**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-KSB**

| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------------------------------------------------------------------------------------------|
| ** ** | **For the Fiscal Year Ended  December 31, 2005**                                          |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**   |

 

**For the transitionperiod from                       to                      **

**CommissionFile No. 000-27783**

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**NATHANIEL ENERGY CORPORATION**

(Exact name of smallbusiness issuer as specified in its charter)
| **Delaware**  (State or other jurisdiction of  Incorporation or organization)                                   |   | **84-1572525**  (I.R.S. Employer  Identification No.) |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
| **8001 South InterPort Blvd.****Suite 260, Englewood, Colorado**  (Address of Principal executive Offices) |   | **80112**  (Zip Code)                                 |

 

**(303)690-8300**

(Issuer’s telephonenumber, including area code)

Securitiesregistered under Section 12(b) of the Exchange Act: None

Securitiesregistered under Section 12(g) of the Exchange Act:

**Title of class:**Common Stock, $0.001 par value per share

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   x Yes   o No

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B in this form, and no disclosure willbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB.   o

Nathaniel Energy’s revenues for its most recent fiscalyear (2005): $689,428

The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theaverage bid and asked price of such common equity, as of March 24, 2006was $6,294,216.

The number of shares outstanding of each of the issuer’sclasses of common equity, as of March 24, 2006 is 90,698,263 shares.

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

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**NATHANIELENERGY CORPORATION**TABLE OF CONTENTS

|                             | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
|                        |       |                                                                                                               |       |     |
| Forward  Looking Statements |       | 3                                                                                                                  |
|                        |       | **PART I**                                                                                                    |       |     |
| Item 1.                     |       | Description of  Business                                                                                           |       | 4        |
| Item 2.                     |       | Description of  Property                                                                                           |       | 14       |
| Item 3.                     |       | Legal Proceedings                                                                                                  |       | 14       |
| Item 4.                     |       | Submission of  Matters to a Vote of Security Holders                                                               |       | 14       |
|                        |       | **PART II**                                                                                                   |       |     |
| Item 5.                     |       | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer of  Purchase of Equity Securities |       | 15       |
| Item 6.                     |       | Management’s  Discussion and Analysis or Plan of Operation                                                    |       | 16       |
| Item 7.                     |       | Financial Statements                                                                                               |       | 24       |
| Item 8.                     |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                         |       | 24       |
| Item 8A.                    |       | Controls and  Procedures                                                                                           |       | 24       |
|                        |       | **PART III**                                                                                                  |       |     |
| Item 9                      |       | Directors and  Executive Officers of the Registrant                                                                |       | 25       |
| Item 10                     |       | Executive  Compensation                                                                                            |       | 28       |
| Item 11                     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   |       | 28       |
| Item 12                     |       | Certain  Relationships and Related Transactions                                                                    |       | 30       |
| Item  13                    |       | Exhibits  List and Reports on Form 8-K                                                                        |       | 31       |
| Item 14                     |       | Principal  Accountant Fees and Services                                                                            |       | 33       |

 

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**FORWARD LOOKINGSTATEMENTS**

Certain informationcontained in this report may include “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995, and is subjectto the safe harbor created by that act. The safe harbor created by theSecurities Litigation Reform Act will not apply to certain “forward lookingstatements” because we issued “penny stock” (as defined in Section 3(a)(51)of the Securities Exchange Act of 1934 and Rule 3a51-1 under theExchange Act) during the three year period preceding the date(s) on whichthose forward looking statements were first made, except to the extentotherwise specifically provided by rule, regulation or order of the Securitiesand Exchange Commission. We caution readers that certain important factors mayaffect our actual results and could cause such results to differ materiallyfrom any forward-looking statements which may be deemed to have been made inthis information statement or which are otherwise made by or on behalf of us.For this purpose, any statements contained in this report that are notstatements 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 comparableterminology are intended to identify forward-looking statements. Factors thatmay affect our results include, but are not limited to, the risks anduncertainties associated with:

·       Risksthat a post-closing determination of the purchase price adjustments for thesale of our helium and gas processing facilities and operations will not resultin a material, or any, increase to the price paid at closing.

·       Ourability to raise capital necessary to implement our business plan.

·       Ourability to execute our business plan and commercialize the Thermal GasifierTMtechnology, including building Thermal GasifiersTM that meet customers’specifications and that meet local regulatory environmental and permitrequirements.

·       Risksrelated to dependency on a small number of customers.

·       Ourability to satisfy our customers’ expectations.

·       Ourability to employ and retain qualified management and employees.

·       Changesin government regulations which are applicable to our business.

·       Theavailability of a consistent, economically viable, and sustainable waste streamsupply to fuel the Thermal GasifierTM operations.

·       Changesin the demand for our products and services, including the impact from changesin governmental regulation and funding for alternative energy.

·       Thedegree and nature of our competition, including the reliability and pricing oftraditional energy sources, economic viability of other alternative energysources such as wind and solar power.

·       Ourability to pay debt service on loans as they come due.

·       Ourability to generate sufficient cash to pay our creditors.

·       Disruptionin the economic and financial conditions primarily from the impact of terroristattacks in the United States and overseas, threats of future attacks, policeand military activities and other disruptive worldwide political events.

We are also subject to other risks detailed from timeto time in other Securities and Exchange Commission filings and elsewhere inthis report. Any one or more of these uncertainties, risks and other influencescould materially affect our results of operations and whether forward-lookingstatements made by us ultimately prove to be accurate. Our actual results,performance and achievements could differ materially from those expressed orimplied in these forward-looking statements. We undertake no obligation topublicly update or revise any forward-looking statements, whether from newinformation, future events or otherwise.

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**PART I**

**Item1.**                        Descriptionof Business.

**General**

OurMission is to provide a lower cost, clean dependable energy alternative tofossil fuels worldwide. Over the last three years, Nathaniel has positioneditself as a hydrocarbon-based waste-to-energy company that providesmunicipalities and industries with solutions that divert waste from landfillswhile providing a clean alternative energy comparable to that of fossil fuels. Nathaniel’smain focus is on its proprietary patented technology, the Thermal GasifierTM,which is a 2-stage gasification system designed to convert industrial andcommercial waste, biomass, waste tires and most any other solid,hydrocarbon-based materials into clean economical thermal and electricalenergy, while exceeding the most stringent EPA and European Union emissionregulations.

Wehave been in the fuel processing business, including waste tire recycling andcollection services, since 1997, and we have operated a 27 acre tire fuelprocessing facility in Hutchins, Texas since 1999. During 2005, we improved theequipment and facilities to further expand the fuel processing operation towarda full fuel procurement division to support the planned commercialization ofour Thermal GasifierTM business.

Weoperated a helium and gas processing facility in Keyes, Oklahoma from April 2003to March 7, 2006 when we sold the assets which comprise our helium and gasprocessing facilities and operations to Midstream Energy Services, LLC.

Duringthe year ended December 31, 2005, our tire fuel processing and alternateenergy businesses generated 88% and 12% of our total revenue, respectively.

Ourlong term goal is to produce the majority of our revenue and cash flow from thecommercialization of our Thermal GasifierTM technology. As a result, themajority of our resources are focused on this business model.

Wefocus our patented technology, the Thermal GasifierTM in three main areas;creating energy infrastructures, building, owning and operating small waste-to-energyplants and licensing.

Weplan to build energy infrastructures for certain industries that have a need todispose of hydrocarbon-based materials and seek an independent source of energyin the form of heat, steam and/or electricity. These energy infrastructureswould be built on the businesses’ premises (“inside the fence”) and can reducethe dependence a business has on fossil fuels and power from the local utility.In some cases, the energy infrastructures can become a business’ selfsustaining utility. We plan to identify new and existing sites where we canbuild, own and operate small waste-to-energy plants through our own resourcesor in conjunction with joint venture partners. Eventually, we plan to licensethe Thermal GasifierTM technology to qualified companies, joint venturepartners, and distributorships as we mature our commercialization activities.

We continued to work with and support the projectowner of our two Thermal GasifiersTM constructed in Cologna Veneta, Italy during2005. In addition, we began using the operating Thermal GasifierTM units inItaly for our sales, marketing and research efforts. We have recognized norevenue from the sale or delivery of our Thermal GasifiersTM through our yearended December 31, 2005.

**Description of Thermal GasifierTM Technology**

TheThermal GasifierTM uses waste tires (tire-derived-fuel—TDF), fuel derived frommunicipal and industrial waste streams (refuse-derived-fuel—RDF), wood waste,and agricultural waste (biomass). Fuel for the Thermal GasifierTM is placed on abelt that moves through a chamber where it is subjected to high temperaturesand converted from a solid to a gas in a process called gasification. Theresulting gas which is called synthesis gas or syngas is withdrawn into aseparate chamber where it is combusted at temperatures 

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of approximately three thousand degrees Fahrenheit,and produces heat, elemental carbon, carbon dioxide, low levels of carbonmonoxide, sulfur dioxide, and nitrogen oxides. The process also generates twoforms of ash. The first is bottom ash, the unburnable solids remaining in thefuel, such as the burned carbons, metals, rock and sand. The second is fly ash,small particles commonly known as particulate, which is captured in filters.

As aresult of the pre-combustion gasification and high temperatures achieved in theThermal GasifierTM, pollutants are only generated in very small quantities, wellbelow current EPA environmental standards. The Thermal Gasifier’sTM hightemperatures destroy 99.9% of hazardous air pollutants emitted fromrefuse-derived-fuel and tire-derived-fuel, including PCBs, dioxins, and furans.Most gaseous pollutants are captured by scrubbers or catalytic converters andthe remaining pollutants fall well below EPA standards.

Theconstruction of the Thermal GasifierTM is relatively straightforward and, ourprocess control system features modern computer technology. The process controlsystem monitors and controls all aspects of fuel and air volume to maintainoptimal combustion. This system is semi-automated reducing the manpower neededto supervise the Thermal Gasifier’s TM operation. The process control systemfeatures self-diagnostic and corrective action functions prompting the operatorto take action if a problem occurs which is beyond the ability of the computersystem to correct. The Predictive Failure Analysis function pinpoints potentialweak spots that can be dealt with as a preventative maintenance item before amore costly failure occurs.

While the Thermal GasifierTM is adaptable to most anycombustible material, the Rubber Manufacturers Association has reported thattire-derived-fuel has higher heat energy by weight than most types of coal,with lower moisture content, more combustible matter and less fixed carbon ascompared to most types of coal. We believe that the abundance of discardedtires in the United States and the European Union and the resultingenvironmental hazard they represent provides an opportunity to expand ourcollection and shredding of waste tires, for fuel for the Thermal GasifierTM.

**EnvironmentalTesting**

In May 2000 Bord Na Mona Environmental Limited,an environmental management company conducted a comprehensive environmentaltest on our behalf of a Thermal GasifierTM temporarily installed at a facilityin County Louth, Ireland. During this testing the Thermal GasifierTM was fueledwith refuse-derived-fuel. Testing was conducted for more than 50 differentchemical pollutants, including dioxins and PCBs, many of which are extremelyhazardous. The report concludes that the Thermal GasifierTM was within then andpending European directive limits. Management believes it is significant thatthe tests show extremely toxic substances in emissions, including dioxins,furans, chlorophenols, chlorobenzenes, and polycyclic aromatic hydrocarbons aresignificantly below the allowable European limits, less than 10% of standard inall cases, with many compounds completely absent.

**MarketableByproducts**

Mostbyproducts of the Thermal GasifierTM can be marketable.

Primary byproducts include:

·       Heat—useable for heatingpurposes, such as heating and cooling adjacent facilities, or for steamgeneration.

·       Electricity—produced by theaddition of steam turbines and generators, for use in a companion project orfor sale to the local utility.

Secondary byproducts include:

·       Carbon black (when TDF isthe fuel used), which can be sold for use in tire manufacturing, waterfiltration, and in the cosmetics industries.

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·       Carbon dioxide, which canbe sold to greenhouse operators for use in growth enhancement or for otherindustrial processes involving carbonation.

·       Sulfur dioxide, which canbe sold in the form of gypsum.

·       Nitrogen, which can be soldfor industrial and cryogenic uses.

Ourability to market any of these secondary byproducts is dependent upon thedemand for those byproducts in the local business community and our ability tofurther process and distribute them at competitive prices.

We believe the marketable byproducts produced by theThermal GasifierTM are ideally suited for use in proximity with a variety ofindustrial operations, such as gas pipelines, chemical plants, printingfacilities, industrial parks, and designated “clean energy” generation sites,especially in colder climates where heat is used for heating adjacentstructures or for co-generation of electricity. We have generated no revenuefrom the sale of Thermal GasifiersTM or any byproducts from the operation of aThermal GasifierTM to date.

**BusinessModel**

Wefocus our patented technology, the Thermal GasifierTM in three main areas;creating energy infrastructures, building, owning and operating smallwaste-to-energy plants and licensing.

Ourprimary plan is to seek qualified joint venture partners to build, own andoperate small waste-to-energy plants or utilize our technology under a licensewhere we will become an ongoing participant in the project. Our joint venturepercentage ownership will vary with each venture. We are focused on forming joint ventures with partners whopossess one or more of the following attributes:  financial capability to cover the project’sdevelopment and capital costs, governmental resources to assist in thepermitting, technical expertise, and host business applications that willsupport a successful operation. We have not generated any revenue fromlicensing or joint ventures to date. Eventually, we plan to license the ThermalGasifierTM technology to qualified companies, joint venture partners, anddistributorships as we mature our commercialization activities.

NathanielEnergy is presently divided into two business segments; renewable energythrough waste-to-energy plants utilizing our Thermal GasifierTM technology andtire fuel processing providing an alternative fuel supply from waste tires. Goingforward we will build on our present organization and take advantage ofexisting strengths. The Thermal Gasifier’sTM commercial activities will beconcentrated in our wholly owned subsidiary, Cleanergy, Inc., created in2005. Cleanergy’s primary mission will be commercialization of the technologyby creating energy infrastructures for commercial and industrial customers, andbuilding, owning and operating small waste-to-energy plants alone or underjoint venture.

Some of our waste-to-energy plants may have asustainable supply of waste fuels available from the host/customer with noadditional fuel needed, which is the ideal situation. Other facilities mayrequire additional fuel to utilize installed generation capacity, or they mayneed supplemental fuel to raise the average fuel value or the volume of fuelneeded to efficiently operate the technology. Cleanergy will use our tire fuelprocessing facilities, such as the Hutchins, TX operations, to furnish tire-derived-fuelto those waste-to-energy plants that need supplemental fuel within that region.The tire fuel processing division will continue to expand and eventually growtoward a full fuel procurement agent for all other fuels at plants withcapacity greater than the local waste fuel supply. This will take advantage ofexisting expertise within Nathaniel and allow us to increase throughput atvarious tire fuel processing facilities as we expand, create a new market forour tire-derived-fuel (as environmental regulations tighten up on our currentcustomers) and position us as a “turn key” provider of waste-to-energysolutions.

**ProposedExpansion of Business**

Wecontinued to work with and support the project owner of our two ThermalGasifiersTM constructed in Cologna Veneta, Italy during 2005. In addition, webegan using the operating Thermal GasifierTM units 

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in Italy for our sales, marketing and research effortsduring 2005. The Thermal GasifiersTM are being used in a co-generationwaste-to-energy plant. Our contracts for this project have been amended severaltimes and most recently under the terms of the amended agreement, we wererequired to have both Thermal GasifiersTM operating on RDF and capable ofproducing 19,240 Kilograms of steam per hour, by June 30, 2005.

Our responsibilities to perform our obligations underthe new agreement were subject to other parties involved in the projectfulfilling their respective obligations, which needed to be completed before wecould perform certain aspects of our obligations. The June 30, 2005completion date has been further extended to an undefined date in 2006 to allowthe other contract parties to correct and fulfill their respective duties underthe amended contract.

Whilethe plant continues to operate at reduced capacity our compensation under theagreement for $2,100,000 less any penalties will require us to complete thefinal performance testing. We are also entitled to reimbursement ofapproximately $275,000 for costs incurred for shipping, transport and packagingcosts, and monthly payments of $40,000 to provide on-site technical support forthe final start up testing, training and operation of the Thermal GasifiersTM.

Thecontract provides financial penalties if the performance of the ThermalGasifiersTM do not meet performance output guarantees specified in theagreement. The delays on the performance testing are due to other contractparties making changes to other equipment that will have a direct effect on thefinal performance. Those parties are trying to improve these systems to limitany penalties during testing. Penalties on the output of steam from the ThermalGasifiersTM reduce our payments by $11,000 for each tenth of a percentage pointif the unit’s steam output is less than the output indicated in the agreementup to $649,000. If the steam output deficiency is greater than 15%, there is anadditional penalty of $14,510 for each 1% deficiency in output below 15%. Thesepenalties apply unless our inability to perform is related to another party’sperformance, specifically, delivery of fuel in accordance with specificationswhich have a direct relationship to the Thermal GasifierTM steam output. We havethe right to test fuels provided to determine whether such fuels meet thecontracted fuel specification.

Underthe contract, any intellectual property and know-how related to any change orupdate to any part of the Thermal GasifierTM is owned and retained by us and wewill have access to the facility for demonstration, marketing and researchpurposes, including access to operating data, fuel samples and otherinformation related to the operation of the facility.

During2005 we were paid a total of $600,000 toward the contract price and received$60,000 in consulting fees related to on-site technical support. Although webelieve we have performed in accordance with our contract and continue tosupport the project owner we are also working to collect the full contractprice. The amount of payments, other than those received, and date ofcollection is uncertain at this time.

Aswe expand our business development activities we will continue to use thewaste-to-energy plant in Cologna Veneta, Italy as “proof of process” for ourfirst commercial Thermal GasifiersTM demonstration of a more economical, cleandependable energy alternative to fossil fuels worldwide. The focus will be onforming joint ventures with partners or customers that will benefit fromwaste-to-energy facilities in an “inside the fence” opportunity where there isan urgent need to solve a waste disposal problem and an energy need at aspecific host location. The  need for awaste disposal option combined with the host’s option to use the total energyoutput from the Thermal GasifierTM, specifically when the industrial ormunicipal customer buys 100% of the steam and/or electric output from theproject, represents a “closed loop” contract arrangement. This arrangement avoidsour market price risk from the ongoing sale of the energy commodities andcontractually matches the energy production obligation directly to the heatcontent of the disposed waste. Selling the energy commodities at a retail rateto the host enhances the return on a project.

Thereare two distinct trends pulling our solution into the marketplace, theincreasing interest in waste disposal options and a need to contain everincreasing energy costs driven by our dependency on 

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fossil fuels. Our solution diverts waste fromlandfills, mitigates increasing costs associated with waste disposal and helpsreduce our dependency on fossil fuels thereby helping to contain energy costs.

