**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-KSB**










(Mark
                  one)**x**
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****For
                  the Fiscal Year Ended December 31, 2006****OR****o**
              **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**


(Name
      of
      small business issuer as specified in its charter)





**Delaware**
              (State
                or other jurisdiction ofIncorporation
                or organization)
            
            **84-1572525**
              (I.R.S.
                EmployerIdentification
                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 is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. **o**


Note
      -
      checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those sections.





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**o**
      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. **x**




Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes **o**No **x**





Nathaniel
      Energy's revenues for its most recent fiscal year (2006): $1,149,484





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 27, 2007 was $2,331,455.





The
      number of shares outstanding of each of the issuer's classes of common equity,
      as of March 27, 2007 is 90,731,596 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE: None**









Table
          of Contents


**NATHANIELENERGY
        CORPORATION**
 
 TABLE
        OF
        CONTENTS
 
 **Page**3Forward
                  Looking Statements**PART
                  I**Item
                  1.
              Description
                  of Business
              4Item
                  2.
              Description
                  of Property
              13Item
                  3.
              Legal
                  Proceedings
              13Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              13**PART
                  II**Item
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and
                  Small Business Issuers Purchase of Equity
                  Securities
              14Item
                  6.
              Management's
                  Discussion and Analysis or Plan of
                  Operation
              15Item
                  7.
              Financial
                  Statements
              22Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              22Item
                  8A.
              Controls
                  and Procedures
              22**PART
                  III**Item
                  9
              Directors,
                  Executive Officers, Promoters, Control Persons,
                  and Corporate Governance; Compliance with Section 16(a) of the
                  Exchange
                  Act
              23Item
                  10
              Executive
                  Compensation
              24Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              25Item
                  12
              Certain
                  Relationships and Related Transactions, and
                  Director Independence
              25Item
                  13
              Exhibits
              28Item
                  14
              Principal
                  Accountant Fees and Services
              28Signatures
 
 
  2
 Table
            of Contents
   **FORWARDLOOKING
        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", "continue",
        or
“hope” 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:
 
 ·
            Our ability to raise capital necessary to implement
              our
              business plan. ·
            Our ability to finance and complete planned projects
              and
              facilities upgrades. ·
            Our
                ability to execute our business plan and commercialize the Thermal
                GasifierTM technology, including building Thermal GasifiersTM that meet
                customers' specifications and that meet local regulatory environmental
                and
                permit requirements. ·
            Risks
                related to dependency on a small number of customers. ·
            Our
                ability to satisfy our customers' expectations. ·
            Our
                ability to employ and retain qualified management and employees. ·
            Changes
                in government regulations which are applicable to our business. ·
            The
                availability of a consistent, economically viable, and sustainable
                waste
                stream supply to fuel the Thermal GasifierTM operations. ·
            Changes
                in the demand for our products and services, including the impact
                from
                changes in governmental regulation and funding for alternative energy. ·
            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. ·
            Our
                ability to pay debt service on loans as they come due. ·
            Our
                ability to generate sufficient cash to pay our creditors. ·
            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
 Table
            of Contents
  **Part
        I**
  **Item
        1. Description of Business.**
  *A
        glossary of certain key terms and acronyms used in the Description of Business
        discussion below is contained in this report, beginning on page
        11.*
  **Company
        Vision**
  Nathaniel
        Energy Corporation’s vision is to be an industry leader, innovating, developing,
        commercializing and operating renewable energy and energy-from-waste
        technologies, projects and business models.
  **Company
        Mission**
  Our
        mission is to provide a clean, dependable, cost-competitive energy alternative
        to fossil fuels. Through ongoing research and development of our proprietary
        technologies, Nathaniel Energy is positioning itself to be a leader in the
        energy-from-waste (EfW) and renewable energy markets. Nathaniel Energy plans
        to
        develop projects with government, community, industry and financial partners
        to
        recover available hydrocarbon based energy from materials generally considered
        as waste and destined for disposal. The recovery of energy from waste utilizing
        Nathaniel Energy’s Thermal GasifierTM diverts large volumes of material from
        landfills and other disposal systems while providing clean alternative energy
        comparable to that of fossil fuels.
  Nathaniel
        Energy’s business philosophy is based on a legacy of technological innovation
        grounded in an ethos of energy and environmental stewardship. Nathaniel Energy’s
        Thermal GasifierTM has evolved from original patents dating back to 1973 and the
        Middle East oil embargos. At that time, the Hand brothers designed, built
        and
        operated the first gasifier as a means to heat their greenhouses using wood
        waste, biomass, as fuel rather than oil. Through the years since those original
        patents were issued, that same ethos drives us to continuously improve and
        develop our technology and the ways in which we do business.
  **Company
        Operations**
  *Current
        Operations*
  Nathaniel
        Energy is presently divided into two business segments:
  ·
            renewable
                energy and energy-from-waste (EfW) utilizing our Thermal GasifierTM
                technology, and 
 ·
            tire
                derived fuel processing providing an alternative fuel supply from
                waste
                tires.  Nathaniel
        Energy has been in the tire derived fuel (TDF) processing business since
        1997
        and has operated a 27 acre TDF processing facility in Hutchins, Texas since
        1999. The TDF facility shreds whole passenger tires into 11⁄2 inch and smaller
“chips” for use as fuel in various industrial processes. In 2006, our facility
        processed a total of 15,075 tons, approximately 1,507,524 passenger car tires,
        into 14,168 tons of TDF for sale to industrial customers including cement
        kilns
        and paper processors. Our future plans call for a portion of the TDF produced
        annually to be used to augment and support commercialization of the Thermal
        GasifierTM EfW business.
  *Former
        Helium and Natural Gas Processing Operations*
  Nathaniel
        Energy also owned and operated a helium and gas processing facility in Keyes,
        from April 2003 until we sold these assets and operations to Midstream Energy
        Services, LLC on March 7, 2006. At the closing of the sale, giving effect
        to
        finally determined adjustments, Midstream delivered $16,915,676 to Nathaniel
        on
        account of the purchase price. Upward adjustments to the purchase price in
        the
        amount of $83,893 as part of post-closing determination pursuant to the
        procedures in the Purchase and Sales Agreement were resolved as of August
        2,
        2006. Midstream assumed all the liabilities under the contracts included
        in the
        gas assets being sold that arose after the closing date. At the time of this
        filing, management believes we have successfully resolved any existing disputes
        relating to this transaction and there are currently no issues
        outstanding.
  Following
        settlement with Midstream, Nathaniel used $14,482,171 of the sale proceeds
        to
        satisfy its indebtedness, including accrued interest, to Richard Strain,
        which
        reduced the company’s debt by approximately 89%. (See Part III Item 12 Certain
        Relationships and Related Party Transactions for further discussion about
        the
        transaction with Mr. Strain). In addition, on June 9, 2006, $800,109 of the
        sale
        proceeds was used to retire a line-of-credit secured by Mr. Strain.
  4
 Table
            of Contents
  **Technology**
  Nathaniel
        Energy’s proprietary patented technology, the Thermal GasifierTM, is a two-stage
        gasification system designed to efficiently convert “waste” materials from
        industrial, residential and agricultural sources into clean economical energy
        while exceeding the most stringent Environmental Protection Agency (EPA)
        and
        European Union (EU) emission standards.
  The
        Nathaniel Energy Thermal GasifierTM is a closed, continuous flow, two-stage
        gasification module. The Thermal GasifierTM is designed to efficiently convert
        hydrocarbon feedstock containing solids such as used tires or tire-derived
        fuel
        (TDF), municipal and industrial solid waste streams (MSW) also known as
        refuse-derived-fuel (RDF), municipal sewage sludge solids (MSSS), wood waste,
        and agricultural waste to a synthesis gas comprised primarily of hydrogen,
        carbon monoxide, carbon dioxide and residual ash (approximately 10% by weight
        of
        the feedstock on average) by a process called gasification.
  Most
        of
        these feedstocks require some preparation for use as fuel, such as shredding,
        blending, densifying and pelletizing, to ensure proper gasification. Following
        preparation, the fuel pellets or chips are fed into the Thermal GasifierTM using
        a system of weigh belts and air locks to ensure an accurately metered supply
        of
        fuel is introduced while preventing the introduction of atmospheric air.
        The
        fuel is distributed on a moving belt which passes through a high temperature,
        oxygen starved environment. It is during this stage the solids break down
        into a
        synthesis gas, or SynGas, which is then drawn off to a separate chamber to
        be
        fully oxidized (combusted) at temperatures at or above 3,000° fahrenheit. The
        oxidation process produces tremendous heat, elemental carbon, carbon dioxide
        and
        low levels of carbon monoxide, sulfur dioxide, and nitrogen oxides.
  The
        Thermal GasifierTM gasification process generates ash in two forms. The first,
        bottom ash, is the unburnable solids and possible contaminants remaining
        from
        the fuel, such as the spent carbon, metal, glass, rock and sand. The second,
        fly
        ash, is comprised of small particulates suspended and entrained in the exhaust
        gas stream which are captured and removed using industrial cyclones and filters
        prior to discharge.
  The
        Thermal GasifierTM two-stage gasification and oxidation process is designed to
        efficiently recover the greatest percentage of available energy possible
        while
        generating very small quantities of environmental pollutants. The Thermal
        Gasifier'sTM high temperatures destroy 99.9% of hazardous air pollutants emitted
        from refuse-derived-fuel and tire-derived-fuel including polychlorinated
        biphenyls (PCBs), dioxins, and furans. Most remaining gaseous pollutants
        are
        captured by scrubbers, catalytic reduction, or other pollution control equipment
        with the remaining pollutants falling well below EPA and EU limits.
  The
        Process Control System (PCS), the “brain” of the Thermal GasifierTM, closely
        monitors and modulates all aspects of the gasification and oxidation reactions
        by metering fuel, introduced air and residence time to optimize energy recovery
        efficiency. The PCS automates the Thermal GasifierTM system reducing the manpower
        needed to supervise operation. The PCS features automated self-diagnostics
        and
        corrective action functions which prompt the operator to take a specified
        action
        if a problem occurs beyond the ability of the PCS to correct. In addition,
        the
        PCS’ predictive failure analysis function identifies potential points and modes
        of failure prior to any actual problem so preventative maintenance can be
        done
        before a more costly failure occurs.
  **Environmental
        Testing**
  In
        May
        2000, Bord na Mona Environmental Limited, a Republic of Ireland-based
        environmental management company working independently on behalf of Nathaniel
        Energy, conducted a comprehensive environmental test on the Thermal GasifierTM as
        part of a demonstration in Dundalk, County Louth, Republic of Ireland. The
        test,
        using RDF as fuel, targeted more than 50 chemical species pollutants of concern
        including dioxins, furans, chlorophenols, chlorobenzenes, polycyclic aromatic
        hydrocarbons (PAH) and polychlorinated biphenyls (PCBs). Bord na Mona concluded
        the Thermal GasifierTM met and surpassed existing and, at that time, pending EU
        directive limits for all pollutants of concern. Management believes it
        significant that independent testing verified the efficacy of the Thermal
        GasifierTM and confirmed the technology produces pollutant emissions
        significantly below allowable EU limits. In all cases, pollutants of concern
        were detected at less than 10% of standard with many compounds below the
        technical ability to detect.
  5
 Table
            of Contents
  **Products,
        Byproducts and Services**
  Nathaniel
        Energy provides valuable marketable services and produces or will produce
        numerous marketable products and byproducts through our Thermal GasifierTM
operations and our TDF processing operations.
  *Thermal
        GasifierTM*
  The
        Nathaniel Energy Corporation Thermal GasifierTM is at the core of our business
        plan, anchoring our business philosophy as well as our business development
        model as we build the company toward our goal of becoming a renewable energy
        business leader.
  During
        2006, we continued consultation with the project owners of the energy-from-waste
        plant in Cologna-Ventura, Italy regarding modification and upgrade of the
        two
        Thermal GasifiersTM located at the plant and potential operational changes to
        increase plant output and reliability. These discussions are still ongoing.
        While we did not materially participate in this project during 2006, we have
        continued to use the performance of the two Thermal GasifiersTM as commercial
“proof-of-process” in our ongoing business development activities. We did not
        realize any revenue from this project during 2006.
  In
        addition to utilizing the Thermal GasifiersTM in Cologna-Veneta as commercial
“proof-of-process,” we have used the considerable hands-on engineering and
        operational experience gained during project design, fabrication, construction
        and startup to advance the technology state-of-the-art. 2006 saw dramatic
        advances in the design of the next generation Thermal GasifierTM as we continue
        to increase the energy efficiency and cost-effectiveness of the technology.
        Future production models will be able to use more types of fuel with greater
        variability in quality while still producing useable energy at a greater
        net
        profit.
  The
        Thermal GasifierTM technology is uniquely suited for the renewable energy and
        especially the EfW business segment. Because it is a truly multi-fuel system,
        we
        enjoy tremendous flexibility in its application. In addition, the Thermal
        GasifierTM generates multiple beneficial use products and
        byproducts.
  Products
        include:
  ·
            Heat
                - produced during gasification production, and oxidation/combustion
                of
                synthesis gas. This heat is available for use in heating and cooling
                of
                adjacent buildings or for generation of
                steam. 
 ·
            Electricity
                - generated through addition of gas turbine generator, boiler and
                steam
                turbine generator, or integrated combined cycle generator, to the
                Thermal
                GasifierTM. Electricity is available for use on-site or sale on the
                electrical grid. 
 ·
            Synthesis
                Gas (SynGas) - produced through gasification of hydrocarbon containing
                solids, is a combination of carbon monoxide and hydrogen. SynGas
                may be
                used as a raw material to make liquid transportation fuels through
                a
                variety of processes, as a substitute for natural gas, or to generate
                heat, steam or electricity. In addition, the hydrogencan
                be separated for use in fuel cells or in chemical
                processes.  Byproducts
        include:
  ·
            Carbon
                black - High purity carbon black is produced during gasification
                and
                oxidation/combustion of TDF and/or petroleum coke. Carbon black can
                be
                sold as a high value raw material for tire manufacturing, water
                filtration, electronics manufacturing, production of inks and toners,
                radar-absorbing paints, cosmetics and construction
                materials. 
 ·
            Carbon
                dioxide - produced during gasification and oxidation/combustion of
                hydrocarbon containing feedstock. Carbon dioxide can be used for
                environmental control and augmentation in greenhouses to enhance
                plant
                growth or for any industrial carbonation process. Carbon dioxide
                production from burning of fossil fuels and industrial processes
                has
                potentially been identified as a primary contributor to global warming.
                Processes considered “carbon neutral” or resulting in sequestration of
                produced carbon dioxide will help reduce the additive affects on
                global
                warming and may qualify for tax
                advantages. 
 ·
            Sulfur
                Dioxide - produced during gasification and oxidation/combustion of
                sulfur
                containing fuels. Sulfur dioxide can be used to make gypsum or sulfuric
                acid. 
 ·
            Nitrogen
                - produced during separation of oxygen from atmospheric air prior
                to
                gasification. At sea level, atmospheric air is comprised of approximately
                78% nitrogen, 21% oxygen, less than 0.93% argon and trace quantities
                of
                carbon dioxide and other gases. The nitrogen can be sold for industrial
                or
                cryogenic uses including production of
                fertilizers. 
 ·
            Bottom
                ash - produced during the gasification process, bottom ash is the
                solid
                inert remnant of the spent fuel. Bottom ash can be used as an aggregate
                for concrete, brick and/or road base.  6
 Table
            of Contents
  Marketability
        of the individual products and byproducts depends upon local demand and our
        ability to further process and distribute them at competitive prices. We
        expect
        that these market demands will drive the configuration of the Thermal GasifierTM
in such a way as to maximize project profitability and will vary from location
        to location.
  We
        believe the marketable products and byproducts of the Thermal
        Gasifier TM ideally
        suit us for locations in close proximity to a variety of industrial operations
        such as greenhouses, petroleum refineries, certain pipelines, chemical plants,
        printing plants, industrial parks, and designated “clean energy” generation
        sites. This is especially true for facilities located in climates with
        temperature extremes requiring heating and cooling of adjacent structures
        and
        co-generation of electricity.
  During
        2006 we generated no revenue from the sale of Thermal Gasifiers TM or from
        the sales of any products or byproducts generated by the operation of a Thermal
        Gasifier TM .
  *TDF
        Processing*
  Our
        TDF
        processing operation in Hutchins, Texas provides valuable services to industry,
        government and the local communities while simultaneously producing a marketable
        product. The facility is permitted by the Texas Commission on Environmental
        Quality (TCEQ) as a waste tire storage facility and as a used tire processor
        and
        recycler. We accept used passenger car tires as a waste product from businesses,
        governments, communities, and individuals for a “tipping fee” as a disposal
        charge. This service diverted more than 1,500,000 tires from landfills and
        illegal dumping in the Dallas, Texas area during 2006 alone.
  The
        tires
        are processed immediately upon receipt through a continuous loop shredding
        system designed to reduce the tires to 11⁄2 inch and smaller rubber chips, known
        as tire-derived-fuel (TDF). During this process, much of the steel belting
        from
        the tires is also recovered and may be reused in other industrial applications.
        Following processing, the TDF is temporarily stored on site awaiting
        transportation to the end user. During 2006, we produced 14,168 tons of TDF,
        90%
        of which we sold to Energis, LLC, an alternative fuel buyer for Holcim, Inc.,
        a
        major Dallas area cement producer who uses TDF as an alternative fuel in
        its
        cement kiln.
  During
        2006, we generated $1,114,887 in gross revenue from TDF processing operations
        with $352,499 generated from TDF sales and $762,388 generated from tipping
        fees,
        environmental consulting, cleanup and other sales. Our total cost of revenue
        for
        TDF processing operations during the same period was $1,150,815 resulting
        in a
        net $35,928 or 3.2% operating loss for 2006. TDF processing operations accounted
        for 100% of our total revenue during 2006.
  **Business
        Goal**
  Our
        overarching business goal is to generate the majority of our revenue from
        energy-from-waste (EfW) projects. In support of this goal, we have focused
        the
        majority of our resources on engineering and project development activities
        in
        an effort to continuously improve and fully commercialize the Thermal GasifierTM
technology. Our business objectives include: creating energy infrastructures;
        developing, owning and operating small EfW plants; and licensing the Thermal
        GasifierTM technology to qualified operating companies. In addition, we intend to
        seek out technologies complementary to the Thermal GasifierTM and build strategic
        relationships to further enhance our renewable energy offerings.
  *Development
        of Energy Infrastructures*
  In
        developing energy infrastructures, we look to build long-term business and
        operating relationships with targeted commercial, industrial and financial
        partners and clients. These potential clients have considerable
        hydrocarbon-based waste disposal concerns and corresponding needs for energy
        input in the form of synthesis gas (SynGas), heat, steam, electricity or
        some
        combination of these. For these clients, Nathaniel Energy would develop EfW
        infrastructure on the business’ premises (“inside the fence”) to accept the
        waste material, recover the available hydrocarbon energy and, in turn, provide
        that energy to the client in a useable form as determined by their needs.
        These
        infrastructures can reduce the client’s dependence on fossil fuels or power from
        the local utility and, in some cases, the energy infrastructures can become
        a
        business' self sustaining utility.
  *Ownership
        and Operation of Energy From Waste Plants*
  Nathaniel
        Energy seeks to develop, own and operate small EfW plants independently using
        our resources or in conjunction with joint venture partners. These plants
        will
        serve industrial clients, communities and/or governments and government entities
        in locations facing difficult “waste” disposal challenges and high energy
        costs.
  *Licensing
        of Technology*
  As
        our
        technology and business mature, we intend to license the Thermal GasifierTM
technology to qualified companies, joint venture partners, and distributorships
        for use in EfW applications in national and, in some cases, international
        markets.
  7
 Table
            of Contents
  **Research
        & Development**
  During
        2006, we spent approximately $55,861 for research and development related
        to our
        Thermal GasifierTM technology and approximately $255,427 in engineering salaries
        dedicated to internal product development. During 2005, we spent approximately
        $117,125 for research and development and approximately $150,000 in engineering
        salaries. We are engaged in continuous improvement of the Thermal GasifierTM
technology through advanced engineering design review and are currently
        developing preliminary designs for a dedicated R&D facility. We are
        utilizing our experience gained during development and operation of the Thermal
        GasifierTM project in Italy to undertake “third generation” redesign of the
        Thermal GasifierTM in order to further improve energy recovery and overall
        efficiency.
  **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
        GasifierTM 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.
  We
        also
        have two US patent applications pending. One, filed during 2002, relates
        to
        improvements in our gasifier system which reduces air and water pollutants
        and
        the second, filed in 2004, relates 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 on our
        oxygen-based biomass combustion system.
  **Government
        Approval / Environmental Laws and Regulation**
  Operation
        of a Thermal GasifierTM and a TDF 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,
        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.
  **Markets**
  We
        believe the optimal projects for our Thermal GasifierTM are not large centralized
        power production facilities, but smaller (less than 25 megawatt) distributed
        power production facilities either co-located with the waste generator and
        end
        user of the power, or located within a short distance of a source of fuel
        and
        the end user of the power.
  8
 Table
            of Contents
  **Competition**
  The
        alternative energy industry is evolving rapidly in response to increasing
        concerns about global warming, environmental degradation and the long-term
        security of our of petroleum products supply. The costs of electricity, natural
        gas and transportation fuels have increased dramatically in the last several
        years and there is no indication that prices will abate in the near future.
        Among the established alternative energy technologies are
        incinerators/massburners, gasifiers, plasma arc, retorts and fluidized-bed
        reactors.
  ·
            Incinerators/massburners
                have been widely used to reduce the volume of material going to landfills
                or destroying material too hazardous to landfill. Almost all of these
                technologies convert raw waste streams by burning it in a heated
                air
                stream, with no attempt to upgrade or process the waste into a better
                fuel. Some of the units generate power and have some level of pollution
                control for the exhaust gases. All operate under “grandfathered” air and
                water permits and, without major retrofits or redesigns, there probably
                will be no more built in the United States. 
 ·
            Gasifiers
                heat solid material in an oxygen-starved environment where the gaseous
                components of the solid material are released. These gaseous components,
                or synthesis gas, retain the heat producing qualities of the solid
                material. The synthesis gas is used to heat a boiler for steam, power
                an
                internal combustion engine or power a gas turbine. Gasifiers have
                become
                increasingly attractive as a means to cleanly convert most solid,
                hydrocarbon-based wastes into heat, steam, electricity and liquid
                transportation fuels. Fixed-bed gasifiers are the most common and
                are
                updraft, downdraft, crossdraft and transport types. Equipment selections
                downstream of the gasifier determine the products and co-products
                produced. Most of the earlier models gasified coal, wood waste and
                petroleum coke. Discarded tires, municipal solid waste, sludge and
                agricultural waste are now fuels of opportunity. Currently there
                are more
                than 12 different companies investigating gasifier technology that
                have
                laboratory scale or pilot plant models, and one company with a few
                operating plants that combust the synthesis gas to create heat to
                produce
                steam and electricity. 
 ·
            Plasma-arc
                reactors can convert almost any waste without pretreatment and produce
                heat, steam and synthesis gas. A glassy residual is produced for
                disposal.
                Plasma-arc reactors are more capital intensive than other alternative
                and
                have higher operating and maintenance costs. Disposing of hazardous
                waste
                is the best application for plasma-arc
                reactors. 
 ·
            Retorts
                are vessels in which the solid fuel is placed. The vessel is then
                heated
                until the synthesis gas is released and collected. The vessel is
                cooled,
                the remaining solid debris is removed and the process repeated. Retorts
                are used as a batch process and are not economically, environmentally
                or
                technically competitive. 
 ·
            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 synthesis gas for extraction
                of
                the heat energy. Fluidized-bed reactors are commonly used for coal-fired
                electric generating plants but may not be effective for many types
                of
                waste materials. 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
        compete for energy-from-waste business with different competitors in each
        market
        addressed above. 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 refineries, we compete with the local utility which provides
        traditional electrical power, in addition to alternate power sources such
        as
        solar or wind power.
  9
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  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 a specified target 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.
  **Major
        Customers**
  We
        currently have one major customer for our tire-derived-fuel, Energis, LLC,
        an
        alternative fuel procurement subsidiary wholly owned by Holcim, Ltd. a global
        supplier of cement, aggregates and concrete with a large production facility
        located in Midlothian, Texas. Energis accounted for approximately 90% of
        our
        tire-derived-fuel revenue and approximately 32% of our total revenue for
        the
        year ended December 31, 2006. We entered into a contract with Energis effective
        September 30, 2005. The three year contract with options to renew annually
        thereafter for an additional three years provides that Energis must purchase
        an
        average monthly minimum of 1,500 tons of our tire-derived-fuel. The contract
        establishes a base price for the tire-derived-fuel with a price re-opener
        at the
        end of year two of the agreement. If at the end of the second year the parties
        cannot agree to a re-negotiated price, then Nathaniel has the sole right
        to
        continue supplying Energis at the current contract price. Either party has
        the
        right to terminate the agreement at the end of the initial three year term
        giving the other party 90 days advance notice of such termination. Should
        Nathaniel not be able to supply Energis with the contracted supply of
        tire-derived-fuel under the agreement then Energis has the right to purchase
        material from another third party supplier. Nothing in the agreement prevents
        Energis from purchasing similar material from another third party with the
        exception that Energis must purchase an annual quantity of 18,000 tons per
        year.
  We
        believe that the loss of this customer would not have a material disruption
        to
        our overall sales volume because we believe that we would be able to replace
        the
        customer in a relatively short time, however, we cannot guarantee that we
        will
        be able to replace the contract with a contract whose terms will generate
        revenue equivalent to revenue we currently recognize.
  During
        2006, we did not have any contracted customers for our Thermal GasifierTM
business.
  **Major
        Suppliers**
  *Tire
        Fuel Processing Operation*
  Nathaniel
        believes there is a readily available supply of waste tires for which we
        are
        paid tipping fees and from which we process tire-derived-fuel. We accept
        waste
        tires from many sources and are not dependent on any one source for our
        supply.
  *Thermal
        GasifierTM Business*
  Nathaniel
        believes there is a readily available supply of materials, equipment and
        associated vendors to fabricate, construct and operate our Thermal GasifiersTM in
        an energy-from-waste (EfW) plant. Additionally, we believe the worldwide
        market
        for EfW plants continues to expand as energy costs increase and lessening
        our
        dependency on fossil fuels becomes more critical. Increasing energy costs
        coupled with burgeoning waste generation and fewer landfills provides a growing
        market opportunity for our renewable EfW solutions. We do not believe we
        are
        dependent on any source for our supply.
  **Personnel**
  We
        have
        16 full-time employees, with 8 located at our corporate offices in Englewood,
        Colorado, and 8 at our fuel processing facility in Hutchins, Texas. We
        anticipate that significant personnel additions will be required when we
        conclude Thermal GasifierTM project related contracts and obtain additional
        project funding for the energy infrastructure or small energy-from-waste
        (EfW)
        plant business.
 
