
accompanied, or followed within 10 days, by payment of the full option price for
the shares of common stock which shall be made by the holder’s delivery of
 
 ·
    a
      check payable to the order of Nathaniel Energy in such amount, or
 
 ·
    previously
      acquired shares of common stock, the fair market value of which shall be
      determined as of the date of exercise, or
 
 ·
    if
      provided for in the stock option agreement, a check in an amount at least
      equal to the par value of the common stock being acquired, together with a
      promissory note, in the form and upon such terms as are acceptable to the
      Board or the committee, in an amount equal to the balance of the exercise
      price, or
 
 ·  a
combination of any of the above methods.
 
 *Duration
of Options*
 
 No
incentive stock option granted under the plan shall be exercisable after the
expiration of ten years from the date of its grant. However, if an incentive
stock option is granted to a 10% Stockholder, that option shall not be
exercisable after the expiration of five years from the date of its grant.
 
 Nonstatutory
stock options granted under the Plan may be of a duration that the Board or the
committee determines.
 
 *Non-Transferability*
 
 Options
granted under the plan are not transferable otherwise than by will or the laws
of descent and distribution and generally, those options are exercisable, during
an optionee’s lifetime, only by the optionee. A nonstatutory stock option may be
transferred, upon the approval of the Board or the committee, in whole or in
part during a holder’s lifetime, to a holder’s family members, through a gift or
domestic relations order, subject to the terms and conditions of the
plan.
 
 *Death,
Disability or Termination of Employment*
 
 Subject
to the terms of the stock option agreement pursuant to which options are
granted, if the employment of an employee or the services of a non-employee
director, consultant or advisor to, Nathaniel Energy or a parent or subsidiary
corporation of Nathaniel Energy shall be terminated for cause, or such
employment or services shall be terminated voluntarily by the employee,
non-employee director, consultant or advisor, or a non-employee to whom an offer
of employment was extended declines the offer, or Nathaniel Energy withdraws the
offer of employment to that non-employee to whom an offer of employment has been
extended, any options held by those persons or entities shall expire
immediately. If such employment or services shall terminate other than by reason
of death or disability, voluntarily by the employee, non-employee director,
consultant or advisor, or for cause, then, subject to the terms of the stock
option agreement pursuant to which options are granted, such option may be
exercised at any time within three months after such termination, but in no
event after the expiration of the option. For purposes of the plan, the
retirement of an individual either pursuant to a pension or retirement plan
adopted by Nathaniel Energy or at the normal retirement date prescribed from
time to time by Nathaniel Energy is deemed to be a termination of such
individual’s employment other than voluntarily by the employee or for
cause.
 
 Subject
to the terms of the stock option agreement pursuant to which options are
granted, if an option holder under the plan
 
 ·
    dies
      while employed by Nathaniel Energy or a parent or subsidiary corporation
      of Nathaniel Energy or while serving as a non-employee director of, or
      consultant or advisor to, Nathaniel Energy or a parent or its subsidiary
      corporation of Nathaniel Energy, or
 
 ·
    dies
      within three months after the termination of his employment or services
      other than voluntarily or for cause,
 
 then such
option may be exercised by the estate of the employee, non-employee director,
consultant or advisor, or by a person who acquired such option by bequest or
inheritance from the deceased option holder, at any time within one year after
his death.
 
 Subject
to the terms of the stock option agreement pursuant to which options are
granted, if the holder of an option under the plan ceases employment or services
because of permanent and total disability (within the meaning of Section
22(e)(3) of the Code) while employed by, or while serving as a non-employee
director of, or consultant or advisor to, Nathaniel Energy, or a parent or
subsidiary corporation of Nathaniel Energy, then that option may be exercised at
any time within one year after his termination of employment, termination of
directorship, or termination of consulting or advisory arrangement or agreement
due to the disability.
 
 15
  *Restricted
Stock Grants*
 
 *Nature
of Restricted Stock Grants*
 
 The Board
or the committee may authorize restricted stock grants under the plan.
Restricted stock grants may be made either alone or in addition to stock options
granted under the plan.
 
 *Vesting*
 
 The Board
or the committee may specify the vesting periods of the restricted stock grant
and other terms and conditions which the Board or committee deems
appropriate.
 
 In
determining vesting requirements of restricted stock grants, the Board or
committee may impose restrictions which it may deem advisable including among
other things, length of service of the grantee, corporate performance and
attainment of individual or group performance objectives.
 
 *Ownership*
 
 During
the period while the restricted stock grants are subject to restriction or have
not vested, the grantee will be the record owner of the shares of common stock
underlying the restricted stock grant. Accordingly, the holder is entitled to
vote those shares. However, any dividends or other distributions on those shares
of common stock will be held by Nathaniel Energy or a third party subject to the
same restrictions as the restricted stock grant.
 
 *Forfeiture*
 
 Unless
the Board or committee determines otherwise at the time of the restricted stock
grant, generally, a grantee will forfeit all shares of common stock underlying
restricted stock grants which have not previously vested, if the grantee is no
longer employed or engaged by, or serves as a director of, Nathaniel Energy or
its parent or its subsidiary. All forfeited shares of common stock shall be
returned to Nathaniel Energy, along with any dividends or other distributions on
those shares, if any. However, if the Board approves a plan of liquidation, or
merger or consolidation in which more than 50% of the continued voting power of
Nathaniel Energy or the entity surviving in the transaction is no longer
represented by voting securities in Nathaniel Energy, the restricted stock grant
will automatically vest.
 
 *Non-Transferability*
 
 Shares of
common stock underlying restricted stock grants are not transferable until those
shares vest.
 
 *Amendment
and Termination*
 
 The plan
(but not options or restricted stock granted under the plan) shall terminate on
February 28, 2015, ten years from the date that it was adopted by the Board.
Subject to certain limitations, the plan may be amended or modified from time to
time or terminated at an earlier date by the Board or by the stockholders.
 
 *Plan
Benefits*
 
 At March
28, 2005 there were no grants of options to purchase shares of our common stock
or stock grants under the plan.
 
 
 **Recent
Sales of Unregistered Securities**
 
 Holder
      Name
    
    Issuance
      Date
    
    Common StockShares
    
    Total
      Price
    
    Type
      of
      ConsiderationKay
      Rhodes
    
    01/05/02
    
    
    294,000
    
    $
    50,000
    
    
    Conversion
      of Debt per NoteAlvin
      Mordoh
    
    02/12/02
    
    
    275,000
    
    $
    121,000
    
    
    Financing
      IncentivePaula
      Lowry(1)
    
    02/12/02
    
    
    10,000
    
    $
    4,400
    
    
    Cash
      InvestmentLinda
      Mordoh(1)
    
    02/12/02
    
    
    5,000
    
    $
    2,200
    
    
    Cash
      InvestmentSam
      Epstein(1)
    
    02/12/02
    
    
    5,000
    
    $
    2,200
    
    
    Cash
      InvestmentSolomon
      Mordoh(1)
    
    02/12/02
    
    
    5,000
    
    $
    2,200
    
    
    Cash
      InvestmentAlternate
      Capital LLC
    
    03/15/02
    
    
    13,500,000(2)
    
    $
    800,000
    
    
    Financial
      ServicesRichard
      Strain
    
    04/19/02
    
    
    8,250,000
    
    $
    1,650,000
    
    
    Conversion
      of DebtManagerial
      Advisory Services
    
    07/11/02
    
    
    198,000
    
    $
    136,620
    
    
    Investor
      Relation ServicesJackson
      Morris
    
    07/11/02
    
    
    200,000
    
    $
    188,000
    
    
    Legal
      ServicesBodden
      Int'l
    
    07/11/02
    
    
    600,000
    
    $
    564,000
    
    
    Financing
      ServicesMel
      Siegal
    
    07/11/02
    
    
    200
    
    $
    200
    
    
    Conversion
      of Note InterestSol
      Adler
    
    07/11/02
    
    
    200,000
    
    $
    140,000
    
    
    Consulting
      ServicesBob
      and Peggy Isom
    
    07/11/02
    
    
    29,690
    
    $
    29,690
    
    
    Manufacture
      of EquipmentJudy
      Bailey
    
    07/16/02
    
    
    205,882
    
    $
    35,000
    
    
    Conversion
      of DebtMichael
      Musich
    
    08/09/02
    
    
    10,000
    
    $
    6,000
    
    
    Cash
      InvestmentKen
      Lucas
    
    08/09/02
    
    
    50,000
    
    $
    50,000
    
    
    Financing
      ServicesRusty
      Bailey
    
    10/17/02
    
    
    12,249
    
    $
    12,249
    
    
    Internet
      ServicesAlvin
      Mordoh
    
    10/17/02
    
    
    13,333
    
    $
    13,333
    
    
    Cash
      InvestmentHerman
      J. Calderon(1)
    
    10/17/02
    
    
    2,000
    
    $
    2,000
    
    
    Cash
      InvestmentHarry
      Greenberg(1)
    
    10/17/02
    
    
    1,000
    
    $
    1,000
    
    
    Cash
      InvestmentPaula
      Lowry(1)
    
    10/17/02
    
    
    1,000
    
    $
    1,000
    
    
    Cash
      InvestmentGilbert
      Cohen(1)
    
    10/17/02
    
    
    1,000
    
    $
    1,000
    
    
    Cash
      InvestmentG.
      M. Fornmarino
    
    10/17/02
    
    
    8,000
    
    $
    8,000
    
    
    Cash
      InvestmentKay
      Rhodes
    
    10/17/02
    
    
    100,000
    
    $
    50,000
    
    
    Conversion
      of DebtRoberta
      Clark
    
    11/14/02
    
    
    21,428
    
    $
    12,856
    
    
    Cash
      InvestmentHarry
      Greenberg(1)
    
    12/24/02
    
    
    2,000
    
    $
    2,000
    
    
    Cash
      InvestmentAlternate
      Capital LLC
    
    02/18/03
    
    
    1,066,667
    
    $
    800,000
    
    
    Marketing
      and Financing ServicesStrong
      Wilken LLC
    
    02/18/03
    
    
    233,333
    
    $
    175,000
    
    
    Marketing
      ServicesMike
      Libeer
    
    05/09/03
    
    
    100,000
    
    $
    195,000
    
    
    Sign-on
      Bonus (4
    )Robert
      Barnett
    
    09/22/03
    
    
    100,000
    
    $
    125,000
    
    
    Legal
      ServicesNEC
      Energy, LLC
    
    10/03/03
    
    
    30,000,000(3
    )
    $
    6,000,000
    
    
    Conversion
      of DebtStan
      Abrams
    
    10/30/03
    
    
    117,733
    
    $
    217,806
    
    
    Accrued
      Compensation PaymentBrett
      Abrams
    
    10/30/03
    
    
    171,632
    
    $
    317,519
    
    
    Accrued
      Compensation PaymentGene
      Bailey
    
    10/30/03
    
    
    166,200
    
    $
    307,470
    
    
    Accrued
      Compensation PaymentBrian
      Culvey
    
    10/30/03
    
    
    565,665
    
    $
    1,046,480
    
    
    Accrued
      Compensation PaymentCesar
      Muniz
    
    10/30/03
    
    
    235,520
    
    $
    435,712
    
    
    Accrued
      Compensation PaymentSol
      Adler
    
    9/21/04
    
    
    27,250
    
    $
    27,250
    
    
    Conversion
      of DebtAlvin
      Mordoh
    
    9/21/04
    
    
    450,000
    
    $
    162,000
    
    
    Conversion
      of DebtIsaac
      Nedd
    
    9/21/04
    
    
    52,083
    
    $
    18,750
    
    
    Conversion
      of Debt
 
 
 (1) The
recipient of these shares was a designee of Alvin Mordoh who was entitled to
receive the shares for an investment made by him.
 
 (2)
12,291,666 of these shares were issued to the members of Alternate Capital, LLC.
 
 (3)
Partial issuance of shares in conversion of an aggregate of $10 million of
indebtedness, which is described in detail under Item 1 "Business - Change in
Control."
 
 16
 (4)
Earned in 2001. Shares were issued in May 2003.
 
 In March
2002, we also issued warrants to purchase 205,882 shares of common stock at a
price of $0.17 per share, expiring two years from date of issue, to Judy Bailey,
wife of Nathaniel Energy's vice president and director. The warrants expired
unexercised.
 
 Each of
the above issuances was exempt from registration under Section 4(2) of the
Securities Act of 1933. We did not use any underwriter or placement agent in
these transactions, and did not pay any compensation to anyone in connection
with these issuances.
 
 All of
the issuances were made:
 
 o
directly by us to persons with whom its management had direct contact and
personal relationships,
 o to
persons who were introduced to us by members of our management, and
 o to
attorneys, consultants and others in compensation for services.
 
  17
   **Item
6. Management's Discussion and Analysis or Plan of Operation.**
 **Results
of Operations**
 
 **Supplemental
Quarterly Results of Operations**
 
 The
following tables set forth certain unaudited quarterly results of operations of
Nathaniel Energy for 2004. The quarterly operating results are not necessarily
indicative of future results of operations.
 
 
 
 Three
Months Ended 2004(unaudited)
 
 March
      31
    
    
    June
      30
    
    
    Sept.
      30
    
    
    Dec.
      31
    
    
    Year
      ended
      Dec.
      31,
      2004Revenue
    
    $
    3,346,792
    
    $
    3,609,352
    
    $
    3,433,929
    
    $
    3,646,720
    
    $
    14,036,793Cost
      of revenue
    
    
    2,891,376
    
    
    3,122,239
    
    
    2,833,250
    
    
    3,288,607
    
    
    12,135,472Gross
      profit (loss)
    
    
    455,416
    
    
    487,113
    
    
    600,679
    
    
    358,113
    
    
    1,901,321Selling,
      general and administrative expense
    
    
    675,007
    
    
    727,790
    
    
    653,974
    
    
    673,489
    
    
    2,730,260Write-down
      of inventory (1)
    
    
    --
    
    
    274,000
    
    
    --
    
    
    2,321,213
    
    
    2,595,213Impairment
      of assets (2)
    
    
    --
    
    
    1,403,046
    
    
    --
    
    
    --
    
    
    1,403,046Total
      operating expenses
    
    
    675,007
    
    
    2,404,836
    
    
    653,974
    
    
    2,994,702
    
    
    6,728,519Loss
      from operations
    
    
    (219,591
    )
    
    (1,917,723
    )
    
    (53,295
    )
    
    (2,636,589
    )
    
    (4,827,198
    )Write-off
      of related party receivable (3)
    
    
    --
    
    
    (264,587
    )
    
    --
    
    
    (11,438
    )
    
    (276,025
    )Interest
      expense, net
    
    
    (144,582
    )
    
    (131,068
    )
    
    (146,926
    )
    
    (141,485
    )
    
    (564,061
    )Loss
      on disposal of equipment
    
    
    --
    
    
    (18,912
    )
    
    
    
    
    2,118
    
    
    (16,794
    )Other
      non-operating income (expense)
    
    
    6,000
    
    
    65,800
    
    
    --
    
    
    --
    
    
    71,805Loss
      before income taxes and minority interest
    
    
    (358,173
    )
    
    (2,266,490
    )
    
    (200,221
    )
    
    (2,787,389
    )
    
    (5,612,273
    )Income
      tax expense
    
    
    (127,411
    )
    
    (131,272
    )
    
    (151,695
    )
    
    386,794
    
    
    (23,584
    )Minority
      interest
    
    
    (93,647
    )
    
    (99,638
    )
    
    (111,495
    )
    
    284,293
    
    
    (20,487
    )Net
      loss
    
    $
    (579,231
    )
    $
    (2,497,400
    )
    $
    (463,411
    )
    $
    (2,116,302
    )
    $
    (5,656,344
    )Weighted-average
      common shares
      outstanding-diluted
    
    
    69,719,414
    
    
    69,676,697
    
    
    70,198,263
    
    
    70,198,263
    
    
    69,950,156Shares
      outstanding at end of period
    
    
    69,719,414
    
    
    69,668,930
    
    
    70,198,263
    
    
    70,198,263
    
    
    70,198,263
 
 (1)
During the quarter ended June 30, 2004, tire shred inventory at the tire fuel
processing facility was written down to a net realizable value of zero. The net
realizable value was calculated using estimated selling prices less costs to
process the inventory into a salable form. During the quarter ended December 31,
2004, we reduced the carrying value of the two Thermal CombustorsTM we are
building in Italy, under a contract for resale, which have been completed and
are in the operating start up and testing phase. Such reduction was included in
research and development expense in the accompanying financial statements. The
Thermal CombustorsTM are valued at that portion of the contract price we
reasonably expect to receive upon completion and acceptance by our customer,
reduced by our contractual exposure to penalties contained in the contract which
could be incurred if our Thermal CombustorsTM do not produce the volume of steam
specified in the contract.
 
