NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2003 and 2002

1. Significant Accounting Policies and Nature of Operations

Description of Business

Nathaniel Energy Corporation (the "Company") is a renewable energy company that provides industry with an alternative energy equal to that of fossil fuels. Its proprietary patented technology, the Thermal Combustor(TM), is a 2-stage gasification system designed to convert waste, biomass, tires and any other solid carbon-based materials into inexpensive electrical and thermal energy, while exceeding the most stringent EPA and European Union regulations. The Company focuses its patented technology in three main areas: licensing, creating energy infrastructures and building mini power plants. The Company intends to license the Thermal Combustor(TM) technology to qualified companies, joint venture partners, and distributorships.

The Company has been in the fuel processing business, including used tire recycling and collection services, since 1997. In two transactions, on August 26, 2002 and April 3, 2003, the Company acquired a minority and then the remaining interest in a helium and gas processing facility in Keyes, Oklahoma. 49% of the interest in the Keyes helium operation was issued to an outside investor who had provided funding for the acquisition. See Note 4 "Acquisition; Minority Interest". In addition to the fuel processing and helium and gas processing operations, the Company is engaged in the development of alternative energy conversion processes and related technologies using its patented Thermal Combustor(TM) technology. Nathaniel Energy's short term objective is to use the fuel processing facility in Hutchins, Texas as a fuel supply for its first energy infrastructure operation which is planned for construction in Keyes, Oklahoma. At this site, Nathaniel Energy plans to build a Thermal Combustor(TM) which will obtain its fuel from the fuel processing facility and produce marketable byproducts, including electricity that will be used to power the helium gas operation.

Business Segments

The Company operates three separate segments which are presently conducted in three separate facilities:

- a fuel processing operation in Hutchins, Texas,- the natural gas processing, gas liquids and helium production in Keyes, Oklahoma and
- the alternate energy engineering and corporate offices in Englewood, Colorado.

Principles of Consolidation

The financial statements include the accounts of Nathaniel Energy Corporation and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

Inventory

Tire shred inventory is valued at its cost to produce using the first-in first-out method, but in an amount not to exceed realizable value, determined with respect to existing contractual sales prices, less costs to complete the tire processing. The gas processing facility has helium inventory in process stored in the BLM (Bureau of Land Management) facility in Texas; this inventory is based on the first-in-first-out method. There is a contract with the BLM which encompasses activity fees, compression fees, storage fees and an annual fee to the BLM.

The components of inventory are as follows:

Helium inventory, valued by first-in, first out method          $363,174
Tire shred inventory, valued by first-in, first-out method       274,000
                                                                --------
                                                                $637,174
                                                                ========

Nathaniel Energy Corporation Notes to Consolidated Financial Statements

(Continued)

Property, Plant and Equipment and Related Depreciation

Property, plant and equipment purchased or constructed is recorded at cost. Direct costs, such as labor and materials, and indirect costs, such as overhead used during construction are capitalized. Major units of property replacements or improvements are capitalized and minor items are expensed. Gain or loss is recorded in income for the difference between the net book value relative to proceeds received, if any, when the asset is sold or retired. Depreciation is provided for using straight-line and accelerated methods. Estimated useful lives of the assets used in the computation of depreciation are as follows:

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

Revenue Recognition

The Company's fuel processing facility recognizes revenue in several ways. First when tires are accepted at the facility ("tipping fees") and secondly from the sale of processed tire shreds. The revenues from tipping fees are fully earned when the tires are accepted at the facility and the processed tire shred revenues are recognized when the shreds are delivered to the end user. Internal quality controls are in place to ensure that shreds meet the standards required in contracts for the delivery of shreds. This quality control reduces the risk of significant returns and allowances of tire shreds sold. Sales returns are reprocessed and added back to the existing tire shreds. Sales returns are booked based on the Company's historical experience.