 10
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            of Contents
  **Company
        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.
  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. Currently MNS is not engaged in any business.
  From
        1997
        to 2002, Nathaniel Energy's operations were limited to its Tire Derived Fuel
        (TDF) processing facility in Hutchins, TX which sells TDF 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, but effective as of January 1, 2003, Nathaniel Energy acquired
        the remaining 81.45% interest in Keyes Helium Company, LLC from Colorado
        Interstate Gas (CIG) Resources Company through our subsidiary, Nathaniel
        Energy
        Oklahoma Holdings Corporation. Nathaniel Energy transferred all of the stock
        in
        MCNIC to NEOHC. Also on April 3, 2003, NEOHC acquired the Keyes gathering
        system
        and Sturgis gas plant from CIG Field Services and the compressor station
        was
        purchased from Colorado Interstate Gas Company. The Company upgraded and
        operated the helium and gas processing facilities from April 3, 2003 through
        March 7, 2006.
  **Subsidiaries**
  We
        have
        three wholly owned subsidiaries:
  ·
              Cleanergy,
                  Inc. which was formed for the purposes of commercializing and marketing
                  our Thermal GasifierTM; entering into joint venture and licensing
                  agreements and; building and operating small energy-from-waste
                  plants,
 ·
              Nathaniel
                  Energy Oklahoma Holdings Corporation, which sold, on March 7, 2006,
                  all of
                  the interests in Keyes Helium Company, LLC, the Keyes gathering
                  system and
                  Sturgis gas processing plant and compressor station to Midstream.
                  Energy
                  Services, LLC.
  ·
              MNS
                    Eagle Equity Group IV, Inc., which currently has no
                    operations.
  **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, www.nathanielenergy.com.
        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).
  **Glossary
        of Key Terms and Acronyms**
  ***BTU
        (British Thermal Unit)*** *.* ****** One
        BTU
        is a unit of energy defined as the amount of heat required to raise the
        temperature of one pound of water by one degree Fahrenheit. In North America,
        fuels are described using their energy content in terms of BTUs of energy
        per
        pound of material. On average, gasoline contains 20,400 BTU per pound (btu/lb)
        and diesel contains 19,300 btu/lb. Primary fuels for the Thermal GasifierTM
include TDF (15,000 btu/lb) and RDF (8,000 btu/lb).
  11
 Table
            of Contents
  ***Carbon
        Neutral.*** Technologies or processes which utilize the carbon contained in biomass or
        other
        feedstocks produced from plants and trees. Using biomass is not considered
        to
        have an additive affect on atmospheric carbon dioxide concentrations as the
        plants and trees absorb and recycle the carbon through photosynthesis and
        other
        organic growth processes.
  ***Carbon
        Sequestration.*** The
        capture and confinement of carbon from the atmosphere through technological,
        industrial or natural processes as a means of reducing the potential additive
        affect of carbon dioxide on global warming.
  ***Dioxin*** .
        Dioxins
        are among the most toxic substances known to man. Dioxins and other persistent
        organic pollutants (POPs) are subject to the Stockholm Convention obliging
        signatories to take measures to eliminate, where possible, and minimize where
        not possible to eliminate, all sources of dioxin. Dioxins are produced in
        small
        concentrations when organic material is burned in the presence of chlorine,
        whether the chlorine is present as chloride ions or as organochlorine compounds,
        so they are widely produced in many contexts. According to the most recent
        US
        EPA data the major sources of dioxin are:
  ·  Coal
        fired utilities
  ·  Metal
        smelting
  ·  Diesel
        trucks
  ·  Land
        application of sewage sludge
  ·  Burning
        treated wood
  ·  Trash
        burn barrels
  These
        sources together account for nearly 80% of dioxin emissions. Following
        incineration, dioxins can also reform in the atmosphere above the stack as
        the
        exhaust gases cool through a temperature window of 600 to 200°C. The most common
        method of reducing dioxins reforming or forming de novo is through rapid
        (30
        millisecond) quenching of the exhaust gases through that 400°C window.
        Incinerator emissions of dioxins have been reduced by over 90% as a result
        of
        new emissions control requirements. Incineration is now a very minor contributor
        to dioxin emissions.
  ***Municipal
        Sewage Sludge Solids (MSS)*** .
        The
        solids accumulated during treatment of wastewater. MSS contains up to 8,000
        btu/lb of energy on a dried basis and may be blended as a possible fuel for
        the
        Thermal GasifierTM. One primary concern of gasifying MSS is the potential
        presence of heavy metals such as lead, cadmium and arsenic in the MSS and
        the
        potential to vaporize these constituents such that they would become airborne
        contaminants.
  ***Municipal
        Solid Waste (MSW)*** .
        MSW is
        more commonly known as trash or garbage and consists of everyday items such
        as
        product packaging, grass clippings, furniture, clothing, bottles, food scraps,
        newspapers, appliances, paint, and batteries. MSW is processed into refuse
        derived fuel (RDF) as a fuel for the Thermal GasifierTM.
  ***Polychlorinated
        Biphenyls (PCBS)*** *.*  ****** PCBs
        are
        a class of organic chemical compounds which are persistent organic pollutants
        found in many waste streams that research has indicated are likely carcinogens.
        Fu rther, improper or incomplete oxidation of PCBs may result in the formation
        of more toxic species such as dioxins and/or dibenzo furans.
  ***Polycyclic
        Hydrocarbons (PAHs)*** .  PAHs are
        found in tars primarily formed by incomplete combustion of
        hydrocarbon-containing fuels, such as wood, coal, diesel and fats. Some forms
        of
        PAHs are known or suspected carcinogens, and are linked to other health
        problems.
  ***Refuse
        Derived Fuel (RDF)*** .
        A fuel
        produced by processing Municipal Solid Waste (MSW) to remove the inert
        materials, concentrating the hydrocarbon containing components, densifying
        and
        pelletizing into relatively uniform fuel pellets for ease of storage, handling
        and gasification and/or combustion.
  ***SynGas
        (Synthesis Gas)*** .  The name
        given to a gas mixture containing varying amounts of carbon monoxide and
        hydrogen generated by the gasification of a carbon containing fuel to a gaseous
        product with a heating value.
  ***Tire
        Derived Fuel (TDF)*** .  A fuel
        produced by reducing or shredding whole tires to smaller strips, chips, or
        crumbs for use in fueling certain industrial processes including cement kilns,
        paper mills and EfW projects.
  12
 Table
            of Contents
  **Item
        2. Description of Property.**
  We
        own
        approximately 27 acres of property in Hutchins, Texas in a semi-industrial
        region of southern Dallas County. The facility includes a 14 year old 10,000
        square foot partially enclosed processing building for TDF production, a
        2 year
        old 1,200 square foot stand alone business office and a 10 year old 1,800
        square
        foot permanently placed office trailer with employee break room. We believe
        this
        facility to be suitable for our existing used tire reclamation and TDF
        processing operations. In November 2006 we redeemed the Certificate of Deposit
        (CD) securing the mortgage loan for $248,616 and used the proceeds to pay
        the
        balance of $204,972 and retire the loan. This transaction netted the company
        cash flow of $43,644.
  We
        lease
        3,815 square feet of Class A office space for our corporate offices at
        Centennial Airport in Englewood, Colorado and believe this space is adequate
        for
        our current and anticipated needs for the following year.
  **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 .
  13
 Table
            of Contents
 **PART
        II**
 