 (2 ) During
the quarter ended June 30, 2004, management changes prompted a review and update
of the expected cash flows on long lived assets. Based on this review, operating
costs were higher than previously estimated, and an impairment of $1,403,046 was
recognized on the assets at the tire fuel processing facility in Hutchins,
Texas. We discounted the cash flows expected from the impaired long lived assets
to determine their current value and the impairment amount. We are working to
add new contracts to increase the tire fuel processing facility revenue, but any
new contracts cannot be assured, and have not been considered in the most recent
cash flow expectations.
 
 (3)
During the quarters ended June 30, 2004 and December 31, 2004, we wrote off a
$264,587 related party receivable from Ripetouch Greenhouse LLC, an entity
controlled by our former chief executive officer, Stan Abrams and a related
party receivable of $11,438 due from Stan Abrams, respectively since debt
collection has been determined to be uncertain. The Ripetouch receivable arose
in 2003 and the first quarter of 2004 and Stan Abrams, receivable arose in
2003.
 
 18
 **Year
ended December 31, 2004 and 2003**
 
 **Company
Overview**
 
 Our
mission is to provide a lower cost, clean dependable energy alternative to
fossil fuels worldwide. Our operational plan focuses on three major business
models in the commercialization of our Thermal CombustorTM technology: licensing,
creating energy infrastructures and building, owning and operating small power
plants. In 2004 and 2003 revenue generated by our largest business, the helium
and gas processing business, provided operating capital funds for our tire fuel
processing and further commercialization of our Thermal CombustorsTM. Our helium
and gas processing business, generated 96% and 93% of our revenue, or
$13,475,220 and $7,851,531 during 2004 and 2003, respectively. The tire fuel
processing operation generated 4% and 7% of the revenue, or $561,573 and
$573,210 during 2004 and 2003, respectively. We have recognized no revenue from
our Thermal CombustorTM business segment during 2004 and 2003.
 
 Our long
term goal is to produce the majority of our revenue and cash flow from the
commercialization of our Thermal CombustorTM technology. As a result, the
majority of our resources are focused on this business model.
 
 Historically,
we have not had difficulty finding potential project opportunities. Worldwide,
industries and municipalities seek lower cost and clean energy alternatives to
fossil fuels. Demand for these energy alternatives is expected to grow. A key to
our success will be wisely choosing among project opportunities and focusing
resources on projects with the greatest chance of success and returns for
stockholders. We are investigating numerous opportunities including a facility
using municipal solid waste (MSW) as fuel for our Thermal CombustorTM to produce
electricity and a facility to produce electricity and steam in connection with
an ethanol plant.
 
 We enter
2005 with a patented proprietary technology deployed in a commercial
application. Once we have obtained acceptance for the two Thermal CombustorTM
units in Cologna Veneta, Italy, we will have access to a commercial operating
facility to use for marketing, testing and additional research and development
efforts. Our current year mission is to contract and initiate implementation as
a partner or joint venture member, commercial operations utilizing our Thermal
CombustorTM technology.
 
 At the
same time, we are developing the infrastructure and business development
activities to secure energy infrastructure and small power plant opportunities
that utilize our Thermal CombustorTM technology. Additionally, we will seek
project funding that will be based on the size, configuration and business
structure of the project. We anticipate that the timeframe from identification
of a project to completion will be 12 to 24 months, provided we obtain the
requisite project financing.
 
 We also
plan to improve operations at our tire fuel processing facility in Hutchins,
Texas during 2005. The tire fuel processing facility is currently the only
storage and processing facility licensed by the State of Texas to operate in the
Dallas Metro area. If we successfully obtain funding for our planned capital
improvements and once these capital improvements are in place, the facility will
be able to increase the number of waste tires it accepts, increasing tipping fee
revenue, and increasing revenue from the sale of tire shreds it produces. The
tire fuel processing facility’s ability to increase revenue and generate
operating cash flows has been hindered by the general poor quality of the
existing equipment, which requires constant repair and maintenance due to the
age of the equipment and the resulting low pricing on tire shreds it produces.
The addition of new equipment combined with existing equipment and certain
facility improvements provides an opportunity to sign new contracts for the
acceptance and disposal of waste tires. The new contracts are expected to
increase the tipping fee revenues. We believe that the new equipment would
improve the quality of the tire shreds, which would result in higher pricing for
the tire shreds. Furthermore, we believe that facility improvement would allow
us to increase the volume of the tire shreds produced.
 
 Operating
results 2004 compared to 2003
 
 For the
year ended December 31, 2004 revenue increased from $8,424,741 in 2003, to
$14,036,793 in 2004, an increase of $5,612,052 due to the inclusion of a full
year of operations of the Keyes helium plant, the Sturgis gas plant and the
Keyes gathering system which were acquired on April 3, 2003 and were
consolidated for nine months in our total revenues and expenses for the year
ended December 31, 2003. Revenues from the helium and gas processing operations
were $13,475,220 for the year ended 2004, an increase of $5,623,689 over
$7,851,531 for the year ended 2003, due primarily to the inclusion of a full
year’s operations of the Keyes helium and gas plant and gathering system,
approximately $1,986,000 on a pro forma basis. In addition, sales of gas and
natural gas liquids increased by approximately $2,154,000, sales of helium
increased approximately $1,868,000 and gathering and other fees increased
approximately $1,013,000 due to increased volume processed and market prices for
gas and natural gas liquids which are sold on a month to month contract basis.
Revenues from tire fuel processing operations were $561,573 for 2004, a slight
decrease of $11,637 from $573,210 for 2003.
 
 Gross
profit increased by $1,328,421 to $1,901,321 for the year ended December 31,
2004 from $572,900 for the year ended December 31, 2003. Gross margin increased
to 13.5% for the year ended December 31, 2004 compared to 7% for the year ended
December 31, 2003. Gross profit increased in our helium and gas processing
operations by approximately $1,364,000 offset by a decrease in gross profit from
the tire fuel processing operation of approximately $36,000. The increase in
gross profit is due primarily to inclusion of the helium and gas processing
operations for the entire year ended December 31, 2004 compared to nine months
during the year ended December 31, 2003, approximately $155,000 on a pro forma
basis, increased gross profit on gas and natural gas liquid revenue due to
increases in market pricing for those products, and increased volumes through
our gas gathering process which increased those revenue at nominal incremental
cost. On January 9, 2004 we entered into a contract with Nexus Energy Company to
receive additional gas through our existing pipeline for processing at our
facilities and extraction of helium and natural gas liquids from this new gas
stream. In addition, we spent approximately $870,000 on
 equipment
upgrades in the first quarter of 2004 to enable us to increase gas volumes and
production at the processing plant which began in the second
quarter of 2004. During 2004, the helium and gas processing operating gross
margin improved to 16.4% from 11% during 2003, offset by a negative margin from
tire fuel processing operations of 55.3% for 2004 compared to a negative 48%
margin for 2003. The negative gross margin generated at the tire fuel processing
operations is primarily due to the use of our older equipment, which produces
approximately one third the volume of finished product produced by new equipment
and at a lower quality. The combination of low volumes and low quality product
result in our negative gross margins for our tire fuel processing operation.
Both businesses have plans to improve gross margins in 2005.
 
 19
 Total
selling, general and administrative expenses decreased $2,693,849 or 50.3% to
$2,661,531 for the year ended December 31, 2004 from $5,355,380 for the year
ended December 31, 2003. The decrease is due primarily to reductions in payroll
and payroll related expense and professional service compensation of
approximately $2,233,000. During 2003, non-cash employee and professional
service compensation was $2,973,745, none of which was incurred during 2004. The
2003 non-cash expense included $1,472,495 of employee compensation expenses
which represents the fair market value of stock issued in payment of accrued
compensation in excess of compensation expense recorded in prior years. See Note
9 to our financial statements for a complete description of stock issued for
compensation. The remainder of the non-cash expenses includes $356,250 for
employee severance and $1,145,000 for marketing, legal and professional
services.
 
 During
the year ended December 31, 2004, management determined that the net realizable
value of the tire shred inventory was nominal and wrote down the inventory by
$274,000. In addition, during the fourth quarter of 2004, management assessed
the collectability of the contract price for two Thermal CombustorsTM we are
starting up and testing in Cologna Veneta, Italy, which are included as work in
progress inventory, resulting in a reduction in the carrying value of that
inventory by $2,321,213 which is included in research and development expense.
After this reduction, the Thermal CombustorsTM are valued at that portion of the
contract price we reasonably expect to receive upon completion and acceptance by
our customer, reduced by our contractual exposure to penalties contained in the
contract which could be incurred if our Thermal CombustorsTM do not produce the
volume of steam specified in the contract.
 
 During
the quarter ended June 30, 2004, management changes prompted a review and update
of the expected cash flows on long lived assets. Based on this review, operating
costs were higher than previously estimated, and an impairment of $1,403,046 was
recognized on the assets at the tire fuel processing facility in Hutchins,
Texas. We discounted the cash flows expected from the impaired long lived assets
to determine their current value and the impairment amount.
 
 We paid
certain expenses related to site clean-up on behalf of Ripetouch Greenhouse LLC,
an entity controlled by our former chief executive officer, Stan Abrams, during
2003 and 2004, which were recorded as related party receivables. During 2004, we
wrote off $264,587 due from Ripetouch and $11,438 due from Stan Abrams, as
collection was determined to be uncertain. See Note 10 to our financial
statements for further discussions of these related party
transactions.
 
 Financing
expense in 2003 included $42,500,000 related to the conversion of $10 million of
debt into stock. The difference between the fair market value of the stock
issued and the carrying value of the debt was recorded as a non-cash financing
expense. The remaining finance expense in 2003 was a $175,500 non-cash write off
of stock subscriptions receivable. We incurred no financing expenses during
2004.
 
 Interest
expense decreased by $457,712 from $1,021,773 for the year ended December 31,
2003 to $564,061 for the year ended December 31, 2004 resulting primarily from a
$10 million conversion of indebtedness to Richard Strain into equity.
 
 **Liquidity
and Capital Resources**
 
 As of
December 31, 2004 Nathaniel Energy owed $462,800 to financial institutions under
installment notes with a blended interest rate of 6.38%, which were secured by
equipment. The remaining $9,694,062 in total debt consists of $8,892,151 in
secured loans from Richard Strain with an average interest rate of 5.94%, which
are described in more detail below, unsecured notes due a vendor for services
they provided us building and installing our Thermal Combustors TM in Italy of
$759,577 with an interest rate of 6.5% and two unsecured notes to unaffiliated
third parties of $42,333 with interest rates of 15%.
 
 Effective
October 3, 2003, Richard Strain converted an aggregate of $10,000,000 of debt
into 50,000,000 shares of common stock. 30,000,000 shares were issued and an
irrevocable right to the other 20,000,000 shares was granted, to Mr. Strain’s
designee NEC Energy, LLC.
 
 In
September and October of 2003, the same investor advanced an additional
$2,000,000 to the company. This debt bears interest at the rate of 3.33% per
year. Principal plus interest is payable in four quarterly payments of $540,000
each on October 1, 2005 and January 1, April 1 and July 1 2006. In March 2004
Richard Strain loaned Nathaniel Energy an additional $2,000,000. The loan bears
interest at the rate of 3.49% per year. Principal plus interest is payable in
four quarterly payments of $540,000 each on October 1, 2005, January 1, April 1,
and July 1, 2006.
 
 Other
debt financing due this investor of $4,892,151 as of December 31, 2004 bears
interest at 8% per year. No payments will be due until March 31, 2007, at which
time the principal and accrued interest will be repaid in quarterly payments of
$572,876 through December 31, 2009. This debt originally totaled $4,097,215.
During 2003 $794,936 of accrued interest was added to the principal
indebtedness. Also during 2003 the same investor forgave $488,294 accrued
interest which was credited to additional paid-in capital.
 
 All the
indebtedness to Richard Strain is secured by a first lien on the assets of
Nathaniel and its subsidiaries.
 
 20
 As of
December 31, 2004, we have negative working capital of $2,078,217. The primary
reason for our negative working capital balance are principal and interest
payments due in October 2005 to our major creditor and one of our largest
beneficial stockholders, Richard Strain. The principal payments due in October
are reflected in our balance sheet as notes payable to a stockholder currently
payable of $1,080,000. In addition, included in accrued interest is $627,823 on
outstanding loans from Mr. Strain. On April 14, 2005, Mr. Strain agreed to
restructure payment terms on the outstanding debt and accrued interest due from
us so that no payments will be required during our fiscal year ending 2005. The
terms and conditions of the debt restructuring have not yet been completed;
however, we believe these terms and conditions will be favorable to
us.
 
 We have
excluded from current assets our restricted cash balance of $237,000. The
restricted cash balance was set aside by our board of directors during our
fiscal year 2003 for the purpose of funding the construction of two Thermal
CombustorsTM in Cologna Veneta, Italy and to provide marketing and communication
funds. We are in the start up and testing phase for the Thermal Combustors TM in
Italy and do not expect to incur any additional significant expenses for which
we are not reimbursed. In addition, we have no future plans to spend funds on
marketing and communication from this restricted cash balance. During 2005, the
restrictions on this cash balance will be removed.
 