The Company's helium, liquid gas and natural gas revenues are recognized in the period of delivery. The revenues are fully earned when recognized. The processing plant has various types of quality control equipment in place to ensure that the processed gases meet the requirements of the Bureau of Land Management ("BLM"), the natural gas pipeline operators and its wholesale gas customers. The Company has a month-to-month contract in place with a natural gas marketing firm for the natural gas delivered to the pipeline and a contract for the helium processed. The natural gas liquids processed are currently sold as produced.

Identifiable Intangible Assets

The company reports identifiable intangible assets net of accumulated amortization. Accumulated amortization on intangible assets was $57,171 and $2,000 at December 31, 2003 and 2002, respectively. The company amortizes intangible assets, excluding goodwill and trademarks, over their estimated useful lives, which range from three to six years. Intangible assets consist of capitalized web site costs and contracts acquired.

Goodwill and Other Intangible Assets

The company adopted the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, during fiscal year 2002. For years ended December 31, 2002 and 2003 the Company had no goodwill. Accordingly the Company did not record goodwill in its financial statements for those years.

Long-Lived Assets

In accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews its long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. Recovery of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. The impairment review performed for fiscal year 2003 indicated no impairment of long-lived assets.

Advertising

The Company expenses non-direct advertising costs as incurred. The Company did not incur any direct response advertising costs during the years ended December 31, 2002 and 2003 to be capitalized and deferred to future periods.

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

Stock-Based Compensation

The FASB's SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

The Company values shares issued in consideration of services at fair value. Options or warrants issued to non-employees and consultants are recorded using the fair value method, based on a Black-Scholes option-pricing model.

Net Income (Loss) Per Common Share

SFAS No. 128, "Earnings Per Share" requires presentation of basic (loss) or earnings per share ("Basic EPS") and diluted (loss) or earnings per share ("Diluted EPS").

The computation of basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. During the periods presented, the Company had no potentially dilutive securities outstanding.

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate cost because of the immediate or short-term maturity of these financial instruments. The fair value of the Company's long-term note and interest receivable from officers and related parties does not significantly differ from cost at December 31, 2003 and 2002.

Income Taxes

Under SFAS 109, "Accounting for Income Taxes," deferred tax assets and liabilities are generally determined based on the difference between the financial statements and the tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Recognition of a deferred tax asset is allowed if future realization is more-likely-than-not. The Company has provided a full valuation allowance for its deferred tax asset because its realization is not considered more-likely-than-not.

Use of Estimates

The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts reported in the 2002 financial statements, as amended and filed on February 23, 2004, have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income or stockholders' equity. Certain expenses reported in the Company's Quarterly Report on Form 10-QSB for the period ended June 30, 2003 have been reclassified and adjusted to conform to the current period presentation and to be consistent with the financial data presented in the March 31, 2003 and September 30, 2003 quarterly reports on Form 10QSB. These reclassification and adjustments reduced June 30, 2003 year to date net income by $195,000.

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

Recent Accounting Pronouncements

In January 2003, The FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; (ii) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: the direct or indirect ability to make decisions about the entities activities through voting rights or similar rights; or the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses.

Interpretation No. 46 also requires expanded disclosures by the primary beneficiary (as defined) of a variable interest entity and by an enterprise that holds a significant variable interest in a variable interest entity but is not the primary beneficiary. Interpretation No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Interpretation No. 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. Management does not expect the adoption of Interpretation No. 46 to have a material impact on the Company's consolidated financial position or results of operations. The company has no variable interest entities.

In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation of Transferred Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft is a proposal that is subject to change and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS
140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obliged a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special-purposes entity's obligation to beneficial interest holders.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies under what circumstances a contract with initial investments meets the characteristics of a derivative and when a derivative contains a financing component. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of SFAS No. 149 will have a significant effect on the Company's financial statement presentation or disclosures.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company does not expect that the adoption of SFAS No. 150 will have a significant effect on the Company's financial statement presentation or disclosures.