 **Item
        5. Market for Common Equity, Related Stockholder Matters and Small Business
        Issuers Purchases of Equity Securities.**
 
 Our
        common stock is presently quoted on the Over-the-Counter Bulletin Board (OTCBB)
        under the symbol NECX.OB. 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, 2005:First
                  Quarter
              $
              0.25
              
              $
              0.07Second
                  Quarter
              $
              0.15
              
              $
              0.05Third
                  Quarter
              $
              0.10
              
              $
              0.06Fourth
                  Quarter
              $
              0.08
              
              $
              0.05Fiscal
                  Year Ended December 31, 2006:First
                  Quarter
              $
              0.29
              
              $
              0.06Second
                  Quarter
              $
              0.58
              
              $
              0.08Third
                  Quarter
              $
              0.12
              
              $
              0.06Fourth
                  Quarter
              $
              0.09
              
              $
              0.06
 
 **Stockholders
        of Record**
 
 As
        of
        March 20, 2007, we had approximately 980 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.
 
 14
 Table
            of Contents
  **Securities
        Authorized for Issuance Under Equity Compensation Plans**
 
 **Equity
                  Compensation Plan Information****Plan
                  Category**
              ****
              **Number
                  of Securities**
                **to
                  be issued**
                **upon
                  exercise of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              ****
              **Weighted-average**
                **Exercise
                  price of**
                **Outstanding
                  options,**
                **Warrants
                  and rights**
              ****
              **Number
                  of securities**
                **Remaining
                  available for**
                **Future
                  issuance under**
                **Equity
                  compensation plans**(a)
              
              (b)
              
              (c)Equity
                  compensationPlans
                  approved bySecurity
                  holders1
              
              0
              
              N/A2
              
              20,000,000
                  shares of common stock3
  **Recent
        Sales of Unregistered Securities**
 
 None.
 
 **Item
        6. Management's Discussion and Analysis or Plan of Operation.**
 
 The
        Management’s Discussion and Analysis is intended to help shareholders and other
        readers understand the dynamics of Nathaniel Energy Corporation’s business and
        the key factors underlying its financial results. It explains trends in
        Nathaniel Energy’s financial condition and results of operations for the year
        ended December 31, 2006 compared with the operating results for the year
        ended
        December 31, 2005.
  1.
        2005 Equity Compensation Plan
 2.
        No options, warrants, restricted stock or other
        rights have been granted or issued under the plan.  3. Shares may be issued directly
        as a restricted stock grant or upon
        exercise of options which may be granted under the
        plan.




15
 Table
            of Contents
  **Environmental
        Liability**
 
 The
        Company has approximately 60,000 tons of whole tires, partially shredded
        tires,
        tire chips and process waste stored onsite at the Hutchins TDF processing
        facility. The waste material consists primarily of steel belting wire with
        attached tire rubber and will be disposed of either in a land reclamation
        project using tires (LRPUT) now under negotiation, or in a permitted landfill.
        In the past, management has considered the piles of tires and tire shreds
        on the
        facility an asset to be reclaimed and sold to an end user. However, in order
        to
        reclaim the material for resale, we would need to install additional equipment
        to screen the material for potential contaminants in the piles such as rocks,
        pieces of metal and concrete. Management believes we could potentially receive
        more than double our current processing capacity of new whole tires for which
        we
        would receive a tipping fee. In addition, the BTU value is somewhat degraded
        by
        oxidation and weathering of the tires and tire chips stored in the piles
        onsite.
        We have chosen not to utilize this whole tire and tire chip inventory as
        feedstock for processing due to the economic benefit of receiving new whole
        tires.
 
 While
        management considers the piles a potential asset, they also represent a
        potential liability if the company were to fail. In such a case, we would
        be
        required to restore the site beginning with transporting the material to
        a
        disposal site (LRPUT or landfill). There are an estimated 60,000 tons of
        tires
        and tire shreds on site; at $25.00 per ton, the total cost of disposal is
        approximately $1,500,000.  We
        are
        currently pursuing less costly alternatives to dispose of this material,
        including utilizing a quarry as part of a land reclamation project using
        tires
        (LRPUT) located within twelve miles of the Hutchins facility. We believe
        the minimum cost of disposing of this material is $150,000, and we have accrued
        that amount on our statement of operations during the twelve months ended
        December 31, 2006.
 
 **Results
        of Operations**
 
 **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 GasifierTM technology: 
creating energy infrastructures, building, owning and operating small
        waste-to-energy plants and licensing. The tire fuel processing operation
        generated 97% and 88% of revenue from continuing operations, or $1,114,887
        and
        $609,428 during 2006 and 2005, respectively. We recognized no revenue from
        our
        Thermal GasifierTM business segment during 2006. Our long term goal is to produce
        the majority of our revenue and cash flow from the commercialization of our
        Thermal GasifierTM 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 GasifierTM to produce
        thermal and electrical energy and a facility using waste tires to produce
        electricity that would be sold on the national electric grid.
 
 16
 Table
            of Contents
  We
        enter
        2006 with a patented proprietary technology deployed in a commercial
        application.  Our current year mission is to contract and initiate
        implementation as a partner or joint venture member, commercial operations
        utilizing our Thermal GasifierTM technology.
 
 At
        the
        same time, we are developing our internal resources, business alliances and
        advancing our business development activities to secure “inside the fence”
energy infrastructure and small waste-to-energy facility opportunities that
        utilize our Thermal GasifierTM technology. Additionally, we will seek project
        funding in some cases with joint venture partners 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
        plan
        to continue to improve operations at our tire fuel processing facility in
        Hutchins, Texas during 2007. 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. Our $1,100,000 of capital improvements to the facility
        in 2005 resulted in an increase in the number of waste tires we accept,
        increased tipping fee revenue, and increased revenue from the sale of
        tire-derived-fuel we produce. During the first half of 2005, the tire fuel
        processing facility’s ability to increase revenue and generate operating cash
        flows was hindered by the generally poor quality of the existing equipment,
        requiring constant repair and maintenance due to the age of the equipment
        and
        the resulting low pricing on tire-derived-fuel produced. The addition of
        new
        equipment combined with existing equipment and certain facility improvements
        have resulted in signing new contracts for the acceptance and disposal of
        waste
        tires, thereby increasing our tipping fee revenues. The new equipment has
        improved the quality of the tire-derived fuel we produce and sell, resulting
        in
        higher pricing for the tire-derived-fuel used as an alternate fuel. Furthermore,
        the facility improvements have allowed us to increase the volume of the
        tire-derived-fuel produced.
 
 **Operating
        results 2006 compared to 2005**
 
 *Revenue*
 
 For
        the
        year ended December 31, 2006, revenue from continuing operations increased
        to
        $1,149,484 compared to $689,428 during the twelve months ended December 31,
        2005, an increase of $460,056 or approximately 67%. The increase was due
        to the
        addition of new shredding equipment at the Hutchins, TX tire processing facility
        at the end of 2005. The addition of this equipment resulted in the facility
        being able to accept additional whole tires and process those tire into tire
        derived fuel (TDF) for sale to end users. Revenue from the discontinued
        operations segment consisted of management fees for asset transition agreed
        to
        by the parties to the purchase and sale agreement.
 
 *Cost
        of Goods Sold*
 
 Cost
        of
        goods sold was $1,270,494 for the twelve months ended December 31, 2006,
        compared to $839,398 during the twelve months ended December 31, 2005, an
        increase of $431,096 or 51%. The increase was primarily due to increased
        volume
        and operating expenses related to the new shredding equipment installed in
        Hutchins, TX.
 
 *Sales,
        General, and Administrative Expenses*
 
 Sales,
        General, and Administrative expenses were $1,722,298 for the twelve months
        ended
        December 31, 2006, compared to $1,602,352 for the twelve months ended December
        31, 2005, an increase of $119,946 or approximately 8%. This increase was
        due to
        the installation of new tire shredding equipment at the Hutchins, TX tire
        processing facility at the end of 2005. This new equipment operated reliably
        throughout 2006 resulting in a production increase and corresponding increase
        in
        revenues from both tipping fees and sales of TDF. The primary components
        of
        sales, general, and administrative expenses during the current year were
        payroll
        and related expenses of $920,348; legal and accounting fees of $382,211;
        insurance expenses of $131,514; facilities and related expenses of $108,436,
        and
        outside service expenses of $60,507.
 
 17
 Table
            of Contents
  *Research
        and Development Expense*
 
 Research
        and development expense totaled $55,861 for the twelve months ended December
        31,
        2006, compared to $117,125 during the twelve months ended December 31, 2005,
        a
        decrease of $61,264 or approximately 52%. The decrease is due to the company
        undertaking redesign of the Thermal GasifierTM initially requiring less
        engineering contract support thereby temporarily reducing R&D
        expenses.
 
 *Interest
        expense*
 
 Interest
        expense, net of interest income, was $137,389 during the twelve months ended
        December 31, 2006, compared to $326,632 during the twelve months ended December
        31, 2005. This decrease was due to a reduction in average outstanding borrowings
        from 2005 to 2006, as a result of increased revenue and cash flow for the
        company during 2006.
 
 *Gain
        on the Disposal of Equipment*
 
 Income
        on
        the disposal of equipment was $4,175 during the twelve months ended December
        31,
        2006 compared to $1,095 during the twelve months ended December 31, 2005.
        The
        increase was due to liquidation of non-productive assets and
        equipment.
 
 *Gain
        on Settlement of Liabilities*
 
 During
        the twelve months ended December 31, 2006, the Company reached a settlement
        of
        certain liabilities which resulted in a gain of $34,666, compared to $141,889
        during the twelve months ended December 31, 2005.
 
 *Income
        Tax Expense (Benefit)*
 
 Income
        taxes expense was $ 12,000 for the twelve months ended December 31, 2006,
        compared to a tax benefit of ($759,000) for the twelve months ended December
        31,
        2005. The increase is due to an income tax benefit recognized in 2005 from
        the
        reassessment of the Company’s ability to utilize net operating losses to offset
        the expected gain on the sale of the Company’s helium and gas processing
        facilities and assets in March 2006. During the twelve months ended December
        31,
        2006, this benefit was used, and the gain on disposal of discontinued operations
        of $6,119,673 is presented net of income tax expense of $759,000.
 
 *Loss
        from Continuing Operations*
 
 For
        the
        reasons stated above, the loss from continuing operations before taxes was
        $2,009,717, or $0.02 per basic and diluted share, for the year ended December
        31, 2006, compared to $1,294,095, or $0.02 per basic and diluted share, for
        the
        year ended December 31, 2005.
 
 *Income
        (Loss) from Discontinued Operations*
 
 Income
        (loss) from discontinued operations was $193,428 and $1,055,611 for the years
        ended December 31, 2006 and 2005, respectively, a decrease of $862,183 or
        approximately 82%. The decrease was due to less than a full year’s activity in
        2007, as the company’s helium and gas processing facilities and assets were sold
        to Midstream Energy Services on March 7, 2006.
 
 *Gain
        on the Sale of Assets- Discontinued Operations*
 
 Gain
        on
        the sale of assets was $6,119,673 (net of income tax expense of $759,000)
        for
        the year ended December 31, 2006, and it is comprised of the sales of the
        company’s helium and gas processing facilities and assets which were sold to
        Midstream Energy Services on March 7, 2006.
 
 18
 Table
            of Contents
  *Net
        Income (Loss)*
 
 For
        the
        reasons stated above, net income (loss) for the year ended December 31, 2006
        was
        $4,303,384, or $0.05 per basic and diluted share, compared with the net income
        (loss) of ($238,484), or ($0.01) per basic and diluted share, for the year
        ended
        December 31, 2005.
  **Liquidity
        and Capital Resources**
 
 As
        of
        December 31, 2006, we have a negative working capital of $776,514. The company’s
        negative working capital balance is due primarily to reduced revenues following
        the sale of the helium and gas processing facilities and assets combined
        with
        increases in Thermal GasifierTM engineering design and business development
        activity expenses.
 
 On
        March
        7, 2006, we closed the Purchase and Sale Agreement with Midstream relating
        to
        the sale of the helium and gas processing facilities and assets and received
        $16,915,676. The company utilized $14,482,171 of the proceeds to repay
        stockholder notes payable and accrued interest through March 7, 2006 and
        retained $2,433,505 for use as operating capital.
 
 For
        the
        period ended December 31, 2006, net cash used by operating activities of
        $1,226,589 consists primarily of the loss from continuing operations of
        $1,889,169, offset by changes in working capital items, primarily income
        tax
        expense of $771,000, a decrease in prepaid expenses of $171,661, and an increase
        in accounts payable of $614,380. Net cash provided by investing activities
        of
        $14,718,920 is primarily due to the cash flows from discontinued operations
        of
        $15,645,759, which includes the proceeds from the sale of helium
        assets.
 
 We
        had a
        cash balance of $257,868 at December 31, 2006 which will be used to fund
        our
        operations, pay current debts, and partially fund the development of future
        Thermal Gasifier TM projects. We expect that our current cash on hand and
        revenues will be sufficient to sustain our current operations for three months.
        The company will need to secure several million dollars of investment capital
        within the next three to four months in order to continue development of
        the
        next generation Thermal GasifierTM and fund ongoing operations.
 
 The
        independent auditors report on our December 31, 2006 financial statements
        states
        that our recurring losses raise substantial doubts about our ability to continue
        as a going concern.
 
 **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.
  19
 Table
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  *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.
  **Off-Balance
        Sheet Arrangements**
 
 We
        have
        no off-balance sheet arrangements that have or are reasonable likely to have
        a
        current or future effect on our financial condition, changes in financial
        condition, revenues, or expenses, results of operation, liquidity, capital
        expenditures, or capital resources that is material to investors.
 