Asthe market matures, the typical project will be a stand alone project that webuild, own, and operate solely or under a joint venture. We will need to takeadvantage of our operating flexibility as different quantities of various wastestreams are processed, based on fuel availability and fluctuation of quantitiesin regional markets. This will also require contractual flexibility in the saleof the energy commodity output, such as steam and/or electricity. Local marketpricing will have an impact on individual project returns in this type of “openloop” contract arrangement.

Oncethe market has fully matured, and the “best practices” for operating theThermal GasifierTM have been captured in standard operating procedures, therewill be an opportunity to leverage the sales of the Thermal GasifierTM withlicensing agreements to qualified companies, joint venture partners, anddistributorships.

We plan to transform the tire fuel processingoperations into a full waste fuel procurement and management division. Tireshave relatively high energy content and are an ideal fuel for the ThermalGasifierTM or can be blended with other waste fuels to achieve energy contentstability. We will receive a fee for accepting waste tires and expect todevelop additional markets for our current and future tire-derived-fuelproducts. We have completed equipment and facility improvements to increaseproduction at our tire fuel processing facility during 2005, which will allowus to increase our tire-derived-fuel revenues. At the same time we will prepareto support potential waste-to-energy projects in the southwest as we work atdeveloping this segment toward a complete fuel procurement and managementdivision.

**TireFuel Processing Operation**

Since1999 we have operated a tire fuel processing facility in Hutchins, Texas. UnderTexas State regulations we are licensed as a tire processor and tire storagefacility. We are paid a tipping fee (fee paid per tire received) for acceptingwaste tires. We process the waste tires into tire-derived-fuel at our facility.We sell the TDF product from our tire fuel processing operation to one majoruser, our primary customer, Energis, is a wholly owned subsidiary of a largecement company located in Texas, which uses the tire-derived-fuel for firingits kilns, thereby displacing equal amounts of coal.

During 2005, we renovated the facility and investedapproximately $1,100,000 in new equipment and improvements which increased ourprocessing capability and improved the quality of the tire-derived-fuel weproduce. The renovation was primarily completed by September 2005. Wenegotiated a new contract with our major customer, Energis, which increased ourtire-derived-fuel price to them by approximately 67% during the fourth quarterof 2005.  We are actively seekingadditional supply and customer contracts. As a result of our investment, ourtotal tire processing capacity increased from approximately 800 tons per monthto approximately 2,400 tons per month based on the equipment’s maximumperformance. Our average monthly production of tire derived fuel during thefourth quarter of 2005 was approximately 1,500 tons. During 2006, we expect toincrease the volume of waste tires we accept which will increase our tippingfee revenue.

**IntellectualProperty**

We own three U.S. patents, the latest issued in March 2003,and have two U.S. and two European patents pending.

Ourtwo initial patents apply to the construction methodology and design of ourThermal GasifierTM biomass burner and were issued in 1993 and 1994. Thesepatents expire in 2011 and 2012, respectively. One additional patent for ourgasifier system and method of gasification was issued in 2003 and expires in2018. Our patents cover the design of a fuel efficient dual combustion chamberand a unique computerized method of mixing air with combustible gas.

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We also have two US patent applications pending, onefiled during 2002 related to improvements in our gasifier system which reducesair and water pollutants and the second, filed in 2004, related to ouroxygen-based biomass combustion system and controls. In addition, two Europeanpatent applications are currently pending on our gasifier system and method ofgasification and on our oxygen based biomass combustion system.

**Government Approval / Environmental Laws andRegulation**

Operationof a Thermal GasifierTM and a tire fuel processing facility are subject to avariety of federal, state, and local laws and regulations, including thoserelating to the discharge of material into the environment and protection ofthe environment. The governmental authorities primarily responsible forregulating our environmental compliance are the U.S. Environmental ProtectionAgency (EPA), Department of Environmental Quality and comparable regulatoryagencies and departments in the states where we establish operations. We aresubject to the air quality programs under federal and state law.

Ourtire fuel processing operation in Texas is subject to regulation by the TexasCommission of Environmental Quality. We are registered with the TexasCommission on Environmental Quality which allows us to receive, store,transport and process waste tires. Our registration expires December 20,2007 and is renewable based upon our compliance with the Texas Commission’s rules governingwaste tire management. While we have been cited for certain compliance issuesduring the year, with the recent improvements we have made to these facilitieswe believe the tire fuel processing operation is now in compliance with thoserules. We continue to maintain our fuel processing facility to meet therequirements of the Texas Commission of Environmental Quality’s regulations,however, should we be unable to continue to fund our compliance, we could looseour permit to operate the facility. During 2005, we expensed approximately$10,000 to dispose of un-salable tire shreds.

Beforewe can begin any Thermal GasifierTM or tire fuel processing operations at anylocation, we are required to obtain air emission permits, as well as, obtainappropriate construction and other necessary permits.

Failure to comply with the laws promulgated by theseauthorities could result in monetary sanctions, liability for environmentalclean up, and other remedies. To maintain our compliance, we may makeoccasional changes in our waste generation and disposal procedures, ThermalGasifierTM operation or other operations. We believe these laws and regulationswill not have a material adverse effect on our capital expenditures orcompetitive position. We believe that our technology complies, in all materialrespects, with the various federal, state, and local regulations that apply toits current and proposed operations.

**Researchand Development**

During 2005, we spent $117,125 for research anddevelopment related to our Thermal GasifierTM technology and over $150,000 inengineering salaries dedicated to internal product development, expensed asgeneral and administrative expense. During 2004, we spent $68,729 for researchand development and over $100,000 in engineering salaries. In addition, wecapitalized $13,410 of patent related costs and $299,339 of cost related totechnical documentation, drawings, design engineering on our Thermal GasifierTM technologyin 2004. We plan to continue increasing internal product research anddevelopment with a goal of offering our customers the best and most efficientproduct solutions.

**MarketOpportunity**

Demandfor licensing the Thermal GasifierTM technology and creating energyinfrastructures or small waste-to-energy plants using the Thermal GasifierTM allincrease as the cost of traditional energy costs rise. In industries with highenergy demands such as chemical plants or refinery operations, grid blackoutsor other service interruptions also drive the need for more reliabledistributed energy infrastructures that can be provided utilizing the ThermalGasifierTM.

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Accordingto the Rubber Manufacturers Association (RMA), there are up to 275 millionwaste tires in stockpiles in the United States. The RMA estimates that in 2003alone, 290 million tires were scrapped. Of these 290 million tires, about 130million were used as fuel, 123 million were recycled, and 57 million weredisposed of or buried in landfills.

Theuse of waste tires for fuel is currently the largest single use of waste tires.Tire-to-energy technology preserves natural resources by utilizing the storedenergy in petroleum-based tires. Tires have a heating value of 12,000 to 15,000BTU’s per pound (6,668 to 8,335 kilo calories per kilogram). Each twenty pound(nine kilogram) car tire is equivalent to about twenty-five pounds (11.4kilograms) of bituminous coal. Tires contain less ash than most types of coaland less sulfur than most bituminous coals. Tires are shredded intotire-derived-fuel. In 2003, cement kilns, pulp and paper mills, electricutilities, waste-to-energy plants, and industrial boilers burned approximately130 million tires. However, management expects new emission regulations will beenacted which will reduce the percentage of waste tires used to fuel cementkilns and other industrial applications. Only a select few facilities use wholetires and/or tire-derived-fuel as the only fuel, most mix or “co-fire” thetires/tire-derived-fuel with other fuels, such as coal.

Our Thermal GasifierTM technology provides a viablemethod of utilizing waste tires, reducing landfill and stockpile accumulationswhile generating clean dependable energy and other marketable byproducts in anenvironmentally friendly manner.

**Competition**

Theexpanding alternative fuel industry is a rapidly changing field of technology.We compete within a broad spectrum of products as this industry continues toexpand including: traditional solid waste burners, fluidized bed boilers, windand solar technology and various forms of gasification technologies. Werecognize that to be competitive, we must continue to expand the applicationand utilization of the Thermal GasifierTM. Management believes that themodularity,  flexibility of multi-fuelcapability, associated low emissions, the advanced state of our development andcompetitive pricing for the manufacture and installation of the ThermalGasifierTM, positions us to capture a share of the waste-to-energy market.

There are numerous examples of laboratory scale andpilot plant operations, however, very few successful commercial scalefacilities have been constructed to extract the energy contained in solid wastematerials. The technologies that attempt to do so fall within a few basiccategories.

***Mass Burners/Incinerators***

These represent more than 95% of the installed base ofwaste-to-energy extraction facilities. These facilities take the solid materialand burn it in a heated air stream. The primary purpose of these facilities isto reduce the volume of the solid material prior to disposal or to render thesolid material less hazardous. Heat produced by this burning may be extractedby a boiler or it may be released directly into the environment. Most of theinstalled facilities are nearing the end of their useful lives and are notconsidered for replacement primarily due to the emission of air pollutionassociated with this equipment, or are being retrofitted to conform to thenewer environmental emission standards.

***Gasifiers***

Gasifiers represent the next generation in theevolution of mass burners and incinerators. The solid material is heated in anoxygen-starved environment  where thegaseous components of the solid material are released. These gaseous componentsor synthesis gas retain the heat producing qualities of the solid material. Thesynthesis gas is used to heat a boiler for steam, power an internal combustionengine or power a gas turbine. The only successful commercial gasifiers use theheat to produce steam in a boiler. There have been laboratory and pilot plantscale examples of gasifiers that collect the synthesis gas once quenched andcleaned to power internal combustion engines or turbines but they requirefurther engineering and development to prove economical to use. Currently thereare approximately 12 companies 

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investigating gasifiertechnology that have laboratory scale or pilot plant models, and one companywith a few operating plants that combust the synthesis gas to create heat toproduce steam and electricity.

***Plasma Conversion***

Plasma conversion uses electrically generated plasmato produce temperatures high enough to gasify solid fuels. The most successfulversion uses plasma to maintain a bath of molten iron in which the solid fuelis added. The fuel then gasifies and the synthesis gas is withdrawn to extractthe heat energy. Plasma conversion has the potential to become a successfulcommercial technology and represents potential competition for our technology. Capitalcosts for plasma conversion are higher than gasification but still competitive;however, the operating costs are significantly higher than gasificationoperating costs.

***Fluidized Bed Reactors***

Fluidized bed reactors function by injecting the solidfuel 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 forextraction of the heat energy. Fluidized bed reactors have been used for manydecades but have not gained recognition as a viable solid fuel conversiontechnology due to the myriad of engineering difficulties that have not beensolved. We do not believe that fluidized bed reactors will play an importantrole in the solid fuel energy extraction field.

***Retort***s

Retorts are vessels in which the solid fuel is placed.The vessel is then heated until the synthesis gas is released and collected. Thevessel is cooled, the remaining solid debris is removed and the processrepeated. Retorts have been used in a number of industrial-scale applicationsand all have proved economically, environmentally and technically unworkablefor energy extraction from solid fuels. To our knowledge, no new installationsof retorts are proposed or are being constructed.

The following table showsthe state of the market based upon data available at the end of 2005.

**SolidFuel Conversion Technology**

| **Technology**             | ** ** | ** ** | ** ** | **Installed Base (MW)(1)** | ** ** | **% Change from 2003  Increase (Decrease)** | ** ** |
|----------------------------|------------|------------|------------|--------------------------------------|------------|-----------------------------------------------------------------|------------|
| Mass  Burners/Incinerators |       |       | 795        |                                 |       |                                                            | (87        | ) |   |
| Gasifiers                  |       |       | 175        |                                 |       |                                                            | 15         |   |   |
| Plasma Conversion          |       |       | 15         |                                 |       |                                                            | 8          |   |   |
| Fluidized Bed  Reactors    |       |       | 280        |                                 |       |                                                            | (30        | ) |   |
| Retorts                    |       |       | 50         |                                 |       |                                                            | (90        | ) |   |

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Source:   NationalRenewable Energy Laboratory, 2005

(1)          Total megawattsproduced.

We are only aware of one gasifier technology companymarketing equipment for the 1 to 50 megawatt power market that has operatingfacilities. We do compete for waste-to-energy business with differentcompetitors in each addressed market. Our competitors, however, may havefinancial and marketing resources far greater than those available to us andmay have greater application for large waste streams, such as municipal wastefrom large cities.

In industries with high energy demands, such asspecialty gas plants, chemical manufacturing or refineries, we compete with thelocal utility which provides traditional electrical power, in addition toalternate power sources such as solar or wind power.

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In industries with regulated waste disposal, wecompete with incinerators and waste management companies. In some cases thesesolutions may provide lower cost waste disposal, but do not remove theemissions and/or pollutants from the environment.

For some municipalities,we may compete against other alternative energy sources, especially if themunicipality seeks to meet a mandated 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 energysources.

**Major Suppliers**

*Tire FuelProcessing Operation*

Nathaniel believes thereis a readily available supply of waste tires for which we are paid tipping feesand from which we process tire-derived-fuel. We accept waste tires from manysources and are not dependent on any one source for our supply.

*Thermal GasifierTMBusiness*

Nathaniel believes thereis a readily available supply of materials, equipment and associated vendors tofabricate, construct and operate our Thermal GasifiersTM in a waste-to-energyplant. Additionally, we believe the worldwide market for waste-to-energy plantscontinues to expand as energy costs increase and lessening our dependency onfossil fuels becomes more critical. Increasing energy costs coupled withburgeoning waste generation and fewer landfills provides a growing marketopportunity for our renewable waste-to-energy solutions. We do not believe weare dependent on any one source for our supply.

**Major Customers**

*Tire FuelProcessing Operation*

We have one major customer for our tire-derived-fuel. Energis,LLC ,an alternative fuel procurement subsidiary wholly owned by Holcim, Ltd. aglobal supplier of cement, aggregates and concrete with a large productionfacility located in Texas, accounted for approximately 30% of ourtire-derived-fuel revenue and 27% of our total revenue for the year ended December 31,2005. We entered into a contract with Energis effective September 30,2005. The three year contract with options to renew annually thereafter for anadditional three years provides that Energis must purchase an average monthlyminimum of 1,500 tons of our tire-derived-fuel. The contract establishes a baseprice for the tire-derived-fuel with a price re-opener at the end of year twoof the agreement. If at the end of the second year the parties cannot agree toa re-negotiated price, then Nathaniel has the right to continue supplyingEnergis at the current contract price. Either party has the right to terminatethe agreement at the end of the initial three year term giving the other party90 days advance notice of such termination. Should Nathaniel not be able tosupply Energis with the contracted supply of tire-derived-fuel under theagreement then Energis has the right to purchase material from another thirdparty supplier. Nothing in the agreement prevents Energis from purchasingsimilar material from another third party with the exception that Energis mustpurchase an annual quantity of 18,000 tons per year.

We believe that the lossof this customer would not have a material disruption to our overall salesvolume because we believe that we would be able to replace this customer in arelatively short time, however, we cannot guarantee that we will be able toreplace the contract with a contract whose terms will generate revenueequivalent to revenue we currently recognize.

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**Personnel**

We have 18 full timeemployees, with nine located at our corporate offices in Englewood, Colorado,eight at our fuel processing facility in Hutchins, Texas and one at oursatellite office in Houston, Texas. We believe that we will need to add fourfull time employees, including a night shift manager for the tire fuel processing business, to enable us to run twofull time operating shifts. We anticipate that significant personnel additionswill be required if we conclude Thermal GasifierTM project related contracts andobtain additional project funding for the energy infrastructure or smallwaste-to-energy plant business.

**Corporate History**

Nathaniel Energy Corporation was incorporated inDelaware in 1996 under the name of Ajax Reinsurance Limited. Ajax had no activetrade or business on or subsequent to its date of incorporation. Nathaniel,Ltd. was incorporated in Colorado in 1992. Nathaniel, Ltd. started its wastetire recycling business in 1997. In 1998, Nathaniel, Ltd. agreed to merge withG-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 NathanielEnergy Corporation.

On December 31, 2002, MNS Eagle Equity Group IV, Inc.(“MNS”) and its stockholders entered into a Stock Exchange Agreement withNathaniel Energy Corporation pursuant to which Nathaniel Energy acquired all ofMNS’s outstanding common stock. Currently MNS is not engaged in any business.

From 1997 to 2002, Nathaniel Energy’s operations werelimited to a tire fuel processing facility which sells its output oftire-derived-fuel to others primarily for use as an alternative fuel. On August 26,2002, Nathaniel Energy acquired MCNIC Rodeo Gathering, Inc. which owned18.55% of Keyes Helium Company, LLC. On April 3, 2003 Nathaniel Energyacquired the remaining 81.45% interest in Keyes Helium Company, LLC from CIGResources Company through our subsidiary, Nathaniel Energy Oklahoma HoldingsCorporation (NEOHC). Nathaniel Energy transferred all of the stock in MCNIC toNEOHC. Also on April 3, 2003, NEOHC acquired the Keyes gathering systemand Sturgis gas plant and compressor station from CIG Field Services Company.The Company improved and operated the helium and gas processing facilities fromApril 3, 2003 through March 7, 2006.

On March 7, 2006, we sold our helium and gasprocessing facilities and operations to Midstream Energy Services, LLC. At theclosing, giving effect to finally determined adjustments, Midstream delivered$16,915,676 to Nathaniel on account of the purchase price. Potential upwardadjustments to the purchase price in the amount of $280,414 which were not finallydetermined at the closing are subject to post-closing determination pursuant tothe procedures in the Purchase and Sale Agreement. Midstream assumed all theliabilities under the contracts included in the gas assets being sold thatarose after the closing date.

Nathaniel used $14,482,171of the sale proceeds to satisfy its indebtedness, including accrued interest,to Richard Strain, which reduced the company’s debt by approximately 89%. (See Part IIIItem 12 Certain Relationships and Related Party Transactions).

**Subsidiaries**

We have threewholly owned subsidiaries:

·       MNSEagle Equity Group IV, Inc., which currently has no operations,

·       Cleanergy, Inc.which was formed for the purposes of commercializing and marketing our ThermalGasifierTM; entering into  joint ventureand licensing agreements and; building and operating small waste-to-energyplants, and

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·       Nathaniel Energy OklahomaHoldings Corporation, which sold, on March 7, 2006, all of its interest inKeyes Helium Company, LLC, the Keyes gathering system and Sturgis gasprocessing plant and compressor station to Midstream. NEOHC also owns all ofMCNIC Rodeo Gathering Inc., its sole asset being an 18.55% interest in KeyesHelium Company, LLC, which was also sold to Midstream on March 7, 2006.

**Available Information**

The SEC maintains an internet site at www.sec.gov thatcontains the reports, proxy and information statements, and other informationregarding us. In addition, we provide easy access to these reports free ofcharge via our internet website, www.nathanielenergy.com. Information on ourwebsite is not part of this report.