2. Material Subsequent Events and Contingencies

On January 9, 2004 Nathaniel Energy completed a new contract with a third party company to receive additional gas through its existing pipeline for processing at the Company's facilities. According to the contract, Nathaniel Energy will extract helium and natural gas liquids from this new gas stream. The Company believes that the new contract and the $1.1 million spent on equipment upgrades in the first quarter of 2004 will enable the Company to increase gas volumes and production at the processing plant. Incremental gross profit from the new contract and upgrades is expected to be approximately $1.7 million per year, and $1.2 million in 2004. The equipment upgrades were customer financed with loan repayments due over an 18 month period ending in September 2005. See Note 14 "Commitments and Contingencies".

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

On March 17, 2004 Richard Strain loaned Nathaniel Energy $2,000,000 pursuant to a loan agreement and promissory note. The loan bears interest at the rate of 8% per year and is payable in four quarterly principal and interest payments of $540,000 each on October 1, 2005 and January 1, April 1 and July 1, 2006. The loan agreement provides that the outstanding principal plus interest under this loan, and the $6,892,151 outstanding indebtedness under previous loans from Mr. Strain to Nathaniel Energy may be converted, at Mr. Strain's option, into shares of Nathaniel Energy's common stock at a conversion rate equal to 103% of the average closing price on the five trading days prior to March 17, 2004. Additionally, Nathaniel Energy has agreed to register the shares of common stock issuable upon conversion of these loans within 180 days of the funding of the $2,000,000 loan.

3. Recapitalization

Effective October 3, 2003, a Company change in control occurred as a result of the closing of a Conversion Agreement between the Company and Richard Strain. Pursuant to the Conversion Agreement, $10 million dollars of indebtedness of the Company to Mr. Strain converted into an aggregate of 50,000,000 shares of the Company's common stock to be issued to NEC Energy, LLC, a designee of Mr. Strain.

4. Acquisition; Minority Interest

On April 3, 2003 the Company completed the acquisition of the remaining 81.45% Keyes Helium Company, LLC ("Keyes Helium") from Colorado Interstate Gas/El Paso ("CIG") through its subsidiary Nathaniel Energy Okalahoma Holding Corporation ("NEC OK"). The Company purchased its initial 18.55% interest in Keyes Helium Company on August 26, 2002 which is discussed in more detail below in this Note
4. On April 3, 2003 we also acquired the Keyes gathering system and Sturgis gas processing plant and compressor station. These facilities are located on a 15 acre site in Keyes, Oklahoma. These facilities receive and process natural gas, remove liquid gases and helium and then send the natural gas into a natural gas pipeline. The Company transferred 49% of the ownership of NEC OK to a principal investor in consideration of an aggregate of $11,997,476 of debt financing to effecuate the acquisition. Accordingly, the Company's interest in Keyes Helium Company and the helium operations is through a 51% ownership of NEC OK that owns 100% of Keyes Helium Company.

The following table represents unaudited proforma income statement for the years ended December 31, 2003 and December 31, 2002, including the operations of the 2003 acquisitions, as if the acquisitions were owned for the entire period shown.

                                           For the year ended
                                    December 31,         December 31,
                                       2003                  2002
                                   ------------          ------------
Revenue                            $  9,837,741          $  6,172,662

Net income (loss)                  $(48,295,269)         $ (6,067,871)

Loss per share                     $      (1.05)         $      (0.30)

The 2003 acquisitions were accounted for as a purchase with an aggregate purchase price of $9,947,215. The acquisitions were funded with cash provided by the issuance of debt by a related party investor, Richard Strain. The purchase price has been allocated as follows:

Cash                                                                $   590,000
Receivables                                                             545,000
Inventory                                                               261,000
Property and Equipment                                                8,746,571
Intangible assets                                                       246,644
Other assets                                                             65,000
Payables                                                               (507,000)
                                                                    -----------
Total                                                               $ 9,947,215
                                                                    ===========

On August 26, 2002, the Company acquired outstanding common shares of MCNIC Rodeo Gathering, Inc., which held an 18.55% membership interest in Keyes Helium Company, LLC., for $1,450,000. MCNIC Rodeo Gathering, Inc. was purchased from

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

MCNIC Pipeline & Processing Corp. An outside investor provided total cash of $1,800,000 to finance the acquisition. Including loans related to this project, this individual held $3,950,000 of the Company's debt, and had converted $1,350,000 of additional debt to equity as of December 31, 2002. The Company subsequently transferred ownership in MCNIC to its 51% subsidiary NEC OK. The remaining 49% of NEC OK is owned by the outside investor.