 **Inflation**
 
 In
        the
        opinion of management, inflation has not had a material effect on the Company’s
        financial condition or results of its operations.
 
 **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.
 
 *We
        have a working capital deficit and our business model depends on obtaining
        several million dollars in funding.*
 
 Nathaniel
        currently has a working capital deficit. We expect that our current cash
        on hand
        and revenues we expect to generate at current levels will be sufficient to
        sustain our operations for three months. We will require several million
        dollars
        in capital investments to further develop our Thermal GasifierTM business.
        Capital investments could be in the form of debt, equity, government grants
        or
        guaranteed loans to fund our business in general or a particular project.
        We
        currently have an agreement with Bailey-Jamar, LLC, an affiliate of our Chief
        Executive Officer Brad Bailey, to provide the Company $7,500,000 in equity
        capital through a joint venture with an equity partner. We are also seeking
        other capital financing project financing opportunities. There can be no
        assurance that we will obtain the funding under the Bailey-Jamar contract,
        or
        any additional or alternative funding needed to develop this business segment.
        We cannot assure that any funds raised for a particular project will be
        sufficient to complete the project.
 
 *Our
        ability to commercialize our Thermal GasifierTM technology is dependent on
        fabricating and successfully testing a Thermal GasifierTM unit.*
 
 Although
        we have tested our Thermal GasifierTM technology in a limited manner, we will
        have to successfully test a Thermal GasifierTM unit at full operational capacity
        to enable us to commercialize and market our Thermal GasifierTM technology,
        develop projects and obtain funding for projects. During 2006, we undertook
        to
        redesign the Thermal GasifierTM technology to further improve energy recovery and
        operational efficiency utilizing the experience gained in development and
        operation of the Cologna-Veneta energy-from-waste project. We will require
        significant funding in order to complete the engineering specifications,
        fabricate a demonstration Thermal GasifierTM unit, and successfully test it at
        full operational capacity.
 
 20
 Table
            of Contents
  *Revenue
        and gross margin growth in our tire fuel processing operation is dependent
        on
        successful equipment maintenance, repair and upgrades.*
 
 Future
        revenue and gross margin increases in our tire fuel processing operation
        are
        dependent on continuous equipment maintenance, repairs and upgrades. Our
        business plan contemplates continuing to improve our tire processing operations
        based on new equipment additions as waste tire volumes increase, repairing
        and
        maintaining existing equipment and increasing our workforce. New equipment
        purchases, repair of existing equipment and increasing our workforce will
        require additional funding and is dependent upon us obtaining additional
        waste
        tire supply contracts and contracts for sale and delivery of our
        tire-derived-fuel. There is no assurance that we will be successful in obtaining
        needed funding and signing such contracts.
 
 *We
        depend on a small number of large customers.*
 
 Our
        top
        customer accounted for 32% of 2006 revenue. Although we believe we could
        replace
        this customer if lost, if we do not maintain positive relationships with
        this
        customer, this customer changes their business strategy, or their financial
        position deteriorates, our revenue and operating results could be materially
        and
        negatively impacted.
 
 *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.
  *We
        have accumulated a potential cleanup liability associated with tire-derived-fuel
        processing operations.*
 
 Should
        operating conditions relating to our tire-derived-fuel processing operations
        substantially deteriorate, we could be required by the Texas Commission on
        Environmental Quality (TCEQ) to remove the existing whole tire, partially
        shredded tire and tire chip inventory piles from the Hutchins, TX facility.
        The
        projected cost of full cleanup of the Hutchins facility ranges from $150,000
        to
        $1,500,000.
 
 *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:
 
 develop
            equipment that meets changing customer needs;
        identify
            and effectively market alternative solutions to a diverse set of customers;
        enhance
            and protect the applications of our patented technology;
        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.
 
 21
 Table
            of Contents
  *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.
        We are committed to full regulatory compliance and high standards of corporate
        governance and we expect legal, accounting and professional fees to account
        for
        a substantial percentage of our operating expenses during 2007. 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.
 
 *One
        stockholder beneficially owns over 60% of outstanding shares and control
        a vote
        of stockholders.*
 
 One
        stockholder, Richard Strain, beneficially owns over 60% of outstanding shares.
        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.
  **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.**
 
 None.
 
 **Item
        8A. Controls and Procedures**
 
 As
        of the
        end of the period covered by this report, the company conducted an evaluation,
        under the supervision and with the participation of the Chief Executive Officer
        and principal financial officer, of the company's disclosure controls and
        procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
        Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer
        and
        principal financial officer concluded that the company's disclosure controls
        and
        procedures are effective to ensure that information required to be disclosed
        by
        the company in reports that it files or submits under the Exchange Act is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms.
 
 The
        company's disclosure controls and procedures include, among other things,
        controls and procedures designed to ensure that information required to be
        disclosed by the company in the reports that it files or submits under the
        Exchange Act is accumulated and communicated to the company's management,
        including its Chief Executive Officer and principal financial officer, to
        allow
        timely decisions regarding required disclosure.
 
 There
        was
        no change in the company's internal control over financial reporting during
        the
        company's most recently completed fiscal quarter that has materially affected,
        or is reasonably likely to materially affect, the company's internal control
        over financial reporting.
 
 22
 Table
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  **PART
        III**
 
 **Item9.
        Directors, Executive Officers Promoters, Control Persons
        and Corporate Governance; compliance with Section 16(a) of the Exchange Act.**
 
 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 Energy**Brad
                  E. Bailey
              
              45
              
              Chief
                  Executive OfficerRussell
                  "Gene" Bailey
              
              67
              
              Vice
                  President and SecretaryKaren
                  Smythe*
              
              45
              
              DirectorMichael
                  Burdis*
              
              54
              
              Director
 
 *
        Directors are also named executive officers 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**
 
 Brad
        E.
        Bailey has served as our Chief Executive Officer since October 2006. After
        graduation from the University of Colorado in 1984, Mr. Bailey served as
        an
        officer in the United States Marine Corps leading as many as 240 Marines
        in
        mechanized and light armored reconnaissance operations until 1989. Following
        his
        military service, Mr. Bailey began a management consulting career in support
        of
        various organizations within the Department of Energy and Department of Defense.
        From 1991 through 2002, Mr. Bailey worked for Argonne National Laboratory,
        URS
        and Booz Allen Hamilton as a management consultant to Air Force Space Command
        and Pacific Air Forces Command on pollution prevention and environmental
        compliance and restoration issues at bases in Alaska, California, Colorado,
        Hawaii, Massachusetts, Montana, New Hampshire, North Dakota, Texas, Wyoming
        and
        in Sondrestrom and Thule, Greenland. From May 2002 through January 2003,
        Mr.
        Bailey served as a facility manager for Nathaniel Energy, and was responsible
        for the management of the company’s tire processing facility in Hutchins, Texas.
        Since January 2003, Mr. Bailey has been, and continues to be a member and
        the
        Executive Vice President of Bailey-Jamar, LLC, a business development company
        working with emerging renewable energy and environmental technology businesses
        and individual investors to develop innovative renewable energy and
        environmental projects. Mr. Bailey earned a B.A. degree in pre-law political
        science and environmental studies in 1984 from the University of Colorado.
        Between 1985 and 1987, while serving in the Marines, Mr. Bailey attained
        the
        rank of captain and completed a year-and-a-half of graduate studies in safety
        and systems management at the University of Southern California.
 
 Russell
        "Gene" Bailey has served as our Vice President since 1998 and served as a
        director from 2000 through March 2006. Mr. Bailey brings 36 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.
 
 Karen
        Smythe has served as a director since June 2005. Ms. Smythe is a Vice-President
        of C.B. Strain & Son, Inc., a mechanical contracting company, a position she
        has held since 1998. She was Vice-President of Marketing for The Dannon Company,
        a division of the Danone Group, from 1997 to 1998. Before that, Ms. Smythe
        held
        various other positions. She received a B.A. from Vassar College and an M.B.A.
        from the University of Virginia, Colgate Darden Graduate School of
        Business.
 
 Michael
        Burdis has served as a director since March, 2006. Mr. Burdis is President
        of
        James L. Taylor Manufacturing Company, a specialty equipment manufacturer,
        a
        position he has held since 1993. He has held various positions with this
        company
        including; Sales Manager, Factory Manager, Shop Forman, Regional Sales Manager
        and Salesman going back to 1978, Mr. Burdis Holds a BS in Civil Engineering
        from
        Cornell University and an MBA from Duke University.
 
 23
 Table
            of Contents
  **Family
        Relationships**
 
 Brad
        E.
        Bailey is the son of Russell “Gene” Bailey. Karen is the daughter of Richard
        Strain, our largest beneficial stockholder. There are no other family
        relationships among any of our executive officers and directors.
 
 **Committees**
 
 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,
        one
        of whom is 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. The Company does not have a nominating
        committee.
 
 **Section
        16(a) Beneficial Ownership Reporting Requirements**
 
 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.
 
 Based
        solely upon a review of Forms 3 and 4 furnished to the Company during the
        2006
        fiscal year and written representations received by the Company that no Form
        5
        is required for the 2006 fiscal year, no reporting person failed to file,
        on a
        timely basis, reports required by Section 16(a) of the Securities and Exchange
        Act of 1934.
  **Code
        of Ethics**
 
 Nathaniel
        has adopted the Nathaniel Energy Corporation Code of Business Conduct and
        Ethics
        for Officers (Vice President and Senior) and Directors that applies to the
        Company’s Chief Executive Officer, Vice President of Finance (Principal
        accounting officer), among others. Nathaniel has also adopted the Nathaniel
        Energy Corporation Code of Business Conduct and Ethics for Employees and
        Officers (other than Vice President and Senior).
 
 Nathaniel’s
        Code of Business Conduct and Ethics for Officers (Vice President and Senior)
        is
        posted on the company’s website at: www.nathanielenergy.com
 
 Nathaniel
        will provide to any person without charge, a copy of its Code of Business
        Conduct and Ethics for Officers (Vice President and Senior) upon written
        request
        to: Nathaniel Energy Corporation, 8001 South InterPort Boulevard, Suite 260,
        Englewood, Colorado, Attention: Code of Conduct and Ethics Request.
 
 **Item10.
        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.
 
 **Summary
                  Compensation Table****Name
                  and Principal Position**
              ****
              **Year**
              ****
              **Salary**
              ****
              **Bonus**
              ****
              **All
                  Other Compensation**
              ****
              **Total**Brad
                  E. Bailey
                
                Chief
                  Executive Officer1
              
              20061
              
              $ 
                  22,500
              
              -
              
              -
              
              $ 
                  22,500George
                  A. Cretecos
                
                Chief
                  Executive Officer2
              
              20062
                
                2005
                
                2004
              
              $154,999
                
                $128,605
                
                $ 
                  61,606
              
              -
                
                -
                
                -
              
              $2,993.143
              
              $157,999
                
                $128,605
                
                $ 
                  66,606Timothy
                  Peach
                
                Acting
                  Chief Executive Officer4
                
                Chief
                  Financial Officer, Treasurer5
              
              20064
                
                2005
                
                20045
              
              $152,557
                
                $117,123
                
                $ 
                  17,972
              
              -
                
                -
                
                -
              
              -
                
                -
                
                -
              
              $152,557
                
                $117,123
                
                $ 
                  17,972
  No
        executive officer named in the table above has any unexercised or unearned
        options, unvested stock amounts or equity incentive plan awards.
 
 **Employment
        Contracts and Termination of Employment, and Change-in-Control Arrangements**
 
 Nathaniel
        has an at-will employment agreement with our Chief Executive Officer, Brad
        E.
        Bailey. The agreement provides for, among other things, a base salary of
        $130,000.00 per annum with standard employee benefits, and includes covenants
        covering non-solicitation of employees and other persons who have relationships
        with the company, disclosure of discoveries to the company, and confidential
        treatment of certain information and trade secrets.
 
 Nathaniel
        did not pay any compensation to its directors in 2006, except for George
        Cretecos who received compensation solely in his capacity of Chief Executive
        Officer of the company, which is reflected in the summary compensation table
        above.
 
 Nathaniel
        does not have any compensation arrangements with its directors. In the future
        Nathaniel may institute director compensation arrangements, however, none
        are
        currently contemplated.
 
 1 Mr.
          Bailey was appointed Chief Executive Officer October 16, 2006.
 2 Mr.
          Cretecos resigned as Chief Executive Officer and as an employee of the
          company
          September 25, 2006.
 3 Represents
          automobile lease payments.
 4 Mr.
          Peach was appointed Acting Chief Executive Officer on September 25, 2006.
          He
          subsequently resigned as an officer and employee of the company November
          29,
          2006.
 5 Mr.
          Peach joined the company in October 2004.
   24
 Table
            of Contents
 
 **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 20, 2007 regarding
        the
        beneficial ownership of the Company's shares of common stock by:
 
 ·  each
        person who we believe to be the beneficial owner of more than five percent
        (5%)
        of outstanding shares of common stock,
 
 ·  by
        each
        current director,
 
 ·  by
        each
        named executive officer, and
  ·  by
        all
        current executive officers and directors of the group:
   **Name
                and Address of Beneficial
                Owner**
              **Amount
                  and Value****of**
                **Beneficial
                  Ownership**
              
              **Percentage**
                **of Class**Richard
                  Strain
                417
                  Manchester Road
                Poughkeepsie,
                  New York 12603
              55,618,333
              (1)
              61.30
                  %Brad
                  E. Bailey(2)
              10,875
              
              *Karen
                  Smythe
                417
                  Manchester Road
                Poughkeepsie,
                  New York 12603
              500,000
              
              *Michael
                  Burdis
                159
                  Malone Road
                Salt
                  Point, New York 12578
              NoneAll
                  directors and executive officers as a group (4 persons)(3)
                  (4)
              882,957
              
              *
  *            Less
        than 1%
 (1)
              Information
                  based upon the records of Nathaniel Energy’s transfer agent and
                  information provided to company by Mr.
                  Strain.
 (2)
              The
                  address of this person is 8001 South InterPort Blvd., Suite 260,
                  Englewood, Colorado 80112.
 (3)
              Includes
                  166,200 shares of common stock held by R. E. “Gene” Bailey, and 205,882
                  shares of common stock held by Gene Bailey’s
                  wife.
 (4)
              Addresses
                  for Ms. Smythe and Mr. Burdis are as set forth under their respective
                  names. Address for theother
                  unnamed executive officers is 8001 South InterPort Blvd., Suite
                  260,
                  Englewood, Colorado 80112.
  **Securities
        Authorized for Issuance Under Equity Compensation Plans**
 
 Nathaniel
        has adopted its 2005 Equity Participation Plan, which was approved by its
        stockholders. There are 20,000,000 shares of common stock available for issuance
        under this plan. No shares of common stock, or securities, options or rights
        exercisable in the common stock have been granted or issued under this plan.
        See
        Part I Item 5 for further disclosure about this plan.
 
 **Item12.
        Certain Relationships and Related Transactions, and
        Director Independence.**
 
 *Transactions
        with related persons, promoters and certain control persons*.
 