 For the
year ended December 31, 2004, our tire fuel processing operation in Hutchins,
Texas generated a cash operating loss of approximately $325,000, which were
funded by increasing our current liabilities, primarily accounts payable and
accrued expenses. Our negative working capital includes this cash operating
loss. We plan to obtain funding for the purchase of new equipment and make
facility improvements at our tire fuel processing operation. The addition of new
equipment, combined with existing equipment and certain facility improvements
provides an opportunity for tire fuel processing to sign new contracts for the
acceptance and disposal of waste tires. We believe the new contracts will
increase the tipping fee revenues and the resulting delivery of tire shreds that
are used as fuel, with improved pricing on that fuel due to the higher quality
of tire shreds produced from the new equipment. Although we cannot assure that
we will be able to obtain the funding required or that expected increases in
revenue and operating profits will be realized in 2005, we believe we will be
able to eliminate cash operating losses by the third quarter of 2005 should we
be successful in obtaining the necessary funding and making the planned capital
improvements during the second quarter of 2005.
 
 The
following is a summary of Nathaniel Energy's cash flows sources (uses) from
operating, investing, and financing activities during the periods indicated:
  Year
      ended December 31,Operating
      activities
    
    $
    2004
      (1,367,253
    )
    $
    2003
      (2,816,456
    )Investing
      activities
    
    
    (1,208,927
    )
    
    (9,702,261
    )Financing
      activities
    
    
    2,639,549
    
    
    12,821,442Net
      effect on cash
    
    $
    63,369
    
    $
    302,725
 For the
period ended December 31, 2004, net cash used in operating activities of
$1,367,253 is primarily due to a cash loss for the year of $2,821,330, an
increase in inventory of $655,854 due primarily to costs incurred relative to
the delivery of two Thermal CombustorsTM in Italy, increase in accounts
receivable of $379,674 in the helium and gas processing operations offset by a
decrease in our restricted cash of $662,300 and an increase in our accounts
payable and accrued expenses of $1,775,702. The cash loss of $2,821,330
represents our net loss of $5,656,344 reduced by non cash expenses of
$2,835,014, which include depreciation and amortization, loss on related party
receivable, write down of inventory, impairment of assets, and other net
non-cash expenses. Net cash used in investing activities of $1,208,927 consists
of equipment purchases primarily for our helium and gas processing operations
and our investment in technical documentation, drawings and design engineering
of our Thermal CombustorTM. Net cash provided by financing activities of
$2,639,549 is primarily due to issuance of a note payable due Richard Strain for
$2,000,000 and issuance of notes payable to a vendor for services provided on
the Thermal CombustorTM project in Italy in the aggregate amount of $786,916
offset by payments on debt principal of $169,160.
 
 For the
period ended December 31, 2003, the net cash used in operating activities is due
to a cash loss for the year of $2,111,805 and an increase in operating assets of
$725,265 offset by an increase in accounts payable and accrued expenses of
$973,791. The $2,111,805 cash loss equals the $48,514,269 GAAP net loss less
non-cash charges of $46,402,464. Non cash charges of $46,402,464 include
depreciation and amortization, stock issued for services, stock issued to
convert debt, minority interest, and subscription receivable write off. The net
cash used in investing activities of $9,702,261 is primarily the result of the
acquisition of the Keyes helium plant, the Sturgis gas plant and Keyes gathering
system assets of $9,357,215 ($9,947,215 less cash acquired $590,000). The net
cash provided by financing activities of $12,821,442 is due to $13,021,043
issuance of debt, offset by payments on debt principal of $199,601.
 
 21
 During
the third quarter of 2003, certain employees who are officers, directors and
stockholders waived accrued compensation aggregating $1,088,459. The remaining
accrued compensation due them and other employees totaled approximately $1.4
million was paid out in cash of $340,000 and by the issuance of an aggregate of
1,256,750 shares of common stock.
 
 We had
cash of $568,151 at December 31, 2004 which will be used to fund our operations,
pay current debts and partially fund completion of our Thermal CombustorTM
project in Italy.
 
 **Critical
Accounting Policies**
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could vary from these estimates. A material change in these or other
estimates could potentially have a material impact on results of operations. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates.
 
 *Conversion
of Debt into Common Stock*
 
 When debt
is converted into shares of common stock the transaction is recorded at the fair
market value of the stock. The difference between the fair market value of the
stock issued and the carry value of the debt is recorded as a non cash financing
expense in the period the transaction occurs.
 
 *Property,
Plant and Equipment and Related Depreciation*
 
 Property,
plant and equipment is recorded at its original cost of construction or, upon
acquisition, the fair value of the assets acquired. Direct costs, such as labor
and materials, and indirect costs, such as overhead used during construction are
capitalized. Major units of property replacements or improvements are
capitalized and minor items are expensed. Depreciation is provided for using the
straight-line method. Significant assumptions and judgment is used to determine
which improvement, replacement or indirect costs are capitalized. Significant
assumptions and judgment is necessary to determine what useful life is
appropriate for each asset, particularly for machinery and equipment which
useful life can range from five to twenty years.
  *Long-Lived
Assets*
 
 In
accordance with the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", the Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. Recovery of assets to be held and used
is measured by a comparison of the carrying amount of the assets to the future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less the cost to sell. Management uses significant
judgments, assumptions and estimates to calculate future cash flows expected to
be generated by the assets under impairment review.
 
 **Impact
from Recent Accounting Pronouncements**
 
 We do not
expect the adoption of recent accounting pronouncements will have a significant
effect on our financial statement presentation or disclosures. See "Recent
Accounting Pronouncements" in Note 1 to the financial statements.
 
 **Other
Considerations**
 
 We are
subject to many risk factors detailed below and elsewhere in this report and
from time to time in our other Securities and Exchange Commission filings. Any
one or more of these uncertainties, risks and other influences could materially
affect our results of operations and prospects and whether forward-looking
statements made by us ultimately prove to be accurate. The following risk
factors represent items that management desires to highlight, in addition to
forward looking statements described at the beginning of this report, to help
investors better understand the potential risks and rewards of Nathaniel
Energy's business.
 
 *Our
business model depends on obtaining several million dollars in funding.*
 
 We will
require several million dollars in capital investments to further develop our
Thermal CombustorTM business, which is the business segment on which we plan to
focus. Capital investments could be in the form of debt, equity, government
grants or guaranteed loans. There can be no assurance that we will obtain the
funding needed to develop this third business segment, or that funds raised for
a particular project will be sufficient to complete the project.
 
 *Revenue
and gross margin growth is dependent on successful equipment maintenance, repair
and upgrades.*
 
 22
 Future
revenue and gross margin increases are dependent on continuous equipment
maintenance, repairs and upgrades. Significant upgrades were completed to our
helium and gas processing operations in the first quarter of 2004. We anticipate
receiving new gas production, requiring processing over the next several months.
There can be no assurance that future upgrades will meet our expectations to
provide the capacity to process higher volumes of gas or that we will receive
the new gas production as anticipated.
 
 Our 2005
business plan contemplates improving our tire processing operations based on new
equipment, the repair of existing equipment and planned facility improvements.
New equipment purchases, repair of existing equipment and planned facility
improvements will require additional funding, however, there is no assurance
that we will be successful in obtaining such funding.
 
 *Results
of operations are dependent upon our contractual arrangements.*
 
 Although
we have long term contracts in place for delivery of crude helium gas, current
markets for helium and natural gas liquids may create opportunities for other
participants which are better capitalized than we are and these participants may
attempt to interfere with our existing contracts. Such interference may require
litigation to resolve, which could negatively impact our results of operations.
 
 *We
depend on a small number of large customers and suppliers.*
 
 Our top
three customers accounted for 74% of 2004 revenue and this percentage dependency
is likely to rise in 2005. Although we believe we could replace these customers
if lost, if we do not maintain positive relationships with these customers,
these customers change their business strategy, or their financial position
deteriorates, our revenue and operating results could be materially and
negatively impacted.
 
 If we
lose any of our major suppliers we could suffer a material disruption to our
natural gas and crude helium business which could have a material adverse affect
on our business and prospects.
 
 *If we
fail to satisfy customer expectations, existing and continuing business could be
adversely affected.*
 
 If we
fail to satisfy customer expectations, our reputation and ability to retain
existing customers and attract new customers may be damaged. In addition, if we
fail to perform adequately on projects, we could be liable to customers for
breach of contract and could incur substantial cost, negative publicity, and
diversion of management resources to defend a claim, and as a result, the
business results could suffer.
  *If we
fail to successfully use patented technology in commercialized applications, our
business may not become profitable.*
 
 If we
fail to identify the latest alternative energy solutions or fail to successfully
apply the technology to customer demand, our reputation and ability to compete
for customers and the best employees could suffer. If we cannot compete
successfully for projects and project funding, revenues may not grow.
 
 Because
our market changes constantly, some of the most important challenges facing us
are the need to:
 
 o develop
equipment that meets changing customer needs;
 
 o
identify and effectively market alternative solutions to a diverse set of
customers;
 
 o enhance
and protect the applications of our patented technology;
 
 o
influence and respond to emerging industry standards and other technological
changes.
 
 All of
these challenges must be met in a timely and cost-effective manner. We cannot
assure you that we will succeed in effectively meeting these challenges.
 
 *Research,
experience and shifts in technology and market demand may require changes in our
business model.*
 
 During
the regular course of business we must adjust our business plan giving
consideration to our own research, experience, technology evolution and market
demand. Accepting unforeseen business opportunities may also result in a
business model change. We cannot guarantee that any business model or adjustment
in business plan will become successful or be more successful than its current
business model. A shift in our business model may result in the use of other
technologies. Other technologies may in the future prove to be more efficient
and/or economical to us than our current technology. We cannot guarantee that
any change in technology will become successful or be more successful than its
current technology.
 
 *Public
company legislative and regulatory requirements, such as the Sarbanes-Oxley Act
of 2002, may lead to increased insurance, accounting, legal and other costs,
which may cause expenses to increase.*
 
 We became
a reporting company under the Securities and Exchange Act of 1934 in early 2003.
The company will be subject to additional reporting and governance requirements
if it applies and is accepted for listing on a national stock exchange or the
NASDAQ system. We are committed to full regulatory compliance and high standards
of corporate governance and expect legal accounting and professional fees to
increase in 2005. The cost of regulatory compliance could strain our limited
resources as well as divert attention of our relatively small management team
from daily business operations.
 
 23
 *One
stockholder beneficially could own over 50% of outstanding shares and control a
vote of stockholders.*
 
 One
stockholder, NEC Energy, LLC, an affiliate of Richard Strain and Corey Morrison,
will beneficially own over 50% of outstanding shares if and when it is issued an
additional 20,000,000 to which it is entitled under a stock conversion agreement
which is described under the heading “Change in Control” in the Description of
Business of this report. This is percentage is based on a Schedule 13D filed by
that stockholder with the SEC. Accordingly, when those shares are issued that
shareholder has the ability to control the director elections and the approval
of any other action requiring stockholder approval, including any amendments to
the certificate of incorporation and mergers or sales of all or substantially
all assets, even if the other stockholders perceive that these actions are not
in their best interests. The Company is currently taking steps to authorize a
sufficient number of shares of common stock to enable it to issue the additional
20,000,000 shares to which NEC Energy is entitled but it cannot predict when
this will be accomplished.
 
 **Item
7. Financial Statements**
 
 The
financial statements required by this Item 7 are included in this Annual Report
on Form 10-KSB following Item 14 hereof.
 
 **Item
8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.**
 
 In March,
2003 and in January 2004, we changed accountants, as reported on a Current
Report on Form 8-K report dated March 11, 2003, and as reported on a Current
Report on Form 8-K for an event dated January 12, 2004.
 
 **Item
8A. Controls and Procedures**
 
 **Disclosure
Controls and Procedures**
 
 Our
Principal Executive Officer and Principal Financial and Accounting Officer,
after evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended) as of December 31, 2004, (the "Evaluation Date"), has
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective to ensure the timely collection, evaluation, and
disclosure of information relating to us that would potentially be subject to
disclosure under the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated under the Act.
 
 
  24
  **PART
III**
 **Item
9. Directors and Executive Officers of the Registrant**
 
 The
names, ages and terms of office of our directors and executive officers are set
forth in the following table:
   Name
    Age
    Positions
      with Nathaniel EnergyRussell
      "Gene" Bailey*
    65
    Director
      & Vice PresidentGeorge
      Cretecos*
    50
    Director
      & Chief Operating Officer, Principal Executive Officer and Principal
      Accounting OfficerBrian
      Culvey
    48
    Vice
      President EngineeringTimothy
      A. Peach
    53
    Vice
      President Finance
 
 *
Directors are also named executive officer for purposes of Section 16(a)
 
 Directors
are elected by holders of the common stock. Officers serve at the will of the
board. We may indemnify directors and officers against damages which qualify, in
the opinion of the disinterested members of the board, for indemnification under
Delaware law and our Bylaws. Insofar as indemnification for liabilities arising
under the federal securities laws may be permitted to directors, officers or
persons controlling us pursuant to Delaware law and its Bylaws, we have been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the laws and is
therefore unenforceable.
 
 **Management
Biographies**
 
 Russell
"Gene" Bailey has served as our Vice President since 1998 and as a director
since 2000. Mr. Bailey brings 35 years of finance, technical and consulting
experience to us. From February 2000 to April 2003 Mr. Bailey served as our
Chief Financial Officer. From 1976 to 2000, Mr. Bailey served as a merger and
acquisition consultant with Bailey and Associates on an as needed basis. In
addition to his merger and acquisition role, from 1994 to 2000 Mr. Bailey has
been an adjunct professor at Pikes Peak Community College teaching geology and
physical geography. Mr. Bailey earned a B.S. degree in geology in 1962 from the
University of New Mexico. He completed the course work for a Ph.D. degree in
geology in 1965 at the University of New Mexico and completed a year of graduate
studies at the University of Arizona in finance and mining economics in 1974.
  George
Cretecos has served as our Chief Operating Officer since February 2003. He has
been a director since April, 2003. Mr. Cretecos has over 25 years of proven
operating and business management experience. Most recently, he served as
Director of Marketing and Sales at a multi-million dollar corporation, Commtract
Corporation, a privately held systems integration and information technology
company, from December 2001 to January 2003, where he spearheaded profitable new
sales and marketing turn-around programs. From 1997 to 2001 he served as a
Management Consultant setting up corporate infrastructure for startup and early
stage companies. Prior to that, as Director of Sales and Marketing at
Schlumberger Technologies from August 1994 to January 1997, Mr. Cretecos
developed all marketing and promotional materials, managed divisional personnel
and had full profit and loss responsibility for all aspects of product roll-out,
from design to distribution. Mr. Cretecos' versatile business expertise includes
working as Product Manager for a company developing an energy management "load
shedding" technology that was acquired by then Bell Atlantic (now Verizon).
Following this success he was promoted to Vice President overseeing operations
for a consortium of companies including Teletimer International, Bell Atlantic,
Square D Corporation and Honeywell. Mr. Cretecos holds a B.A. from the State
College of Westfield, Massachusetts with Master's courses from Boston State
College and has received extensive training in sales, management, leadership and
public speaking.
 