We maintain a codes andpolicies page on our website, www.nathanielenergy.com. This page includes,among other items, the Nathaniel Energy Code of Business Conduct and Ethics forOfficers (Vice President and Senior) and Directors, and the Nathaniel EnergyCode of Business Conduct and Ethics for Employees and Officers (other than VicePresident and Senior).

**Item 2.**                        Descriptionof Property.

We own approximately 27 acres of property in Hutchins,Texas with a 13 year old 10,000 square foot covered structure for production ofthe tire-derived-fuel and a new 1,200 square foot standalone office located onthe property. We believe it is suitable for our existing waste tire reclamationand processing operations. This property has a mortgage loan, secured by acertificate of deposit, which has a principal balance of $215,070 and bearsinterest at an annual rate of 3.85%.

We lease 3,815 square feetof Class A office facility for our corporate offices in Englewood,Colorado and believe this space will meet our corporate business needs in 2006.We also lease approximately 500 square feet of office space in Houston, Texasfor some of our engineering personnel.

**Item 3.**                        LegalProceedings.

We are involved in routinelitigation which is incidental to our business, none of which is anticipated tohave a material adverse effect on our financial condition, operations orprospects.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

None

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**PART II**

**Item 5.**                        Marketfor Common Equity and Related Stockholder Matters and Small Business IssuerPurchases of Equity Securities.

Ourcommon stock is presently quoted on the Over-the-Counter Bulletin Board (OTCBB)under the symbol NECX. The following table sets forth, for the fiscal quartersindicated, the high and low close price quotations for our common stock asreported on the OTCBB. The quotations reflect inter-dealer quotations withoutretail markup, markdown or commission, and may not represent actualtransactions.

| ** **                                 | ** ** | **High**   | ** ** | **Low**    | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
| Fiscal Year Ended  December 31, 2004: | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                              |       | $          | 1.15       |       | $          | 0.65 |   |
| Second Quarter                             |       | $          | 0.55       |       | $          | 0.30 |   |
| Third Quarter                              |       | $          | 0.45       |       | $          | 0.14 |   |
| Fourth Quarter                             |       | $          | 0.24       |       | $          | 0.10 |   |
| Fiscal Year Ended  December 31, 2005: | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                              |       | $          | 0.25       |       | $          | 0.07 |   |
| Second Quarter                             |       | $          | 0.15       |       | $          | 0.05 |   |
| Third Quarter                              |       | $          | 0.10       |       | $          | 0.06 |   |
| Fourth Quarter                             |       | $          | 0.08       |       | $          | 0.05 |   |

 

**Stockholders of Record**

As of March 24, 2006,we had approximately 1, 019 stockholders of record.

**Dividends**

We have never declared orpaid any dividends on its common stock. We currently intend to retain anyearnings for use in the business and therefore do not anticipate paying anydividends in the near future. Dividends on our common stock can be paidlawfully 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 paidany dividends on the common stock and there is no assurance dividends will bepaid in the foreseeable future. The payment of dividends in the future restswithin the discretion of the Board of Directors and will depend, among otherthings, upon our earnings, our capital requirements and our financialcondition, as well as other factors, which the Board of Directors deems relevant.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

See Part III Item 11for a discussion about securities authorized for issuance under equitycompensation plans.

**RecentSales of Unregistered Securities**

| **Holder Name** | ** ** | ** **           | ** ** | **Issuance Date** | ** ** | **Number of Shares** | ** ** | **Total Price** | ** ** | **Type of Consideration** | ** **         |
|----------------------|------------|----------------------|------------|------------------------|------------|--------------------------------|------------|----------------------|------------|-------------------------------------|--------------------|
| Robert Barnett       |       | January 5, 2005 |       |                   | 500,000    |                           |       | $                    | 87,500     |                                | Services  rendered | ** ** |
| Richard Strain       |       | October 5, 2005 |       |                   | 20,000,000 |                           |       | $                    | 4,000,000  | (1)                                 | Conversion of debt | ** ** |

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(1)          Partial issuance ofshares in conversion of an aggregate of $10,000,000 of indebtedness into50,000,000 shares of common stock, pursuant to a Conversion Agreement dated October 3,2003 and amended on May 19, 2005. 30,000,000 shares were previously issuedwith respect to the conversing of this debt. This conversion of debt isdescribed in more detail under Part III, Item 12, “Certain Relationshipsand 

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Related Transactions” andNote 7 “Stockholders’ Equity” to our Financial Statements for the years ended December 31,2005 and 2004.

The above issuances were exempt from registrationunder Section 4(2) of the Securities Act of 1933. We did not use anyunderwriter or placement agent in these transactions, and did not pay anycompensation to anyone in connection with these issuances.

These issuance were madedirectly by us to persons with whom our management had direct contact and apre-existing relationship.

**Item 6.**                        Management’sDiscussion and Analysis or Plan of Operation.

**Results of Operations**

**SupplementalQuarterly Results of Operations**

Thefollowing tables set forth certain unaudited quarterly results of operations ofNathaniel Energy for 2005. The quarterly operating results are not necessarilyindicative of future results of operations. In September 2005, managementcommitted to a plan to dispose of the assets and liabilities of its helium andgas processing business. Revenues and expenses of this disposal group arereclassified for all periods as discontinued operations.

| ** **                                                 | ** ** | **Three Months Ended 2005 (unaudited)** | ** ** | **Year ended** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------|------------|
|                                                            | ** ** | **March 31**                                           | ** ** | **June 30**    | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Dec. 31,  2005** | ** ** |
| Revenue                                                    |       | $                                                           | 210,364    |                | $          | 111,966 |   | $ | 102,125 |   | $ | 264,973 |   | $ | 689,428 |   |
| Cost of revenue                                            |       | 226,130                                                     |       | 186,403             |       | 202,607 |   | 224,258 |   | 839,398 |   |
| Gross profit  (loss)                                       |       | (15,766                                                     | )          | (74,437             | )          | (100,482 | ) | 40,715 |   | (149,970 | ) |
| Selling, general and administrative expense                |       | 500,416                                                     |       | 398,204             |       | 418,205 |   | 402,652 |   | 1,719,477 |   |
| Loss from  operations                                      |       | (516,182                                                    | )          | (472,641            | )          | (518,687 | ) | (361,937 | ) | (1,869,447 | ) |
| Interest expense, net                                      |       | (64,160                                                     | )          | (67,320             | )          | (46,462 | ) | (148,690 | ) | (326,632 | ) |
| Gain (loss) on disposal of equipment                       |       | —                                                      |       | —              |       | 19,957 |   | (18,862 | ) | 1,095 |   |
| Other non-operating income (expense)(1)                    |       | —                                                      |       | 7,842               |       | 133,047 |   | 1,000 |   | 141,889 |   |
| Loss from continuing operations before income tax  benefit |       | (580,342                                                    | )          | (532,119            | )          | (412,145 | ) | (528,489 | ) | (2,053,095 | ) |
| Income tax  benefit                                        |       | —                                                      |       | —              |       | — |   | 759,000 |   | 759,000 |   |
| Income (loss)  from continuing operations                  |       | (580,342                                                    | )          | (532,119            | )          | (412,145 | ) | 230,511 |   | (1,294,095 | ) |
| Income from discontinued operations, net of tax            |       | 255,048                                                     |       | 219,321             |       | 225,752 |   | 355,490 |   | 1,055,611 |   |
| Net income (loss)                                          |       | $                                                           | (325,294   | )                   | $          | (312,798 | ) | $ | (186,393 | ) | $ | 586,001 |   | $ | (238,484 | ) |
| Net loss per  common share (basic and diluted)             |       | $                                                           | (0.005     | )                   | $          | (0.005 | ) | $ | (0.003 | ) | $ | 0.007 |   | $ | (0.01 | ) |
| Weighted-average  common shares outstanding-diluted        |       | 70,676,041                                                  |       | 70,698,263          |       | 70,698,263 |   | 83,959,133 |   | 74,035,249 |   |
| Shares outstanding at  end of period                       |       | 70,698,263                                                  |       | 70,698,263          |       | 70,698,263 |   | 90,698,263 |   | 90,698,263 |   |

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(1)          Otherincome during the third quarter includes $133,047 income from the settlement ofa note payable. We entered into a $728,637 note payable with a vendor on August 2005.During 

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September 2005,we made an advance payment on, and extinguished the note. The value of the noteof $728,637 less our principal cash payments and our lump sum payment through September 2005of $520,590 and an unsecured non-interest bearing note we exchanged in thesettlement of $70,000 is $138,047, which we have reflected as other income, netof estimated legal expense incurred in the settlement of $5,000.

**Year ended December 31, 2005 and 2004**

**Company Overview**

Our mission is to provide a lower cost, cleandependable energy alternative to fossil fuels worldwide. Our operational planfocuses on three major business models in the commercialization of our ThermalGasifierTM technology:  creating energyinfrastructures, building, owning and operating small waste-to-energy plantsand licensing. The tire fuel processing operation generated 88% and 100% of therevenue, or $609,428 and $561,573 during 2005 and 2004, respectively. Werecognized $80,000 of revenue from our Thermal GasifierTM business segmentduring 2005 for consulting fees related to on-site technical support for theThermal GasifiersTM provided to our customer in Cologna Veneta, Italy. Our longterm goal is to produce the majority of our revenue and cash flow from thecommercialization of our Thermal GasifierTM technology. As a result, themajority of our resources are focused on this business model.

Historically, we have not had difficulty findingpotential project opportunities. Worldwide, industries and municipalities seeklower cost and clean energy alternatives to fossil fuels. Demand for theseenergy alternatives is expected to grow. A key to our success will be wiselychoosing among project opportunities and focusing resources on projects withthe greatest chance of success and returns for stockholders. We areinvestigating numerous opportunities including a facility using municipal solidwaste (MSW) as fuel for our Thermal GasifierTM to produce thermal and electricalenergy and a facility using waste tires to produce electricity that would besold on the national electric grid.

We enter 2006 with a patented proprietary technologydeployed in a commercial application and have access to a commercial operatingfacility to use for marketing, testing and additional research and developmentefforts. Our current year mission is to contract and initiate implementation asa partner or joint venture member, commercial operations utilizing our ThermalGasifierTM technology.

At the same time, we are developing our internalresources, business alliances and advancing our business development activitiesto secure “inside the fence” energy infrastructure and small waste-to-energyfacility opportunities that utilize our Thermal GasifierTM technology.Additionally, we will seek project funding in some cases with joint venturepartners that will be based on the size, configuration and business structureof the project. We anticipate that the timeframe from identification of aproject to completion will be 12 to 24 months, provided we obtain the requisiteproject financing.

We plan to continue toimprove operations at our tire fuel processing facility in Hutchins, Texasduring 2006. The tire fuel processing facility is currently the only storageand processing facility licensed by the State of Texas to operate in the DallasMetro area. We successfully funded and made approximately $1,100,000 of capitalimprovements to the facility which has resulted in an increase in the number ofwaste tires we accept, increasing tipping fee revenue, and increasing revenuefrom 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 generateoperating cash flows was hindered by the general poor quality of the existingequipment, requiring constant repair and maintenance due to the age of theequipment and the resulting low pricing on tire-derived-fuel produced. Theaddition of new equipment combined with existing equipment and certain facilityimprovements have resulted in signing new contracts for the acceptance anddisposal of waste tires, thereby increasing our tipping fee revenues. The newequipment has improved the quality of the tire-derived fuel we produce andsell, resulting in higher pricing for the tire-derived-fuel used as analternate fuel. Furthermore, the facility improvements have allowed us toincrease the volume of the tire-derived-fuel produced.

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**Operatingresults 2005 compared to 2004**

In March 2006, we disposed of our helium and gasprocessing plant. For purposes of the financial statements, this plant has beenaccounted for as a discontinued operation. Items of revenue and direct expensesincurred or properly allocable to the helium and gas processing plant have beenreclassified in the 2004 year to conform to the current year presentation. Unlessotherwise noted, the operating results discussed herein relate to ourcontinuing operations.

For the year ended December 31, 2005 revenue fromcontinuing operations increased from $ 561,573 in 2004, to $689,428 in 2005, anincrease of $127,855. The increase is primarily due to consulting fees of$80,000 in 2005 for on-site technical support for our Thermal GasifiersTM webuilt for our customer in Cologna Veneta, Italy with no correspondingconsulting fees during 2004. Tire—derived-fuel revenue and waste tire tippingfees increased by $47,855 to $609,428 in 2005 from $561,573 during 2004. Thisincrease is due to the increased production and sale of tire-derived-fuelsduring the fourth quarter of 2005 resulting from the installation and operationof new equipment at our tire fuel processing facility. During the second andthird quarters of 2005, the tire fuel processing operations had limitedcapacity to produce tire-derived-fuel due to the installation and start up ofour new equipment and facility improvements.

Gross loss fromcontinuing operations improved by $160,398, or approximately 52%, to $149,970for the year ended December 31, 2005 from $310,368 for the year ended December 31,2004. The negative gross margin generated at the tire fuel processingoperations is primarily due to the use of our older equipment, which producesapproximately one third the volume of finished product produced by new equipmentand at a lower quality during the first two quarters of 2005. The combinationof low volumes and low quality product resulted in negative gross margins forour tire fuel processing operation during 2004 and for the first three quartersof 2005. During the fourth quarter of 2005, our tire fuel processing businessgenerated a gross profit of $40,715 due to improved quality and pricing oftire-derived-fuel produced and increased production volume resulting from newequipment placed in service at the end of September 2005.

Selling, general and administrative expenses decreased$155,254 or 9% to $1,602,352 for the year ended December 31, 2005 from$1,757,606 for the year ended December 31, 2004. The decrease is dueprimarily to a decrease in professional communication and marketing andconsulting expenses offset by an increase in amortization and insuranceexpense. Research and development expenses paid to third parties increased by$48,396 from $68,729 in 2004 to $117,125 in 2005.

Loss from operations improved by $4,265,515 or 70%from $6,134,962 for the year ended December 31, 2004 to $1,869,447 for theyear ended December 31, 2005. The improvement in loss from operations isdue to a reduction in gross loss of $160,398, primarily due to improvement in theoperating performance our tire fuel processing facility, and non-recurringwrite down of inventory of $2,595,213 and impairment of assets of $1,403,046during 2004.

During 2004,management determined that the net realizable value of the tire shred inventorywas nominal and wrote down the inventory by $274,000. In addition, during 2004,management assessed the collectability of the contract price for two ThermalGasifiersTM we are starting up and testing in Cologna Veneta, Italy, which wereincluded as work in progress inventory, resulting in a reduction in thecarrying value of that inventory by $2,321,213 which was included in our writedown of inventory. During 2004, management reviewed and updated  the expectedcash flows on long lived assets. Based on this review, tire fuel operatingcosts were higher than previously estimated, and an impairment of $1,403,046was recognized on the assets at the tire fuel processing facility in Hutchins,Texas. We discounted the cash flows expected from the impaired long livedassets to determine their current value and the impairment amount.

Interest expense increased by $111,990 from $214,642for the year ended December 31, 2004 to $326,632 for the year ended December 31,2005 resulting primarily from interest of approximately $70,500 

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on debt issued to RichardStrain on September 29, 2005 of $3,354,210 to acquire the minorityinterest in Nathaniel Energy Oklahoma Holdings Corporation and interest expenseof approximately $18,000 on our line of credit obtained in 2005.

We paid certain expenses related to site clean-up onbehalf of Ripetouch Greenhouse LLC, an entity controlled by our former chiefexecutive officer, Stan Abrams, during 2004, which were recorded as relatedparty receivables. During 2004, we wrote off $264,587 due from Ripetouch and$11,438 due from Stan Abrams, as collection was determined to be uncertain. SeeNote 8 to our financial statements for further discussions of these relatedparty transactions.

A deferred income tax benefit of $759,000 was recognizedduring the fourth quarter of 2005 due to our expected use of approximately$2,000,000 of our net operating loss carry forward from 2005 and prior fiscalyears which will be used to offset the estimated 2006 gain resulting from thesale of our helium and gas processing operations’ assets on March 7, 2006.

Income fromdiscontinued operations, which includes the net income of our helium and gasprocessing operations that are to be sold to Midstream Energy Services, LLC, asdescribed in our Financial Statements for the years ended December 31,2005 and 2004, Note 2.—“Subsequent Events” and Note 3.—“Disposition of aBusiness Segment”, increased from $902,836 for the year ended December 31,2004 to $1,055,611, or $152,775, an increase of 17%. The increase in incomefrom discontinued operations is primarily related to an increase in totalrevenue from discontinued operations of $735,056 primarily related to increasedsales prices of natural gas liquids offset by an increase in our cost ofnatural gas of $574,960.

Net loss decreased by$5,417,860 or 96% to $238,484 for the year ended December 31, 2005 from$5,656,344 for the year ended December 31, 2004.

**Liquidity and Capital Resources**

As of December 31, 2005 Nathaniel Energy owed$1,175,788 to financial institutions under installment notes with an effectiveinterest rate of 6.68%, which were secured by property and equipment. Theremaining $12,362,397 in total debt consists of $12,246,361 in secured loansfrom Richard Strain with an effective interest rate of 6.71%, which aredescribed in more detail below, and unsecured notes due vendors andunaffiliated third parties of $116,036 with an effective interest rate of3.69%.

During September 2005, we issued a promissorynote, reflected as a note payable due stockholder of $3,354,210 in our balancesheet, resulting from a Stock Purchase Agreement dated September 2005 withRichard Strain to purchase  49% or 4,900shares of NEOHC. As a result of the stock purchase NEOHC became a wholly-ownedsubsidiary of Nathaniel. The remaining secured loans due Richard Strain of$8,892,151 which bears an effective interest rate of 5.94% are included in ourbalance sheet as liabilities held for sale.

All the indebtedness to Richard Strain was secured bya first lien on the assets of Nathaniel and its subsidiaries. All theindebtedness to Richard Strain was repaid on March 7, 2006, as describedbelow.

On September 30, 2005, we entered into a Purchaseand Sale Agreement with Midstream Energy Services, LLC pursuant to which wewould sell the assets which comprise our helium and gas processing facilitiesand operations to Midstream for $16,200,000, payable in cash at the closing.The Purchase and Sale Agreement provided that in the event that we or Midstreamsigned a new Operating Agreement with Colorado Interstate Gas Company toreplace our current agreement with them expiring in December 2006, whichrepresents a positive adjustment to the purchase price of $1,800,000,  we would receive additional cash proceeds of$918,000. Under the terms of a Stock Purchase Agreement with Richard Strain,our major shareholder and debt holder, whereby we purchased his 49% ownershipinterest in NEOHC, Richard Strain is entitled to 49% or $882,000 of thispositive adjustment. An agreement with Colorado Interstate Gas Company wasreached during December 2005 resulting in a positive adjustment 

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of $1,800,000 to thepurchase price. On March 7, 2006, we closed the Purchase and SaleAgreement with Midstream and received $16,915,676. Potential upward adjustmentsto the purchase price in the amount of $280,414 which were not finallydetermined at the closing are subject to post-closing determination pursuant tothe procedures in the Purchase and Sale Agreement.