 On
        July
        7, 2005, Mr. Strain guaranteed up to $500,000 of third party debt incurred
        by us
        for purposes of improving our operations at our Hutchins, Texas tire processing
        facility. Mr. Strain secured this guarantee by posting a $500,000 letter
        of
        credit in favor of our institutional lender. On September 13, 2005, Mr. Strain
        guaranteed up to an additional $500,000 of third party debt incurred by us
        for
        purposes of settling a dispute between Nathaniel and Merrick & Company who
        had provided installation and start up services for us on our Thermal GasifierTM
Project in Cologna Veneta, Italy. To secure this guarantee, Mr. Strain increased
        the supporting letter of credit posted by him to $1,000,000. In June 2006,
        Mr.
        Strain requested the third party debt be settled in order that he might withdraw
        his letter of credit. On June 9, 2006 we retired the outstanding principal
        in
        the amount of $790,000 plus interest and bank charges of $10,109 and Mr.
        Strain
        subsequently withdrew the letter of credit.
  On
        March
        7, 2006, Nathaniel paid Richard Strain, the beneficial holder of 61.30% of
        the
        company’s outstanding common stock, $14,482,171 in satisfaction of indebtedness
        owed by the company to Mr. Strain, inclusive of $13,128,361 in principal
        remaining after conversion of 10,000,000 of indebtedness into 50,000,000
        shares
        of common stock in 2003 and 2005 pursuant to an October 3, 2003 Conversion
        Agreement, and $1,353,801 of accrued interest on the debt.
  25
 Table
            of Contents
 The
        indebtedness from the Company to Mr. Strain arose from
 loans
              by Mr. Strain to the Company which were consolidated and restated in
              the
              following three promissory notes
        $2,000,000
            promissory note dated October 1, 2003 bearing interestat
            3.33% annually,
        2,000,000
            promissory note dated March 17, 2004 bearing interestat
            3.49% annually, and
        4,892,151
            promissory note dated October 3, 2003 bearing interestof
            8%
            annually.
        a
            note
            from the company to Mr. Strain in payment for 49% of the common stock
            of
            Nathaniel’s then 51%-owned subsidiary, Nathaniel Energy Oklahoma Holdings
            Corporation (“NEOHC”), in the principal amount of $3.354,210 bearing interest
            at 7% annually. Nathaniel paid Richard Strain an additional $882,000
            in
            payment for the NEOHC shares pursuant to the terms of the stock purchase
            agreement between the Company and Mr. Strain for the purchase of the
            NEOHC
            shares to reflect 49% of the upward adjustment of the purchase price
            for the
            helium and gas processing facilities and assets which were sold by NEOHC
            to
            Midstream Services, LLC on March 7, 2006. On
        December 5, 2006, Nathaniel Energy Corporation entered into an agreement
        with
        Bailey-Jamar, LLC, under which Bailey-Jamar agreed to provide the company
        with
        $7,500,000 in capital through an equity investment by a joint venture consisting
        of Bailey-Jamar and a co-venturer to be identified by Bailey-Jamar in the
        future.
 
 Brad
        E.
        Bailey, the company’s Chief Executive Officer, is a principal member of
        Bailey-Jamar.
 
 Under
        the
        terms of the agreement, the joint-venture will purchase 56,618,333 shares
        of
        common stock of the company for approximately 13.25 cents per share if the
        transaction closes. If this transaction is consummated, the closing price
        for
        the company’s common stock on the over-the-counter bulletin board on December 5,
        2006 was six cents per share. The number of shares to be purchased will
        represent approximately 38.4% of the outstanding common stock of the company,
        based on the number of shares currently outstanding.
 
 The
        company’s obligation to close the transaction is conditioned upon, among other
        things, the members of the joint venture and their respective principals
        and
        affiliates meeting certain standards of acceptability set forth in the agreement
        generally relating to the absence of:
 
 ·
            Convictions
                of any felonies and misdemeanors in connection with the purchase
                and sale
                of securities; 
 ·
            Injunctions
                or judgments restraining of enjoining conduct in connection with
                the
                purchase and sale of any securities; 
 ·
            Suits
                or investigations or inquiries including a claim under the federal
                or
                state securities laws or breach of fiduciary duty;
                and 
 ·
            Conduct
                which causes the company to believe that an association with the
                joint
                venture will be materially injurious to the company or its stockholders,
                or will bring the company or its stockholders into
                disrepute. 
 26
 Table
            of Contents
  At
        the
        closing of the purchase of the stock, the entire purchase price will be placed
        in escrow, and released to the company for the following purposes as certain
        milestones are met:
 
 ·
            Project
                demonstration and Thermal GasifierTM demonstration unit$
                3,500,000  ·
            Project
                seed funds$ 
                1,600,000 
 ·
            Working
                capital and corporate operations           $2,400,000 
 The
        company has the right to reallocate the use of the purchase price funds with
        the
        joint venture’s consent which will not unreasonably be withheld.
 
 The
        shares purchased by the joint venture will be issued to the joint venture
        when,
        and to the extent that, the purchase price funds are delivered out of escrow
        to
        the company from time-to-time.
 
 Under
        the
        agreement, the joint venture will have “piggy back” registration rights for the
        shares that it purchases.
 
 Commencing
        at the time that, and so long as, the joint venture owns 20% or more of the
        company’s voting stock, the joint venture will have a right of first refusal to
        negotiate in good faith with the company to purchase any securities that
        the
        company desires to offer and sell for cash, pursuant to any offer initiated
        by
        the company or solicited by a third party, upon the material terms of the
        proposed offer.
 
 Under
        the
        terms of the Agreement, either party may terminate the agreement upon
        notice.
 
 The
        company cannot assure that Bailey-Jamar will be able to form a joint venture
        with a co-venturer that meets the acceptability requirements under the
        agreement, or that the joint venture will be able to provide the capital
        required by this agreement. Additionally, if a joint venture is formed and
        provides the capital to the company under the agreement, we cannot assure
        that
        the company will achieve the milestones to release the capital funds to
        Nathaniel Energy, that the amount of funds will be enough to accomplish the
        purposes to which the capital is allocated, or that those purposes will be
        achieved in any event.
 
 *Director
        independence*
 
 Nathaniel’s
        common stock is quoted on the Over-the-Counter Bulletin Board. Nathaniel
        uses
        the independent director definition in Rule 4200 of the Nasdaq Stock Market,
        Inc. and Rule 10A-3 of the Securities Exchange Act of 1934 to determine whether
        the directors of the Company are independent or not.
 
 Applying
        the Nasdaq standards, the board of directors has determined that Mr. Burdis
        is
        independent and that Ms. Smythe is not. The following persons who served
        as
        directors of the Company during 2006 were not independent: George Cretecos,
        Russell “Gene” Bailey and William Mulrow. The Company does not have an audit
        committee, compensation committee or nominating committee.
 
 27
 Table
            of Contents
 
 **Item
        13. 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*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(i).4
              Certificate
                  of Amendment to Certificate of Incorporation filed on October 12,
                  2005**3(ii).1
              Amended
                  and Restated By-Laws***10.1
              Tire
                  Derived Fuel Co-Processing Agreement, dated September 30, 2005
                  by and
                  between Nathaniel Energy Corporation and Energis, LLC.
                  ****10.2
              Stock
                  Purchase Agreement dated September 29, 2005 between Nathaniel Energy
                  Oklahoma Holdings, Corporation (“NEHOC”) and Richard
                  Strain**10.3
              Purchase
                  and Sale Agreement dated September 30, 2005 between Nathaniel Energy
                  Corporation, NEOHC, MCNIC Rodeo Gathering, Inc. and Midstream Energy
                  Services**10.4
              Nathaniel
                  Energy Corporation 2005 Equity Participation Plan**10.5
              Employment
                  Agreement dated October 16, 2006 between Nathaniel Energy Corporation
                  and
                  Brad E. Bailey+10.6
              Agreement
                  dated December 5, 2006 between Nathaniel Energy Corporation and
                  Bailey-Jamar, LLC.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.
              Subsidiaries31.
              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 Quarterly Report on Form 10-QSB
        for
        the period ended September 30, 2005 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 Annual report on Form 10-KSB for the
        year
        ended December 31, 2005.
 
 +Denotes
        documents filed as an exhibit to our Current Report on Form 8-K filed on
        October
        20, 2006 and incorporated herein by reference.
 
 **Item
        14. Principal Accountant Fees and Services**
 
 **Audit
        Fees**
 
 The
        aggregate fees billed for our fiscal years ended December 31, 2006 and 2005
        by
        Comiskey & Company, P.C., our principal accountants in 2006 and 2005, 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 $32,635 and $34,303 respectively.
 
 **Audit
        Related Fees**
 
 Our
        principal accountants did not bill us any fees during our fiscal years ended
        December 31, 2006 and 2005 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, 2006 and 2005.
 
 **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,
        2006
        and 2005 respectively.
  28
 Table
            of Contents
  
 **NATHANIEL
        ENERGY CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **FOR
        THE**
 **FISCAL
        YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **INDEX**
 
 **Page**Report
                  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
 
   Table
            of Contents
  **Comiskey
          & Company**
 **Professional
          Corporation**
 
 **REPORTOF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING
          FIRM**
 
 
 The
          Board
          of Directors
 Nathaniel
          Energy Corporation
 
 We
          have
          audited the accompanying consolidated balance sheets of Nathaniel Energy
          Corporation as of December 31, 2006 and 2005, and the related consolidated
          statements of operations, stockholders’ equity (deficit), and cash flows for the
          years ended December 31, 2006 and 2005. 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 (U.S.). Those standards require that we plan
          and
          perform the audit to obtain reasonable assurance about whether the financial
          statements are free of material misstatement. The Company is not required
          to
          have, nor were we engaged to perform, an audit of its internal control
          over
          financial reporting. Our audits included consideration of internal control
          over
          financial reporting as a basis for designing audit procedures that are
          appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting. Accordingly, we express no such opinion. An audit also 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 that
          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, 2006 and 2005, and the consolidated results
          of
          its operations, changes in stockholders’ equity (deficit) and cash flows for the
          years ended December 31, 2006 and 2005 in conformity with accounting principles
          generally accepted in the United States of America.
 
 The
          accompanying financial statements are presented assuming the company will
          continue as a going concern. As more fully described in Note 1 to the financial
          statements, at December 31, 2006 the Company had a working capital deficit
          of
          $776,514, and an accumulated deficit of $60,276,138, and used cash of $1,226,589
          in operating activities for the year then ended. These conditions raise
          substantial doubt about its ability to continue as a going concern. Management’s
          plans to address these conditions are also set forth in Note 1 to the financial
          statements. The accompanying financial statements do not include any adjustments
          which might be necessary if the Company is unable to continue.
 
 Denver,
          Colorado
 March
          17,
          2007
 
 /s/
          Comiskey & Company
 **PROFESSIONAL
          CORPORATION**
 
 **Certified
          Public Accountants and Consultants**
 **789
          Sherman Street Suite 385 Denver Co 80203**
 **(303)
          830-2255 - Fax (303) 830-0876 -** **info@comiskey.com** **- www.comiskey.com**
 
   2
 F-1
 Table
            of Contents
  **NathanielEnergy
        Corporation**
 **Consolidated
        Balance Sheet**
 
 **December
                  31, 2006**
              
              **December
                  31, 2005****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              257,868
              
              $
              260,032Accounts
                  receivable (note 4)
              
              
              121,276
              
              
              85,418Deferred
                  tax asset
              
              
              -
              
              
              759,000Assets
                  held for sale
              
              
              -
              
              
              2,036,783Prepaid
                  expenses
              
              
              40,277
              
              
              88,698Total
                  current assets
              
              
              419,421
              
              
              3,229,931Deposits
              
              
              72,895
              
              
              88,322Assets
                  held for sale
              
              
              -
              
              
              9,768,510Property
                  and equipment, net of accumulated depreciation of $562,194 (note
                  5)
              
              
              1,069,443
              
              
              1,256,708Intangibles,
                  net of accumulated amortization of $313,344 (note 6)
              
              
              193,423
              
              
              322,482Total
                  assets
              
              $
              1,755,182
              
              $
              14,665,953**LIABILITIES
                  AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY**Current
                  liabilitiesAccounts
                  payable and accrued liabilities
              
              
              981,169
              
              
              628,784Accrued
                  compensation and payroll liabilities
              
              
              39,917
              
              
              75,757Accrued
                  interest
              
              
              12,035
              
              
              14,760Other
                  accrued expenses
              
              
              -
              
              
              5,399Notes
                  payable and capital leases - current portion (note 7)
              
              
              162,814
              
              
              1,014,235Notes
                  payable - stockholder
              
              
              -
              
              
              3,354,210Liabilities
                  held for sale
              
              
              -
              
              
              7,307,128Total
                  current liabilities
              
              
              1,195,935
              
              
              12,400,273Long-term
                  portion of notes payable (note 5)
              
              
              41,923
              
              
              277,589Liabilities
                  held for sale
              
              
              -
              
              
              4,892,151Total
                  liabilities
              
              
              1,237,858
              
              
              17,570,013Commitments
                  and contingencies (note 12)
              
              
              -
              
              
              -(Deficiency
                  in) stockholder's equityCommon
                  stock, $0.001 par value; 200,000,000 shares authorized;90,731,596
                  shares issued outstanding at December 31, 2006 (note 10)
              
              
              90,731
              
              
              90,698Additional
                  paid-in capital
              
              
              60,702,446
              
              
              61,584,446Common
                  stock to be issued
              
              
              285
              
              
              318Accumulated
                  deficit
              
              
              (60,276,138
              )
              
              (64,579,522
              )Total
                  (deficiency in) stockholder's equity
              
              
              517,324
              
              
              (2,904,060
              )Total
                  liabilities and (deficiency in) stockholders' equity
              
              $
              1,755,182
              
              $
              14,665,953
  The
      accompanying notes are an integral part
      of the financial statements. 
 F-2
 Table
            of Contents
  **NathanielEnergy
        Corporation**
 **Consolidated
        Statements of Operations**
 
 **********For
                  the** Year
                  Ended********
                ******December
                  31, 2006******
              
              ****For the** Year Ended**
                **December
                  31, 2005**Revenues
              
              $
              1,149,484
              
              $
              689,428Cost
                  of revenue
              
              
              1,270,494
              
              
              839,398Gross
                  profit (loss)
              
              
              (121,010
              )
              
              (149,970
              )Operating
                  expenses:Selling,
                  general and administrative expenses
              
              
              1,722,298
              
              
              1,602,352Research
                  and development
              
              
              55,861
              
              
              117,125Total
                  operating expenses
              
              
              1,778,159
              
              
              1,719,477Loss
                  from operations
              
              
              (1,899,169
              )
              
              (1,869,447
              )Other
                  income (expense:)Interest
                  income (expense)
              
              
              (137,389
              )
              
              (326,632
              )Gain
                  (loss) on disposal of equipment
              
              
              4,175
              
              
              1,095Gain
                  on settlement of liabilities
              
              
              34,666Other
                  income (expense)
              
              
              -
              
              
              141,889Loss
                  from continuing operations before income tax benefit
              
              
              (1,997,717
              )
              
              (2,053,095
              )Income
                  tax benefit (expense)
              
              
              (12,000
              )
              
              759,000Loss
                  from continuing operations
              
              
              (2,009,717
              )
              
              (1,294,095
              )Income
                  form discontinued operations
              
              
              193,428
              
              
              1,055,611Gain
                  on sale of assets, discontinued operations, net of tax
              
              
              6,119,673
              
              
              -Net
                  income (loss)
              
              $
              4,303,384
              
              $
              (238,484
              )Loss
                  per share from continuing operations, basic and diluted
              
              $
              (0.02
              )
              $
              (0.02
              )Income
                  per share from discontinued operations, basic and diluted
              
              $
              0.00
              
              $
              0.01Income
                  per share from gain on sale of assets, basic and diluted
              
              $
              0.07
              
              $
              (0.01
              )Net
                  income (loss) per share, basic and diluted
              
              $
              0.05
              
              $
              (0.01
              )Weighted
                  average common shares outstanding
              
              
              90,731,596
              
              
              74,035,249
 
 The
        accompanying notes are an integral part of the financial
        statements.
  F-3
 Table
            of Contents
  **NathanielEnergy
        Corporation**
 **Consolidated
        Statement of Stockholders' Equity (Deficit)**
 
 ****
              ****
              ****
              ****
              ****
              **Additional**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **Stockholders'**
              ********
              ****
              ****
              ****
              ****
              ****
              **Paid-in**
              ****
              **Shares
                  to be issued**
              ****
              **Accumulated**
              ****
              **Equity**
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Capital**
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Deficit**
              ****
              **(Deficit)**Balance
                  at December 31, 2004
              