 Brian
Culvey was appointed our Vice President Engineering in February 2000. Dr. Culvey
was a consulting engineer for us from 1997 to 2000. Dr. Culvey brings 20 years
of combustion and air emission engineering experience to Nathaniel Energy.
Recognized worldwide as a leader in the combustion engineering field, Dr.
Culvey's problem solving abilities consistently produce innovative cost saving
solutions. Dr. Culvey was Technical Director of air emission sampling teams
responsible for all Federal, State and local air emission regulatory compliance
along with the design and development of testing procedures and associated
equipment. Dr. Culvey has gained extensive experience in the management of
emission controls and EPA test methodologies. Prior to these positions, Dr.
Culvey began his professional career at Chemical Waste Management responsible
for hazardous waste technical services and for all associated regulatory
compliance including EPA, DOT, OSHA and Department of Health. Dr. Culvey earned
a B.S in environmental chemistry from the Colorado School of Mines in 1977 and
went on to earn a Ph.D. degree in metaphysics in 1982.
 
 Timothy
A. Peach joined us as an employee in October 2004 and was appointed Vice
President Finance on March 1, 2005. Mr. Peach has over 25 years of proven
experience in finance, administration and operations. Mr. Peach spent over ten
years with PriceWaterhouse Coopers in the Pittsburgh and Denver offices, from
1974 to 1985, providing consulting and advisory services to international,
publicly traded companies in technology, refining, manufacturing and banking
business sectors. Mr. Peach’s background includes senior executive financial
positions in medical equipment and telecommunications industries. Most recently,
Mr. Peach was Vice President Finance and Chief Accounting Officer for Convergent
Group Corporation, a large scale systems integration and consulting firm in the
utility industry, from 1997 to 2000, where he was an integral participant in
that company’s redesign and implementation of internal management systems and
financial reporting, restructuring and improving operating structures, and its
successful initial public offering. In 2000, that company was acquired by
SchlumbergerSema, an oil and gas information and operating support company. Mr.
Peach served as Chief Accounting Officer and Vice President Finance of
SchlumbergerSema North American Operations from 2000 to 2002 where among other
things, he managed the integration of Convergent Group Corporation and two other
business units focused on the manufacture of utility meters and technologically
advanced remote meter reading systems for the utility industry. Prior to joining
us, from 2002 to October 2004 Mr. Peach provided the technical accounting
support for a successful initial public offering by Affordable Residential
Communities, Inc., a real estate investment trust, and he was also engaged as an
advisor to Duke Energy Field Services, Inc., an oil and gas processing company,
in the development of and overview of their Sarbanes-Oxley compliance programs
during that time. Mr. Peach holds a B.S and an M.B.A. from the University of
Pittsburgh and is a member of the AICPA and the Pennsylvania Institute of Public
Accountants.
 
 **Audit
Committee**
 
 We do not
have an audit committee, and accordingly we do not have an audit committee
financial expert. Currently we have two members of the Board of Directors, none
of whom are independent. The Board of Directors plans to seek qualified
candidates for election as independent board and audit committee members. We
cannot anticipate when we will have independent board members’ elected or will
establish an audit committee.
 
 **Compliance
with Section 16(a) of the Exchange Act**
 
 Directors,
officers, and beneficial owners of more than ten percent of our common stock are
required to file reports of ownership as required by Section 16(a) of the
Exchange Act. Russell “Gene” Bailey, director and Vice President of the Company,
and Timothy Peach, the Vice President finance of the Company have not filed
Forms 3. George Cretecos, a director and Chief Operating Officer of the Company
and three non officer or director affiliates, NEC Energy, LLC, Richard Strain
and Corey Morrison, filed their respective Forms 3 late.
 
 **Item
10. Executive Compensation.**
 
 The
following table sets forth the compensation paid during the past three years to
our chief executive officer. No other executive officer’s remuneration exceeded
$100,000 per year. We did not pay any non-cash current compensation or long term
compensation to the officers during the listed years.
 
 
 
 Annual
      CompensationName
      & Position
    
    
    Year
    
    
    Salary
    
    
    Other
      CompensationStanley
      Abrams(1)
      Chief
      Executive
      Officer
    
    
    2004
      2003
      2002
    
    $
      $
      $
    85,577(2
      125,000(2
      250,000(3
    )
      )
      )
    $
      $
      $
    --
      --
      --George
      Cretecos(4)
      Chief
      Operating
      Officer
    
    
    2004
      2003
      2002
    
    $
      $
      $
    99,765
      61,606
      -0-
      (5
    )
    $
      $
      $
    --
      --
      --
  (1)
Stanley Abrams’ employment with Nathaniel Energy terminated on June 25, 2004 at
which time he ceased to be the Chief Executive Officer of the
Company.
 
 (2) The
entire amount was paid in cash.
 
 (3) This
entire amount was accrued. In September 2003, Mr. Abrams waived his right to
$125,000. The remaining amount was paid in 2003 with a combination of $87,500 in
cash and 37,500 shares of common stock valued at $37,500.
 
 (4)
George Cretecos, Nathaniel Energy’s Chief Operating Officer is the Company’s
principal executive officer.
 
 (5)
George Cretecos became our Chief Operating Officer in February
2003.
  25
  **Employment
Contracts and Termination of Employment, and Change-in-Control Arrangements**
 
 **George
Cretecos**
 
 George
Cretecos serves as our Chief Operating Officer. We currently do not have an
employment agreement with Mr. Cretecos.
 
 **Russell
"Gene" Bailey**
 
 Nathaniel
Energy and Russell "Gene" Bailey had a four year employment agreement which
expired on January 31, 2004. We currently do not have an employment agreement
with Mr. Bailey. Mr. Bailey serves as our Vice President.
 
 **Brian
G. Culvey**
 
 Nathaniel
Energy and Brian G. Culvey had a four year employment agreement which expired on
January 31, 2004. We currently do not have an employment agreement with Mr.
Culvey. Mr. Culvey serves as our Vice President Engineering.
 
 **Timothy
A. Peach**
 
 Timothy
Peach serves as our Vice President of Finance. We currently do not have an
employment agreement with Mr. Peach.
 
 **Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.**
 
 **Security
Ownership of Certain Beneficial Owners and Management**
 
 The
following table sets forth, to Nathaniel Energy’s knowledge, based solely upon
records available to it, certain information as of March 28, 2005 regarding the
beneficial ownership of the Company's shares of common stock by:
 
 o each
person who we believe to be the beneficial owner of more than five percent (5%)
of outstanding shares of common stock,
 
 o by each
current director,
 
 o by each
named executive officer, and
  o by all
current executive officers and directors of the group:
  Name
      and Address
      of
      Beneficial Owner
    
    
    Number
      of Shares
    
    
    Approximate
      Percent ofClass(1
    )NEC
      Energy, LLC (1)
      73
      Deer Park Avenue,
      Suite
      4
      Babylon
      Village, New York 11702
    
    
    30,000,000
      (2
    )
    
    42.4
    %Richard
      Strain
      329
      Manchester Road
      Poughkeepsie,
      New York 12603
    
    
    6,718,333
      (3
    )
    
    9.5
    %George
      Cretecos(4)
    
    
    NoneAll
      Directors and Executive Officers as a group
      (4
      persons) (4)
    
    
    372,082
      (5
    )
    
    .5
    %
 (1) NEC
Energy, LLC is 50% owned by Richard Strain and 50% owned by Como Group, LLC,
which is an affiliate of Corey Morrison.
 
 (2)
Excludes 5,718,333 shares owned by Richard Strain, 500,000 shares held in the
name of Mr. Strain’s wife and 500,000 shares held in the name of Mr. Strain’s
son. Excludes 20,000,000 shares which NEC Energy, LLC has the irrevocable right
to receive pursuant to a Conversion Agreement at the time that number of shares
is authorized and available for issuance.
 
 (3)
Excludes 30,000,000 shares owned by NEC Energy, LLC and 20,000,000 shares for
which NEC has the irrevocable right pursuant to a Conversion Agreement, which
shall be issued at the time that number of shares is authorized and available
for issuance. Includes 500,000 shares held in the name of Mr. Stain's wife and
500,000 shares held in the name of Mr. Strain's son.
 
 (4) The
address of these persons is 8001 S. InterPort Blvd., Suite 260, Englewood,
Colorado 80112.
 
 26
 (5)
Includes 166,200 shares owned by Russell “Gene” Bailey and 205,882 shares held
by Mr. Bailey's wife.
  **Item
12. Certain Relationships and Related Transactions**
 
 On April
3, 2003, our subsidiary, Nathaniel Energy Oklahoma Holdings Corporation,
acquired the remaining 81.45% of interest in Keyes Helium Company, LLC. The
company transferred ownership of MCNIC to Nathaniel Energy Oklahoma Holdings
Corporation. Richard Strain was issued 49% of Nathaniel Energy Oklahoma Holdings
Corporation's common stock in connection with financing for this acquisition. As
a result of this transaction, we own 51% and Mr. Strain owns 49% of Nathaniel
Energy Oklahoma Holdings Corporation.
 
 Prior to
2000, Mr. Strain loaned a total of $1,350,000 to us. In April 2002, Mr. Strain
converted the outstanding balance into 8,250,000 shares of our common stock at a
price of $0.20, which was the market price at the date of conversion. The shares
were not issued until the first week of January 2003. A portion of these shares
were issued to persons designated by Mr. Strain.
 
 On
October 3, 2003, $10,000,000 of our indebtedness to Mr. Strain was converted
into an aggregate of 50,000,000 shares of our common stock. NEC Energy, LLC, a
designee of Mr. Strain, received 30,000,000 shares, and an irrevocable right to
receive 20,000,000 shares at the time that number of shares is authorized and
available for issuance. This transaction is described in detail under Item 1
"Business - Change in Control."
 
 In
September and October, 2003 Mr. Strain loaned us $1,000,000 and $1,000,000
respectively, each bearing interest at the rate of 8% per year. In October, 2003
we consolidated an aggregate of $6,892,151 in principal into two promissory
notes in the principal amounts of $2,000,000 and $4,892,151 respectively. The
note for the $2,000,000 loaned to us in 2003 bears interest at the rate of 3.33%
per year and is payable in four quarterly principal and interest payments of
$540,000 each on October 1, 2005 and January 1st, April 1st and July 1st 2006.
The note for the principal amount of $4,892,151 bears interest at the rate of 8%
per year. No payments will be due on this note until March 31, 2007, at which
time the principal and accrued interest will be repaid in quarterly payments of
$572,876 through December 31, 2009.
 
 On March
16, 2004, Mr. Strain loaned a total of $2,000,000 to us. The note for the
$2,000,000 loaned to us bears interest of 3.49% per year and is payable in four
quarterly principal and interest payments of $540,000 each on October 1, 2005
and January 1st, April 1st and July 1st 2006.
 The loan
agreement which provides that the outstanding principal plus interest under the
March 16, 2004 loan, and the $6,892,151 outstanding indebtedness under previous
loans from Mr. Strain to the Company may be converted, at Mr. Strain's option,
into shares of our common stock at a conversion rate equal to 103% of the
average closing price on the five trading days prior to March 17, 2004.
Additionally, we agreed to register the resale of the shares of common stock
issuable upon conversion of these loans within 180 days of the funding of the
March 16, 2004 $2,000,000 loan. Resale of these shares have not been registered.
Furthermore, the repayment under this loan, plus the repayment of $6,892,151
indebtedness under previous loans, are secured by a security interest in all of
our and our subsidiaries' assets, including the shares of stock of our
subsidiaries.
 
 On April
14, 2005, Mr. Strain agreed to restructure payment terms on the outstanding debt
and accrued interest due from us, which is described above, so that no payments
will be required during our fiscal year ending 2005. The terms and conditions of
the debt restructuring have not yet been completed; however, we believe these
terms and conditions will be favorable to us.
 
 During
the year ended December 31, 2003, we paid $750,000 in cash and issued 233,333
shares of common stock for corporate marketing and communication services to
Strong Wilken, Inc., a company affiliated with Corey Morrison, who is a 50%
beneficial owner of NEC Energy LLC. During the year ended December 31, 2004, the
Company accrued $250,000 related to services provided by Strong Wilken, Inc. for
corporate marketing and communication services which was paid in January 2005.
We terminated our relationship with Strong Wilken on April 12,
2005.
 
 We are a
party to a 25-year Consulting Agreement with Alternate Capital, LLC (formerly
known as Alternate Energy, LLC), an affiliate of Corey Morrison, which was
entered into as of March 1, 2002. Under this agreement, Alternate Capital agreed
to secure financing to purchase or lease equipment or for other projects in the
amount of $650,000 or more. Alternate Capital also agreed to provide consulting
services relating to business projects, financing opportunities and strategic
planning. In consideration of these services Nathaniel Energy issued 13,500,000
shares of common stock to Alternate Capital and its designees, valued at
$800,000. The Consulting Agreement also provides that Nathaniel Energy shall pay
Alternate Capital a fee for its services equal to 10% of the Company’s quarterly
pre-tax profits, if any. Alternate Capital has a right of first refusal to
provide any debt or equity financing to Nathaniel Energy. Either party has the
right to terminate this agreement on 120 days notice. However, the fees paid on
the pre-tax profit, if any, are required to be paid for the length of the
original term of the agreement.
 
 During
the first quarter of 2003, we issued 1,066,666 shares of common stock valued at
$800,000 to Alternate Capital LLC, an affiliate of Corey Morrison, in payment
for corporate marketing and financing services.
 
 On
October 1, 2004 Nathaniel Energy entered into a Consulting Agreement with CJM
Group, LLC which is affiliated with Corey Morrison under which CJM Group
provided senior management consulting services, contract negotiation and deal
structure services and business structure and planning services for a consulting
fee of $12,500 per month. The agreement had a 24 month term and was terminable
by either party for any reason. On April 12, 2005 we terminated this Consulting
Agreement.
 