The cash received at closing was used as follows:

| Cash received  from Midstream at closing                                                            |   | $           | 16,915,676 |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------|------------|--------|
| Less:   Repayment  of stockholder notes payable and accrued interest through date of sale |   | (14,482,171 | )          |
| Net proceeds retained                                                                               |   | $           | 2,433,505  |   |

 

We plan to use the net proceeds of $2,433,505, withoutregard to a potential upward adjustment of $280,414 which we can not assurewill be received in total, as working capital for overhead and to advance ourtire fuel processing operation and the commercialization and marketing of ourThermal GasifierTM technology.

As of December 31, 2005, we have negative workingcapital of $9,170,342. The primary reasons for our negative working capitalbalance are current maturities on promissory notes due Richard Strain totaling$7,354,210, accrued interest due Richard Strain of $1,226,183 and our line ofcredit balance of $790,000. We used $14,482,171 of the sale proceeds notedabove to satisfy our total indebtedness to Richard Strain, including long termdebt of $4,892,151which reduced our total debt by approximately 89%.

For the year ended December 31, 2005, our tirefuel processing operation in Hutchins, Texas generated a cash operating loss ofapproximately $480,000 which was funded by increasing our current liabilities,primarily accounts payable and accrued expenses. Our negative working capitalincludes this cash operating loss. During 2005, we obtained a line of creditsecured by a letter of credit from Richard Strain to purchase new equipment andmake facility improvements at our tire fuel processing operation. The additionof new equipment, combined with existing equipment and certain facilityimprovements provided the opportunity for the tire fuel processing operation tosign new contracts for the acceptance and disposal of waste tires. The newcontracts increased pricing on that fuel due to the higher quality oftire-derived-fuel produced from the new equipment. We believe we will eliminatecash operating losses during 2006 and generate sufficient operating capitalfrom the tire fuel processing operation to service our indebtedness and provideadditional capital to assist in the funding of overhead expenses.

Thefollowing is a summary of Nathaniel Energy’s cash flows sources (uses) fromoperating, investing, and financing activities during the periods indicated:

| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Operating  activities |       | $                                          | 307,068    |   | $ | (1,397,905 | ) |
| Investing  activities |       | (1,248,759                                 | )          | (1,208,927 | ) |
| Financing  activities |       | 1,167,826                                  |       | 2,639,549 |   |
| Net effect on cash    |       | $                                          | 226,135    |   | $ | 32,717 |   |

 

For the period ended December 31, 2005, net cashprovided by operating activities of $307,068 is primarily due to a cash lossfor the year of $833,115,  an increase inaccounts receivable of $88,545 in the tire fuel processing operation and adecrease in accounts payable and accrued expenses of $96,509 offset by adecrease in inventory of $536,423 due primarily to collection of amounts duefrom the delivery of two Thermal GasifiersTM in Italy,  a decrease in our restricted cash of $237,000and an increase in net cash from discontinued operations or $573,064. The cashloss of $833,115 represents our net loss of $238,484 reduced by non cash expensesof $315,456, which include depreciation and amortization, loss on dispositionof equipment and our reserve for doubtful accounts offset by a non-cashsettlement of debt of $151,087 and 

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our non-cash income taxbenefit of $759,000. Net cash used in investing activities of $1,248,759consists primarily of the purchase of new equipment and facility upgrades atour tire fuel processing operation. Net cash provided by financing activitiesof $1,167,826 is primarily due borrowing on our line of credit of $790,000 anddebt issued to equipment vendors related to our purchase of new equipment atour tire fuel processing operation, cash flows from discontinued operations of$1,080,000 which represents the current portion of our indebtedness due RichardStrain included in current liabilities held for sale offset by payments on debtprincipal of $952,589.

For the period ended December 31, 2004, net cashused in operating activities of $1,397,905 is primarily due to a cash loss forthe year of $3,460,397, an increase in inventory of $681,123 due primarily tocosts incurred relative to the delivery of two Thermal CombustorsTM inItaly  offset by a decrease in ourrestricted cash of $662,300 and an increase in our accounts payable and accruedexpenses of $231,217. The cash loss of $3,460,397 represents our net loss of$5,656,344 reduced by non cash expenses of $2,195,947, which includedepreciation and amortization, loss on related party receivable, write down ofinventory, impairment of assets, and other net non-cash expenses. Net cash usedin investing activities of $1,208,927 consists of equipment purchases primarilyfor our discontinued operations and our investment in technical documentation,drawings and design engineering of our Thermal CombustorTM. Net cash provided byfinancing activities of $2,639,549 is primarily due to issuance of a notepayable due Richard Strain for $2,000,000 and issuance of notes payable to avendor for services provided on the Thermal CombustorTM project in Italy in theaggregate amount of $786,916 offset by payments on debt principal of $169,160.

We had cash of $260,032 atDecember 31, 2005 which will be used to fund our operations, pay currentdebts and partially fund development of future Thermal GasifierTM projects.

**Critical Accounting Policies**

*The preparation of financial statementsand related disclosures in conformity with accounting principles generallyaccepted in the United States requires management to make judgments,assumptions and estimates that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. Actual results could vary fromthese estimates. A material change in these or other estimates couldpotentially have a material impact on results of operations. The followingcritical accounting policies are impacted significantly by judgments,assumptions and estimates*.

*Conversion of Debtinto Common Stock*

When debt is convertedinto shares of common stock the transaction is recorded at the fair marketvalue of the stock. The difference between the fair market value of the stockissued and the carry value of the debt is recorded as a non cash financingexpense in the period the transaction occurs.

*Property, Plant andEquipment and Related Depreciation*

Property, plant andequipment is recorded at its original cost of construction or, upon acquisition,the fair value of the assets acquired. Direct costs, such as labor andmaterials, and indirect costs, such as overhead used during construction arecapitalized. Major units of property replacements or improvements arecapitalized and minor items are expensed. Depreciation is provided for usingthe straight-line method. Significant assumptions and judgment is used todetermine which improvement, replacement or indirect costs are capitalized.Significant assumptions and judgment is necessary to determine what useful lifeis appropriate for each asset, particularly for machinery and equipment whichuseful life can range from five to twenty years.

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*Long-Lived Assets*

In accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, the Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that therelated carrying amount may not be recoverable. Recovery of assets to be heldand used is measured by a comparison of the carrying amount of the assets tothe future net cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less the cost to sell. Management uses significantjudgments, assumptions and estimates to calculate future cash flows expected tobe generated by the assets under impairment review.

**Impactfrom Recent Accounting Pronouncements**

We do not expect theadoption of recent accounting pronouncements will have a significant effect onour financial statement presentation or disclosures. See “Recent AccountingPronouncements” in Note 1 to the financial statements.

**Other Considerations**

We are subject to manyrisk factors detailed below and elsewhere in this report and from time to timein our other Securities and Exchange Commission filings. Any one or more ofthese uncertainties, risks and other influences could materially affect ourresults of operations and prospects and whether forward-looking statements madeby us ultimately prove to be accurate. The following risk factors representitems that management desires to highlight, in addition to forward lookingstatements described at the beginning of this report, to help investors betterunderstand the potential risks and rewards of Nathaniel Energy’s business.

*Our business modeldepends on obtaining several million dollars in funding.*

We will require several milliondollars in capital investments to further develop our Thermal GasifierTMbusiness, which is the business segment on which we plan to focus. Capitalinvestments could be in the form of debt, equity, government grants orguaranteed loans. There can be no assurance that we will obtain the fundingneeded to develop this business segment, or that funds raised for a particularproject will be sufficient to complete the project.

*Revenue and grossmargin growth is dependent on successful equipment maintenance, repair andupgrades.*

Future revenue and gross margin increases aredependent on continuous equipment maintenance, repairs and upgrades. Significantupgrades were completed to our tire fuel processing operations in the secondand third quarter of 2005. We anticipate receiving new waste tire supply andtire-derived-fuel customer contracts over the next several months.

Our 2006 business plancontemplates continuing to improve our tire processing operations based on newequipment additions as waste tire volumes increase,  repairing and maintaining existing equipment and increasing our workforce. Newequipment purchases, repair of existing equipment and increasing our workforcewill require additional funding and is dependent upon us obtaining additionalwaste tire supply contracts and contracts for sale and delivery of ourtire-derived-fuel. There is no assurance that we will be successful inobtaining such funding and signing such contracts.

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*We depend on asmall number of large customers and suppliers.*

Our top customer accountedfor 27% of 2005 revenue. Although we believe we could replace this customer iflost, if we do not maintain positive relationships with this customer, thiscustomer changes their business strategy, or their financial position deteriorates,our revenue and operating results could be materially and negatively impacted.

*If we fail tosatisfy customer expectations, existing and continuing business could beadversely affected.*

If we fail to satisfycustomer expectations, our reputation and ability to retain existing customersand attract new customers may be damaged. In addition, if we fail to performadequately on projects, we could be liable to customers for breach of contractand could incur substantial cost, negative publicity, and diversion ofmanagement resources to defend a claim, and as a result, the business resultscould suffer.

*If we fail tosuccessfully use patented technology in commercialized applications, ourbusiness may not become profitable.*

If we fail to identify the latest alternative energysolutions or fail to successfully apply the technology to customer demand, ourreputation and ability to compete for customers and the best employees couldsuffer. If we cannot compete successfully for projects and project funding, revenuesmay not grow.

Because our marketchanges constantly, some of the most important challenges facing us are theneed to:

·       developequipment that meets changing customer needs;

·       identifyand effectively market alternative solutions to a diverse set of customers;

·       enhanceand protect the applications of our patented technology;

·       influenceand respond to emerging industry standards and other technological changes.

All of these challengesmust be met in a timely and cost-effective manner. We cannot assure you that wewill succeed in effectively meeting these challenges.

*Research,experience and shifts in technology and market demand may require changes inour business model.*

During the regular courseof business we must adjust our business plan giving consideration to our ownresearch, experience, technology evolution and market demand. Acceptingunforeseen business opportunities may also result in a business model change.We cannot guarantee that any business model or adjustment in business plan willbecome successful or be more successful than its current business model. Ashift in our business model may result in the use of other technologies. Othertechnologies may in the future prove to be more efficient and/or economical tous than our current technology. We cannot guarantee that any change intechnology will become successful or be more successful than its currenttechnology.

*Public companylegislative and regulatory requirements, such as the Sarbanes-Oxley Act of2002, may lead to increased insurance, accounting, legal and other costs, whichmay cause expenses to increase.*

We became a reportingcompany under the Securities and Exchange Act of 1934 in early 2003. Thecompany will be subject to additional reporting and governance requirements ifit applies and is accepted for listing on a national stock exchange or theNASDAQ system. We are committed to full regulatory compliance and highstandards of corporate governance and expect legal, accounting and professionalfees to increase in 2006. The cost of regulatory compliance could strain ourlimited resources as well as divert attention of our relatively smallmanagement team from daily business operations.

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*One stockholderbeneficially owns over 50% of outstanding shares and control a vote ofstockholders.*

One stockholder, RichardStrain, beneficially owns over 50% of outstanding shares. That shareholder hasthe ability to control the director elections and the approval of any otheraction requiring stockholder approval, including any amendments to the certificateof incorporation and mergers or sales of all or substantially all assets, evenif the other stockholders perceive that these actions are not in their bestinterests.

**Item 7.**                        FinancialStatements

The financial statementsrequired by this Item 7 are included in this Annual Report on Form 10-KSBfollowing Item 14 hereof.

**Item 8.**                        ChangesIn and Disagreements with Accountants on Accounting and Financial Disclosure.

In January 2004, wechanged accountants, as reported on a Current Report on Form 8-K foran event dated January 12, 2004.

**Item 8A.**                Controlsand Procedures

As of the end of the period covered by this report,the company conducted an evaluation, under the supervision and with theparticipation of the Chief Executive Officer and Chief Financial Officer, ofthe company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934). Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

The company’s disclosure controls and proceduresinclude, among other things, controls and procedures designed to ensure thatinformation required to be disclosed by the company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to thecompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, to allow timely decisions regarding required disclosure.

There was no change in the company’s internal controlover financial reporting during the company’s most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the company’s internal control over financial reporting.

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**PART III**

**Item 9.**                        Directorsand Executive Officers of the Registrant

Thenames, ages and terms of office of our directors and executive officers are setforth in the following table:

| Name                                   | ** ** | ** ** | ** ** | **Age** | ** ** | **Positions with Nathaniel Energy**               |
|----------------------------------------|------------|------------|------------|---------|------------|---------------------------------------------------|
| George Cretecos*                       |       |       | 53         |    |       | Director, Chief  Executive Officer, and President |
| Russell “Gene” Bailey*  |       |       | 66         |    |       | Vice President  and Secretary                     |
| Timothy A. Peach                       |       |       | 54         |    |       | Chief Financial  Officer and Treasurer            |
| Paul Marley II                         |       |       | 48         |    |       | Vice President                                    |
| William J. Mulrow*                     |       |       | 50         |    |       | Director                                          |
| Karen Smythe*                          |       |       | 44         |    |       | Director                                          |
| Michael Burdis*                        |       |       | 53         |    |       | Director                                          |

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*                    Directors arealso named executive officers for purposes of Section 16(a)

Directors are elected byholders of the common stock. Officers serve at the will of the board. We mayindemnify directors and officers against damages which qualify, in the opinionof the disinterested members of the board, for indemnification under Delawarelaw and our Bylaws. Insofar as indemnification for liabilities arising underthe federal securities laws may be permitted to directors, officers or personscontrolling us pursuant to Delaware law and its Bylaws, we have been informedthat in the opinion of the Securities and Exchange Commission suchindemnification is against public policy as expressed in the laws and istherefore unenforceable.

**Management Biographies**

George Cretecos has served as our Chief ExecutiveOfficer since July, 2005 and our President since March 10, 2006. He servedas our Chief Operating Officer from February 2003 to July 2005. Hehas been a director since April, 2003. Mr. Cretecos has over 25 years ofproven operating and business management experience. Most recently, he servedas Director of Marketing and Sales at a multi-million dollar corporation,Commtract Corporation, a privately held systems integration and informationtechnology company, from December 2001 to January 2003, where hespearheaded profitable new sales and marketing turn-around programs. From 1997to 2001 he served as a Management Consultant setting up corporateinfrastructure for startup and early stage companies. Prior to that, asDirector of Sales and Marketing at Schlumberger Technologies from August 1994to January 1997, Mr. Cretecos developed all marketing and promotionalmaterials, managed divisional personnel and had full profit and lossresponsibility for all aspects of product roll-out, from design todistribution. Mr. Cretecos’ versatile business expertise includes workingas Product Manager for a company developing an energy management “load shedding”technology that was acquired by Bell Atlantic (now Verizon). Following thissuccess he was promoted to Vice President overseeing operations for aconsortium of companies including Teletimer International, Bell Atlantic,Square D Corporation and Honeywell. Mr. Cretecos holds a B.A. from theState College of Westfield, Massachusetts with Master’s courses from BostonState College and has received extensive training in sales, management,leadership and public speaking.

Russell “Gene” Bailey has served as our Vice Presidentsince 1998 and as a director from 2000 through March 2006. Mr. Baileybrings 35 years of finance, technical and consulting experience to us. From February 2000to April 2003 Mr. Bailey served as our Chief Financial Officer. From1976 to 2000, Mr. Bailey served as a merger and acquisition consultantwith Bailey and Associates on an as needed basis. 

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In addition to his mergerand acquisition role, from 1994 to 2000 Mr. Bailey has been an adjunctprofessor at Pikes Peak Community College teaching geology and physicalgeography. Mr. Bailey earned a B.S. degree in geology in 1962 from theUniversity of New Mexico. He completed the course work for a Ph.D. degree ingeology in 1965 at the University of New Mexico and completed a year of graduatestudies at the University of Arizona in finance and mining economics in 1974.

Timothy A. Peach joined us as an employee in October 2004.He served as Vice President Finance from March 1, 2005 to March 10,2006 when he was elected Chief Financial Officer and Treasurer.  Mr. Peach has over 25 years of provenexperience in finance, administration and operations. Mr. Peach spent overten years with PriceWaterhouse Coopers in the Pittsburgh and Denver offices,from 1974 to 1985, providing consulting and advisory services to international,publicly traded companies in technology, refining, manufacturing and bankingbusiness sectors. Mr. Peach’s background includes senior executivefinancial positions in medical equipment and telecommunications industries. Mostrecently, Mr. Peach was Vice President Finance and Chief AccountingOfficer for Convergent Group Corporation, a large scale systems integration andconsulting firm in the utility industry, from 1997 to 2000, where he was anintegral participant in that company’s redesign and implementation of internalmanagement systems and financial reporting, restructuring and improvingoperating structures, and its successful initial public offering. In 2000, thatcompany was acquired by SchlumbergerSema, an oil and gas information andoperating support company. Mr. Peach served as Chief Accounting Officerand Vice President Finance of SchlumbergerSema North American Operations from2000 to 2002 where among other things, he managed the integration of ConvergentGroup Corporation and two other business units focused on the manufacture ofutility meters and technologically advanced remote meter reading systems forthe utility industry. Prior to joining us, from 2002 to October 2004 Mr. Peachprovided the technical accounting support for a successful initial publicoffering by Affordable Residential Communities, Inc., a real estateinvestment trust, and he was also engaged as an advisor to Duke Energy FieldServices, Inc., an oil and gas processing company, in the development ofand overview of their Sarbanes-Oxley compliance programs during that time.Mr. Peach holds a B.S and an M.B.A. from the University of Pittsburgh andis a member of the AICPA and the Pennsylvania Institute of Public Accountants.

Paul Marley II has been employed by Nathanielsince  May 16, 2005 as our VicePresident of Project Development. He was elected Vice President of the Companyon March 10, 2006. Mr. Marley joined Nathaniel Energy from MustangConsulting, where as President he built a successful practice servingindustrial clients interested in energy management and cogeneration powerprojects. He has over 25 years of experience in the development, construction,operation & maintenance (O&M), and management of power projects.After receiving his BSE in Mechanical Engineering from Duke University, Mr. Marleyserved as a nuclear-trained submarine officer in the US Navy. He has worked forboth Investor Owned Utilities and Independent Power Producers since leavingactive duty with the Navy and was the General Manager of the CogenerationDevelopment Group for Shell Trading in Houston. His assignments have coveredthe entire range of technical and commercial activities required for powerplant development and operation. This includes the supervision of projectdevelopment, engineering, construction, O&M, and asset management tasks,with extensive experience in industrial cogeneration projects. Mr. Marley’stechnical expertise includes work on power projects using municipalwaste-to-energy, nuclear, solar, geothermal, hydro, waste coal, biomass, coal and gas technologies. Hiscommercial experience includes supervisory responsibilities in the areas ofmarket analysis, project financial modeling, fuel procurement, labor relationsand staffing procedures, and contract negotiation and administration. Mr. Marleyreceived his MBA through the Executive Program at the University of Notre Dameand he is a registered Professional Engineer. Mr. Marley will lead thecommercialization of Nathaniel Energy’s Thermal Combustor TM technology fromour Houston office.