              
              70,198,263
              
              
              70,198
              
              
              64,851,656
              
              
              20,318,000
              
              
              20,318
              
              
              (64,391,418
              )
              
              550,754Shares
                  issued for services
              
              
              500,000
              
              
              500
              
              
              87,000
              
              
              -
              
              
              -
              
              
              -
              
              
              87,500Issuance
                  of shares to satisfy debt conversion
              
              
              20,000,000
              
              
              20,000
              
              
              -
              
              
              (20,000,000
              )
              
              (20,000
              )
              
              -
              
              
              -Acquisition
                  of minority interest
              
              
              -
              
              
              -
              
              
              (3,354,210
              )
              
              -
              
              
              -
              
              
              50,380
              
              
              (3,303,830
              )Net
                  loss for the year ended December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (238,484
              )
              
              (238,484
              )Balance
                  at December 31, 2005
              
              
              90,698,263
              
              
              90,698
              
              
              61,584,446
              
              
              318,000
              
              
              318
              
              
              (64,579,522
              )
              
              (2,904,060
              )Issuance
                  of shares to satisfy debt conversion
              
              
              33,333
              
              
              33
              
              
              -
              
              
              (33,333
              )
              
              (33
              )
              
              -
              
              
              -Acquisition
                  of minority interest
              
              
              -
              
              
              -
              
              
              (882,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              (882,000
              )Net
                  income for the year ended December 31, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,303,384
              
              
              4,303,384Balance
                  December 31, 2006
              
              
              90,731,596
              
              
              90,731
              
              
              60,702,446
              
              
              284,667
              
              $
              285
              
              $
              (60,276,138
              )
              $
              517,324
 
 The
        accompanying notes are an integral part of the financial
        statements.
  F-4
 Table
            of Contents
  **NathanielEnergy
        Corporation**
 **Condensed
        Consolidated Statements of Cash Flows**
 
 **********For
                  the** Year Ended** December 31,
                  2006******
              
              ************For
                  the** Year Ended**December 31,
                  2005********Cash
                  flows from operating activities:Net
                  Income (loss)
              
              $
              4,303,384
              
              $
              (238,484
              )**Adjustments
                  to reconcile net loss to net****cash
                  used in operating activities:**Depreciation
                  and amortization
              
              
              397,746
              
              
              271,953Income
                  tax benefit
              
              
              -
              
              
              (759,000
              )Reserve
                  for doubtful accounts
              
              
              -
              
              
              20,000Gain
                  on sale of assets
              
              
              (6,119,673
              )(Gain)
                  Loss on disposition of equipment
              
              
              (1,546
              )
              
              23,503Income
                  tax expense
              
              
              12,000Non-cash
                  settlement of debt
              
              
              -
              
              
              (151,087
              )Changes
                  in assets and liabilities:(Increase)
                  decrease in assets:Inventory
              
              
              -
              
              
              536,423Accounts
                  receivable, net
              
              
              (29,858
              )
              
              (88,545
              )Prepaid
                  expenses
              
              
              171,661
              
              
              (18,405
              )Restricted
                  cash
              
              
              -
              
              
              237,000Other
                  assets
              
              
              15,427
              
              
              (2,845
              )Increase
                  (decrease) in liabilities:Accounts
                  payable
              
              
              614,380
              
              
              (96,509
              )Net
                  effect on cash from discontinued operations
              
              
              (590,110
              )
              
              573,064**Net
                  cash used in operating activities**
              
              
              (1,226,589
              )
              
              307,068Cash
                  flows from investing activities:Acquisition
                  of minority interest
              
              
              (882,000
              )
              
              -Cash
                  flows from discontinued operations
              
              
              15,645,759
              
              
              (213,254
              )Equipment
                  and intangible asset purchases
              
              
              (44,839
              )
              
              (1,035,505
              )**Net
                  cash provided by investing activities**
              
              
              14,718,920
              
              
              (1,248,759
              )Cash
                  flows from financing activities:Payments
                  on debt
              
              
              (4,602,344
              )
              
              (952,589
              )Cash
                  flows from discontinued operations
              
              
              (8,892,151
              )
              
              1,080,000Proceeds
                  from issuance of notes and loans
              
              
              -
              
              
              1,040,415**Net
                  cash used in financing activities**
              
              
              (13,494,495
              )
              
              1,167,826Increase
                  (decrease) in cash and cash equivalents
              
              
              (2,164
              )
              
              226,135Cash
                  and cash equivalents at beginning of period
              
              
              260,032
              
              
              33,897Cash
                  and cash equivalents at end of period
              
              $
              257,868
              
              $
              260,032
 Supplemental
                  disclosure of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              1,486,395
              
              $
              59,169Taxes
              
              $
              -
              
              $
              -Issuances
                  of stock to settle accrued expenses
              
              $
              -
              
              $
              87,500Equipment
                  purchased with debt
              
              $
              -
              
              $
              32,223Note
                  issued to acquire minority interest
              
              $
              -
              
              $
              3,354,210Book
                  value of vehicle transferred to employee as compensation
              
              $
              2,629
              
              $
              -Gain
                  on vehicle returned for cancellation of note payable
              
              $
              5,224
              
              $
              -Insurance
                  financed with notes payable
              
              $
              123,240
              
              $
              -
 
 The
        accompanying notes are an integral part of the financial statements
 
 F-5
 Table
            of Contents
  **NathanielEnergy
        Corporation**
 **Notes
        to Consolidated Financial Statements**
 **For
        the years ended December 31, 2006 and 200** **5**
 
 **1.  
        Significant Accounting Policies and Nature of Operations**
 
 **Description
        of Business**
  Nathaniel
        Energy Corporation is in the business of developing, commercializing and
        operating renewable energy and energy-from-waste (EfW) technologies, projects
        and business models . The Company’s mission is to provide a clean, dependable,
        cost-competitive energy alternative to fossil fuels. Nathaniel Energy plans
        to
        develop projects with government, community, industry and financial partners
        to
        recover the available hydro-carbon based energy from materials previously
        considered “waste” and destined for disposal. The recovery of energy from waste
        using Nathaniel Energy’s Thermal GasifierTM diverts large volumes of material
        from landfills and other disposal while providing clean alternative energy
        comparable to that of fossil fuels.
  During
        September 2005, we entered into a Purchase and Sale Agreement with Midstream
        Energy Services, LLC pursuant to which we agreed to sell the assets which
        comprise our helium and gas processing facilities and operations to Midstream.
        On March 7, 2006, we closed the Purchase and Sale Agreement and sold those
        assets. The results of operations of our helium and gas processing facilities
        and operations through the date of the closing are shown as income from
        discontinued operations in our statement of operations. See Note 3. —
“Disposition of a Business Segment”. The gain on the sale of our helium and gas
        processing facilities and operations is shown as gain on sale of assets,
        discontinued operations in our statement of operations.
  **Business
        Segments**
 
 The
        Company operates two separate segments which are presently conducted in three
        separate facilities:
 
 · tire derived fuel processing operation in Hutchins, Texas, and
 
 · renewable energy and energy-from-waste (EFW) util izing
        the
        Company’s Thermal GasifierTM technology operations in Englewood,
        Colorado 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.
 
 F-6
 Table
            of Contents
  **Inventory**
 
 Tire-derived-fuel
        (TDF) inventory is valued at its cost to produce a salable product 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 waste tire processing. TDF inventory value at December 31, 2006
        is
        zero.
  The
        Thermal GasifiersTM 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 GasifiersTM do not produce the volume of steam
        specified in the contract and payments received. Our customer continues to
        have
        difficulty with a third party subcontractor’s fuel preparation system that
        prepares the fuel for the Thermal GasifiersTM so that it meets the specifications
        agreed to in our contract to meet our output performance guarantee. In addition,
        our customer is in the process of retrofitting downstream thermal equipment
        provided to them by the same third party subcontractor. The retrofit is required
        to bring the downstream thermal equipment into specification to accept the
        synthesis gas that our units produce. Because both the fuel supply and
        downstream thermal equipment capability concerns are of significant importance
        to our customer, we have agreed to evaluate and recommend modifications that
        would improve the output and reliability of those systems and the overall
        EfW
        facility while we continue to pursue payment of amounts due us on our
        contract.  Because management determined that the timing of receipt and
        amount of any payment we could expect to receive is uncertain, we reduced
        the
        carrying value of the construction in progress inventory to zero during fiscal
        2005.  We are reimbursed for our out of pocket expenses, including shipping
        expenses incurred during the start up phase and we record those expenses
        and the
        reimbursement of those expenses in cost of revenue and revenue, respectively.
        The Thermal GasifierTM inventory value at December 31, 2006 is zero.
  We
        continue to provide technical support while we undertake the evaluation process
        of assessing the EfW facility in Cologna Veneta, Italy for modifications
        to
        improve the output and reliability of the plant. In conjunction with the
        enhancements to the EfW facility we continue to work toward the completion
        of
        the start-up and testing of the two Thermal GasifiersTM. Both units have been
        operated in start up phase
  **Research
        and Development**
 
 Research
        and development expenses, all of which relate directly to the design and
        development of our Thermal GasifierTM technology, are expensed as incurred. For
        the years ended December 31, 2006 and 2005, we incurred $55,861  and
        $117,125  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
                  yearsBuildings
                  and improvements
              5-15
                  yearsVehicles
              5
                  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.  Management uses significant judgments, assumptions and estimates
        to calculate future cash flows expected to be generated by the assets under
        impairment review.
  F-7
 Table
            of Contents
  **Revenue
        Recognition**
 
 Our
        tire
        fuel processing facility recognizes revenue in two ways. First when waste
        tires
        are accepted at the facility we receive a disposal fee (“tipping fees”) and
        secondly from the sale of processed tire-derived-fuel. The revenues from
        tipping
        fees are fully earned when the waste tires are accepted at the facility and
        the
        processed tire shred revenues are recognized when the TDF is delivered to
        the
        end user. Internal quality controls are in place to ensure that the
        tire-derived-fuel meets the standards required in contracts for the delivery
        to
        our customers. This quality control reduces the risk of significant returns
        and
        allowances of tire-derived-fuel sold. Sales returns are reprocessed and added
        back to the existing production of tire-derived-fuel. Sales returns are booked
        based on the Company’s historical experience.
  We
        recognize revenue from the sale of our Thermal GasifiersTM upon completion,
        delivery and customer acceptance, using the completed contract method of
        accounting. We recognize revenue for consulting services during the period
        those
        services are provided. We have recognized no revenue from the sale of our
        Thermal GasifiersTM as of December 31, 2006.
  **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.
 
 **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.
 
 **Identifiable
        Intangible Assets**
 
 The
        Company reports identifiable intangible assets net of accumulated amortization.
        Accumulated amortization on intangible assets was $313,344 and $184,285 at
        December 31, 2006 and 2005, 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 GasifierTM 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, 2006 and 2005.
 
 F-8
 Table
            of Contents
  **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, 2006 and 2005 to be capitalized and deferred to future
        periods.
 
 **Stock-Based
        Compensation**
 
 Effective
        January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based
        Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior
        to the
        adoption of SFAS 123(R) we accounted for stock option grant in accordance
        with
        APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic
        value method), and accordingly, recognized compensation expense for stock
        option
        grants.
 
 Under
        the
        modified prospective approach, SFAS 123(R) applies to new awards and to awards
        that were outstanding on January 1, 2006 that are subsequently modified,
        repurchased or cancelled. Under the modified prospective approach, compensation
        cost recognized in the nine months of fiscal 2006 includes compensation cost
        for
        all share-based payments granted prior to, but not yet vested as of January
        1,
        2006, based on the grant-date fair value estimated in accordance with the
        original provisions of SFAS 123, and compensation cost for all share-based
        payments granted subsequent to January 1, 2006 based on the grant-date fair
        value estimated in accordance with the provisions of SFAS 123(R). Prior periods
        were not restated to reflect the impact of adopting the new
        standard.
 
 The
        Company had no stock-based compensation activity during the twelve months
        ended
        December 31, 2006 and 2005, and had no unvested stock options outstanding
        at
        December 31, 2006 and 2005.
 
 **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, 2006 and 2005.
 
 **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.
 
 **Reclassifications**
 
 We
        have
        reclassified certain prior period amounts to conform to the current period
        presentation. See Note 3-”Disposition of a Business Segment”.
 
 **Recent
        Accounting Pronouncements**
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial Assets and Financial Liabilities: (“SFAS No. 159”) which
        permits entities to choose to measure many financial instruments and certain
        other items at fair value that are not currently required to be measured
        at fair
        value. SFAS No. 159 will be effective for us on January 1, 2008.
        The Company is currently evaluating the impact of adopting
        SFAS No. 159 on its financial position, cash flows and results of
        operations.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). This standard defines fair value, establishes a
        framework for measuring fair value in accounting principles generally accepted
        in the United States of America and expands disclosure about fair value
        measurements. This pronouncement applies under the other accounting standards
        that require or permit fair value measurements. Accordingly, this statement
        does
        not require any new fair value measurement. This statement is effective for
        fiscal years beginning after November 15, 2007, and interim periods within
        those fiscal years. The Company is currently evaluating the requirements
        of
        SFAS No. 157 and has not yet determined the impact, if any, on the
        financial statements.
 
 F-9
 Table
            of Contents
  In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty
        in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty
        in income taxes recognized in a company’s financial statements in accordance
        with SFAS No. 109, “Accounting for Income Taxes.” This Interpretation
        defines the minimum recognition threshold a tax position is required to meet
        before being recognized in the financial statements. FIN No. 48 is
        effective for fiscal years beginning after December 15, 2006. The Company
        is currently evaluating the requirements of FIN No. 48 and has
        estimated the impact on the financial statements. (see Note 9)
 
 In
        March
        2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
        Financial Assets - an amendment to FASB Statement No. 140. Statement 156
        requires that an entity recognize a servicing asset or servicing liability
        each
        time it undertakes an obligation to service a financial asset by entering
        into a
        service contract under certain situations. The new standard is effective
        for
        fiscal years beginning after September 15, 2006. The company does not expect
        its
        adoption of this new standard to have a material impact on its financial
        position, results of operations or cash flows.
 
 In
        February 2006 the FASB issued SFAS 155, "Accounting for Certain Hybrid
        Instruments," which amends SFAS 133, "Accounting for Derivative Instruments
        and
        Hedging Activities," and SFAS 140, "Accounting for Transfers and Servicing
        of
        Financial Assets and Extinguishments of Liabilities." SFAS 155 allows financial
        allows financial instruments that have embedded derivatives to be accounted
        for
        as a whole (eliminating the need to bifurcate the derivative from its host)
        if
        the holder elects to account for the whole instrument on a fair value basis.
        SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and
        SFAS
        140. This statement is effective for all financial instruments acquired or
        issued in fiscal years beginning after September 15, 2006. The company does
        not
        expect its adoption of this new standard to have a material impact on its
        financial position, results of operations or cash flows.
 
 Effective
        January 1, 2006, the company adopted SFAS 123R using the modified prospective
        transition method, which provides for certain changes to the method for valuing
        share-based compensation. The valuation provisions of SFAS 123R apply to
        new
        awards and to awards that are outstanding at the effective date and subsequently
        modified or cancelled. Estimated compensation expense for awards outstanding
        at
        January 1, 2006 will be recognized over the remaining service period using
        the
        compensation cost calculated for pro forma disclosure purposes under SFAS
        123.
        In accordance with the modified prospective transition method, our statements
        of
        operations for periods prior to January 1, 2006 will not be restated to reflect
        the impact of SFAS 123R.
 
 Our
        calculation of share-based compensation expense in future periods will be
        calculated using the Black-Scholes option valuation model and will include
        the
        portion of share-based payment awards that is ultimately expected to vest
        during
        the period and therefore will be adjusted to reflect estimated forfeitures.
        SFAS
        123R requires forfeitures to be estimated at the time of grant and revised,
        if
        necessary, in subsequent periods if actual forfeitures differ from those
        estimates. In our pro forma information required under SFAS 123 for the periods
        prior to 2006, we accounted for forfeitures as they occurred. For share awards
        granted after January 1, 2006, expenses will be amortized under the
        straight-line attribution method. For share awards granted prior to 2006,
        expenses are amortized under the straight-line single option method prescribed
        by SFAS 123. We expect that our adoption of SFAS 123R in 2006 will not have
        a
        material impact on our results of operations and net loss per
        share.
 