 27
 Our Board
of Directors adopted a policy in February, 2004 that all related party
transactions must be approved by a majority of the disinterested directors and
those transactions will be on commercially reasonable terms which are no less
favorable to the Company than we could obtain in arms-length transactions with
unaffiliated third parties.
  **Item
13. Exhibits List and Reports on Form 8-K**
 
 **(a)
      Exhibits.**2.1
    Stock
      Exchange Agreement, dated as of December 31, 2002, by and between
      Nathaniel Energy Corporation, and MNS Eagle Equity Group, Inc. and the
      shareholders of MNS Equity Group, Inc.*2.2
    Stock
      Purchase Agreement, dated August 26, 2002 but effective as of June 30,
      2002, by and between MCNIC Pipeline & Processing Company and Nathaniel
      Energy Corporation*2.3
    Purchase
      and Sale Agreement, dated as of April 3, 2003, by and between CIG
      Resources Company and Nathaniel Energy Oklahoma Holdings
      Corporation**3(i).1
    Certificate
      of Incorporation*3(i).2
    Articles
      of Amendment to Articles of Incorporation, as amended on August 6,
      1999*3(i).3
    Certificate
      of Amendment of Certificate of Incorporation, as amended on April 24,
      2002*3(ii).1
    Amended
      and Restated By-Laws**10.1
    Employment
      Agreement, dated August 15, 2001, by and between Nathaniel Energy
      Corporation and Stan Abrams**10.2
    Acknowledgment
      letter of Stan Abrams, dated September 22, 2003 relating to a reduction of
      accrued salary**10.3
    Agreement,
      dated October 30, 2003 by and between Nathaniel Energy Corporation and
      Stan Abrams relating to issuance of shares for accrued
      salary**10.4
    Employment
      Agreement, dated February 1, 2000 by and between Nathaniel Energy
      Corporation and Russell Eugene Bailey**10.5
    Agreement,
      dated October 30, 2003 by and between Nathaniel Energy Corporation and
      Russell "Gene" Bailey relating to the issuance of shares for accrued
      salary**10.6
    Employment
      Agreement, dated February 1, 2000 by and between Nathaniel Energy
      Corporation and Brian G. Culvey**10.7
    Agreement,
      dated October 30, 2003 by and between Nathaniel Energy Corporation and
      Brian Culvey relating to the issuance of shares for accrued
      salary**10.8
    Consulting
      Agreement, dated March 1, 2002, as supplemented as of June 7, 2002, by and
      between Nathaniel Energy Corporation and Alternate Energy,
      LLC**10.9
    Amended
      and Restated Patent Assignment Agreement, dated September 30 2003 but
      effective as of July 7, 1998 between Stan Abrams and Brett Abrams and
      Nathaniel Energy Corporation**10.10
    Conversion
      Agreement, dated October 3, 2003 between Nathaniel Energy Corporation and
      Richard Strain**Loan
      Agreement, dated October 3, 2003 between Richard Strain and Nathaniel
      Energy Corporation*10.12
    Promissory
      Note, dated October 3, 2003 between Nathaniel EnergyCorporation
      and RichardStrain**10.13
    Promissory
      Note II, dated March 16, 2004 between Nathaniel Energy Corporation and
      Richard Strain ***10.14
    Loan
      Agreement II, dated March 16, 2004 between Nathaniel Energy Corporation
      and Richard Strain ***10.15
    Compression
      Facility Agreement, dated January 9, 2004 between Nathaniel Energy
      Corporation and Nexus Energy Company***10.16
    Contract
      for Sale and Purchase of Liquid Helium between Keyes Helium Company, LLC
      and Air Products Helium, Inc., amended and restated as of January 1,
      1999(the “Liquid Helium Agreement”)****10.17
    Amendment
      No. 1 to the Liquid Helium Agreement dated as of January 30, 2004
      ****10.18
    Agreement
      dated as of June 25, 2004 between Stan Abrams and Nathaniel Energy
      *****10.19
    Agreement
      dated July 16, 2004 among EcoIdeaS.r.l.,
      Electronic Solar S.r.l., European Waste Solutions, Ltd., L&R Energy
      Company, LLC and Nathaniel Energy Corporation (the “Italy Project
      Parties”) *****10.20
    Agreement
      dated as of July 16th,
      2004 between Nathaniel Energy Corporation and L&R Energy Corporation,
      LLC. *****10.21
    Agreement
      dated August 25, 2004 amending an agreement dated July 16, 2004 on the
      Italy Project Parties. ******10.22
    Contract
      dated January 12, 2005, among the Italy Project Parties+10.23
    Contract
      dated February 22, 2005, among the Italy Project Parties+14.1
    Code
      of Business Conduct and Ethics for Officers (Vice President and Senior)
      and Directors (effective March 8, 2004)**14.2
    Code
      of Business Conduct and Ethics for Employees and Officers(other than Vice
      President and Senior)(effective March 8, 2004)**21.
    Subsidiaries+31.
    Certification
      of Chief Executive Officer and Principal Accounting Officer pursuant to
      Rule 13a-14(a)or Rule 15d-14(a)as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.
    Certification
      of Chief Executive Officer and Principal Accounting Officer pursuant to 18
      U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 * Denotes
document filed as an exhibit to our Annual Report on Form 10-KSB for the year
ended December 31, 2003 and incorporated herein by reference.
 
 **Denotes
document filed as an exhibit to our Current Report on Form 8-K for an event
dated December 31, 2002 and incorporated herein by reference.
 
 ***
Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the period ended March 31, 2004 and incorporated herein by
reference.
 
 ****
Denotes document that contains confidential material omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934. Brackets surrounding asterisks in this
document denote the omission.
 
 *****
Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the period ended June 30, 2004 and incorporated herein by reference.
 
 ******
Denotes documents filed as an exhibit to our Quarterly Report on Form 10-QSB for
the period ended September 30, 2004 and incorporated herein by
reference.
 
 + Denotes
document filed as an exhibit to our Annual report on Form 10-KSB for the year
ended December 31, 2004.
 
 28
 **(b)
Reports on Form 8-K** :
 
 In the
last quarter of 2004 Nathaniel Energy filed the following Current Reports on
Form 8-K:
 
 Date
      of Earliest Event
      Reported
    Item
      ReportedNovember
      2, 2004
    8.01
 
  29
  **Item
14. Principal Accountant Fees and Services**
 
 **Audit
Fees**
 
 The
aggregate fees billed for our fiscal years ended December 31, 2004 and 2003 by
Comiskey & Company, P.C., our principal accountants in 2004 and 2003, for
the audit of our financial statements for each of those years and the review of
our financial statements included in our Quarterly Reports on Form 10-QSB during
those financial years were $23,572 and $25,790 respectively.
 
 **Audit
Related Fees**
 
 Our
principal accountants did not bill us any fees during our fiscal years ended
December 31, 2004 and 2003 for any assurance and related services.
 
 **Tax
Fees**
 
 Our
principal accountants did not bill us any fees for tax compliance, tax advice
and tax planning for our fiscal years ended December 31, 2004 and 2003.
 
 **Other
Fees**
 
 Our
principal accountants did not bill us for any services or products other than as
reported above in this Item 14 during our fiscal years ended December 31, 2004
and 2003 respectively.
 
  30
  
 **NATHANIEL
ENERGY CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **FOR
THE**
 **FISCAL
YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 
 **INDEX**
 
  PageReport
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheets
    F-2Consolidated
      Statements of Operations
    F-3Consolidated
      Statement of Stockholders' Equity (Deficit)
    F-4Consolidated
      Statements of Cash Flows
    F-5Notes
      to Consolidated Financial Statements
    F-6
      to F-17
 
 
 
 31
 **COMISKEY
& COMPANY**
 
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors and Stockholders of Nathaniel Energy Corporation
 Englewood,
Colorado
 
 We have
audited the accompanying consolidated balance sheets of Nathaniel Energy
Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of operations, cash flows and stockholders’ equity (deficit) for each
of the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Nathaniel Energy
Corporation as of December 31, 2004 and 2003, and the consolidated results of
its operations, cash flows, and changes in stockholders’ equity (deficit) for
each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
 
 As
discussed in Note 2 to the financial statements, the Company has an informal
agreement with its major stockholder to restructure debt.
 
 
 March 3,
2005
 Denver,
Colorado
 
 */s/
Comiskey & Company*
 PROFESSIONAL
CORPORATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Certified
Public Accountants & Consultants
 789
Sherman Street, Suite 440, Denver, CO 80203
 (303)
830-2255 Fax (303) 830-0876 info@comiskey.com  www.comiskey.com
  F-1
   Nathaniel
Energy Corporation
 Consolidated
Balance Sheets
 
 December
      31, 2004
    
    
    December
      31, 2003AssetsCurrent
      assets:Cash
    
    $
    568,151
    
    $
    504,782Accounts
      receivable
    
    
    1,340,229
    
    
    960,555Inventory
    
    
    1,019,028
    
    
    637,174Prepaid
      expenses
    
    
    136,022
    
    
    130,669Advances
      receivable
    
    
    529
      __________
    
    
    30,718
      __________Total
      current assets
    
    
    3,063,959
    
    
    2,263,898Property,
      plant and equipment, net of accumulated
      depreciation
    
    
    10,304,828
    
    
    11,662,969Intangible
      assets, net
    
    
    597,014
    
    
    382,267Restricted
      cash
    
    
    237,000
    
    
    899,300Related
      party receivables
    
    
    --
    
    
    345,959Deposits
    
    
    85,477
    
    
    50,000Total
      Assets
    
    $
    14,288,278
    
    $
    15,604,393Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
    
    $
    2,686,524
    
    $
    1,689,072Accrued
      compensation and payroll liabilities
    
    
    97,300
    
    
    109,365Accrued
      interest
    
    
    640,033
    
    
    141,402Accrued
      property tax
    
    
    37,080
    
    
    38,331Accrued
      income tax
    
    
    23,584
    
    
    --Other
      accrued expenses
    
    
    41,520
    
    
    25,018Notes
      payable, current portion
    
    
    536,135
    
    
    406,644Notes
      payable - stockholder, current portion
    
    
    1,080,000
    
    
    --Total
      current liabilities
    
    
    5,142,176
    
    
    2,409,532Long-term
      debt
    
    
    728,571
    
    
    230,989Long-term
      debt, stockholder
    
    
    7,812,151
    
    
    6,892,151Total
      liabilities
    
    
    13,682,898
    
    
    9,532,672Minority
      interest
    
    
    54,626
    
    
    34,139Stockholders'
      equity:
    
    
    --
    
    
    --Preferred
      stock, 2,000,000 shares of $.001 par value
      authorized, none issued or outstanding
      Common
      stock, 75,000,000 shares of $.001 par value
      authorized, 70,198,263 shares and 69,719,414 shares
      issued
      and outstanding at December 31, 2004 and 2003
    
    
    70,198
    
    
    69,719Common
      stock to be issued
    
    
    20,318
    
    
    20,285Additional
      paid-in capital
    
    
    64,851,656
    
    
    64,682,652Accumulated
      deficit
    
    
    (64,391,418
    )
    
    (58,735,074
    )Total
      stockholders' equity
    
    
    550,754
    
    
    6,037,582Total
      Liabilities and Stockholders' Equity
    
    $
    14,288,278
    
    $
    15,604,393
 
 
 The
accompanying notes are an integral part of the financial
statements.
 
  F-2
  
  Nathaniel
Energy Corporation
 Consolidated
Statements of Operations
 
 For the Year EndedDecember
      31, 2004
    
    
    December
      31, 2003Revenue
    
    $
    14,036,793
    
    $
    8,424,741Cost
      of revenue
    
    
    12,135,472
    
    
    7,851,841Gross
      profit
    
    
    1,901,321
    
    
    572,900Selling,
      general and administrative expenses
    
    
    2,661,531
    
    
    5,355,380Research
      and development expense
    
    
    2,389,942
    
    
    37,409Write
      down of inventory
    
    
    274,000
    
    
    --Impairment
      of assets
    
    
    1,403,046
    
    
    --Total
      operating expenses
    
    
    6,728,519
    
    
    5,392,789Loss
      from operations
    
    
    (4,827,198
    )
    
    (4,819,889
    )Other
      income (expense)Partnership
      income
    
    
    --
    
    
    20,733Loss
      on disposal of equipment
    
    
    (16,794
    )
    
    (13,207
    )Interest
      expense
    
    
    (564,061
    )
    
    (1,021,773
    )Write
      off of related party receivable
    
    
    (276,025
    )
    
    --Financing
      costs
    
    
    --
    
    
    (42,675,500
    )Investment
      income
    
    
    --
    
    
    1,109Other
      income
    
    
    71,805
    
    
    2,039Loss
      before income taxes and minority interest
    
    
    (5,612,273
    )
    
    (48,506,488
    )Income
      tax expense
    
    
    (23,584
    )
    
    --Loss
      before minority interest
    
    
    (5,635,857
    )
    
    (48,506,488
    )Minority
      interest
    
    
    (20,487
    )
    
    (7,781
    )Net
      loss
    
    $
    (5,656,344
    )
    $
    (48,514,269
    )Loss
      per share, basic and diluted
    
    $
    (0.08
    )
    $
    (1.06
    )Weighted
      average common shares outstanding
    
    
    69,950,156
    
    
    45,913,555
 
 The
accompanying notes are an integral part of the financial
statements.
 
 
  F-3
  Nathaniel
Energy Corporation
 Consolidated
Statement of Stockholders' Equity (Deficit)
 
 Shares
    
    
    Amount
    
    
    Additional
      Paid-In
      Capital
    
    Shares
      to be Issued
      Shares        
      Amount
    
    Subscription
      Receivable
    
    
    Accumulated
      Deficit
    
    
    Stockholder
      Equity
      (Deficit)Balance,
      December
      31, 2002
    
    
    36,912,664
    
    $
    36,913
    
    $
    6,682,704
    
    
    --
    
    
    
    
    $
    $
      (175,500
    )
    $
    (10,220,805
    )
    $
    (3,676,688
    )Issued
      for MNS
    
    
    50,000
    
    
    50
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    50Issued
      for
      services
    
    
    1,500,000
    
    
    1,500
    
    
    1,293,500
    
    
    
    
    
    
    
    
    --
    
    
    --
    
    
    1,295,000Forgiveness
      of
      accrued
      compensation
      payable
      to stockholders
    
    
    --
    
    
    --
    
    
    1,088,459
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    1,088,459Debt
      conversion
    
    
    30,000,000
    
    
    30,000
    
    
    52,450,000
    
    
    20,000,000
    
    
    20,000
    
    
    --
    
    
    --
    
    
    52,500,000Interest
      forgiven
      by
      stockholder
    
    
    --
    
    
    --
    
    
    488,294
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    488,294Issued
      for accrued
      Compensation
    
    
    1,256,750
    
    
    1,256
    
    
    2,679,695
    
    
    285,000
    
    
    285
    
    
    --
    
    
    --
    
    
    2,681,236Write
      off of
      Subscription
      Receivable
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    175,500
    
    
    --
    
    
    175,500Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    
    
    
    
    
    
    --
    
    
    (48,514,269
    )
    
    (48,514,269
    )Balance,
      December
      31, 2003
    
    
    69,719,414
    
    
    69,719
    
    
    64,682,652
    
    
    20,285,000
    
    
    20,285
    
    
    --
    
    
    (58,735,074
    )
    
    6,037,582Cancellation
      of shares
    
    
    (50,484
    )
    
    (50
    )
    
    (38,467
    )
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (38,517
    )Debt
      conversion
    
    
    529,333
    
    
    529
    
    
    195,504
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    196,033Issued
      for interest
    
    
    --
    
    
    --
    
    
    11,967
    
    
    33,000
    
    
    33
    
    
    --
    
    
    --
    
    
    12,000Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    
    
    
    
    
    
    --
    
    
    (5,656,344
    )
    
    (5,656,344
    )__________
    
    
    
    
    
    __________
    
    
    __________
    
    
    __________
    
    
    __________
    
    
    __________
    
    
    __________
    
    
    __________Balance,
      December
      31, 2004
    
    
    70,198,263
    
    $
    70,198
    
    $
    64,851,656
    
    
    20,318,000
    
    $
    20,318
    
    $
    --
    
    $
    (64,391,418
    )
    $
    550,754
 
 
 The
accompanying notes are an integral part of the financial
statements.
  F-4
  Nathaniel
Energy Corporation
 Consolidated
Statements of Cash Flows
 