William J. Mulrow has servedas a director since June 2005. Mr. Mulrow is a Director atCitigroup Global Capital Markets Inc. Previously he was a Senior Vice Presidentat Gabelli Asset Management, a 

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position he held since1999. He was Managing Director,Corporate Finance of Rothschild, Inc. from 1995 to 1999, and ManagingDirector and Head of Public Finance Banking of Donaldson, Lufkin &Jenrette Securities Corp. from 1982 to 1995. Before that, Mr. Mulrow heldvarious other positions. He received a B.A. Cum Laude from Yale University andan M.P.A. from Harvard University John F. Kennedy School of Government.

Karen Smythe has served as a director since June 2005.Ms. Smythe is a Vice-President of C.B. Strain & Son, Inc., amechanical contracting company, a position she has held since 1998. She wasVice-President of Marketing for The Dannon Company, a division of the DanoneGroup, from 1997 to 1998. Before that, Ms. Smythe held various otherpositions. She received a B.A. from Vassar College and an M.B.A. from theUniversity of Virginia, Colgate Darden Graduate School of Business.

Michael Burdis has servedas a director since March 6, 2006. Mr. Burdis is President of JamesL. Taylor Manufacturing Company a specialty equipment manufacturer, a positionhe has held since 1993. He has held various positions with this companyincluding; Sales Manager, Factory Manager, Shop Forman, Regional Sales Managerand Salesman going back to 1978, Mr. Burdis Holds a BS in CivilEngineering from Cornell University and an MBA from Duke University.

**Family Relationships**

Mr. Mulrow is theson-in-law of Richard Strain, our largest beneficial stockholder, and Ms. Smytheis Mr. Strain’s daughter. Mr. Mulrow and Ms. Smythe are notmarried to each other. There are no other family relationships among any of ourexecutive officers and directors.

**Audit Committee**

We do not have an auditcommittee, and accordingly we do not have an audit committee financial expert.Currently we have four members of the Board of Directors, one of whom isindependent. The Board of Directors plans to seek qualified candidates forelection as independent board and audit committee members. We cannot anticipatewhen we will have independent board members’ elected or will establish an auditcommittee.

**Compliancewith Section 16(a) of the Exchange Act**

Directors, officers, andbeneficial owners of more than ten percent of our common stock are required tofile reports of ownership as required by Section 16(a) of theExchange Act. William J. Mulrow and Karen Smythe, each a director of Nathaniel,each filed one report, their respective Forms 3, late. Richard Strain, whobeneficially owns of more than ten percent of Nathaniel’s common stock, filedthree Forms 4, reporting an aggregate of four transactions, late.

**Code of Ethics**

Nathaniel has adopted theNathaniel Energy Corporation Code of Business Conduct and Ethics for Officers(Vice President and  Senior) andDirectors that applies to the Company’s Chief Executive Officer, Vice Presidentof Finance (Principal accounting officer), among others. Nathaniel has alsoadopted the Nathaniel Energy Corporation Code of Business Conduct and Ethicsfor Employees and Officers (other than Vice President and Senior).

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**Item 10.**                 ExecutiveCompensation.

Thefollowing table sets forth the compensation paid during the past three years toour chief executive officer. No other executive officer’s remuneration exceeded$100,000 per year. We did not pay any non-cash current compensation or longterm compensation to the officers during the listed years.

|                                   | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------|------------|
| **Name & Position** | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary** | ** ** | **Other Compensation** | ** ** |
| George Cretecos                   |       | 2005       |       | $                            | 128,605    |   |   | $ | — |   |   |
| Chief Executive Officer,          |       | 2004       |       | $                            | 99,765     |   |   | $ | — |   |   |
| President                         |       | 2003       |       | $                            | 61,606     |   |   | $ | — |   |   |
| Timothy Peach                     |       | 2005       |       | $                            | 117,123    |   |   | $ | — |   |   |
| Chief Financial  Officer,         |       | 2004       |       | $                            | 17,972     |   |   | $ | — |   |   |
| Treasurer                         |       | 2003       |       | $                            | —     |   |   | $ | — |   |   |
| Paul Marley II                    |       | 2005       |       | $                            | 64,508     |   |   | $ | — |   |   |
| Vice President                    |       | 2004       |       | $                            | —     |   |   | $ | — |   |   |
|                                   |       | 2003       |       | $                            | —     |   |   | $ | — |   |   |
|                                   |            |            |            |                              |            |  |  |  |  |  |  |  |  |

 

**Employment Contracts and Termination of Employment,and Change-in-Control Arrangements**

**GeorgeCretecos**

George Cretecos serves as our Chief Executive Officerand President. We currently do not have an employment agreement with Mr. Cretecos.

**Russell“Gene” Bailey**

Mr. Bailey serves as our Vice President andSecretary. We currently do not have an employment agreement with Mr. Bailey.

**TimothyA. Peach**

Timothy Peach serves as our Chief Financial Officerand Treasurer. We currently do not have an employment agreement with Mr. Peach.

**Paul Marley II**

Paul Marley II serves as our Vice President. Wecurrently do not have an employment agreement with Mr. Marley.

**Item 11.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

**Security Ownership of Certain Beneficial Owners andManagement**

The following table sets forth, to Nathaniel Energy’sknowledge, based solely upon records available to it, certain information as ofMarch 28, 2005 regarding the beneficial ownership of the Company’s sharesof common stock by:

·       each person who we believeto be the beneficial owner of more than five percent (5%) of outstanding sharesof common stock,

·       by each current director,

·       by each named executiveofficer, and

·       byall current executive officers and directors of the group:

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| Name and Address of Beneficial Owner           | ** ** | ** ** | ** ** | **Number of Shares** | ** ** | **Percentage of Class** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Richard Strain                                                          |       |       | 49,218,333 | (1)                            |       |                              | 54.3       | % |   |
| 417 Manchester Road                                                     |       |       |       |                           |       |                              |       |   |   |
| Poughkeepsie, New York 12603                                            |       |       |       |                           |       |                              |       |   |   |
| Corey Morrison                                                          |       |       | 9,066,673  | (2)                            |       |                              | 10.0       | % |   |
| 26 Railroad Ave, #332                                                   |       |       |       |                           |       |                              |       |   |   |
| Babylon, New York 11702                                                 |       |       |       |                           |       |                              |       |   |   |
| George Cretecos(3)                                                      |       |       | None       |                           |       |                              | —     |   |   |
| Karen Smythe                                                            |       |       | 500,000    |                           |       |                              | *          |   |   |
| 417 Manchester Road                                                     |       |       |       |                           |       |                              |       |   |   |
| Poughkeepsie, New York  12603                                           |       |       |       |                           |       |                              |       |   |   |
| William J. Mulrow                                                       |       |       | None       |                           |       |                              | —     |   |   |
| 7 Northway                                                              |       |       |       |                           |       |                              |       |   |   |
| Bronxville, New York 10708                                              |       |       |       |                           |       |                              |       |   |   |
| Michael Burdis                                                          |       |       | None       |                           |       |                              | —     |   |   |
| 159 Malone Road                                                         |       |       |       |                           |       |                              |       |   |   |
| Salt Point, New York  12578                                             |       |       |       |                           |       |                              |       |   |   |
| All directors and executive  officers as a group (6 persons)(4)(5) |       |       | 872,082    |                           |       |                              | 1.0        | % |   |

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*                    Less than 1%

(1)          Information based upon aSchedule 13D, Amendment No. 2 filed by Richard Strain with the Securitiesand Exchange Commission.

(2)          Based on informationprovided by Corey Morrison and our records and the records of our transferagent. Includes 4,200,000 shares of common stock held by Como Group, LLC,1,586,000 shares of common stock held by Strong Wilken, Inc. and 3,280,673held by Werbler Townsend, LLC, each of which is, to our knowledge, beneficiallyowned by, or an affiliate of, Corey Morrison.

(3)          The address of thisperson is 8001 South InterPort Blvd., Suite 260, Englewood, Colorado80112.

(4)          Includes 205,882 sharesof common stock held by Russell “Gene” Bailey’s wife.

(5)          Addresses for Mr. Cretecos,Ms. Smythe, Mr. Mulrow and Mr. Burdis are as set forth undertheir respective names. Address for the other unnamed executive officers is8001 South InterPort Blvd., Suite 260, Englewood, Colorado 80112.

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Nathaniel has adopted its2005 Equity Participation Plan, which was approved by its stockholders. Thereare 20,000,000 shares of common stock available for issuance under this plan. Noshares of common stock, or securities, options or rights exercisable in thecommon stock have been granted or issued under this plan.

**Item 12.**                 CertainRelationships and Related Transactions

In September and October, 2003 Richard Strain,the beneficial owner of 54.3% of our issued and outstanding shares of commonstock, loaned us $1,000,000 and $1,000,000 respectively, each bearing interestat the rate of 8% per year.

In October, 2003 we consolidated an aggregate of$6,892,151 in principal indebtedness to Mr. Strain into two promissorynotes in the principal amounts of $2,000,000 and $4,892,151 respectively. Thenote for the $2,000,000 loaned to us in 2003 bears interest at the rate of3.33% per year and is payable in four quarterly principal and interest paymentsof $540,000 each on October 1, 2005 and January 1st, April 1stand July 1st 2006. The note for the principal amount of $4,892,151 bearsinterest at the rate of 8% per year. No payments were due on this note until March 31,2007, at which time the principal and accrued interest was to be repaid inquarterly payments of $572,876 through December 31, 2009.

On March 17, 2004, Mr. Strain loaned a totalof $2,000,000 to us. The note for the $2,000,000 loaned to us bears interest of3.49% per year and was payable in four quarterly principal and interestpayments of $540,000 each on October 1, 2005 and January 1st, April 1stand July 1st 2006. The loan agreement provided that the outstandingprincipal plus interest under the March 17, 2004 loan, and the $6,892,151outstanding indebtedness under previous loans from Mr. Strain to us wereconvertible, at Mr. Strain’s option, into shares of our common stock at aconversion rate equal to 103% of the average closing price on the five tradingdays prior to March 17, 2004, which was $0.78 per share. Additionally, weagreed to register the resale of the shares of common stock issuable uponconversion of these loans within 180 days of the funding of the March 17,2004 $2,000,000 loan. Furthermore, the repayment under this loan, plus therepayment of $6,892,151 indebtedness under previous loans, was secured by asecurity interest in all of our and our subsidiaries’ assets, including theshares of stock of our subsidiaries.

On April 14, 2005, payment terms wererestructured for $4,000,000 of the outstanding debt plus accrued interest whichwas due in four quarterly payments of $1,080,000 each on October 1, 2005and January 1, April 1 and July 1, 2006, such that the firstpayment is extended until after January 1, 2006.

On May 19, 2005, Mr. Strain and Nathanielamended their October 3, 2003 Conversion Agreement to provide that20,000,000 shares of Nathaniel common stock issuable under the ConversionAgreement to NEC Energy, LLC as Mr. Strain’s designee, as was provided forin the original Conversion Agreement, will be issued to Mr. Strain whensufficient shares of common stock were authorized for issuance. On October 31,2005 the 20,000,000 shares of common stock were issued to Mr. Strain.

Contemporaneously with amending the ConversionAgreement, NEC Energy, LLC, the owner of 30,000,000 shares of our common stock,instructed Nathaniel’s transfer agent to distribute 22,500,000 of those sharesof common stock to Mr. Strain and 7,500,000 of those shares of commonstock to Como Group, LLC. Mr. Strain and Como Group are the members of NECEnergy, LLC. To management’s knowledge, Corey Morrison, the beneficial owner ofapproximately 10.0% of our common stock, is the principal of Como Group.

On July 7, 2005, Mr. Strain guaranteed up to$500,000 of third party debt incurred by us for purposes of improving ouroperations at our Hutchins, Texas tire processing facility. Mr. Strainsecured this guarantee by posting a $500,000 letter of credit in favor of ourinstitutional lender. On September 13, 2005, Mr. Strain guaranteed upto an additional $500,000 of third party debt incurred by us for purposes of 

30

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settling a dispute betweenNathaniel and Merrick & Company who had provided installation andstart up services for us on our Thermal GasifierTM Project in Cologna Veneta,Italy. To secure this guarantee, Mr. Strain increased the supportingletter of credit posted by him to $1,000,000.

Nathaniel and Mr. Strain entered into and closeda Stock Purchase Agreement effective September 29, 2005 pursuant to whichNathaniel purchased 4,900 shares of common stock of its 51% owned subsidiaryNEOHC for $4,236,210. The NEOHC shares purchased represent 49% of NEOHC. As aresult of this acquisition, NEOHC became a wholly-owned subsidiary ofNathaniel.

The purchase price was paid by a $3,354,210 promissorynote from Nathaniel to Mr. Strain, which was payable on demand by Mr. Strainat any time after December 31, 2005, or earlier on the date of thecommencement of any bankruptcy or insolvency proceedings against Nathaniel, ifany. Nathaniel had the right to pre-pay the promissory note at any time withoutpenalty. The promissory note bares interest at the prime rate plus 1.5%annually.

Nathaniel’s obligations under the promissory note weresecured by a first priority security interest in all of Nathaniel’s assets anda pledge of the NEOHC shares that Nathaniel purchased. The remaining $882,000was paid in cash.

Nathaniel satisfied all its indebtedness to RichardStrain on March 7, 2006 out of the proceeds from the sale of its heliumand gas processing facilities and operations to Midstream Energy Services, LLC.See Note 2.—“Subsequent Events”.

Our Board of Directorsadopted a policy in February, 2004 that all related party transactions must beapproved by a majority of the disinterested directors and those transactionswill be on commercially reasonable terms which are no less favorable to thecompany than we could obtain in arms-length transactions with unaffiliatedthird parties.

| **Item 13.** | ** ** | **Exhibits List**                                                                                                                                                                                        |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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         |       | Conversion Agreement,  dated October 3, 2003 between Nathaniel Energy Corporation and Richard  Strain***                                                                                            |
| 10.3         |       | Loan Agreement, dated  October 3, 2003 between Richard Strain and Nathaniel Energy Corporation*                                                                                                     |
| 10.4         |       | Promissory Note, dated  October 3, 2003 between Nathaniel Energy Corporation and Richard  Strain***                                                                                                 |

31

----

 

| 10.5  |   | Promissory Note II,  dated March 16, 2004 between Nathaniel Energy Corporation and Richard  Strain ****                                                                                                                    |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6  |   | Loan Agreement II, dated  March 16, 2004 between Nathaniel Energy Corporation and Richard Strain  ****                                                                                                                     |
| 10.7  |   | First Amendment to  Conversion Agreement dated May 25, 2005 between Nathaniel Energy  Corporation and Richard Strain *****                                                                                                 |
| 10.8  |   | Agreement dated  July 16, 2004 among EcoIdea S.r.l., Electronic Solar S.r.l., European  Waste Solutions, Ltd., L&R Energy Company, LLC and Nathaniel Energy  Corporation (the “Italy Project Parties”) ***** |
| 10.9  |   | Agreement dated as of  July 16th,  2004 between Nathaniel Energy Corporation and L&R Energy Corporation,  LLC. *****                                                                                                   |
| 10.10 |   | Agreement dated  August 25, 2004 amending an agreement dated July 16, 2004 on the  Italy Project Parties. +                                                                                                           |
| 10.11 |   | Contract dated  January 12, 2005, among the Italy Project Parties++                                                                                                                                                        |
| 10.12 |   | Contract dated  February 22, 2005, among the Italy Project Parties++                                                                                                                                                       |
| 10.13 |   | Stock Purchase Agreement  dated September 29, 2005 between Nathaniel Energy Oklahoma Holdings,  Corporation (“NEHOC”) and Richard Strain**                                                                       |
| 10.14 |   | $3,354,210 Promissory Note  dated September 29, 2005 from NEOHC to Richard Strain**                                                                                                                                        |
| 10.15 |   | Purchase and Sale  Agreement dated September 30, 2005 between Nathaniel Energy Corporation,  NEOHC, MCNIC Rodeo Gathering, Inc. and Midstream Energy Services**                                                       |
| 10.16 |   | Nathaniel Energy Corporation  2005 Equity Participation Plan**                                                                                                                                                                  |
| 14.1  |   | Code of Business Conduct  and Ethics for Officers (Vice President and Senior) and Directors (effective  March 8, 2004)***                                                                                                  |
| 14.2  |   | Code of Business Conduct  and Ethics for Employees and Officers(other than Vice President and  Senior)(effective March 8, 2004)***                                                                                         |
| 21.   |   | Subsidiaries++                                                                                                                                                                                                                  |
| 31.   |   | Certification of Chief  Executive Officer and Principal Accounting Officer pursuant to Rule 13a-14(a)or  Rule 15d-14(a)as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                     |
| 32.   |   | 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                                 |

----

*                                              Denotesdocument filed as an exhibit to our Annual Report on Form 10-KSB forthe year ended December 31, 2003 and incorporated herein  by reference.

**                                       Denotesdocument filed as an exhibit to our Quarterly Report on Form 10-QSBfor the period ended September 30, 2005 and incorporated herein byreference.

***                                Denotesdocument filed as an exhibit to our Current Report on Form 8-K foran event dated December 31, 2002 and incorporated herein by reference.

32

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****                         Denotesdocument filed as an exhibit to our Quarterly Report on Form 10-QSBfor the period ended March 31, 2004 and incorporated herein by reference.

*****                  Denotes documentfiled as an exhibit to our Current Report on Form 8-K filed June 8,2005 and incorporated herein by reference.

******           Denotes document filedas an exhibit to our Quarterly Report on Form 10-QSB for the periodended June 30, 2004 and incorporated herein by reference.

+                                          Denotesdocuments filed as an exhibit to our Quarterly Report on Form 10-QSBfor the period ended September 30, 2004 and incorporated herein byreference.

++                               Denotesdocument filed as an exhibit to our Annual report on Form 10-KSB forthe year ended December 31, 2004.

**Item 14.**                 PrincipalAccountant Fees and Services

**Audit Fees**

The aggregate fees billedfor our fiscal years ended December 31, 2005 and 2004 by Comiskey &Company, P.C., our principal accountants in 2005 and 2004, for the audit of ourfinancial statements for each of those years and the review of our financialstatements included in our Quarterly Reports on Form 10-QSB duringthose financial years were $34,303 and $24,578 respectively.