 **2.  
        Liquidity, Going Concern, and Management’s Plan**
 
 The
        Company had a loss from continuing operations of $2,009,717 for the twelve
        months ended December 31, 2006. At December 31, 2006, the Company had a working
        capital deficit of $776,514, and an accumulated deficit of $60,276,138. During
        the twelve months ended December 31, 2006, the Company used cash of $1,226,589
        in operating activities.
  The
        sale
        of the Company’s helium and gas processing facilities in March, 2006 generated
        cash of $16,999,569, which the Company used primarily to make principal payments
        on notes payable in the amount of $13,494,495 and accrued interest in the
        amount
        of $1,353,810 (see note 3). Management believes that additional financing
        will
        be necessary in order for the Company to execute its business plan. There
        can be
        no assurance that additional financing will be available at rates favorable
        to
        the Company, or at all.
 
 Our
        financial statements do not include any adjustments relating to the
        recoverability and classification of recorded asset amounts or the amounts
        and
        classification of liabilities that might be necessary should we be unable
        to
        continue as a going concern. Our continuation as a going concern is dependent
        upon the ability to generate sufficient cash flow to meet obligations on
        a
        timely basis and ultimately to achieve successful operations.
 
 Management
        plans to focus the company’s resources in three key areas: Thermal GasifierTM
engineering design, development of core business opportunities and attracting
        strategic investment. While management considers the Thermal GasifierTM and
        energy-from-waste segment to be our core business, we also intend to continue
        modernization and improvement of the TDF processing operation at our Hutchins,
        TX facility to increase production and reduce operating costs. It is
        management’s belief that by improving all facets of company operations, we will
        be better situated to attract investors looking to enter the energy-from-waste
        and renewable energy marketplace.
  The
          Company believes its cash on hand and the revenues it expects to generate
          at
          current levels will be sufficient to fund the Company’s planned operating needs
          for the next three months. We are seeking funding for the purposes described
          above. We have an agreement with Bailey-Jamar, LLC pursuant to which
          Bailey-Jamar may invest $7,500,000 through a joint venture (see Note 8).
          This
          agreement, which gave Bailey-Jamar exclusivity until February 28, 2007,
          is
          non-exclusive and may be terminated by the Company or Bailey-Jamar at any
          time
          upon notice. No investment has been proposed under this Agreement. The
          Company
          is also exploring other financing opportunities but has no agreements or
          commitments for funding. Future funding may be through an equity investment,
          debt or convertible debt.
 
 The
          Company can give no assurance that it will be able to obtain funds from
          financing opportunities, or that if available, the Company will be able
          to
          obtain funds on favorable terms and conditions. If the Company cannot secure
          additional funds it may be required to scale back operations or change
          its
          plans.
 
 F-10
 Table
            of Contents
  **3.  
        Disposition of a Business Segment**
 
 On
        March
        7, 2006 Nathaniel Energy Corporation, its wholly-owned subsidiary Nathaniel
        Energy Oklahoma Holdings Corporation (“NEOHC”) and NEOHC’s wholly-owned
        subsidiary, MCNIC Rodeo Gathering, Inc. closed a Purchase and Sale Agreement
        with Midstream Energy Services, LLC pursuant to which NEOHC sold the assets
        which comprised Nathaniel’s helium and gas processing facilities and operations
        to Midstream. Pursuant to the Purchase and Sale Agreement, the purchase price
        was subject to the following adjustments:
  ·
            upward
                for any capital expenditures made by Nathaniel relating to the helium
                and
                gas operations from August 1, 2005. ·
            upward
                for expenses incurred by Nathaniel from August 1, 2005 to operate
                the
                helium and gas assets. ·
            upward
                for all amounts owed to Nathaniel or its affiliates as of the closing
                under the contracts which are included in the assets to be
                sold. ·
            upward
                by up to $1,800,000 if Midstream and Colorado Interstate Gas entered
                into
                an agreement for nitrogen and/or air services which commences on
                or near
                January 1, 2007. This agreement was entered
                into. ·
            downward
                for any expenses relating to the operation of the gas assets which
                are
                attributed to the period before closing that were unpaid at the closing,
                and the liability for which is transferred to
                Midstream. ·
            downward
                for amounts due under the contracts which are included in the gas
                assets
                to be sold that were unpaid as of the closing, and the liability
                for which
                is transferred to Midstream. ·
            downward
                for all funds, receivables and the like, that are attributable to
                the gas
                assets being sold, for all periods from August 1, 2005 to the extent
                retained by Nathaniel.  Additionally,
        the Purchase and Sale Agreement provided that in the event any adjustments
        were
        not finally determined prior to the closing, they were to be determined after
        the closing.
  Midstream
        assumed all the liabilities under the contracts included in the gas assets
        being
        sold that arose after the closing date.
  Nathaniel
        used $14,482,171 of the sale proceeds to satisfy its indebtedness to Richard
        Strain, which reduced the company’s debt by approximately 89%.
  At
        the
        closing, giving effect to agreed adjustments, Midstream delivered $16,915,676
        to
        Nathaniel on account of the purchase price.  The purchase price was
        increased by $83,893 to $16,999,569 to reflect post-closing adjustments which
        were finally determined pursuant to the terms of the Purchase and Sale
        Agreement.
  We
        have
        recorded the $83,893 adjustment in our Consolidated Statements of Operations
        for
        the year ended December 31, 2006 as gain on sale of assets, net of
        tax.
  On
        April
        10, 2006, in accordance with the terms of the Purchase and Sale Agreement,
        we
        received a letter from Midstream detailing certain title defects in the gas
        gathering pipeline system which would have had a potential negative post-closing
        adjustment to the purchase price of $271,300. Pursuant to the Purchase and
        Sale
        Agreement, we corrected those defects at a cost to us of $7,829.  We
        recorded additional gain on sale of assets of $42,171 in the second quarter
        of
        2006, representing the excess of our original estimated cost to cure these
        defects, over the actual cost incurred. On October 1, 2006 we received a
        letter
        from Midstream claiming that certain title defects remained. We do not believe
        that these claims amount to defects under the Purchase and Sale Agreement
        which
        require correction under the terms of that agreement. Accordingly, we have
        not
        recorded any contingency for this on our balance sheet or statement of
        operations for the twelve months ended December 31, 2006.
  The
        gain
        on sale of the helium and gas processing facilities and operations is as
        follows
        as of December 31, 2006:
  Final
                  sales price
              
              
              
              $
              16,999,369Book
                  value of assets sold
              $
              10,420,436Less:
                  Liabilities assumed by Midstream
              
              (530,618
              )Expense
                  of sale
              
              230,87810,120,896Pretax
                  gain on sale of assets
              
              
              
              
              6,878,673Income
                  tax expense
              
              
              
              
              759,000Gain
                  on sale of assets, net of tax
              
              
              
              $
              6,119,673
  F-11
 Table
            of Contents
  **4.
        Accounts Receivable**
 
 The
        Company has trade accounts receivable in the amount of $257,868 and $260,032,
        at
        December 31, 2006 and 2005, respectively. All doubtful accounts have been
        written-off at December 31, 2006 and 2005, and the Company has a reserve
        of $0
        as of December 31, 2006 and 2005.
  
 **5.  
        Property, Plant and Equipment**
 
 Following
        is a summary of property, plant and equipment at December 31, 2006 and
        2005:
  **December 31,****2006**
                
                
                **December 31,****2005**Machinery
                    and equipment
                $
                1,158,155
                
                $
                1,121,764Buildings
                
                43,575
                
                
                43,575Vehicles
                
                66,225
                
                
                67,559Land
                
                51,085
                
                
                51,085Furniture,
                    fixtures and equipment
                
                184,317
                
                
                149,157Improvements
                
                128,280
                
                
                128,2801,631,637
                
                
                1,561,420Less
                    accumulated depreciation
                
                (562,194
                )
                
                (304,712
                )Net
                    book value
                $
                1,069,443
                
                $
                1,256,708
 Depreciation
        expense recorded in the financial statements for continuing operations was
        $306,720 and $167,783 for the years ended December 31, 2006 and 2005,
        respectively.
 
 **6.
        Intellectual Property**
 
 Nathaniel
        Energy owns three U.S. patents, two pending U.S. patent applications and
        two
        pending European patent applications covering the Thermal GasifierTM 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.
 
 **2006**
              
              
              **2005**Patents
                  (at cost)
              
              $
              207,428
              
              $
              206,205Blueprints
                  and engineering design
              
              
              299,339
              
              
              299,339Less
                  Accumulated Amortization
              
              
              (313,344
              )
              
              (80,116
              )Intangible
                  assets, net
              
              $
              193,423
              
              $
              425,428
  
 Amortization
        expense for the twelve months ended December 31, 2006 and 2005 was $129,029
        and $104,170, respectively.
  F-12
 Table
            of Contents
  **7.
        Notes Payable**
 
 At
        December 31, 2006 and 2005, the Company had the following promissory notes
        outstanding:
  **2006**
              
              
              **2005**15%
                  promissory notes payable to individuals, due on demand
              
              $
              17,000
              
              $
              17,000Non-interest
                  bearing unsecured promissory note due upon receipt of payments
                  from theCologna
                  Veneta, Italy thermal Gasifier TM project owner at 20% of amount
                  received
              
              
              70,000
              
              
              70,0004.5%
                  installment note, secured by equipment, monthly payments of $2,531
                  principaland
                  interest through June 2007
              
              
              15,126
              
              
              44,10820.15%
                  installment obligation, secured by equipment, monthly payments
                  of
                  $1,390principal
                  and interest through April 2006
              
              
              -
              
              
              4,5653.85%
                  promissory note, secured by land, monthly payments of $1,742, principal
                  andinterest
                  through April 2009 with a final payment of $174,605 due April 2009,
                  paid
                  infull
                  during the twelve months ended December 31, 2006
              
              
              -
              
              
              215,0707.25%
                  line of credit facility secured by a letter of credit provided
                  by a
                  stockholder
              
              
              -
              
              
              790,0008.45%
                  installment note, secured by equipment, monthly payments of $454
                  principaland
                  interest through November 2007
              
              
              -
              
              
              9,55310.59%
                  installment note, secured by equipment, monthly payments of $3,231
                  principaland
                  interest through February 2007
              
              
              6,118
              
              
              60,0959.00%
                  installment note, secured by vehicle, monthly payments of $641
                  principal
                  andinterest
                  through August 2008
              
              
              12,946
              
              
              18,6326.14%
                  unsecured installment note, final principal and interest payment
                  due
                  January 2006
              
              
              -
              
              
              29,0372.90%
                  installment note, secured by equipment, monthly payments of $936
                  of
                  principaland
                  interest through August 2008
              
              
              -
              
              
              28,8368.45%
                  installment note, secured by vehicle, monthly payments of $308
                  principal
                  andinterest
                  through May 2007
              
              
              1,508
              
              
              4,9289.89%
                  capital lease, secured by software, monthly payments of $1,595
                  principal
                  andinterest
                  through September 2008
              
              
              9,298
              
              
              -15%
                  installment notes for insurance premium financing
              
              
              4,196
              
              
              -3.35%
                  installment note, secured by equipment, monthly payments of $905
                  principaland
                  interest through September 2009
              
              
              28,545
              
              
              -Total
                  debt:
              
              $
              204,737
              
              $
              1,291,824Current
                  portion:
              
              
              (162,814
              )
              
              (1,014,235
              )Long-term
                  portion:
              
              $
              41,923
              
              $
              277,589
 
  F-13
 Table
            of Contents
  Maturities
        of debt are as follows:
  **December
                  31,**2007
              
              $
              162,8142008
              
              
              34,6512009
              
              
              7,2722010
              
              
              -thereafter
              
              
              -$
              204,737
  Debt
        repayments:
 
 On
        March
        7, 2006, we repaid total principal of $12,246,361 related to all previous
        obligations due Richard Strain out of the proceeds we received from the sale
        of
        our helium and gas processing assets to Midstream.  As of December 31, 2006
        and December 31, 2005, our total indebtedness to Richard Strain was $0 and
        $12,246,361, respectively.
  On
        June
        9, 2006, we paid off the borrowings outstanding on our line of credit of
        $790,000. The line of credit was secured by a letter of credit provided by
        our
        majority stockholder, Richard Strain. Also during the twelve months ended
        December 31, 2006, the Company made principal payments on twelve other notes
        payable in the aggregate amount of $458,134. The Company also reached an
        agreement with a lender to accept return of equipment purchased under a note
        in
        return for cancellation of the note in the amount of $22,432.
  During
        the year ended December 31, 2006, the Company also entered into four new
        note
        agreements in the aggregate amount of $183,478, including $123,240 to finance
        insurance premiums over a period of twelve months.
  **8.
        Related Party Transactions**
  Promissory
        Notes - Richard Strain
  On
        March 7, 2006, we closed the Purchase and Sale Agreement with Midstream and
        received $16,915,676. From the $16,915,676 received, we paid Mr. Strain
        $13,600,171 in satisfaction of our October 2003 promissory notes of
        $6,892,151, our March 2004 promissory note of $2,000,000, our
        September 2005 promissory note of $3,354,210 and accrued interest through
        March 7, 2006 on those notes of $1,353,810.
  The
        NEOHC
        shares purchased represented 49% of NEOHC. As a result of this acquisition,
        NEOHC became a wholly-owned subsidiary of Nathaniel.
  Pursuant
        to our Purchase and Sale Agreement with Midstream for the sale of our helium
        and
        gas operations, the purchase price under that agreement was subject to an
        upward
        adjustment by up to $1,800,000 if Midstream and Colorado Interstate Gas entered
        into an agreement for nitrogen and/or air blending services which commences
        on
        or before January 1, 2007. This agreement was entered into in December 2005.
        As
        a result of this upward adjustment, we paid Richard Strain an additional
        $882,000 at closing.
  Financing
        Agreement - Baily-Jamar, LLC
  On
        December 5, 2006, we entered into an agreement with Bailey-Jamar, LLC, under
        which Bailey-Jamar agreed to provide the company with $7,500,000 in capital
        through an equity investment by a joint venture consisting of Bailey-Jamar
        and a
        co-venturer to be identified by Bailey-Jamar in the future. Brad E. Bailey,
        the
        company’s Chief Executive Officer, is a principal member of Bailey-Jamar. At
        December 31, 2006, we had not utilized this financing arrangement.
  **9.  
        Income Taxes**
 
 Deferred
        income taxes result from the temporary differences arising from differences
        in
        the timing of recognition of the state income tax provision for book and
        tax
        reporting purposes, and an accumulation of Net Operating Loss carryforwards
        for
        income tax purposes with a valuation allowance against the carryforwards
        for
        book purposes.
 
 In
        assessing the realizability of deferred tax assets, management considers
        whether
        it is more likely than not that some portion or all of the deferred tax assets
        will not be realized. Included in deferred tax assets is a Federal net operating
        loss carryforward available to offset future taxable income of $13,400,000,
        which expires between 2018 and 2025. Approximately $10,500,000 of these losses
        are limited under the change in control provisions of Internal Revenue Code
        Section 382. Losses so limited will be available to offset future taxable
        income of up to $938,000 annually until their expiration. The ultimate
        realization of deferred tax assets is dependent upon the generation of future
        taxable income during the periods in which those temporary differences become
        deductible. Management considers the scheduled reversal of deferred tax
        liabilities, projected future taxable income, and tax planning strategies
        in
        making this assessment. Based upon our cumulative losses through December
        31,
        2006, we have provided a valuation allowance reducing the net realizable
        benefits of these deductible differences to $ zero at December 31, 2006.
        The net
        change in the valuation allowance from December 31, 2005 was a decrease of
        $
        1,015,000. The amount of the deferred tax asset considered realizable could
        change in the near term if projected future taxable income is
        realized.
 