 For the Year EndedDecember
      31, 2004
    
    
    December
      31,
      2003Cash
      flows from operating activities:
      Net
      loss
    
    $
    (5,656,344
    )
    $
    (48,514,269
    )Adjustments
      to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization
    
    
    922,462
    
    
    745,438Loss
      on related party receivable
    
    
    276,025
    
    
    --Write
      down of inventory
    
    
    274,000
    
    
    --Impairment
      of assets
    
    
    1,403,046
    
    
    --Stock
      issued for services
    
    
    --
    
    
    2,973,745Minority
      interest
    
    
    20,487
    
    
    7,781Stock
      issued to settle debt
    
    
    --
    
    
    42,500,000Loss
      on disposition of equipment
    
    
    16,794
    
    
    --Non-cash
      settlement of debt
    
    
    (77,800
    )
    
    --Subscription
      receivable write off
    
    
    --
    
    
    175,500Changes
      in operating assets and liabilities:
      (Increase)
      decrease in:
      Inventory
    
    
    (655,854
    )
    
    (127,757
    )Accounts
      receivable
    
    
    (379,674
    )
    
    (411,259
    )Prepaid
      expenses
    
    
    (5,353
    )
    
    (61,955
    )Other
      receivable
    
    
    30,189
    
    
    (5,168
    )Restricted
      cash
    
    
    662,300
    
    
    (899,300
    )Related
      party receivable
    
    
    19,450
    
    
    (119,126
    )Other
      assets
    
    
    7,317
    
    
    (53,877
    )Increase
      in:
      Accounts
      payable and accrued expenses
    
    
    1,775,702
    
    
    973,791Net
      cash used in operating activities
    
    
    (1,367,253
    )
    
    (2,816,456
    )Cash
      flows from investing activities:
      Cash
      acquired in acquisition
    
    
    --
    
    
    590,000Equipment
      and intangible asset purchases
    
    
    (1,208,927
    )
    
    (588,341
    )Acquisition
      of assets
    
    
    --
    
    
    (9,703,920
    )Net
      cash used in investing activities
    
    
    (1,208,927
    )
    
    (9,702,261
    )Cash
      flows from financing activities:
      Payments
      on debt
    
    
    (169,160
    )
    
    (199,601
    )Proceeds
      from issuance of notes and loans
    
    
    2,808,709
    
    
    13,021,043Net
      cash provided by financing activities
    
    
    2,639,549
    
    
    12,821,442Net
      increase in cash
    
    
    63,369
    
    
    302,725Cash
      and cash equivalents, beginning of year
    
    
    504,782
    
    
    202,057Cash
      and cash equivalents, end of year
    
    $
    568,151
    
    $
    504,782Cash
      paid for interest
    
    $
    53,430
    
    $
    93,704Cash
      paid for income taxes
    
    $
    --
    
    $
    --Non
      cash financing activity Issuance of stock to settle debt
    
    $
    220,000
    
    $
    10,000,000Equipment
      purchased with debt
    
    $
    25,741
    
    $
    --Forgiveness
      of accrued interest and compensation
    
    $
    --
    
    $
    1,576,753
 
 The
accompanying notes are an integral part of the financial
statements.
  F-5
   **Nathaniel
Energy Corporation**
 **Notes
to Financial Statements**
 
 For the
years ended December 31, 2004 and 2003
 
 1.
Significant Accounting Policies and Nature of Operations
 
 **Description
of Business**
 
 Nathaniel
Energy Corporation (the "Company") is a renewable energy company that provides
industry with an alternative energy equal to that of fossil fuels. Its
proprietary patented technology, the Thermal CombustorTM, is a 2-stage
gasification system designed to convert waste, biomass, tires and any other
solid hydrocarbon-based materials into inexpensive electrical and thermal
energy, while exceeding the most stringent EPA and European Union regulations.
The Company focuses its patented technology in three main areas: licensing,
creating energy infrastructures and building and operating small power plants.
The Company intends to license the Thermal CombustorTM technology to qualified
companies, joint venture partners, and distributorships.
 
 The
Company has been in the fuel processing business, including used tire recycling
and collection services, since 1997. In two transactions, on August 26, 2002 and
April 3, 2003, the Company acquired a minority and then the remaining interest
in a helium and gas processing facility in Keyes, Oklahoma. 49% of the interest
in the Keyes helium operation was issued to an outside investor who had provided
funding for the acquisition. See Note 4 "Acquisition; Minority Interest". In
addition to the fuel processing and helium and gas processing operations, the
Company is engaged in the development of alternative energy conversion processes
and related technologies using its patented Thermal CombustorTM technology.
Nathaniel Energy's short term objective is to complete the start up and testing
of a commercial scale waste-to-energy facility in Cologna Veneta, Italy and use
that facility as a marketing site to demonstrate the technology’s operating
capabilities and generate additional contracts for development of
waste-to-energy facilities.
 
 **Business
Segments**
 
 The
Company operates three separate segments which are presently conducted in three
separate facilities:
 
 - tire
fuel processing operation in Hutchins, Texas,
 - natural
gas processing, gas liquids and helium production in Keyes, Oklahoma and
 -
alternative energy engineering and corporate offices in Englewood, Colorado.
 
 **Principles
of Consolidation**
 
 The
financial statements include the accounts of Nathaniel Energy Corporation and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
 
 **Cash
and Cash Equivalents**
 
 For the
purpose of the consolidated statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. Cash balances used to fund particular
capital projects, which are not authorized or available for general corporate
purposes, are classified as restricted cash.
 
 **Inventory**
 
 Tire
shred inventory is valued at its cost to produce using the first-in first-out
method, but in an amount not to exceed realizable value, determined with respect
to existing contractual sales prices, less costs to complete the tire
processing. The tire shred inventory value at December 31, 2004 is zero. The gas
processing facility has helium inventory in process stored in the BLM (Bureau of
Land Management) facility in Texas; this inventory is based on the
first-in-first-out method. There is a contract with the BLM which encompasses
activity fees, compression fees, storage fees and an annual fee to the BLM. The
BLM fees are expensed as incurred. We are
also building two Thermal CombustorsTM in Italy, under a contract for resale,
which have been completed and are in the operating start up phase. The Thermal
CombustorsTM are valued at that portion of the contract price we reasonably
expect to receive upon completion and acceptance by our customer, reduced by our
contractual exposure to penalties contained in the contract which could be
incurred if our Thermal CombustorsTM do not produce the volume of steam specified
in the contract. We are
reimbursed for our out of pocket expenses incurred during this start up phase
and we record those expenses and the reimbursement of those expenses in cost of
revenue.
   F-6
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
  The
components of inventory are as follows:
 
 Helium
      inventory, valued by first-in, first-out method Construction in progress,
      valued by first-in, first-out method
    
    $
      $
    337,905
      681,123
      1,019,028
  **Research
and Development**
 
 Research
and development expenses, all of which relate directly to the design and
development of our Thermal CombustorTM technology, are expensed as incurred. For
the years ended December 31, 2004 and 2003, we incurred $2,389,942 and $37,409
for outside resources for research and development expense.
 
 **Property,
Plant and Equipment and Related Depreciation**
 
 Property,
plant and equipment purchased or constructed is recorded at cost. Direct costs,
such as labor and materials, and indirect costs, such as overhead used during
construction are capitalized. Major units of property replacements or
improvements are capitalized and minor items are expensed. Gain or loss is
recorded in income for the difference between the net book value relative to
proceeds received, if any, when the asset is sold or retired. Depreciation is
provided for using straight-line and accelerated methods. Estimated useful lives
of the assets used in the computation of depreciation are as follows:
 
  Machinery
      and equipment
    5
      - 20 yearsBuildings
    25
      yearsVehicles
    5
      yearsGathering
      pipeline
    20
      years
 
 **Long
Lived Assets**
 
 In
accordance with the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", the Company reviews its long-lived assets,
including intangible assets, for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
Recovery of assets to be held and used is measured by a comparison of the
carrying amount of the assets to the future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less the cost
to sell. The impairment review performed for fiscal year 2004 indicated an
impairment of long-lived assets at the Hutchins, TX tire processing facility. At
the time of the impairment review, net realizable value for these assets was
determined to be $300,000, resulting in a net impairment adjustment of
$1,403,046. Management uses significant judgments, assumptions and estimates to
calculate future cash flows expected to be generated by the assets under
impairment review.
 
 **Revenue
Recognition**
 
 The
Company's tire fuel processing facility recognizes revenue in several ways.
First when tires are accepted at the facility ("tipping fees") and secondly from
the sale of processed tire shreds. The revenues from tipping fees are fully
earned when the tires are accepted at the facility and the processed tire shred
revenues are recognized when the shreds are delivered to the end user. Internal
quality controls are in place to ensure that shreds meet the standards required
in contracts for the delivery of shreds. This quality control reduces the risk
of significant returns and allowances of tire shreds sold. Sales returns are
reprocessed and added back to the existing tire shreds. Sales returns are booked
based on the Company's historical experience.
 
 The
Company's helium, liquid gas and natural gas revenues are recognized in the
period of delivery. The revenues are fully earned when recognized. The
processing plant has various types of quality control equipment in place to
ensure that the processed gases meet the requirements of the Bureau of Land
Management ("BLM"), the natural gas pipeline operators and its wholesale gas
customers. The Company has a month-to-month contract in place with a natural gas
marketing firm for the natural gas delivered to the pipeline and a contract for
the helium processed. The natural gas liquids processed are currently sold as
produced under a month to month contract.
 
 We
recognize revenue from the sale of our Thermal CombustorsTM upon completion,
delivery and acceptance by the customer, using the completed contract method of
accounting.
 
  F-7
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 **Identifiable
Intangible Assets**
 
 The
Company reports identifiable intangible assets net of accumulated amortization.
Accumulated amortization on intangible assets was $155,174 and $57,171 at
December 31, 2004 and 2003, respectively. The company amortizes intangible
assets, excluding goodwill and trademarks, over their estimated useful lives,
which range from three to ten years. Intangible assets consist of patents,
capitalized web site costs, contracts acquired, and engineering drawings,
designs and manuals for our Thermal CombustorTM technology.
 **Goodwill
and Other Intangible Assets**
 
 The
Company adopted the Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets , during fiscal year 2002. The Company has no recorded goodwill at
December 31, 2004 and 2003.
 
 **Advertising**
 
 The
Company expenses non-direct advertising costs as incurred. The Company did not
incur any direct response advertising costs during the years ended December 31,
2003 and 2004 to be capitalized and deferred to future periods.
 
 **Stock-Based
Compensation**
 
 The
Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transactions
and Disclosure--an amendment of SFAS No. 123." Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the date
of grant, between the fair value of the Company's stock over the exercise price.
No stock options were issued during 2004 or 2003.
 
 The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.
 
 **Net
Income (Loss) Per Common Share**
 
 SFAS No.
128, "Earnings Per Share" requires presentation of basic (loss) or earnings per
share ("Basic EPS") and diluted (loss) or earnings per share ("Diluted EPS").
 
 The
computation of basic loss per share is computed by dividing loss available to
common stockholders by the weighted average number of outstanding common shares
during the period. Diluted loss per share gives effect to all dilutive potential
common shares outstanding during the period. The computation of diluted EPS does
not assume conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on earnings. During the periods presented, the
Company had no potentially dilutive securities outstanding.
 
 **Fair
Value of Financial Instruments**
 
 The fair
values of cash and cash equivalents, accounts receivable, short-term debt and
accounts payable approximate cost because of the immediate or short-term
maturity of these financial instruments. The fair value of the Company's
long-term note and interest receivable from officers and related parties does
not significantly differ from cost at December 31, 2004 and 2003.
 
 **Income
Taxes**
 
 Under
SFAS 109, "Accounting for Income Taxes," deferred tax assets and liabilities are
generally determined based on the difference between the financial statements
and the tax bases of assets and liabilities using enacted tax rates in effect
for the years in which the differences are expected to reverse. Recognition of a
deferred tax asset is allowed if future realization is more-likely-than-not. The
Company has provided a full valuation allowance for its deferred tax asset
because its realization is not considered more-likely-than-not.
  F-8
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 **Use
of Estimates**
 
 The
preparation of the Company's financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
 **Reclassifications**
 
 We have
reclassified certain prior period amounts to conform to the current period
presentation.
  **Recent
Accounting Pronouncements**
 
 In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of
ARB No.43, Chapter 4." This Statement clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials.
This Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The initial application of SFAS No. 151 will have
no impact on the Company's financial statements.
 
 In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29." This Statement eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect application of SFAS No. 153 to have a material affect on its financial
statements.
 
 In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(SFAS 123R), which replaces SFAS 123 and supercedes APB Opinion No. 25. SFAS
123R 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 proforma disclosures previously permitted under SFAS 123
no longer will be an alternative to financial statement recognition. For the
Company, SFAS 123R is effective for periods beginning after December 15, 2005.
Early application of SFAS 123R is encouraged, but not required. We plan to adopt
SFAS 123R on January 1, 2006 using the modified prospective application method
described in the statement. Under the modified prospective application method,
we will apply the standard to new awards, and to awards modified, repurchased,
or cancelled after the required effective date. Additionally, compensation cost
for the unvested portion of awards outstanding as of the required effective date
will be recognized as compensation expense as the requisite service is rendered
after the required effective date.
 
 We are
evaluating the impact of adopting SFAS 123R and expect that we will not record
substantial non-cash stock compensation expenses. The adoption of SFAS 123R is
not expected to have a significant effect on our financial condition, results of
operations, and cash flows. The future impact of the adoption of SFAS 123R
cannot be predicted at this time because it will depend on levels of share-based
payments granted by us in the future.
  2.
Material Subsequent Events and Contingencies
 
 Effective
January 12, 2005 the Company, EcoIdea s.r.l., Electronic Solar s.r.l., European
Waste Solutions, Ltd. and L&R Energy Company, LLC entered into a contract
which amended and supplemented the Company’s July 16, 2004 agreement relating to
the supply of two MFC 1800 BHP Thermal CombustorsTM for a refuse-derived fuel
project in Cologna Veneta, Italy. Under the amended contract the original
$3,000,000 contract amount payable to Nathaniel was reduced by $900,000 to cover
costs borne by Ecoldea s.r.l. in the project for implementation of modifications
relating to the Thermal CombustorsTM that were agreed to by the Company. An
advance payment of $300,000 of the contract price was paid to the Company at the
time the agreement was signed. In addition, $750,000 of the contract price was
to have been paid within three days of a positive outcome for the acceptance
test of the first Thermal CombustorTM. The amended contract specified a date for
completion and testing of the first Thermal CombustorTM of January 31, 2005. The
remaining $1,050,000 of the contract price was to have been paid within three
days of a positive outcome of the acceptance test of the second Thermal
CombustorTM. The amended contract specified a date for completion and testing of
the second Thermal CombustorTM of February 28, 2005. These completion dates were
subject to an extension of time if conditions necessary to our performance were
not fulfilled by the other parties to the contract. The Company also was to be
reimbursed approximately $275,000 for shipping and handling costs on the date of
a positive outcome of the acceptance test of the second Thermal CombustorTM. In
addition, Nathaniel was to have been paid an additional $80,000 for costs
relating to assistance in the start up of the Thermal CombustorsTM by certain of
the parties within 30 days of the signing of the contract. The specifications
for gasification which have to be met to deem the testing of the Thermal
CombustorsTM successful and the quality and grade of fuel which must be used to
operate the Thermal CombustorsTM, were set forth. The contract price may be
reduced by up to $649,000 if the steam output are from five to eleven percent
lower than the testing specifications. The reductions to the purchase price will
be in increments of $11,000 for each one tenth of one percent between five
percent and the eleven percent deficiency threshold. The Company is acknowledged
to be the owner of all intellectual property and any changes or upgrades to the
intellectual property relating to the Thermal CombustorsTM and grants a non
transferable, royalty free perpetual license to the Company’s intellectual
property to operate and maintain the power plant. The Company will be allowed
access to the power plant to observe the Thermal CombustorsTM and for marketing
and research purposes.
  