**Audit Related Fees**

Our principal accountantsdid not bill us any fees during our fiscal years ended December 31, 2005and 2004 for any assurance and related services.

**Tax Fees**

Our principal accountantsdid not bill us any fees for tax compliance, tax advice and tax planning forour fiscal years ended December 31, 2005 and 2004.

**Other Fees**

Our principal accountants did not bill us for anyservices or products other than as reported above in this Item 14 during ourfiscal years ended December 31, 2005 and 2004 respectively.

33

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**NATHANIEL ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005 AND 2004**

**INDEX**

|                                                                | **Page**    |
|----------------------------------------------------------------|-------------|
| Report of Independent Registered Public Accounting  Firm       | F-2         |
| Consolidated Balance Sheets                                    | F-3         |
| Consolidated Statements of Operations                          | F-4         |
| Consolidated Statement of Stockholders’ Equity  (Deficit) | F-5         |
| Consolidated Statements of Cash Flows                          | F-6         |
| Notes to Consolidated Financial Statements                     | F-7 to F-22 |

 

F-1

----

**COMISKEY & COMPANY**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofNathaniel Energy CorporationEnglewood, Colorado

We have audited the accompanying consolidated balancesheets of Nathaniel Energy Corporation as of December 31, 2005 and 2004,and the related consolidated statements of operations, cash flows andstockholders’ equity (deficit) for each of the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance that the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe ouraudits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Nathaniel Energy Corporation as of December 31, 2005 and 2004,and the consolidated results of its operations, cash flows, and changes instockholders’ equity (deficit) for each of the years then ended, in conformitywith accounting principles generally accepted in the United States of America.

The Company disposed of asignificant subsidiary in 2006, see Notes 2 and 3 to the financial statements.

March 8, 2006Denver, Colorado

| * * | */s/ Comiskey & Company* |
|----------|-----------------------------------|
|     | PROFESSIONAL CORPORATION          |

 

Certified PublicAccountants & Consultants789 Sherman Street, Suite 440, Denver, CO 80203(303) 830-2255 Fax (303) 830-0876 *info@comiskey.com www.comiskey.com*

F-2

----

**NathanielEnergy CorporationConsolidated Balance Sheets**

| ** **                                                                                                                                                          | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                          |       |                        |       |                        |       |
| Current assets:                                                                                                                                                     |       |                        |       |                        |       |
| Cash                                                                                                                                                                |       | $                           | 260,032    |                        | $          | 33,897 |   |
| Accounts  receivable                                                                                                                                                |       | 85,418                      |       | 16,873                      |       |
| Inventory                                                                                                                                                           |       | —                      |       | 681,123                     |       |
| Prepaid expenses                                                                                                                                                    |       | 88,698                      |       | 70,293                      |       |
| Deferred tax  asset                                                                                                                                                 |       | 759,000                     |       | —                      |       |
| Assets held for  sale                                                                                                                                               |       | 2,036,783                   |       | 2,261,773                   |       |
| Total current  assets                                                                                                                                               |       | 3,229,931                   |       | 3,063,959                   |       |
| Property, plant  and equipment, net of accumulated depreciation                                                                                                     |       | 1,256,708                   |       | 396,784                     |       |
| Intangible  assets, net                                                                                                                                             |       | 322,482                     |       | 425,428                     |       |
| Restricted cash                                                                                                                                                     |       | —                      |       | 237,000                     |       |
| Deposits                                                                                                                                                            |       | 88,322                      |       | 85,477                      |       |
| Assets held for  sale                                                                                                                                               |       | 9,768,510                   |       | 10,079,630                  |       |
| Total Assets                                                                                                                                                        |       | $                           | 14,665,953 |                        | $          | 14,288,278 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                      |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                    |       | $                           | 628,784    |                        | $          | 835,809 |   |
| Accrued  compensation and payroll liabilities                                                                                                                       |       | 75,757                      |       | 67,112                      |       |
| Accrued interest                                                                                                                                                    |       | 14,760                      |       | 12,210                      |       |
| Other accrued  expenses                                                                                                                                             |       | 5,399                       |       | 4,904                       |       |
| Notes payable,  current portion                                                                                                                                     |       | 1,014,235                   |       | 536,135                     |       |
| Notes payable,  stockholder                                                                                                                                         |       | 3,354,210                   |       | —                      |       |
| Liabilities held  for sale                                                                                                                                          |       | 7,307,128                   |       | 3,686,006                   |       |
| Total current  liabilities                                                                                                                                          |       | 12,400,273                  |       | 5,142,176                   |       |
| Long-term debt                                                                                                                                                      |       | 277,589                     |       | 728,571                     |       |
| Liabilities held  for sale                                                                                                                                          |       | 4,892,151                   |       | 7,812,151                   |       |
| Total liabilities                                                                                                                                                   |       | 17,570,013                  |       | 13,682,898                  |       |
| Minority interest                                                                                                                                                   |       | —                      |       | 54,626                      |       |
| Stockholders’ equity:                                                                                                                                          |       |                        |       |                        |       |
| Preferred stock,  10,000,000 shares of $.001 par value authorized, none issued or outstanding                                                                       |       | —                      |       | —                      |       |
| Common stock,  200,000,000 shares of $.001 par value authorized, 90,698,263 shares and  70,198,263 shares issued and outstanding at December 31, 2005 and 2004 |       | 90,698                      |       | 70,198                      |       |
| Common stock to  be issued                                                                                                                                          |       | 318                         |       | 20,318                      |       |
| Additional  paid-in capital                                                                                                                                         |       | 61,584,446                  |       | 64,851,656                  |       |
| Accumulated  deficit                                                                                                                                                |       | (64,579,522                 | )          | (64,391,418                 | )          |
| Total  stockholders’ equity                                                                                                                                    |       | (2,904,060                  | )          | 550,754                     |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                    |       | $                           | 14,665,953 |                        | $          | 14,288,278 |   |

 

The accompanying notes are an integral part of the financial statements.

F-3

----

**NathanielEnergy CorporationConsolidated Statements of Operations**

| ** **                                                        | ** ** | **For the Year Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **December 31,  2005**           | ** ** | **December 31,  2004** | ** ** |
| Revenue                                                           |       | $                                     | 689,428    |   | $ | 561,573 |   |
| Cost of revenue                                                   |       | 839,398                               |       | 871,941 |   |
| Gross profit                                                      |       | (149,970                              | )          | (310,368 | ) |
| Selling, general and  administrative expenses                     |       | 1,602,352                             |       | 1,757,606 |   |
| Research and  development                                         |       | 117,125                               |       | 68,729 |   |
| Write down of  inventory                                          |       | —                                |       | 2,595,213 |   |
| Impairment of  assets                                             |       | —                                |       | 1,403,046 |   |
| Total operating  expenses                                         |       | 1,719,477                             |       | 5,824,594 |   |
| Loss from  operations                                             |       | (1,869,447                            | )          | (6,134,962 | ) |
| Other income (expense)                                            |       |                                  |       |   |   |
| Interest expense                                                  |       | (326,632                              | )          | (214,642 | ) |
| Gain (loss) on  disposal of equipment                             |       | 1,095                                 |       | (16,794 | ) |
| Write off of  related party receivable                            |       | —                                |       | (264,587 | ) |
| Other income                                                      |       | 141,889                               |       | 71,805 |   |
| Loss from  continuing operations before income tax benefit        |       | (2,053,095                            | )          | (6,559,180 | ) |
| Income tax  benefit                                               |       | 759,000                               |       | — |   |
| Loss from  continuing operations                                  |       | (1,294,095                            | )          | (6,559,180 | ) |
| Income from  discontinued operations                              |       | 1,055,611                             |       | 902,836 |   |
| Net loss                                                          |       | $                                     | (238,484   | ) | $ | (5,656,344 | ) |
| Loss per share  from continuing operations, basic and diluted     |       | $                                     | (0.02      | ) | $ | (0.09 | ) |
| Income per share  from discontinued operations, basic and diluted |       | $                                     | 0.01       |   | $ | 0.01 |   |
| Loss per share,  basic and diluted                                |       | $                                     | (0.01      | ) | $ | (0.08 | ) |
| Weighted average common  shares outstanding                       |       | 74,035,249                            |       | 69,950,156 |   |

 

The accompanying notes are an integral part of the financial statements.

F-4

----

**Nathaniel Energy CorporationConsolidated Statement of Stockholders’ Equity (Deficit)**
|                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional  Paid-In ** | ** ** | **Shares to be Issued** | ** ** | **Accumulated** | ** ** | **Stockholder  Equity** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|----------------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**                   | ** ** | **Shares**                             | ** ** | **Amount**      | ** ** | **Deficit**             | ** ** | **(Deficit)** | ** ** |
| Balance,  December 31,  2003                          |       | 69,719,414 |       | $          | 69,719     |                          | $          | 64,682,652                             |       | 20,285,000      |       | $                       | 20,285     |   | $ | (58,735,074 | ) | $ | 6,037,582 |   |
| Cancellation of shares                                     |       | (50,484    | )          | (50        | )          | (38,467                       | )          | —                                 |       | —          |       | —                  |       | (38,517 | ) |
| Debt conversion                                            |       | 529,333    |       | 529        |       | 195,504                       |       | —                                 |       | —          |       |                    |       | 196,033 |   |
| Issued for interest                                        |       | —     |       | —     |       | 11,967                        |       | 33,000                                 |       | 33              |       | —                  |       | 12,000 |   |
| Net loss                                                   |       | —     |       | —     |       | —                        |       | —                                 |       | —          |       | (5,656,344              | )          | (5,656,344 | ) |
| Balance,  December 31,  2004                          |       | 70,198,263 |       | 70,198     |       | 64,851,656                    |       | 20,318,000                             |       | 20,318          |       | (64,391,418             | )          | 550,754 |   |
| Issued for services                                        |       | 500,000    |       | 500        |       | 87,000                        |       | —                                 |       | —          |       | —                  |       | 87,500 |   |
| Issuance of shares to  satisfy debt conversion  obligation |       | 20,000,000 |       | 20,000     |       | —                        |       | (20,000,000                            | )          | (20,000         | )          | —                  |       | — |   |
| Acquisition of minority  interest                          |       | —     |       | —     |       | (3,354,210                    | )          | —                                 |       | —          |       | 50,380                  |       | (3,303,830 | ) |
| Net loss                                                   |       | —     |       | —     |       | —                        |       |                                   |       |            |       | (238,484                | )          | (238,484 | ) |
| Balance, December 31,  2005                           |       | 90,698,263 |       | $          | 90,698     |                          | $          | 61,584,446                             |       | 318,000         |       | $                       | 318        |   | $ | (64,579,522 | ) | $ | (2,904,060 | ) |
|                                                            |            |            |            |            |            |                               |            |                                        |            |                 |            |                         |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the financial statements.

F-5

----

**Nathaniel Energy CorporationConsolidated Statements of Cash Flows**
|                                                                              | ** ** | **For the Year Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,  2005**           | ** ** | **December 31,  2004** | ** ** |
| Cash flows from  operating activities:                                       |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (238,484   | ) | $ | (5,656,344 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                |       | 271,953                               |       | 303,882 |   |
| Income tax benefit                                                           |       | (759,000                              | )          | — |   |
| Loss on related party receivable                                             |       | —                                |       | 276,025 |   |
| Write down of inventory                                                      |       | —                                |       | 274,000 |   |
| Impairment of assets                                                         |       | —                                |       | 1,403,046 |   |
| Reserve for doubtful accounts                                                |       | 20,000                                |       | — |   |
| Loss on disposition of equipment                                             |       | 23,503                                |       | 16,794 |   |
| Non-cash settlement of debt                                                  |       | (151,087                              | )          | (77,800 | ) |
| Changes in operating assets and liabilities:                                 |       |                                  |       |   |   |
| (Increase) decrease in:                                                      |       |                                  |       |   |   |
| Inventory                                                                    |       | 536,423                               |       | (681,123 | ) |
| Accounts receivable                                                          |       | (88,545                               | )          | 2,334 |   |
| Prepaid expenses                                                             |       | (18,405                               | )          | 16,325 |   |
| Other receivables                                                            |       | —                                |       | 6,027 |   |
| Restricted cash                                                              |       | 237,000                               |       | 662,300 |   |
| Related party receivable                                                     |       | —                                |       | 19,450 |   |
| Other assets                                                                 |       | (2,845                                | )          | 7,317 |   |
| Increase (decrease) in:                                                      |       |                                  |       |   |   |
| Accounts payable and accrued expenses                                        |       | (96,509                               | )          | 231,217 |   |
| Net effect on cash from discontinued operations                              |       | 573,064                               |       | 1,798,645 |   |
| Net cash provided by (used in) operating activities                          |       | 307,068                               |       | (1,397,905 | ) |
| Cash flows from investing activities:                                        |       |                                  |       |   |   |
| Cash flows from discontinued operations                                      |       | (213,254                              | )          | (1,151,531 | ) |
| Equipment and intangible asset purchases                                     |       | (1,035,505                            | )          | (57,396 | ) |
| Net cash used in investing activities                                        |       | (1,248,759                            | )          | (1,208,927 | ) |
| Cash flows from financing activities:                                        |       |                                  |       |   |   |
| Payments on debt                                                             |       | (952,589                              | )          | (169,160 | ) |
| Cash flows from discontinued operations                                      |       | 1,080,000                             |       | 2,000,000 |   |
| Proceeds from issuance of notes and loans                                    |       | 1,040,415                             |       | 808,709 |   |
| Net cash provided  by financing activities                                   |       | 1,167,826                             |       | 2,639,549 |   |
| Net increase in  cash                                                        |       | 226,135                               |       | 32,717 |   |
| Cash and cash  equivalents, beginning of year                                |       | 33,897                                |       | 1,180 |   |
| Cash and cash  equivalents, end of year                                      |       | $                                     | 260,032    |   | $ | 33,897 |   |
| Cash paid for  interest                                                      |       | $                                     | 59,169     |   | $ | 53,430 |   |
| Cash paid for  income taxes                                                  |       | $                                     | —     |   | $ | — |   |
| Non cash financing  activity:   Issuance of stock to settle accrued expenses |       | $                                     | 87,500     |   | $ | 220,000 |   |
| Equipment  purchased with debt                                               |       | $                                     | 32,223     |   | $ | 25,741 |   |
| Note issued to acquire  minority interest                                    |       | $                                     | 3,354,210  |   | $ | — |   |
|                                                                              |            |                                       |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the financial statements.

F-6

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2005 and 2004**

**1.   SignificantAccounting Policies and Nature of Operations**

**Description of Business**

Nathaniel Energy Corporation is a renewablehydrocarbon-based waste-to-energy company that provides municipalities andindustries with solutions that divert waste from landfills while providing aclean alternative energy comparable to that of fossil fuels. Our proprietarypatented technology, the Thermal GasifierTM, is a 2-stage gasificationsystem designed to convert commercial and industrial waste, biomass, wastetires and any other solid, hydrocarbon-based materials into economical cleanthermal and electrical energy, while exceeding the most stringent EPA andEuropean Union regulations.

We have been in the alternative fuel processingbusiness, including waste tire recycling and collection services, since 1997.We have operated a 27 acre tire fuel processing facility in Hutchins, Texassince 1999. During the years ended December 31, 2005 and 2004, our tirefuel processing business has generated 88% and 100% of our total revenue,respectively.

We plan to focus our patented technology, the ThermalGasifierTM in three main areas: creating energy infrastructures; building,owning and operating small hydrocarbon-based waste-to-energy plants andlicensing. The Company’s mission is to become an environmental partner withmunicipalities and commercial and industrial businesses for the diversion ofsolid waste from landfills, while providing an economically cost effective,clean energy alternative to fossil fuels worldwide.

We plan to build energy infrastructures for certainindustries that have a need to dispose of hydrocarbon-based materials and seekan independent source of energy in the form of heat, steam and/or electricity.These energy infrastructures would be built on a business’ premises (“insidethe fence”) and can reduce the dependence a business has on fossil fuels andpower from the local utility. In some cases, the energy infrastructures canbecome a business’ self sustaining utility. We plan to identify new andexisting sites where we can build, own and operate small hydrocarbon-basedwaste-to-energy plants through our own resources or in conjunction with jointventure partners. Eventually, we plan to license the Thermal GasifierTMtechnology to qualified companies, joint venture partners, and distributorshipsas we mature our commercialization activities.

We continue to provide technical assistance to theproject owner of our two Thermal GasifiersTM recently constructed in ColognaVeneta, Italy. We began to utilize the operating Thermal GasifierTM units inItaly in our sales, marketing and research efforts during 2005. We are usingthe waste-to-energy plant in Cologna Veneta, Italy as “proof of process” forour first commercial Thermal Gasifiers in our business development activitiesdemonstrating  a lower cost, cleandependable energy alternative to fossil fuels worldwide. We have recognized norevenue from the sale or delivery of our Thermal GasifierTM through the periodended December 31, 2005. During the first quarter of 2005, we formedCleanergy, Inc., a Delaware corporation, as a wholly owned subsidiary forpurposes of advancing our business for the commercialization of our ThermalGasifierTM technology through hydrocarbon-based waste-to-energy projects.Cleanergy, Inc. had no financial activity during the fiscal year 2005. TheCompany has employed the services of an experienced executive to advance thebusiness plan and secure a sales pipeline of hydrocarbon-based waste-to-energyprojects and business development activities.

During September 2005,we entered into a Purchase and Sale Agreement with Midstream Energy Services,LLC pursuant to which we will sell the assets which comprise our helium and gasprocessing facilities and operations. The results of operations of our heliumand gas processing facilities and 

F-7

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

operationsare shown as income from discontinued operations in our statement ofoperations. See Note 3.—“Disposition of a Business Segment”.

**Business Segments**

The Companyoperates two separate segments which are presently conducted in three separatefacilities:

·       tirefuel processing operation in Hutchins, Texas, and

·       alternative energyengineering and corporate offices in Englewood, Colorado and Houston, Texas.

**Principles of Consolidation**

The financial statementsinclude the accounts of Nathaniel Energy Corporation and its subsidiaries. Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.

**Cash and Cash Equivalents**

For the purpose of theconsolidated statements of cash flows, the Company considers all highly liquiddebt instruments purchased with an initial maturity of three months or less tobe cash equivalents. Cash balances used to fund particular capital projects,which are not authorized or available for general corporate purposes, areclassified as restricted cash.

**Inventory**

Tire shred inventory is valued at its cost to produceusing the first-in first-out method, but in an amount not to exceed realizablevalue, determined with respect to existing contractual sales prices, less coststo complete the tire processing. The tire shred inventory value at December 31,2005 is zero.