 F-14
 Table
            of Contents
  At
        December 31, 2005 we included in our consolidated statements of operations
        the
        results of operations of our wholly owned subsidiary, NEOHC. For periods
        prior
        to September 30, 2005, we could not file a consolidated income tax return
        for federal income tax purposes and therefore we could not use our tax loss
        against NEOHC’s taxable income for federal income tax purposes. Since the
        companies filed separate federal income tax returns, the financial statements
        reflect federal income tax expense and accrued income tax liabilities computed
        at statutory rates on a separate company basis.
 
 On
        September 29, 2005, we acquired a 49% interest in NEOHC from Richard
        Strain. See Note 8-”Related Party Transactions”. As a result of that
        acquisition, we own 100% of NEOHC as of September 30, 2005 and from that
        date, we are able to include taxable income or loss of NEOHC with our taxable
        income or loss for federal income tax purposes. For the period subsequent
        to and
        including September 30, 2005, we have computed our federal income tax
        expense combining our taxable income or loss with taxable income or loss
        of
        NEOHC, subject to limitations provided by the federal income tax regulations
        on
        the use of our losses during the period. For the period prior to
        September 30, 2005, we have computed NEOHC’s federal income tax expense on
        a separate company basis resulting in a combined federal and state income
        tax
        liability and related tax expense of $259,304 for the year ended
        December 31, 2005, included in assets held for sale on our consolidated
        balance sheet and income from discontinued operations on our consolidated
        statement of operations for the year ended December 31, 2005.
 
 As
        a
        result of the sale of our helium and gas processing assets on March 7,
        2006, we have utilized approximately $5,975,000 of our December 31, 2005
        and prior net operating loss carry forwards to offset the gain on the sale
        of
        those assets. As of December 31, 2005, we had recorded a deferred tax asset
        and
        total provision benefit of $759,000. In 2006, this amount has reduced gain
        on
        disposed operations to its net tax of tax amount.
 
 
 The
        income tax provision (benefit) for the years ended December 31, 2006 and
        2005
        consists of the following:
 
 **December
                    31, 2006**
                ****
                **December
                    31, 2005**Continuing
                    OperationsCurrent:Federal
                $
                --
                
                $
                --State
                
                12,000
                
                
                --12,000
                
                
                --Deferred:Federal
                
                --
                
                
                (641,900
                )State
                
                --
                
                
                (117,100
                )--
                
                
                (759,000
                )Discontinued
                    OperationsFederal
                
                641,900
                
                
                --State
                
                117,100
                
                
                --759,000
                
                
                --Total
                $
                771,000
                
                $
                (759,000
                )
 A
        reconciliation between the actual income tax expense and income taxes computed
        by applying the statutory Federal and state income tax rates to income from
        continuing operations before income taxes is as follows:
 
 **December
                  31, 2006**
              
              **December
                  31, 2005**Computed
                  “expected” income tax expense atapproximately
                  37%
              $
              1,978,000
              
              $
              --Use
                  of in NOL carryforwards
              
              (1,978,000
              )
              
              --Discretionary
                  change in valuation allowances of deferred income taxes
              
              --
              
              
              (759,000
              )Various
                  other
              
              12,000
              
              
              --Discontinued
                  Operations
              
              759,000
              
              
              --$
              771,000
              
              $
              (759,000
              )
 
 
 Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        the amounts used for income tax purposes. Significant components of our deferred
        tax assets and liabilities as of December 31, 2006 and 2005 are as
        follows:
 
 **December
                  31, 2006**
              
              **December
                  31, 2005**Deferred
                  tax assets:Federal
                  net operating loss
              $
              4,971,000
              
              $
              6,745,000Allowance
                  and accruals not recognized for income tax purposes
              
              --
              
              
              --Total
                  gross deferred tax assets
              
              4,971,000
              
              
              6,745,000Less
                  : Valuation allowance
              
              (4,971,000
              )
              
              (5,986,000
              )Net
                  deferred tax assets
              $
              --
              
              $
              759,000Deferred
                  tax liabilities:Total
                  gross deferred tax liabilities:Depreciation
                  and amortization, net
              
              --
              
              
              --Deferred
                  state tax liability
              
              --
              
              
              --Total
                  net deferred tax liabilities
              $
              --
              
              $
              --
 
 
 These
        amounts have been presented in the consolidated balance sheets as
        follows:
 
 **December
                  31, 2006**
              
              **December
                  31, 2005**Current
                  deferred tax asset
              $
              --
              
              $
              759,000Current
                  deferred tax liability
              
              --
              
              
              --Non
                  current deferred tax asset
              
              --
              
              
              --Non
                  current deferred tax liability
              
              --
              
              
              --Total
                  net deferred tax asset
              $
              --
              
              $
              759,000
 
 
 F-15
 Table
            of Contents
  In
        July
        2006, the FASB issued FASB Interpretation No. 48, *“Accounting
        for Uncertainty in Income Taxes” - an interpretation of FASB Statement No. 109 (
        FIN 48* *)* . 
        This interpretation of SFAS No. 109 prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return.  This
        interpretation also provides guidance on de-recognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition.  The interpretation is effective for fiscal years
        beginning after December 15, 2006.  Nathaniel Energy has reserves related
        to certain of its tax positions, which would be subject to analysis under
        FIN
        48 . 
        Specifically, the Company believes there may be an exemption for some or
        all of
        the gain from the sale of the helium assets under the Oklahoma source capital
        gain exception for corporations for purposes of Oklahoma state income tax.
        In
        addition, the Company believes there is justification for the utilization
        of
        certain outside basis adjustments incurred by the Company in 2005 as a reduction
        of its taxable capital gain for both federal and state tax reporting purposes.
        Nathaniel Energy will adopt FIN 48 as of January 1, 2007, as required. The
        cumulative effect, if any, of adopting FIN 48 will be recorded in retained
        earnings. Nathaniel Energy has determined that the adoption of FIN 48 could
        have
        a significant impact on Nathaniel Energy’s consolidated financial statements
        ranging from zero to $379,000.
  **10.  
        Stockholders’ Equity**
 
 On
        October 12, 2005, we filed an amendment to our certificate of incorporation
        with the Delaware Secretary of State. The amendment increases our authorized
        shares of common stock from 75,000,000 to 200,000,000 shares and preferred
        stock
        from 2,000,000 to 10,000,000 shares.
  **Preferred
        Stock**
 
 The
        Company has 10,000,000 shares of preferred stock, $0.001 par value, authorized
        for issuance. Our board of directors is vested with the authority to provide
        for
        the issuance of and terms of the preferred shares. No preferred shares have
        been
        issued and no terms have been provided a December 31, 2006.
 
 **Common
        Stock**
 
 The
        Company has 200,000,000 shares of common stock $0.001 par value, authorized
        for
        issuance. As of December 31, 2006, 90,731,596 shares of common stock were
        issued and outstanding.
 
 Twelve
        months ended December 31, 2006
 
 During
        the twelve months ended December 31, 2006, the Company issued 33,333 shares
        of
        common stock previously classified as Shares to be Issued. These shares were
        issued in satisfaction of certain liabilities of the Company which were agreed
        to be settled for stock in a previous period.
 
 Twelve
        months ended December 31, 2005
 
 During
        the twelve months ended December 31, 2003, the Company entered into a debt
        conversion agreement with Mr. Richard Strain, a related party. Pursuant to
        that
        conversion agreement, $10,000,000 of our indebtedness to Mr. Strain was
        converted into an aggregate of 50,000,000 shares of our common stock. At
        the
        time we entered into the conversion agreement, we an insufficient number
        of
        shares authorized to issue to Mr. Strain the full 50,000,000 shares due to
        him
        under the conversion agreement. During the twelve months ended December 31,
        2003, we issued 30,000,000 shares of common stock pursuant to the conversion
        agreement, and recorded the additional 20,000,000 shares of common stock
        due to
        Mr. Strain as common stock to be issued on the Company’s balance sheet at
        December 31, 2003. During the twelve months ended December 31, 2005, the
        Company
        issued these 20,000,000 shares to Mr. Strain.
 
 In
        connection with the conversion, Mr. Strain received the right to demand
        registration of the resale of the shares at any time after January 3, 2004.
        Additionally, Mr. Strain was granted piggyback registration rights relating
        to certain registration statements which Nathaniel Energy files after
        January 3, 2004, if any. Mr. Strain owns 61.32% of the issued and
        outstanding shares of common stock of the Company as of December 31,
        2006.
 
 Also
        during the twelve months ended December 31, 2005, the Company issued 500,000
        shares of common stock with a fair value of $87,500 for legal services.
 
 F-16
 Table
            of Contents
  **11.
        Minority Interest**
 
 On
        September 29, 2005 we entered into a Stock Purchase Agreement with
        Mr. Richard Strain to purchase the 49% minority interest in our 51% owned
        subsidiary, Nathaniel Energy Oklahoma Holdings Corporation, owned by
        Mr. Strain, and issued a $3,354,210 promissory note to Mr. Strain. We
        recorded the $3,354,210 promissory note as a current note payable due
        stockholder with a corresponding reduction in our additional paid-in capital
        on
        our balance sheet as of December 31, 2005. This note was paid in full to
        Mr. Strain during the twelve months ended December 31, 2006 (note
        6).
 
 Pursuant
        to our Purchase and Sale Agreement with Midstream for the sale of our helium
        and
        gas operations (note 3), the purchase price under that agreement was subject
        to
        an upward adjustment by up to $1,800,000 if Midstream and Colorado Interstate
        Gas entered into an agreement for nitrogen and/or air blending services which
        commences on or before January 1, 2007. This agreement was entered into in
        December 2005. As a result of this upward adjustment, we paid Richard Strain
        an
        additional $882,000 at closing. This amount was charged to additional paid-in
        capital on the Company’s balance sheet at December 31, 2006.
 
 **12.  
        Commitments and Contingencies**
 
 **Commitments**
 
 We
        signed
        a Co-Processing Agreement with Energis, LLC, effective September 30, 2005,
        to supply tire-derived-fuel of up to 1,500 tons per month from our tire fuel
        processing facility in Hutchins, Texas to their cement kiln operation in
        Texas.
        The agreement has a three-year term, automatically renewable for additional
        one
        year terms with extensions not to exceed three years, unless either party
        provides a 90 day advance notification of its intent not to renew.
 
 **Litigation
        and Claims**
 
 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.
 
 The
        Company is a defendant in a suit by a former employee alleging violation
        of Fair
        Labor and Standards Act and Title VII of the Civil Rights Act. The proceeding
        is
        being adjudicated in US District Court of Northern Texas—Dallas Division. The
        case is being vigorously defended, and management considers the suit to be
        without merit. The court has ordered the parties to attend mediation but
        it is
        undetermined if the case will settle.
 
 **Environmental
        Liability**
  Nathaniel
          Energy has approximately 60,000 tons of whole tires, partially shredded
          tires,
          tire chips and process waste stored onsite at the Hutchins TDF processing
          facility. The waste material consists primarily of steel belting wire with
          attached tire rubber and will be disposed of either in a land reclamation
          project using tires (LRPUT) now under negotiation, or in a permitted landfill.
          In the past, management has considered the piles of tires and tire shreds
          on the
          facility an asset to be reclaimed and sold to an end user. However, in
          order to
          reclaim the material for resale, we would need to install additional equipment
          to screen the material for potential contaminants in the piles such as
          rocks,
          pieces of metal and concrete. Rather than shredding these tire piles, management
          believes we could improve existing processing capability and potentially
          receive
          more than double our current processing capacity of new whole tires for
          which we
          would receive a tipping fee. In addition, the BTU value of the tires and
          tire
          chips stored onsite has been somewhat degraded by oxidation and weathering.
          We
          have chosen not to utilize this whole tire and tire chip inventory as feedstock
          for processing due to the economic benefit of receiving new whole
          tires.
 
 While
        management considers the piles a potential asset, they also represent a
        potential liability if the company were to fail. In such a case, we would
        be
        required to restore the site beginning with transporting the material to
        a
        disposal site (LRPUT or landfill). There are an estimated 60,000 tons of
        tires
        and tire shreds on site; at $25.00 per ton, the estimated maximum total cost
        of
        disposal is approximately $1,500,000. We are currently pursuing less costly
        alternatives to dispose of this material, including utilizing a potential
        LRPUT
        site within twelve miles of the Hutchins facility. We believe the minimum
        cost
        of disposing of this material is $150,000, and accordingly, this amount has
        been
        included in current liabilities at December 31, 2006. Due to projected
        uncertainty of the timing and amount future cash flows to be received from
        our
        TDF processing facility, the cleanup obligation was recorded as a charge
        to
        earnings in 2006.
 
 F-17
 Table
            of Contents
  **13.  
        Segment Data**
 
 The
        Company conducts business in two separate facilities presently managed as
        two
        energy operating business segments, alternative energy and tire fuel processing.
        The location and use of our facilities are shown as follows:
  -
        the
        renewable energy (EfW) and energy-from-waste operation and corporate offices
        in
        Englewood, Colorado and
 -
        the
        tire fuel processing operation in Hutchins, Texas.
  **Year
                  ended December 31, 2006****Fuel**
              ****
              **Renewable**
              ****
              **Discontinued**
              ****
              ****
              ********
              **Processing**
              ****
              **Energy
                  and EfW**
              ****
              **Helium
                  Operations**
              ****
              **Total**Revenue
              $
              1,114,887
              
              $
              -
              
              $
              34,597
              
              $
              1,149,484Significant
                  non-cash expenditures:depreciation
                  and amortization
              $
              297,966
              
              $
              99,780
              
              $
              -
              
              $
              397,746Net
                  income (loss)
              $
              1,314,996
              
              $
              (562,721
              )
              $
              6,313,101
              
              $
              4,435,384Capital
                  expenditures
              $
              105,077
              
              $
              -
              
              $
              -
              
              $
              105,077Total
                  assets as of December 31, 2006
              $
              1,615,513
              
              $
              139,669
              
              $
              -
              
              $
              1,755,182
  **Year
                  ended December 31, 2005****Fuel**
              ****
              **Renewable**
              ****
              **Discontinued**
              ****
              ****
              ********
              **Processing**
              ****
              **Energy
                  and EfW**
              ****
              **HeliumOperations**
              ****
              **Total**Revenue
              $
              609,428
              
              $
              80,000
              
              $
              -
              
              $
              689,428Significant
                  non-cash expenditures:depreciation
                  and amortization
              $
              270,953
              
              $
              -
              
              $
              -
              
              $
              270,953Net
                  income (loss)
              $
              (447,469
              )
              $
              (846,626
              )
              $
              1,055,611
              
              $
              (238,484
              )Capital
                  expenditures
              $
              1,035,505
              
              $
              -
              
              $
              -
              
              $
              1,035,505Total
                  assets as of December 31, 2005
              $
              1,826,211
              
              $
              275,449
              
              $
              11,805,293
              
              $
              13,906,953
 
  **14.  
        Lease Commitments**
 
 Nathaniel
        Energy leases certain office facilities under non-cancelable operating leases
        that expire at various dates through 2008. At December 31, 2006, 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:
 
 2007
              
              $
              63,9382008
              
              
              16,1022009
              
              
              —2010
              
              
              —2011
              
              
              —Total
                  minimum lease payments
              
              $
              80,040
  Rent
          expense for operating leases, including month-to-month rentals, was $79,219
          and
          $171,037 for the years ended December 31, 2006 and 2005,
          respectively.
  F-18
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            of Contents
   **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**Date: April
                  2, 2007
                By:
                /s/ Brad
                  E.
                  BaileyBrad E. BaileyChief
                  Executive Officer
                  (Principal
                    financial officer)
 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.
 
 /s/
                      Karen
                      Smythe
                    Karen
                      Smythe, Director
                    Date:
                      April 2, 2007
                    
                    
                    /s/
                      Michael
                      Burdis
                    Michael
                      Burdis, Director
                    Date:
                      April 2, 2007


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