5. Property, Plant and Equipment

Following is a summary of property, plant and equipment at December 31, 2003 and 2002:

                                                 December 31,       December 31,
                                                     2003              2002
                                                 ------------      ------------

 Machinery and equipment                         $  8,915,532      $  1,404,111
 Pipeline                                           2,755,488              --
 Buildings                                            100,000           100,000
 Vehicles                                             251,115           212,835
 Land                                                 290,000           290,000
 Furniture, fixtures and equipment                    131,540            18,759
 Improvements                                         200,070            79,672
                                                 ------------      ------------
                                                   12,643,745         2,105,377
Less accumulated depreciation                        (980,776)         (295,821)
                                                 ------------      ------------
Net book value                                   $ 11,662,969      $  1,809,556
                                                 ============      ============

Depreciation expense recorded in the financial statements was $688,267 and $156,135 for the year ended December 31, 2003 and 2002, respectively.

6. Notes Payable

(a) At December 31, 2003 and 2002, the Company is obligated under three promissory notes payable to individuals with a total face amount of $72,000. Interest was payable quarterly at rates of 10-11% until the due date in September 2001, after which a 15% interest rate went into effect.

(b) At December 31, 2003 and 2002 the Company was obligated under a 12% unsecured demand note with an outstanding balance of $18,250.

(c) At December 31, 2003 the Company is obligated to Mr. Richard Strain for $6,892,151 in loans with an average interest rate of 8.0%. This indebtedness is memorialized in a promissory note in the principal amount of $2,000,000 and a loan agreement in the amount of $4,892,151 respectively. The $2,000,000 note represents loans to the Company in 2003 and is payable in four quarterly principal and interest payments of $540,000 each on October 1, 2005 and January 1st, April 1st and July 1st 2006. The loan agreement for the principal amount due to the creditor of $4,892,151 bears interest at the rate of 8% per year. No payments will be due under this loan agreement until March 31, 2007, at which time the principal and accrued interest will be repaid in quarterly payments of $572,876 through December 31, 2009. At December 31, 2002, this creditor was owed $3,950,000 bearing interest at 12% per year.

(d) Notes payable, current portion (excluding note payable - stockholder) consists of the following components:

                                                December 31   December 31
                                                   2003           2002
                                                 --------       --------
Current portion:
Installment debt                                 $316,394       $320,541
Promissory notes (a)                               72,000           --
Unsecured demand note (b)                          18,250           --
                                                 --------       --------
Total notes payable, current portion             $406,644       $320,541
                                                 ========       ========

                          Nathaniel Energy Corporation
             Notes to Consolidated Financial Statements (Continued)

The Company has the following installment debt outstanding at December 31st:

                                                                2003          2002
                                                              -------        -------
13.75% installment note, secured by trailer, monthly
payments of $859 principal and interest through
October 2003                                                       --        13,956

13.75% installment note, secured by trailer, monthly
payments of $1,016 principal and interest through
May 2002                                                           --         1,940

4.5% installment note, secured by equipment,
mnthly payments of $2,531 principal and interest
through September 2007                                         96,146       118,400

22.56% installment obligation, secured by
equipment, monthly payments of $1,397 principal
and interest through January 2006                              29,367        38,367

14% installment note, secured by land and
equipment, monthly interest only payments of
$2,567 principal and interest due January 1, 2004             220,000(1)    220,000

10.25% installment note, secured by vehicle,
monthly payments of $730 principal and interest
through August 2004                                             6,888        13,860

1.90% installment note, secured by equipment,
monthly payments of $707 principal and interest
through November, 2005                                         16,682        24,771

8.45% installment note, secured by equipment,
monthly payments of $454 principal and interest
through November, 2006                                         18,097        22,130