We continue to providetechnical assistance to the project owner in preparation of the final  start-up and testing of two ThermalGasifiersTM in Italy, under a contract for resale to a customer, which have beeninstalled. Both units have been operated in start up phase. The ThermalGasifiersTM are valued at that portion of the contract price we reasonablyexpect to receive upon completion and acceptance by our customer, reduced byour contractual exposure to penalties contained in the contract which could beincurred if our Thermal GasifiersTM do not produce the volume of steam specifiedin the contract and payments received. Our customer continues to work throughissues with other contract parties for equipment to properly prepare the wastefuel to meet the system specifications and the modification or retrofitting of thermal equipment. The modificationand/or retrofit is required to bring the thermal equipment into specificationto accept the synthesis gases our units produce in order to maximize thetransfer of heat to steam. Both the fuel supply and thermal equipmentcapability concerns are being addressed by our customer and we continue toadvise our customer and pursue payment of amounts due us on our contract withour customer. During the year ended December 31, 2005, managementdetermined that the timing of receipt and amount of payment we could expect toreceive is uncertain and therefore, reduced the carrying value of theconstruction in progress inventory by $144,700 to zero. The write down ofinventory has been primarily offset by the reversal of $143,204 of accruedexpenses, which have been negotiated with certain third party subcontractorsand eliminated. The costs of the accrued expenses had been included in thecarrying cost of inventory. The net write down of $1,496 has been included incost of 

F-8

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

revenuefor the year ended December 31, 2005. We are reimbursed for our out ofpocket expenses incurred during the start up phase and we record those expensesand the reimbursement of those expenses in cost of revenue and revenue,respectively. We have no Thermal GasifierTM inventory as of December 31, 2005.

**Research and Development**

Research and developmentexpenses, all of which relate directly to the design and development of ourThermal GasifierTM technology, are expensed as incurred. For the years ended December 31,2005 and 2004, we incurred $117,125  and$68,729  for outside resources forresearch 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 duringconstruction are capitalized. Major units of property replacements orimprovements are capitalized and minor items are expensed. Gain or loss isrecorded in income for the difference between the net book value relative toproceeds received, if any, when the asset is sold or retired. Depreciation isprovided for using straight-line and accelerated methods. Estimated usefullives of the assets used in the computation of depreciation are as follows:

| Machinery and  equipment |   | 5–20 years |   |
|--------------------------|--------|-----------------|--------|
| Buildings                |   | 25 years        |   |
| Vehicles                 |   | 5 years         |   |
| Gathering pipeline       |   | 20 years        |   |

 

**Long Lived Assets**

In accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, the Company reviews its long-lived assets,including intangible assets, for impairment whenever events or changes incircumstances indicate that the related carrying amount may not be recoverable.Recovery of assets to be held and used is measured by a comparison of thecarrying amount of the assets to the future net cash flows expected to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lessthe cost to sell. The impairment review performed for fiscal year 2004indicated an impairment of long-lived assets at the Hutchins, Texas tireprocessing facility. At the time of the impairment review, net realizable valuefor these assets was determined to be $300,000, resulting in a net impairmentadjustment of $1,403,046. Management uses significant judgments, assumptionsand estimates to calculate future cash flows expected to be generated by theassets under impairment review.

**Revenue Recognition**

The Company’s tire fuelprocessing facility recognizes revenue in several ways. First when tires areaccepted at the facility (“tipping fees”) and secondly from the sale ofprocessed tire-derived-fuel, TDF. The revenues from tipping fees are fullyearned when the tires are accepted at the facility and the 

F-9

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

processedTDF revenues are recognized when the TDF is delivered to the end user. Internalquality controls are in place to ensure that TDF meets the standards requiredin contracts for the delivery of TDF. This quality control reduces the risk ofsignificant returns and allowances of TDF sold. Sales returns are reprocessedand added back to the existing TDF supply. Sales returns are booked based onthe Company’s historical experience.

We recognize revenue fromthe sale of our Thermal GasifiersTM upon completion, delivery and acceptance bythe customer, using the completed contract method of accounting.

**Identifiable Intangible Assets**

The Company reportsidentifiable intangible assets net of accumulated amortization. Accumulatedamortization on intangible assets was $184,285 and $80,116 at December 31,2005 and 2004, respectively. The company amortizes intangible assets, excludinggoodwill and trademarks, over their estimated useful lives, which range fromthree to ten years. Intangible assets consist of patents, capitalized web sitecosts, contracts acquired, and engineering drawings, designs and manuals forour Thermal GasifierTM technology.

**Goodwilland Other Intangible Assets**

The Company adopted theFinancial Accounting Standards Board (FASB), Statement of Financial AccountingStandards (SFAS) No. 142, Goodwill and Other Intangible Assets, duringfiscal year 2002. The Company has no recorded goodwill at December 31,2005 and 2004.

**Advertising**

The Company expensesnon-direct advertising costs as incurred. The Company did not incur any directresponse advertising costs during the years ended December 31, 2005 and2004 to be capitalized and deferred to future periods.

**Stock-Based Compensation**

The Company accounts forstock-based employee compensation arrangements in accordance with provisions ofAccounting Principles Board (“APB”) Opinion No. 25,  “Accounting for Stock Issued to Employees,”and complies with  the  disclosure  provisions  of  SFAS  No. 123,  “Accounting for Stock-Based Compensation,” asamended by SFAS No. 148,  “Accountingfor Stock-Based Compensation Transactions and Disclosure—an amendment of SFAS No. 123.”Under APB Opinion No. 25, compensation expense for employees is based onthe excess, if any, on the date of grant, between the fair value of the Company’sstock over the exercise price. No stock options were issued during 2005 or2004.

The Company accounts for equity instruments issued tonon-employees in accordance with the provisions of SFAS No. 123 andEmerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.” All transactions in which goodsor services are the consideration received for the issuance of equityinstruments are accounted for based on the fair value of the considerationreceived or the fair value of the equity instrument issued, whichever is morereliably measurable. The measurement 

F-10

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

date of the fair value ofthe equity instrument issued is the earlier of the date on which thecounterparty’s performance is complete or the date on which it is probable thatperformance will occur.

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS 123R), which replaces SFAS 123 andsupercedes APB Opinion No. 25. SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values. The proforma disclosurespreviously permitted under SFAS 123 no longer will be an alternative tofinancial statement recognition. For the Company, SFAS 123R is effective forperiods beginning after December 15, 2005.  Early application of SFAS 123R is encouraged,but not required. We plan to adopt SFAS 123R on January 1, 2006 using themodified prospective application method described in the statement. Under themodified prospective application method, we will apply the standard to newawards, and to awards modified, repurchased, or cancelled after the requiredeffective date. Additionally, compensation cost for the unvested portion ofawards outstanding as of the required effective date will be recognized ascompensation expense as the requisite service is rendered after the requiredeffective date.

We are evaluating theimpact of adopting SFAS 123R and expect that we will not record substantialnon-cash stock compensation expenses. The adoption of SFAS 123R is not expectedto have a significant effect on our financial condition, results of operations,and cash flows. The future impact of the adoption of SFAS 123R cannot bepredicted at this time because it will depend on levels of share-based paymentsgranted by us in the future.

**Net Income (Loss) Per Common Share**

SFAS No. 128, “Earnings Per Share” requirespresentation of basic (loss) or earnings per share (“Basic EPS”) and diluted(loss) or earnings per share (“Diluted EPS”).

The computation of basicloss per share is computed by dividing loss available to common stockholders bythe weighted average number of outstanding common shares during the period.Diluted loss per share gives effect to all dilutive potential common sharesoutstanding during the period. The computation of diluted EPS does not assumeconversion, exercise or contingent exercise of securities that would have ananti-dilutive effect on earnings. During the periods presented, the Company hadno potentially dilutive securities outstanding.

**Fair Value of Financial Instruments**

The fair values of cashand cash equivalents, accounts receivable, short-term debt and accounts payableapproximate cost because of the immediate or short-term maturity of thesefinancial instruments. The fair value of the Company’s long-term note andinterest receivable from officers and related parties does not significantlydiffer from cost at December 31, 2005 and 2004.

**Income Taxes**

Under SFAS 109, “Accountingfor Income Taxes,” deferred tax assets and liabilities are generally determinedbased on the difference between the financial statements and the tax bases ofassets and liabilities using enacted tax rates in effect for the years in whichthe differences are expected to reverse. Recognition of a deferred tax asset isallowed if future realization is more-likely-than-not. The Company 

F-11

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

hasprovided a full valuation allowance for its deferred tax asset because itsrealization is not considered more-likely-than-not.

**Use of Estimates**

The preparation of theCompany’s financial statements in conformity with generally accepted accountingprinciples requires the Company’s management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

**Reclassifications**

We have reclassifiedcertain prior period amounts to conform to the current period presentation. SeeNote 3-”Disposition of a Business Segment”.

**Recent Accounting Pronouncements**

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—an amendment of ARB No.43, Chapter 4.”  This Statement clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials. This Statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The initial application ofSFAS No. 151 will have no impact on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29.”This Statement eliminates the exception for  nonmonetary  exchanges of  similar  productive assets and replaces it with a general exception for exchanges of nonmonetary  assets that  do  not  have commercial  substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. ThisStatement is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company does not expectapplication of SFAS No. 153 to have a material affect on its financialstatements.

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB No. 20 and FAS No. 3” (“SFAS 154”). SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The correction of an error in previously issuedfinancial statements is not an accounting change. However, the reporting of anerror correction involves adjustments to previously issued financial statementssimilar to those generally applicable to reporting an accounting changeretrospectively. Therefore, the reporting of a correction of an error by restatingpreviously issued financial statements is also addressed by SFAS 154. SFAS 154is required to be adopted in fiscal years beginning after December 15,2005. The Company does not believe that adoption of this standard will have animpact on its financial statements.

F-12

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

**2.   SubsequentEvents and the Effect on Liquidity**

On March 7, 2006, we closed the Purchase and SaleAgreement with Midstream and received $16,915,676. Potential upward adjustmentsto the purchase price in the amount of $280,414 which were not finallydetermined at the closing are subject to post-closing determination pursuant tothe procedures in the Purchase and Sale Agreement. From the $16,915,676received, we paid Mr. Strain $14,482,171 in satisfaction of our October 2003promissory notes of $6,892,151, our March 2004 promissory note of$2,000,000, our September 2005 promissory note of $3,354,210 and accruedinterest through March 7, 2006 on those notes of $2,235,810.

The Company has incurredrecurring operating losses and at December 31, 2005, had a working capitaldeficit of $9,170,342 and a deficit in equity of $2,904,060. After the disposalof the helium division and the associated repayment of indebtedness, theCompany has positive net equity and working capital. Management projects thatcash proceeds realized from the sale of the helium division, in addition toexpected positive cash flows from its tire fuel processing division will besufficient to sustain the Company’s operations for the coming year. Additionalfinancing may be sought for additional expansion in the Company’s alternativeenergy division. There can be no assurance that additional financing will beavailable at rates favorable to the Company, or at all.

**3.   Dispositionof a Business Segment**

During September 2005, we and our  wholly-owned subsidiary NEOHC and NEOHC’swholly-owned subsidiary, MCNIC Rodeo Gathering, Inc. entered into aPurchase and Sale Agreement with Midstream Energy Services, LLC pursuant towhich NEOHC will sell  the assets whichcomprise our helium and gas processing facilities and operations to MidstreamEnergy Services, LLC. Management had determined that the helium and gasprocessing facility required significant additional infrastructure investmentin order to maintain its current profitability levels, and that the Company’sability to obtain such investment was impeded by existing liens against thehelium and gas processing assets. At September 30, 2005 the Companydetermined that the plan of sale criteria in SFAS No. 144,  *Accountingfor the Impairment or Disposal of Long-Lived Assets*, had been metand classified the assets and liabilities accordingly on the balance sheet. Gainfrom the disposal of the helium and gas processing plant will be recognized inthe first quarter of 2006.

F-13

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

Thecomposition of assets and liabilities held for sale in the accompanying balancesheet are as follows:

| ** **                                    | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash                                          |       | $                           | 257,365    |                        | $          | 534,254 |   |
| Accounts  receivable                          |       | 1,250,662                   |       | 1,323,356                   |       |
| Inventory                                     |       | 463,027                     |       | 337,905                     |       |
| Prepaid expenses                              |       | 65,729                      |       | 65,729                      |       |
| Advances and  other receivables               |       | —                      |       | 529                         |       |
| Total current  assets held for sale           |       | 2,036,783                   |       | 2,261,773                   |       |
| Plant, property  and equipment, net           |       | 9,629,070                   |       | 9,908,044                   |       |
| Intangible  assets, net                       |       | 139,440                     |       | 171,586                     |       |
| Total assets held  for sale                   |       | $                           | 11,805,293 |                        | $          | 12,341,403 |   |
| Accounts payable                              |       | $                           | 1,665,251  |                        | $          | 1,850,715 |   |
| Accrued  compensation and payroll liabilities |       | 31,864                      |       | 30,188                      |       |
| Accrued interest                              |       | 1,226,183                   |       | 627,823                     |       |
| Accrued property  tax                         |       | 63,361                      |       | 37,080                      |       |
| Accrued income  taxes                         |       | 282,888                     |       | 23,584                      |       |
| Other accrued expenses                        |       | 37,581                      |       | 36,616                      |       |
| Notes payable, stockholder                    |       | 4,000,000                   |       | 1,080,000                   |       |
| Total current liabilities held for sale       |       | 7,307,128                   |       | 3,686,006                   |       |
| Long term debt, stockholder                   |       | 4,892,151                   |       | 7,812,151                   |       |
| Total liabilities held  for sale              |       | $                           | 12,199,279 |                        | $          | 11,498,157 |   |

 

Discontinued operations includes revenue of$14,227,001 and 13,475,220, for the years ended December 31, 2005 and2004, respectively. Pre-tax net profits totaled $1,135,622 and $926,420 in 2005and 2004.

See Note 2.—“Subsequent Events”.

F-14

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

**4.   Property, Plant and Equipment**

Followingis a summary of property, plant and equipment at December 31, 2005 and2004:

| ** **                         | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Machinery and equipment            |       |                        | $          | 1,121,764                   |       |   |   | $ | 193,790 |   |   |
| Pipeline                           |       |                        | —     |                        |       |   | — |   |   |
| Buildings                          |       |                        | 43,575     |                        |       |   | 15,607 |   |   |
| Vehicles                           |       |                        | 67,559     |                        |       |   | 67,800 |   |   |
| Land                               |       |                        | 51,085     |                        |       |   | 51,085 |   |   |
| Furniture, fixtures and  equipment |       |                        | 149,157    |                        |       |   | 146,231 |   |   |
| Improvements                       |       |                        | 128,280    |                        |       |   | 68,434 |   |   |
|                               |       |                        | 1,561,420  |                        |       |   | 542,947 |   |   |
| Less accumulated  depreciation     |       |                        | (304,712   | )                           |       |   | (146,163 | ) |   |
| Net book value                     |       |                        | $          | 1,256,708                   |       |   |   | $ | 396,784 |   |   |

 

Depreciation expense recorded in the financialstatements for continuing operations was $167,783 and $249,061 for the yearsended December 31, 2005 and 2004, respectively.

**5.   NotesPayable**

**RelatedParty Debt:**

At December 31, 2005 and 2004, we are obligatedto Mr. Richard Strain, our largest beneficial shareholder, for $12,246,361and $8,892,151, respectively, as follows:

·       On September 29, 2005we entered into a Stock Purchase Agreement with Mr. Strain to purchase the49% minority interest in our 51% owned subsidiary, Nathaniel Energy OklahomaHoldings Corporation, owned by Mr. Strain, and issued a $3,354,210promissory note to Mr. Strain, which is payable on demand by Mr. Strainat any time after December 31, 2005, or earlier on the date of thecommencement of any bankruptcy or insolvency proceedings against us, if any. Wehave the right to pre-pay the promissory note at any time without penalty. Thepromissory note bears interest at the prime rate plus 1.5% annually. Thepromissory note is secured by a first priority security interest in all of ourassets and a pledge of the NEOHC shares that we purchased. See Note 8.—“RelatedParty Transactions”. We recorded the $3,354,210 promissory note as a currentnote payable due stockholder with a corresponding reduction in our additionalpaid-in capital on our balance sheet as of December 31, 2005.

·       On March 17, 2004, weborrowed $2,000,000 with an interest rate of 3.49% per year and entered intoPromissory Note II, which provides repayments of $540,000 on each of thefollowing dates: October 1, 2005, January 1, 2006, April 1, 2006and July 1, 2006. The outstanding principal and interest under the Notemay be converted at any time, at Mr. Strain’s election, into common stock.The conversion price of any or all of the indebtedness is equal 103% of theaverage closing price of our common stock for the five trading days prior tothe date of the election. This note is included in liabilities held for sale inthe accompanying balance sheet.

·       This remainder of theindebtedness is memorialized in a promissory note in the principal amount of$2,000,000 and a loan agreement in the amount of $4,892,151 respectively. The$2,000,000 note represents loans to the Company in 2003 and is payable in fourquarterly principal and interest 

F-15

----

**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

paymentsof $540,000 each on October 1, 2005 and January 1st, April 1stand July 1st 2006. Payments on this note have been deferred until 2006pursuant to a verbal agreement with Mr. Strain. The loan agreement for theprincipal amount due to the creditor of $4,892,151 bears interest at the rateof 8% per year. No payments will be due under this loan agreement until March 31,2007, at which time the principal and accrued interest will be repaid inquarterly payments of $572,876 through December 31, 2009. These notes areincluded in liabilities held for sale in the accompanying balance sheet.

On March 7, 2006, we closed our Purchase and SaleAgreement with Midstream and received $16,915,676. From the $16,915,676received, we paid Mr. Strain $14,482,171 in satisfaction of our October 2003promissory notes of $6,892,151, our March 2004 promissory note of$2,000,000, our September 2005 promissory note of $3,354,210 and accruedinterest through March 7, 2006 on those notes of $2,235,810. See Note 2. -“Subsequent Events”.