 F-9
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 Effective
February 22, 2005, the parties entered into an amendment to the January 12, 2005
agreement. Under the amendment, the date upon which the first and second Thermal
CombustorsTM must be completed and tested was extended from January 31, 2005 and
February 28, 2005, respectively, to June 30, 2005, subject to an extension of
time if conditions necessary to the Company’s performance are not fulfilled by
the other parties to the contract. Upon the signing of the February 22, 2005
amendment, the Company was paid $50,000. The Company was to have been paid an
additional $250,000 on March 15, 2005. This amount remains unpaid. Both these
payments are advances on the contract price.
 
 The
provisions in the contract relating to reductions in the contract price due to
insufficient energy output were revised in the February 22, 2005 contract. In
addition to the $649,000 reduction in the contract purchase price set forth in
the January 12, 2005 contract amendment the contract price may be further
reduced by up to an additional $1,233,350 if the steam output is more than 15%
lower than the guaranteed output. The reductions to the purchase price will be
in increments of $14,510 for each one percent deficiency below the 15%
deficiency threshold. The Company will be paid $40,000 per month to provide
technical assistance for the final start up and testing of the Thermal
CombustorsTM. The remaining terms of the January 12, 2005 agreement continue in
effect.
 
 On April
12, 2005 the Company terminated its October 1, 2004 Consulting Agreement with
CJM Group, Inc. and its relationship with Strong Wilken, Inc. See also Note
10.
 
 On April
14, 2005, Mr. Strain and the Company agreed to restructure loans due Mr. Strain
in the total amount of $4,000,000 which were made during September and October
2003 in the amounts of $1,000,000 each and March 2004 in the amount of
$2,000,000. These loans, without restructuring the payment terms, are payable in
four quarterly principal and interest payments of $1,080,000 each on October 1,
2005 and January 1, April 1 st and July
1 st 2006.
The specific terms and conditions of the restructuring have not been agreed at
this time, however, Mr. Strain has consented to extend the date of the first and
subsequent principal and interest payments beyond January 1, 2006. The Company
expects the restructured payment terms will represent obligations that the
Company will be able to satisfy from future operating and financing cash flows.
See also Note 10.
 
 3.
Recapitalization
 
 Effective
October 3, 2003, a Company change in control occurred as a result of the closing
of a Conversion Agreement between the Company and Richard Strain. Pursuant to
the Conversion Agreement, $10 million dollars of indebtedness of the Company to
Mr. Strain converted into an aggregate of 50,000,000 shares of the Company's
common stock to be issued to NEC Energy, LLC, a designee of Mr. Strain.
 
 4.
Acquisition; Minority Interest
 
 On April
3, 2003 the Company completed the acquisition of the remaining 81.45% Keyes
Helium Company, LLC ("Keyes Helium") from Colorado Interstate Gas/El Paso
("CIG") through its subsidiary Nathaniel Energy Oklahoma Holdings Corporation
("NEC OK"). The Company purchased its initial 18.55% interest in Keyes Helium
Company on August 26, 2002 which is discussed in more detail below in this Note
4. On April 3, 2003 we also acquired the Keyes gathering system and Sturgis gas
plant and compressor station. These facilities are located on a 15 acre site in
Keyes, Oklahoma. These facilities receive and process natural gas, remove liquid
gases and helium and then send the natural gas into a natural gas pipeline. The
Company transferred 49% of the ownership of NEC OK to a principal investor in
consideration of an aggregate of $11,997,476 of debt financing to effectuate the
acquisition. Accordingly, the Company's interest in Keyes Helium Company and the
helium operations is through a 51% ownership of NEC OK that owns 100% of Keyes
Helium Company.
 
 The
following table represents unaudited pro forma income statement for the year
ended December 31, 2003 including the operations of the 2003 acquisitions, as if
the acquisitions were owned for the entire period shown.
 
 For
      the year ended
      December
      31,2003Revenue
    
    $
    9,837,741Net
      income (loss)
    
    $
    (48,295,269
    )Loss
      per share
    
    $
    (1.05)
 
  F-10
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 The 2003
acquisitions were accounted for as a purchase with an aggregate purchase price
of $9,947,215. The acquisitions were funded with cash provided by the issuance
of debt by a related party investor, Richard Strain. The purchase price has been
allocated as follows:
 
 Cash
    
    $
    590,000Receivables
    
    
    545,000Inventory
    
    
    261,000Property
      and Equipment
    
    
    8,746,571Intangible
      assets
    
    
    246,644Other
      assets
    
    
    65,000Payables
    
    
    (507,000
    )Total
    
    $
    9,947,215
 
 5.
Property, Plant and Equipment
 
 Following
is a summary of property, plant and equipment at December 31, 2004 and 2003:
 
 December
      31,2004
    
    
    December
      31,
      2003Machinery
      and equipment
    
    $
    8,283,493
    
    $
    8,915,532Pipeline
    
    
    2,784,743
    
    
    2,755,488Buildings
    
    
    15,607
    
    
    100,000Vehicles
    
    
    78,081
    
    
    251,115Land
    
    
    51,085
    
    
    290,000Furniture,
      fixtures and equipment
    
    
    150,951
    
    
    131,540Improvements
    
    
    68,434
    
    
    200,07011,432,394
    
    
    12,643,745Less
      accumulated depreciation
    
    
    (1,127,566
    )
    
    (980,776
    )Net
      book value
    
    $
    10,304,828
    
    $
    11,662,969
 
 Depreciation
expense recorded in the financial statements was $824,459 and $688,267 for the
year ended December 31, 2004 and 2003, respectively.
 
 6. Notes
Payable
 
 (a) At
December 31, 2004 and 2003, we are obligated under promissory notes payable to
certain individuals with a total face amount of $42,333 and $72,000,
respectively. Interest was payable quarterly at rates of 10-11% until the due
date in September 2001, after which a 15% interest rate went into effect.
 
 (b) At
December 31, 2003 we were obligated under various unsecured demand obligations
with an aggregate outstanding principal balance of $183,250 plus accrued but
unpaid interest. During the year ended December 31, 2004, these demand notes
were settled in exchange for 529,333 shares of common stock.
  (c) At
December 31, 2004, we are obligated to Mr. Richard Strain for $8,892,151 in
loans with an average interest rate of 5.94%. On March 17, 2004, we borrowed
$2,000,000 with an interest rate of 3.49% per year and entered into Promissory
Note II, which provides repayments of $540,000 on each of the following dates:
October 1, 2005, January 1, 2006, April 1, 2006 and July 1, 2006. The
outstanding principal and interest under the Note may be converted at any time,
at Mr. Richard Strain’s election, into common stock. The conversion price of any
or all of the indebtedness is equal 103% of the average closing price of our
common stock for the five trading days prior to the date of the
election.
 
 F-11
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 This
remainder of the indebtedness is memorialized in a promissory note in the
principal amount of $2,000,000 and a loan agreement in the amount of $4,892,151
respectively. The $2,000,000 note represents loans to the Company in 2003 and is
payable in four quarterly principal and interest payments of $540,000 each on
October 1, 2005 and January 1st, April 1st and July 1st 2006. The loan agreement
for the principal amount due to the creditor of $4,892,151 bears interest at the
rate of 8% per year. No payments will be due under this loan agreement until
 March 31,
2007, at which time the principal and accrued interest will be repaid in
quarterly payments of $572,876 through December 31, 2009.
 
 (d) Notes
payable, current portion (excluding note payable - stockholder) consists of the
following components:
 
 December
      31,2004
    
    
    December
      31,
      2003Current
      portion:Installment
      debt
    
    $
    493,802
    
    $
    316,394Promissory
      notes (a)
    
    
    42,333
    
    
    72,000Unsecured
      demand note (b)
    
    
    --
    
    
    18,250Total
      notes payable, current portion
    
    $
    536,135
    
    $
    406,644
 
  The
Company has the following installment debt outstanding at December
31st:
 
 2004
    
    
    20036.50%
      unsecured promissory note, monthly payments of $14,512 principal and
      interest through October 2006
    
    $
    298,442
    
    $
    -0-6.50%
      unsecured promissory note, monthly payments of $20,542 principal and
      interest through December 2006
    
    
    461,135
    
    
    -0-4.50%
      installment note, secured by equipment, monthly payments of $2,531
      principal and interest through September 2007
    
    
    71,816
    
    
    96,14622.56%
      installment obligation, secured by equipment, monthly payments of $1,397
      principal and interest through January 2006
    
    
    18,675
    
    
    29,3673.85%
      promissory note, secured by land, monthly payments of $1,742, principal
      and interest through April 2009 with a final payment of $174,605 due April
      2009
    
    
    227,317
    
    
    -0-14.00%
      installment note, secured by land and equipment, monthly interest only
      payments of $2,567 principal and interest due January 1, 2004
    
    
    -0-
    
    
    220,00010.25%
      installment note, secured by vehicle, monthly payments of $730 principal
      and interest through August 2004
    
    
    -0-
    
    
    6,8881.90%
      installment note, secured by equipment, monthly payments of $707 principal
      and interest through November, 2005
    
    
    7,744
    
    
    16,6828.45%
      installment note, secured by equipment, monthly payments of $454 principal
      and interest through November, 2006
    
    
    14,083
    
    
    18,09710.58%
      installment note, secured by equipment, monthly payments of $3,231
      principal and interest through February, 2005
    
    
    90,715
    
    
    118,2719.00%
      installment note, secured by vehicle, monthly payments of $641 of
      principal and interest through October, 2008
    
    
    24,378
    
    
    -0-9.50%
      installment note, secured by equipment, monthly payments of $1,148
      principal and interest through March, 2004
    
    
    -0-
    
    
    4,4808.45%
      installment note, secured by vehicle, monthly payments of $663 principal
      and interest through November, 2007
    
    
    -0-
    
    
    26,4558.00%
      installment note, secured by vehicle, monthly payments of $308 principal
      and interest through May, 2007
    
    
    8,072
    
    
    10,997Total
      Debt:
    
    $
    1,222,377
    
    $
    547,383Current
      Portion:
    
    
    (493,802
    )
    
    (316,394
    )Long-term
      Portion:
    
    $
    728,575
    
    $
    230,989
  F-12
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
   Maturities
of debt, including notes payable to shareholders, are as follows:
 
  December
      31,
    
    
    Amount2005
    
    $
    1,616,1352006
    
    
    3,389,4892007
    
    
    1,695,3442008
    
    
    1,649,6882009
    
    
    1,806,201Thereafter
    
    
    -0-$
    10,156,857
 
 7. Income
Taxes
 
 The
components of the provision for income taxes are as follows:
 
 For
      the years ended December 31:2004
    
    
    2003Current
      tax expense (benefit)
    
    $
    23,584
    
    $
    --Deferred
      tax (Income)U.S.
      federal
    
    
    --
    
    
    --State
      and local
    
    
    --
    
    
    --Total
      deferred
    
    
    --
    
    
    --Total
      tax provision (benefit)from
      continuing operations
    
    $
    23,584
    
    $
    --
  
 The
actual and expected tax rates are similar for both years.
 
 The
Company's deferred tax assets and liabilities as of December 31, 2004 and 2003
are as follows:
 
 2004
    
    
    2003Deferred
      income tax assets:Due
      to net operating loss carry forwards
    
    $
    6,521,000
    
    $
    4,323,000Due
      to deductible temporary differences
    
    
    (1,546,000
    )
    
    (99,300
    )Less
      valuation allowance
    
    
    (4,975,000
    )
    
    (4,223,900
    )Total
      deferred income tax asset
    
    $
    --
    
    $
    --
 
 As of
December 31, 2004, the Company has approximately $19,102,000 in net operating
loss carry forwards available to offset future taxable income expiring between
2018 and 2024. Approximately $9,800,000 of these losses are limited under the
change in control provisions of Internal Revenue Code Section 382. Losses so
limited are available to offset future taxable income at a rate of approximately
$250,000 per year until their expiration. Also, Nathaniel Energy's majority
owned subsidiary, Nathaniel Energy Oklahoma Holdings Corporation, must file a
tax
 return
separate from the consolidated tax return. Any future undistributed taxable
income from the subsidiary will not offset the loss carry forwards. For these
and other reasons, the Company considers it less likely than not that all net
operating losses and deductible temporary difference will be realized in future
tax years, and has established a valuation allowance equal to the entire
deferred tax asset generated by the losses and deductible temporary
differences.
  F-13
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 During
2003, the company incurred expenses aggregating approximately $45,039,000 which
will not be deductible for federal income tax purposes; these costs have not
been included in the computation of the net operating loss carry forward
amount.
 
 8.
Stockholders' Equity
 
 Preferred
Stock
 
 The
Company has 2,000,000 shares of Preferred Stock, $0.001 par value, authorized
for issuance. As of December 31, 2004, no preferred stock was issued.
 
 Common
Stock
 
 The
Company has 75,000,000 shares of stock $0.001 par value, authorized for
issuance. As of December 31, 2004, 70,698,263 shares of common stock were issued
and outstanding.
 
 Effective
October 3, 2003, a Company change in control occurred as a result of the closing
of a conversion agreement between the Company and Richard Strain. Pursuant to
the conversion agreement, $10 million dollars of indebtedness of Nathaniel
Energy to Mr. Strain converted into an aggregate of 50,000,000 shares of the
Company's common stock issued to NEC Energy, LLC, a designee of Mr. Strain.
 
 Nathaniel
Energy has 75,000,000 shares of common stock authorized for issuance. Prior to
the conversion transaction, the Company had 38,262,664 shares of common stock
issued and outstanding. Accordingly, the Company did not have a sufficient
number of shares of common stock authorized for issuance to issue all of the
shares of common stock in the conversion. The conversion agreement provided that
to the extent that the Company did not have sufficient shares of common stock
authorized to issue all of the shares in the conversion, NEC Energy has the
irrevocable right to the shares that could not be issued. Nathaniel Energy has
issued 30,000,000 shares of common stock to NEC Energy, and NEC Energy has the
irrevocable right to an additional 20,000,000 shares of common stock. In the
conversion agreement, Nathaniel Energy agreed to take all required corporate
action to seek the stockholders' approval to increase the number of authorized
shares to a number which is at least sufficient for the Company to deliver all
of the shares of common stock issuable to NEC Energy pursuant to the conversion
agreement.
 