10.58% installment note, secured by equipment,
monthly payments of $3,231 principal and interest
through February, 2005                                        118,271       143,242

9.50% installment note, secured by equipment,
monthly payments of $1,148 principal and interest
through March, 2004                                             4,480        16,206

8.45% installment note, secured by vehicle,
Monthly payments of $663 principal and interest
through November, 2007                                         26,455            --

8.00% installment note, secured by vehicle,
monthly payments of $308 principal and interest
through May, 2007                                              10,997            --
                                                           ----------    ----------
Total Debt:                                                  $547,383      $612,872

Current Portion:                                            ($316,394)    ($320,541)
                                                           ----------    ----------
Long-term Portion:                                           $230,989      $292,331
                                                           ==========    ==========

(1) The $220,000 secured by land and equipment due January 1, 2004 was not paid as of the date this report was filed and is due immediately.

Maturities of debt are as follows:

December 31,                          Amount
-----------                         ----------
  2004                              $  406,644
  2005                                 594,217
  2006                               1,582,336
  2007                               1,948,701
  2008                               2,050,413
  Thereafter                           947,473
                                    ----------
                                    $7,529,784
                                    ==========

For the years ended December 31:
                                                     2003            2002
                                                  ----------       --------
   Current tax expense (benefit)                  $     --         $   --

   Deferred tax (Income)
   U.S. federal                                         --             --
   State and local                                      --             --
                                                  ----------       --------
   Total deferred                                       --             --
                                                  ----------       --------
   Total tax provision (benefit)
   from continuing operation                      $     --         $   --
                                                  ==========       ========

The actual and expected tax rates are similar for both years.

The Company's deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows:

                                                       2003             2002
                                                   -----------      -----------
Deferred income tax assets:
Due to net operating loss carryforwards            $ 4,323,200      $ 1,166,000
Due to deductible temporary differences                (99,300)         552,000
         Less valuation allowance                   (4,223,900)      (1,718,000)
                                                   -----------      -----------
Total deferred income tax asset                    $      --        $      --
                                                   -----------      -----------

As of December 31, 2003, the Company has approximately $12,715,000 in net operating loss carry forwards available to offset future taxable income expiring between 2018 and 2023. A portion of these losses may be limited under the change in control provisions of Internal Revenue Code Section 382. Also, Nathaniel Energy's majority owned subsidiary, Nathaniel Energy Oklahoma Holding Corporation, must file a tax return separate from the consolidated tax return. Any future undistributed taxable income from the subsidiary will not offset the loss carry forwards.

During 2003, the company incurred expenses aggregating approximately $45,639,000 which will not be deductible forfederal income tax purposes; these costs have not been included in the computation of the net operating loss carry forward amount.

8. Stockholders' Equity

Preferred Stock
The Company has 2,000,000 shares of Preferred Stock, $0.001 par value, authorized for issuance. As of December 31, 2003, no preferred stock was issued.

Common Stock
The company has 75,000,000 shares of stock $0.001 par value, authorized for issuance. As of March 4, 2004 69,719,414 shares of common stock were issued and outstanding.

Effective October 3, 2003, a Company change in control occurred as a result of the closing of a conversion agreement between the Company and Richard Strain. Pursuant to the conversion agreement, $10 million dollars of indebtedness of Nathaniel Energy to Mr. Strain converted into an aggregate of 50,000,000 shares of the Company's common stock issued to NEC Energy, LLC, a designee of Mr. Strain.

Nathaniel Energy has 75,000,000 shares of common stock authorized for issuance. Prior to the conversion transaction, the Company had 38,262,664 shares of common stock issued and outstanding. Accordingly, the Company did not have a sufficient number of shares of common stock authorized for issuance to issue all of the shares of common stock in the conversion. The conversion agreement provided that to the extent that the Company did not have sufficient shares of common stock authorized to issue all of the shares in the conversion, NEC Energy has the irrevocable right to the shares that could not be issued. Nathaniel Energy has issued 30,000,000 shares of common stock to NEC Energy, and NEC Energy has the irrevocable right to an additional 20,000,000 shares of common

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

stock. In the conversion agreement, Nathaniel Energy agreed to take all required corporate action to seek the stockholders' approval to increase the number of authorized shares to a number which is at least sufficient for the Company to deliver all of the shares of common stock issuable to NEC Energy pursuant to the conversion agreement.