**OtherNotes Payable:**

Exclusive of notes payable—stockholder, the Companyhas the following promissory notes outstanding at December 31:
|                                                                                                                                                                              | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| 7.25% line of credit facility secured by a letter of  credit provided by a stockholder                                                                                       |       | $          | 790,000    |     | $          | — |   |
| 15% promissory notes payable to individuals, due on  demand                                                                                                                  |       | 17,000     |       | 42,333   |       |
| 6.50% unsecured promissory note, monthly payments of  $14,512 principal and interest through October 2006, settled during 2005                                          |       | —     |       | 298,442  |       |
| 6.50% unsecured promissory note, monthly payments of  $20,542 principal and interest through December 2006, settled during  2005                                        |       | —     |       | 461,135  |       |
| Non-interest bearing unsecured promissory note due  upon receipt of payments from the Cologna Veneta, Italy Thermal Gasifier TM  project owner at 20% of amount received |       | 70,000     |       | —   |       |
| 4.50% installment note, secured by equipment, monthly  payments of $2,531 principal and interest through June 2007                                                      |       | 44,108     |       | 71,816   |       |
| 20.15% installment obligation, secured by equipment,  monthly payments of $1,390 principal and interest through April 2006                                              |       | 4,565      |       | 18,675   |       |
| 3.85% promissory note, secured by land, monthly  payments of $1,742, principal and interest through April 2009 with a  final payment of $174,605 due April 2009    |       | 215,070    |       | 227,317  |       |
| 1.90% installment note, secured by equipment, monthly  payments of $707 principal and interest through November 2005                                                    |       | —     |       | 7,744    |       |
| 8.45% installment note, secured by equipment, monthly  payments of $454 principal and interest through November 2007                                                    |       | 9,553      |       | 14,083   |       |
| 10.59% installment note, secured by equipment,  monthly payments of $3,231 principal and interest through February 2007                                                 |       | 60,095     |       | 90,715   |       |
| 9.00% installment note, secured by vehicle, monthly  payments of $641 of principal and interest through August 2008                                                     |       | 18,632     |       | 24,378   |       |
| 6.14% unsecured installment note, final principal and  interest payment due January 2006                                                                                |       | 29,037     |       | —   |       |
| 2.90% installment note, secured by equipment, monthly  payments of $936 of principal and interest through August 2008                                                   |       | 28,836     |       | —   |       |
| 8.45% installment note, secured by vehicle, monthly  payments of $308 principal and interest through May 2007                                                      |       | 4,928      |       | 8,072    |       |
| Total Debt:                                                                                                                                                                  |       | $          | 1,291,824  |     | $          | 1,264,706 |   |
| Current Portion:                                                                                                                                                             |       | (1,014,235 | )          | (536,135 | )          |
| Long-term Portion:                                                                                                                                                           |       | $          | 277,589    |     | $          | 728,571 |   |
|                                                                                                                                                                              |            |            |            |          |            |  |  |  |  |  |  |

 

F-16

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

Maturitiesof debt, including notes payable to shareholders, are as follows:

| **December 31,** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-----------------------|------------|------------|------------|------------|------------|
| 2006                  |       | $          | 8,368,445  |       |
| 2007                  |       | 1,708,346  |       |
| 2008                  |       | 1,655,104  |       |
| 2009                  |       | 1,806,291  |       |
| Thereafter            |       | 0          |       |
|                  |       | $          | 13,538,186 |       |

 

**Debt Settlements:**

During August 2005, we signed a mutual releaseand settlement agreement and executed a promissory note for $728,637 with avendor that provided engineering and consulting services to us for the designand installation of two Thermal GasifiersTM we built in Cologna Veneta, Italy.The promissory note has a two year term commencing July 15, 2005, bearsinterest at 8% per annum and replaces and cancels two previous notes dated December 21,2004 in the original principal amounts of $461,135 and $325,780, outstandingaccrued expenses of $89,219 included as research and development expense in thefirst quarter of 2005, and accrued and unpaid interest of approximately$18,000. During September 2005, we executed a first amendment to themutual release and settlement agreement, made a one time lump sum payment of$430,000 to our vendor, and cancelled our August 2005 promissory note. Theterms of the first amendment require us to pay our vendor an additional$70,000, in total, to be paid in the amount of 20% of each and every payment wereceive from our customer for our Thermal GasifierTM project in Cologna Veneta,Italy, until the $70,000 is paid in full. The difference between our August 2005note payable of $728,637, less our principal cash payments and our lump sumpayment through September 2005 of $520,590 and the $70,000 note payablebalance is $138,047, which we have reflected as other income, net of estimatedlegal expense incurred in the settlement of $5,000, in our statement ofoperations for the year ended December 31, 2005. The $70,000 note payableis reflected as a current liability on our balance sheet as of December 31,2005.

During the year ended December 31,2004, various unsecured demand obligations with an aggregate outstandingprincipal balance of $183,250 plus accrued but unpaid interest were settled inexchange for 529,333 shares of common stock.

**6.   Income Taxes**

Thecomponents of the provision for income taxes are as follows:

| **For the years ended December 31:** | ** ** | ** ** | ** ** | **2005** | ** ** | **     2004      ** | ** **               |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|----------------------------------------------------------------------------|--------------------------|
| Current tax  expense (benefit)                                |       | $          | —     |     |       | $                                                                          | —                   |   |   |
| Deferred tax (Income)                                         |       |       |       |     |       |                                                                       |                     |
| U.S. federal                                                  |       | (641,900   | )          |     | —     |                                                                       |                     |
| State and local                                               |       | (117,100   | )          |     | —     |                                                                       |                     |
| Total deferred                                                |       | (759,000   | )          |     | —     |                                                                       |                     |
| Total tax provision  (benefit) from continuing operations     |       | $          | (759,000   | )        |       | $                                                                          |    — |   |   |

 

The actual and expected tax rates are similar for bothyears.

F-17

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

TheCompany’s deferred tax assets and liabilities as of December 31, 2005and2004 are as follows:

| ** **                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income  tax assets:              |       |       |       |       |       |
| Due to net  operating loss carry forwards |       | $          | 7,254,000  |       | $          | 6,521,000 |   |
| Due to deductible  temporary differences  |       | (509,000   | )          | (1,546,000 | )          |
| Less valuation allowance                  |       | (5,986,000 | )          | (4,975,000 | )          |
| Total deferred income  tax asset          |       | $          | 759,000    |       | $          | —- |   |

 

As of December 31, 2005,the Company has approximately $19,300,000 in net operating loss carry forwardsavailable to offset future taxable income expiring between 2018 and 2025.Approximately $2,700,000 of these losses are limited under the change incontrol provisions of Internal Revenue Code Section 382. Losses so limitedwill be available to offset future taxable income without limitation during ourfiscal year 2006 until their expiration.

We include in ourconsolidated statements of operations the results of operations of our whollyowned subsidiary, NEOHC. For periods prior to September 30, 2005, we couldnot file a consolidated income tax return for federal income tax purposes andtherefore we could not use our tax loss against NEOHC’s taxable income forfederal income tax purposes. Since the companies filed separate federal incometax returns, the financial statements reflect federal income tax expense andaccrued income tax liabilities computed at statutory rates on a separatecompany basis.

On September 29,2005, we acquired a 49% interest in NEOHC from Richard Strain. See Note 8-”RelatedParty Transactions”. As a result of that acquisition, we own 100% of NEOHC asof September 30, 2005 and from that date, we are able to include taxableincome or loss of NEOHC with our taxable income or loss for federal income taxpurposes. For the period subsequent to and including September 30, 2005,we have computed our federal income tax expense combining our taxable income orloss with taxable income or loss of NEOHC, subject to limitations provided bythe 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’sfederal income tax expense on a separate company basis resulting in a combinedfederal and state income tax liability and related tax expense of $259,304 and$23,584 for the years ended December 31, 2005 and 2004, respectively,included in assets held for sale on our consolidated balance sheet and incomefrom discontinued operations on our consolidated statement of operations forthe year ended December 31, 2005.

As a result of the sale ofour helium and gas processing assets on March 7, 2006, we estimate that wewill utilize approximately $2,034,000 of our December 31, 2005 netoperating loss carry forward to offset the gain on the sale of those assets andhave recorded a deferred tax asset and total provision benefit of $759,000. SeeNote 2—“Subsequent Events and the Effect on Liquidity.”  We consider it less likely than not that thebalance of the net operating losses and deductible temporary differences willbe realized within the next twelve month period and have established avaluation allowance for the remaining deferred tax asset generated by thoselosses and temporary differences.

F-18

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

**7.   Stockholders’Equity**

On October 12, 2005,we filed an amendment to our certificate of incorporation with the DelawareSecretary of State. The amendment increases our authorized shares of commonstock from 75,000,000 to 200,000,000 shares and preferred stock from 2,000,000to 10,000,000 shares.

**Preferred Stock**

The Company has 10,000,000shares of Preferred Stock, $0.001 par value, authorized for issuance. Our boardof directors is vested with the authority to provide for the issuance of andterms of the preferred shares. No preferred shares have been issued and noterms have been provided as of the time of this filing.

**Common Stock**

The Company has200,000,000 shares of stock $0.001 par value, authorized for issuance. As of December 31,2005, 90,698,263 shares of common stock were issued and outstanding.

During October 2005,20,000,000 shares of common stock were issued to Mr. Strain, a relatedparty, to satisfy an outstanding obligation arising from a debt conversionagreement with Mr. Strain dated October 3, 2003. Pursuant to thatconversion agreement, $10,000,000 of our indebtedness to Mr. Strain wasconverted into an aggregate of 50,000,000 shares of our common stock. We had75,000,000 shares of common stock authorized for issuance prior to filing anamendment to our certificate of incorporation and 70,698,263 shares issued asof September 30, 2005. At the time we entered into the conversionagreement, we had 75,000,000 shares authorized and 38,262,664 shares issued andoutstanding. We issued 30,000,000 shares of common stock pursuant to theconversion agreement. Accordingly, we did not have a sufficient number ofshares of common stock authorized for issuance to issue all of the shares ofcommon stock in the conversion. The conversion agreement provided that to theextent that we did not have sufficient shares of common stock authorized toissue all of the shares in the conversion, Mr. Strain has the irrevocableright to the shares that could not be issued.

Giving effect to theissuance of all of the shares of common stock under the conversion agreement, Mr. Strainowns 54.3% of the issued and outstanding shares of common stock of the Company.

In connection with theconversion, Mr. Strain received the right to demand registration of theresale of the shares at any time after January 3, 2004. Additionally, Mr. Strainwas granted piggyback registration rights relating to certain registrationstatements which Nathaniel Energy files after January 3, 2004, if any.

As of March 24, 2006,Nathaniel Energy had approximately 1,019 stockholders of record.

At December 31, 2003there were options to purchase 500,000 shares of common stock with a cashlessexercise right at the rate of $3.00 per share. The number of shares to beissued upon exercise varies with the market price of the stock. The optionsexpired unexercised on December 31, 2004.

**8.   RelatedParty Transactions**

See Note 5—Notes Payable—“RelatedParty Debt” for a description of lending activities with our major beneficialshareholder, Mr. Richard Strain.

F-19

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

During July 2005, weobtained a one year bank line of credit for $500,000, interest payable at theprime lending rate, for purposes of funding improvements at our tire fuelprocessing operation. The line of credit is supported by a standby letter ofcredit, issued in our bank’s favor, and provided by Mr. Strain, our majorbeneficial shareholder. During September 2005, we obtained a $500,000increase in that bank line of credit which was supported by a correspondingincrease in the standby letter of credit provided by Mr. Strain. We haveborrowed $790,000 against the line of credit as of December 31, 2005.

On October 1, 2004,the Company entered into a consulting agreement with CJM Group, Inc., acompany affiliated with Corey Morrison, to provide senior management and consultingservices, contract negotiation and deal structure services, and business andplanning services. The agreement has a term of 24 months, unless terminated byeither party, and provides that the consultant receive a consulting fee of$12,500 monthly for services provided.

During the year ended December 31,2004, $250,000 in marketing and communication related expenses were accrued toStrong Wilken, Inc., an entity affiliated with Corey Morrison, which waspaid during January 2005. On April 12, 2005 the Company terminatedits October 1, 2004 Consulting Agreement with CJM Group, Inc. and itsrelationship with Strong Wilken, Inc. Corey Morrison and his relatedcompanies are beneficial owners of approximately 10% of the Company’s commonstock at December 31, 2005.

The Company acquired threepatents, two pending U.S. patent applications, and two pending European patentapplications relating to the Company’s ownership of technology by assignmentfrom Stan Abrams, Nathaniel Energy’s chief executive officer, pursuant to anagreement dated July 7, 1998 and amended in September 2003. Under theassignment agreement, the Company is required, upon written demand, to reassignthe patents and patent applications to Mr. Abrams in the event both StanAbrams and Brett Abrams are not employed as officers of the Company and neitherof them is a director, except as a result of termination for cause, voluntaryresignation, death or legal incompetence. Furthermore, the agreement providesfor a reassignment of the technology to Messrs. Abrams in the eventNathaniel Energy ceases business operations or becomes bankrupt. On June 25,  2004, as a result of Stan  Abrams’ andBrett  Abrams’  voluntary retirement and resignation from theCompany,  all rights they had in, or tothe return of, any of these patents, under the Amended and  RestatedPatent Reassignment  Agreement made as ofSeptember 30, 2003 but effective as of July 7, 1998  between Stan Abrams,  Brett  Abrams, and  Nathaniel  Energy, or otherwise, expired and were waived.

During 2004, the Companywrote off $264,587 due from Ripetouch Greenhouse LLC, an entity controlled byStan Abrams, the Company’s former chief executive officer and $11,438 due fromStan Abrams, as collection was determined to be uncertain.

F-20

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

**9.**   IntellectualProperty

Nathaniel Energy owns three U.S. patents, two pendingU.S. patent applications and two pending European patent applications coveringthe Thermal GasifierTM technology. These patents and patent applications are forutility patents directed to devices and methods of uses. The three U.S. patentsexpire September 6, 2011, December 4, 2012, and February 4,2022, respectively.

| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Patents (at cost)                  |       | $        | 207,428    |     | $          | 206,205 |   |
| Blueprints and  engineering design |       | 299,339  |       | 299,339  |       |
| Less Accumulated  Amortization     |       | (184,285 | )          | (80,116  | )          |
| Intangible assets, net             |       | $        | 322,482    |     | $          | 425,428 |   |

 

Amortization expense forthe twelve months ended December 31, 2005 and December 31, 2004 was$104,170 and $55,116, respectively.

**10.**   EconomicDependency—Major Customers

During 2005 and 2004, onecustomer, accounted for approximately 27% and 37%, respectively, of the Company’srevenue.

**11.**   Commitmentsand Contingencies

**Commitments**

We signed a Co-ProcessingAgreement with Energis, LLC, effective September 30, 2005, to supplytire-derived-fuel of up to 1,500 tons per month from our tire fuel processingfacility in Hutchins, Texas to their cement kiln operation in Texas. Theagreement has a three year term, automatically renewable for additional oneyear terms with extensions not to exceed three years, unless either partyprovides a 90 day advance notification of its intent not to renew.

**Litigation and Claims**

The Company is subject to a variety of litigation andclaims relating to past due payments for goods and services. The Company is inthe process of negotiating settlement arrangements for these items, and theestimated settlement amounts are recorded on the books in accounts payable.

The Company is a defendantin a suit by a former employee alleging violation of Fair Labor and StandardsAct and Title VII of the Civil Rights Act. The proceeding is being adjudicatedin US District Court of Northern Texas—Dallas Division. The case is beingvigorously defended, and management considers the suit to be without merit. Thecourt has ordered the parties to attend mediation but it is undetermined if thecase will settle.

F-21

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**Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued) For the years ended December 31, 2005 and 2004**

**12.**   SegmentData

| ** **                                                         | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Fuel  Processing**                                 | ** ** | **Alternate  Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
| Revenue                                                            |       | $                                                    | 609,428    |   | $ | 80,000 |   |   |   | $ | 689,428 |   |
| Significant non  cash expenses —depreciation and amortization |       | $                                                    | 271,953    |   | — |   |   |   | $ | 271,953 |   |
| Net income (loss)                                                  |       | $                                                    | (447,469   | ) | $ | (846,626 | ) | $ | 1,055,611 |   | $ | (238,484 | ) |
| Capital  expenditures                                              |       | $                                                    | 1,035,505  |   | — |   |   |   | $ | 1,035,505 |   |
| Total assets as of Dec  31, 2005                                   |       | $                                                    | 1,826,211  |   | $ | 275,449 |   | $ | 11,805,293 |   | $ | 13,906,953 |   |

 

| ** **                             | ** ** | **Year ended December 31, 2004** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **Fuel  Processing**                                 | ** ** | **Alternate  Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
| Revenue                                |       | $                                                    | 561,573    |   | — |   |   |   | $ | 561,573 |   |
| Significant non  cash expenses         |       |                                                 |       |   |   |   |   |   |   |
| —write down of inventory          |       | $                                                    | 274,000    |   | — |   |   |   | $ | 274,000 |   |
| —impairment of assets             |       | 1,403,046                                            |       | — |   |   |   | 1,403,046 |   |
| —depreciation and amortization    |       | 303,882                                              |       | — |   |   |   | 303,882 |   |
| —loss on related party receivable |       | 264,587                                              |       | — |   |   |   | 264,587 |   |
| Net income (loss)                      |       | $                                                    | (2,940,952 | ) | $ | (3,618,228 | ) | $ | 902,836 |   | $ | (5,656,344 | ) |
| Capital  expenditures                  |       | $                                                    | 64,260     |   | — |   |   |   | $ | 64,260 |   |
| Total assets as of Dec  31, 2004       |       | $                                                    | 926,315    |   | $ | 1,020,560 |   | $ | 12,341,403 |   | $ | 14,288,278 |   |

 

**13.**   LeaseCommitments

NathanielEnergy leases certain office facilities under non cancelable operating leasesthat expire at various dates through 2008. At December 31, 2005, NathanielEnergy was obligated for future minimum lease payments under operating leasesthat have initial or remaining non-cancelable terms in excess of one year, asfollows:

| 2006                          |   | $      | 62,176  |   |
|-------------------------------|--------|--------|---------|--------|
| 2007                          |   | 63,938 |    |
| 2008                          |   | 16,102 |    |
| 2009                          |   | — |    |
| 2010                          |   | — |    |
| Total minimum lease  payments |   | $      | 142,216 |   |

 

Rent expense for operating leases, including month tomonth rentals, was $171,037 and $107,268 for the years ended December 31,2005 and 2004, respectively.

F-22

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

|        |   | **Nathaniel Energy Corporation**(Registrant)    |
|--------|--------|-------------------------------------------------|
|   | By:    | /s/ GEORGE A. CRETECOS                          |
|   |   | George A. Cretecos,                             |
|   |   | Chief Executive Officer, President and Director |

 

Date:  March 29,2006

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

|        |   | /s/ GEORGE A. CRETECOS                           |
|--------|--------|--------------------------------------------------|
|   |   | George A. Cretecos,                              |
|   |   | Chief Executive Officer,  President and Director |
|   |   | Date:  March 29, 2006                  |
|   |   | /s/  WILLIAM J. MULROW                           |
|   |   | William J. Mulrow,  Director                     |
|   |   | /s/  KAREN SMYTHE                                |
|   |   | Karen Smythe, Director                           |
|   |   |                                             |
|   |   | Michael Burdis, Director                         |

 

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