 Giving
effect to the issuance of all of the shares of common stock under the conversion
agreement, NEC Energy owns 55.5% of the issued and outstanding shares of common
stock of the Company.
 
 In
connection with the conversion, NEC Energy received the right to demand
registration of the resale of the shares at any time after January 3, 2004.
Additionally, NEC Energy was granted piggyback registration rights relating to
certain registration statements which Nathaniel Energy files after January 3,
2004, if any.
 
 As of
March 28 2005, Nathaniel Energy had approximately 1023 stockholders of record.
 
 At
December 31, 2003, the Company had outstanding warrants to purchase 205,882
shares at $0.17 per share which expired unexercised on March 24, 2004.
 
 At
December 31, 2003 there were options to purchase 500,000 shares of common stock
with a cashless exercise right at the rate of $3.00 per share. The number of
shares to be issued upon exercise varies with the market price of the stock. The
options expired unexercised on December 31, 2004.
 
 9. Non
Cash Financing Activities
 
 During
the third quarter of 2003, certain employees who are officers, directors and
stockholders waived accrued compensation aggregating $1,088,459. The employees
agreed that the remaining accrued compensation due them of $864,885 could be
paid, at the option of the Company, either in cash or in shares of common stock.
During the fourth quarter of 2003, the Company paid an aggregate of $340,000 in
cash to two of the employees and issued 289,365 common stock shares in payment
of the remaining accrual to these two employees. A third employee was issued
235,520 common stock shares to pay $235,520 in accrued compensation. Two other
employees were issued 731,865 common stock shares in payment of $314,213 of
accrued wages. Non cash compensation totaling $1,472,495 million was recorded in
the fourth quarter for shares issued to employees in payment of accrued
compensation. The non cash expense was calculated using the fair market value of
the shares on each issuance date. Non cash employee and professional service
expense for the years ended 2004 and 2003 was $-0- and $2,973,745,
respectively. The $2,973,745 non-cash expense in 2003 includes $1,472,495 for
accrued compensation, $356,250 for employee severance and $1,145,000 for
professional services paid to non-employees.
  F-14
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 10.
Related Party Transactions
 
 On
October 1, 2004, the Company entered into a consulting agreement with CJM Group,
Inc., a company affiliated with Corey Morrison, to provide senior management and
consulting services, contract negotiation and deal structure services, and
business and planning services. The agreement has a term of 24 months, unless
terminated by either party, and provides that the consultant receive a
consulting fee of $12,500 monthly for services provided. See Note 2 for
discussion about the termination of this contract.
 
 The
Company acquired three patents two pending U.S. patent application , and two
pending Europena patent applications relating to the Company's ownership of
technology by assignment from Stan Abrams, Nathaniel Energy's chief executive
officer, pursuant to an agreement dated July 7, 1998 and amended in September
2003. Under the assignment agreement, the Company is required, upon written
demand, to reassign the patents and patent applications to Mr. Abrams in the
event both Stan Abrams and Brett Abrams are not employed as officers of the
Company and neither of them is a director, except as a result of termination for
cause, voluntary resignation, death or legal incompetence. Furthermore, the
agreement provides for a reassignment of the technology to Messrs. Abrams in the
event Nathaniel Energy ceases business operations or becomes bankrupt. On June
25, 2004, as a result of Stan Abrams' and Brett Abrams' voluntary retirement and
resignation from the Company, all rights they had in, or to the return of, any
of these patents, under the Amended and Restated Patent Reassignment Agreement
made as of September 30, 2003 but effective as of July 7, 1998 between Stan
Abrams, Brett Abrams, and Nathaniel Energy, or otherwise, expired and were
waived.
 
 The
Company paid certain expenses related to site clean-up on behalf of Ripetouch
Greenhouse LLC, ("Ripetouch Greenhouse", or "RTG") an entity controlled by the
Company's chief executive officer. During the years ended December 31, 2004 and
2003 net payments to RTG were $0 and $33,642, respectively. The balance
receivable from RTG at December 31, 2004 and December 31, 2003 was $0 and
$260,475, respectively. During 2004, the Company wrote off $264,587 due from RTG
and $11,438 due from Stan Abrams, as collection was determined to be
uncertain.
 
 During
the March 2003 quarter, the Company issued 1,066,667 shares valued at $800,000
for corporate marketing and financing services to Alternate Capital LLC, which
at the time of issuance of those shares, was a principal investor in Nathaniel
Energy.
 
 Effective
October 3, 2003 $10 million dollars of Nathaniel Energy indebtedness to Richard
Strain, a principal stockholder, converted into an aggregate of 50,000,000
shares of the Company's common stock issued to NEC Energy, LLC, a designee of
Mr. Strain which is also affiliated with Corey Morrison. Mr. Strain also loaned
the Company $1,000,000 in September 2003 and $1,000,000 in October 2003. On
March 17, 2004, Mr. Strain loaned the Company an additional $2,000,000. At
December 31, 2004 the Company is obligated to Mr. Strain for $8,892,151 million
in loans with a weighted average interest rate of 5.94%. See also Note 2 and
Note 6.
 
 During
the year ended December 31, 2003, the Company paid $750,000 in cash and issued
233,333 common stock shares for corporate marketing and communication services
to Strong Wilken, Inc., an entity affiliated with Corey Morrison. As of and for
the year ended December 31, 2004, an additional $250,000 in marketing and
communication related expenses was accrued to Strong Wilken, Inc., which was
paid during January 2005. See Note 2 for a discussion of the termination of the
Company’s relationship with Strong Wilken, Inc.
 
 11.
Intellectual Property
 
 Nathaniel
Energy owns three U.S. patents, two pending U.S. patent applications and two
patent European applications covering the Thermal CombustorTM technology. These
patents and patent applications are for utility patents directed to devices and
methods of uses. The three U.S. patents expire September 6, 2011, December 4,
2012, and February 4, 2022, respectively. Nathaniel Energy acquired these
patents by assignment from Stan Abrams, Nathaniel Energy's former Chief
Executive of the Company. Under the agreement relating to the patent assignment,
the Company is required, upon written demand, to reassign the patents and patent
applications to Mr. Abrams or his son Brett Abrams in the event both Stan Abrams
and Brett Abrams are not employed as officers of the Company and neither of them
is a director, except as a result of termination for cause, voluntary
resignation, death or legal incompetence. Furthermore, the agreement provides
for a reassignment of the technology to Messrs. Abrams in the event the Company
ceases business operations or becomes bankrupt. On June 25, 2004, as a result of
Stan Abrams' and Brett Abrams' voluntary retirement and resignation from the
Company, all rights they had in, or to the return of, any of the patents, under
the Amended and Restated Patent Reassignment Agreement made as of September 30,
2003 but effective as of July 7, 1998 between Stan Abrams, Brett Abrams, and
Nathaniel Energy, or otherwise, expired and were waived.
 
 12.
Economic Dependency - Major Customers
 
 Air
Products Helium Inc. purchases all of the helium produced from our Keyes helium
plant under contract through 2021, subject to earlier termination in 2008 and
2015 if either party requests a price determination that is not agreed to by the
other party. If the contract is not terminated by either party in 2021, it will
continue unless extended upon two years' advance notice by either party. Should
this contract
 terminate
or expire there are other major companies which have a stated interest in
purchasing the helium.
 
 F-15
 **Nathaniel
Energy Corporation**
 Notes to
Consolidated Financial Statements (Continued)
 During
2004, two customers, representing approximately 37% and 24%, respectively,
accounted for 61% of the Company’s revenue. During 2003, two customers,
representing approximately 37% and 19%, respectively, accounted for 56% of the
Company’s revenue.
  13.
Commitments and Contingencies
 
 **Commitments**
 
 Nathaniel
Energy has an agreement with Regency Gas Services, LLC which requires Nathaniel
Energy to purchase all crude helium production from the Lakin processing plant
until 2021 at which time either party may terminate the agreement. If it is not
terminated at that time, it may be terminated subsequently at any time upon two
years’ advance notice by either party. This contract can be terminated in 2008
and 2015 if either party requests pricing that is not agreed to by the other
party. Crude helium purchases from Regency Gas Services, LLC under this
agreement were approximately, $2,100,000 and $1,400,000 during 2004 and 2003,
respectively.
 
 Nathaniel
Energy has an agreement with a group led by Energy Alliance Company, Inc. (EAC)
that requires EAC to produce and deliver natural gas to Nathaniel Energy
throughout the life of the leases for up to 8,000 Mcf (thousand cubic feet) of
natural gas per day. Nathaniel Energy is entitled to remove for its benefit at a
cost of $0.10 per Mcf, the gas stream delivered to the plant. During 2004 and
2003, Nathaniel Energy recorded costs totaling $128,800 and $70,000,
respectively, under this agreement. Under this agreement, the maximum annual
cost through the life of the EAC leases is $292,000.
 
 On
January 9, 2004 Nathaniel Energy signed a renewable 10 year agreement with Nexus
Energy LLC (an EAC Group member). This agreement provides for the installation
of field gas compression at the Company's Spelunker CDP, which will provide up
to 4,000 Mcf of natural gas per day. Nathaniel Energy is entitled to extract the
helium content for its benefit at a cost of between $0.05 per Mcf to $0.10 per
Mcf based on the percent of helium content in the natural gas. Nexus pays a
gathering fee to Nathaniel Energy of $0.05 per Mcf, in addition to a compression
fee equal to 4% of all the decatherms compressed at the Company's Spelunker CDP.
Under this agreement, the maximum annual cost through the life of the Nexus
leases is approximately $235,000. In 2004, the Company expensed $57,188 for
upgrades to the field gas compression unit related to this
agreement.
 
 During
2004, repairs and improvements to the Helium processing facility were provided
by a customer, Air Products and Chemicals, Inc. and are repayable out of the
sale of Helium. The outstanding balance under this arrangement at December 31,
2004 is $236,626.
 
 **Litigation
and Claims**
 
 The
Company was a defendant in ABM Fabrication and Machining, LLC, vs. Nathaniel
Energy Corporation, Case No. 2002 CV 0094, District Court, County of Douglas,
Colorado. The plaintiff alleged damages of approximately $100,000 for unpaid
labor and materials invoices. Nathaniel Energy settled the claim for $35,000 on
December 19, 2003.
 
 The
Company is subject to a variety of litigation and claims relating to past due
payments for goods and services. The Company is in the process of negotiating
settlement arrangements for these items, and the estimated settlement amounts
are recorded on the books in accounts payable.
 
 14.
Segment Data
 Year
ended December 31, 2004
 
 Helium
      and GasProcessing
    
    
    Fuel
      Processing
    
    
    Alternate
      Energy
    
    
    TotalRevenue
    
    $
    13,475,220
    
    $
    561,573
    
    
    --
    
    $
    14,036,793Significant
      non cash expenses
      -write
      down of inventory
      -impairment
      of assets
      -depreciation
      and amortization
      -loss
      on related party receivable
    
    
    --
      --
      $
      618,285
      11,438
    
    $
    274,000
      1,403,046
      304,177
      264,587
    
    
    --
      --
      --
      --
    
    $
    274,000
      1,403,046
      922,462
      276,025Net
      income (loss)
    
    $
    19,136
    
    $
    (2,057,252
    )
    $
    (3,618,228
    )
    $
    (5,656,344
    )Capital
      expenditures
    
    $
    870,159
    
    $
    64,260
    
    
    --
    
    $
    934,419Total
      assets as of Dec 31, 2004
    
    $
    12,341,403
    
    $
    926,315
    
    $
    1,020,560
    
    $
    14,288,278
  F-16
 Year
ended December 31, 2003
 
 Helium
      and GasProcessing
    
    
    Fuel
      Processing
    
    
    TotalRevenue
    
    $
    7,851,531
    
    $
    573,210
    
    $
    8,424,741Significant
      non cash expenses compensation and professional services
      -depreciation
      and amortization
      -interest
      expense forgiven
    
    
    --
      $
      438,177
      --
    
    $
    2,973,745
      307,261
      488,294
    
    $
    2,973,745
      745,438
      488,294Net
      loss
    
    $
    (24,743
    )
    $
    (48,489,52
    )
    $
    (48,514,269)Capital
      expenditures
    
    $
    124,943
    
    $
    463,398
    
    $
    588,341Acquisition
      of assets
    
    $
    9,703,920
    
    
    --
    
    $
    9,703,920Total
      assets as of Dec 31, 2004
    
    $
    11,763,679
    
    $
    3,840,714
    
    $
    15,604,393
 
 
 For the
year ended December 31, 2003 the alternate energy segment did not generate any
revenue and incurred minimal expenses.
 
 15.
Intangible Assets
 
 For the
year ended December 31, 2004, we capitalized $299,339 of engineering design and
configuration documentation related to our Thermal CombustorTM technology. In
addition, we capitalized $13,410 of related patent application costs.
Engineering design and configuration documentation will be amortized over three
years on a straight line basis beginning on the date that our Thermal
CombustorsTM are accepted by our customer in Italy. Patent application costs are
amortized over ten years on a straight line basis.
 
 During
2003 the Company capitalized website development costs, pursuant to EITF 00-2.
The total costs capitalized were $150,000, which are being amortized over three
years. The company also allocated $246,644 of the Keyes Helium purchase price to
intangible assets during 2003. Intangible assets acquired represent long term
contracts transferred to Nathaniel Energy, which are being amortized over six
years.
 Amortization
expense for the twelve months ended December 31, 2004 and December 31, 2003 was
$98,003 and $57,171, respectively.
 
 16. Lease
Commitments
 
 Nathaniel
Energy leases certain office facilities under non cancelable operating leases
that expire at various dates through 2008. At December 31, 2004, Nathaniel
Energy was obligated for future minimum lease payments under operating leases
that have initial or remaining non-cancelable terms in excess of one year, as
follows:
 
 2005
    
    $
    60,2682006
    
    
    62,0762007
    
    
    63,9382008
    
    
    16,1022009
    
    
    --Total
      minimum lease payments
    
    $
    202,384
 
 Rent
expense for operating leases, including month to month rentals, was $112,416 and
$63,774 for the years ended December 31, 2004 and 2003, respectively.
   F-17
  **SIGNATURES**
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 **Nathaniel
Energy Corporation**
 (Registrant)
 
 By:     
      /s/ George A. Cretecos
      George
      A. Cretecos, Principal Executive
      Officer, Chief
      Operating Officer Principal
      Financial and
      Accounting Officer and Director
 
 
 Date:
April __, 2005
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 
 By:     
      /s/ George A. Cretecos
      George
      A. Cretecos, Principal Executive
      Officer, Chief
      Operating Officer Principal
      Financial and
      Accounting Officer and Director
      
      Date:
      May 2, 2005
      
      
      By:     
      /s/ Russell Gene Bailey
      Russell
      “Gene” Bailey, Vice President
      and
      Director
      
      Date:
      May 2, 2005