Giving effect to the issuance of all of the shares of common stock under the conversion agreement, NEC Energy owns 55.7% of the issued and outstanding shares of common stock of the Company.

In connection with the conversion, NEC Energy received the right to demand registration of the resale of the shares at any time after January 3, 2004. Additionally, NEC Energy was granted piggyback registration rights relating to certain registration statements which Nathaniel Energy files after January 3, 2004, if any.

As of March 1, 2004, Nathaniel Energy had approximately 1031 stockholders of record.

Effective April 24, 2002, the Company increased its authorized common shares, $0.001 par value, from 20,000,000 to 75,000,000.

At December 31, 2003 and 2002, the Company had outstanding warrants to purchase 205,882 shares at $0.17 per share which expire on March 24, 2004.

At December 31, 2003 there are options to purchase 500,000 shares of common stock with a cashless exercise right at the rate of $3.00 per share. The number of shares to be issued upon exercise vary with the market price of the stock. The options expire December 31, 2004.

9. Non Cash Financing Activities

During the third quarter of 2003, certain employees who are officers, directors and stockholders waived accrued compensation aggregating $1,088,459. The employees agreed that the remaining accrued compensation due them of $864,885 could be paid, at the option of the Company, either in cash or in shares of common stock. During the fourth quarter of 2003, the Company paid an aggregate of $340,000 in cash to two of the employees and issued 289,365 common stock shares in payment of the remaining accrual to these two employees. A third employee was issued 235,520 common stock shares to pay $235,520 in accrued compensation. The company and two other employees were issued 731,865 common stock shares in payment of $314,213 of accrued wages. Non cash compensation totaling $1,472,495 million was recorded in the fourth quarter for shares issued to employees in payment of accrued compensation. The non cash expense was calculated using the fair market value of the shares on each issuance date. Non cash employee and professional service expense for the years ended 2003 and 2002 was $2,973,745 and $2,690,949, respectively. The $2,973,745 non-cash expense in 2003 includes $1,472,495 for accrued compensation, $356,250 for employee severance and $1,145,000 for professional services paid to non-employees.

10. Related Party Transactions

The Company acquired three patents and a pending patent application relating to the Company's ownership of technology by assignment from Stanley Abrams, Nathaniel Energy's chief executive officer, pursuant to an agreement dated July 7, 1998 and amended in September 2003. Under the assignment agreement, the Company is required, upon written demand, to reassign the patents and patent applications to Mr. Abrams in the event both Stanley Abrams and Brett Abrams are not employed as officers of the Company and neither of them is a director, except as a result of termination for cause, voluntary resignation, death or legal incompetence. Furthermore, the agreement provides for a reassignment of the technology to Messrs. Abrams in the event Nathaniel Energy ceases business operations or becomes bankrupt.

The Company paid certain expenses related to site clean-up on behalf of Ripetouch Greenhouse LLC, ("Ripetouch Greenhouse", or "RTG") an entity controlled by the Company's chief executive officer. During the years ended December 31, 2002 and 2003 net payments to RTG were $61,170 and $33,642, respectively. The balance receivable from RTG at December 31, 2002 and December 31, 2003 was $226,833 and $260,475, respectively.

During the year ended December 31, 2003, the Company paid $750,000 in cash and issued 233,333 common stock shares for corporate marketing and communication services to Strong Wilken, LLC affiliated with the Como Group, LLC, which in October 2003 became a 50% owner of NEC Energy LLC.

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

During the March 2003 quarter, the Company issued 1,066,667 shares valued at $800,000 for corporate marketing and financing services to Alternate Capital LLC, which at the time of issuance of those shares, was a principal investor in Nathaniel Energy.

Effective October 3, 2003 $10 million dollars of Nathaniel Energy indebtedness to Richard Strain, a principal stockholder, converted into an aggregate of 50,000,000 shares of the Company's common stock issued to NEC Energy, LLC, a designee of Mr. Strain. Mr. Strain also loaned the Company $1,000,000 in September 2003 and $1,000,000 in October 2003. At December 31, 2003 the Company is obligated to Mr. Richard Strain for $6,892,151 million in unsecured loans with an average interest rate of 8.0%. See Note 8.

11. Intellectual Property

Nathaniel Energy owns three U.S. patents and a European patent application covering the Thermal Combustor(TM) technology. These patents and patent applications are for utility patents directed to devices and methods of uses. The three U.S. patents expire September 6, 2011, December 4, 2012, and February 4, 2022, respectively. Nathaniel Energy acquired these patents by assignment from Stanley Abrams, Nathaniel Energy's Chief Executive to the Company. Under the agreement relating to the patent assignment, the Company is required, upon written demand, to reassign the patents and patent applications to Mr. Abrams or his son Brett Abrams in the event both Stanley Abrams and Brett Abrams are not employed as officers of the Company and neither of them is a director, except as a result of termination for cause, voluntary resignation, death or legal incompetence. Furthermore, the agreement provides for a reassignment of the technology to Messrs. Abrams in the event the Company ceases business operations or becomes bankrupt.

12. Economic Dependency - Major Customer

During 2002 the Company's primary sales were to several local customers and two major users of its tire-derived fuel ("TDF"). The two major users each represented approximately 20% of its fuel processing sales activities. With the acquisition of the Keyes helium and the Sturgis gas processing plant and compressor station and Keyes gathering system, the majority of the sales stem from helium sales and processed natural gas sales, while there will be some additional sales of liquid gases and monthly fees from a take and pay blending contract with Colorado Interstate Gas. The various products have enabled the Company to reduce its dependency on any one customer, however Air Products Helium Inc. purchases all of the helium produced under contract through 2021, subject to earlier termination in 2008 and 2015 if either party requests a price determination that is not agreed to by the other party. If the contract is not terminated by either party in 2021, it will continue unless extended upon two years' advance notice by either party. Should this contract terminate or expire there are other major companies which have a stated interest in purchasing the helium.

During 2003, two customers, representing approximately 37% and 19%, respectively, accounted for 56% of the Company's revenue. During 2002, three customers, representing approximately 22%, 17% and 15%, respectively, accounted for 54% of the Company's revenue.

13. Consulting Agreement

On March 1, 2002 Alternate Capital, LLC (the "Consultant") provided an $800,000 loan to the company and agreed to provide consulting services to the Company in consideration for 13,500,000 Company unregistered shares of common stock representing at least 50% of the total outstanding stock of the Company on a fully diluted basis. At that time, the Consultant met its obligations and the shares were issued. Also at that time, the Consultant distributed these shares among its members in proportion to their ownership interest in the Consultant. The company repaid the loan to the Consultant. The term of the agreement is for 25 years. Under this agreement the Consultant was responsible for, among other things, (a) arranging for $650,000, or greater, of purchase money mortgage financing to purchase certain equipment, (b) providing for a lease arrangement for such equipment or (c) arranging financing for a financial project for the Company or in which the Company has a financial interest.

Additionally, in consideration for the services the Consultant shall continue to render to the Company, the Company shall pay to the Consultant, a continuing consulting fee equal to ten percent (10%) of pre-tax profits of the Company and any subsidiary the Company owns at least one percent of, before depreciation and amortization and before deductions for stock based compensation (including, but not limited to stock options) and before any non-cash expenditures. Such consulting fee, to the extent there is a profit, shall be paid to Consultant in quarterly installments within sixty (60) days after each calendar quarter, with a yearly adjustment after the Company's annual financial statement is completed, but not later than April 15 of the following year. In the event the agreement is terminated by the Company, the Company is obligated to pay the consulting fee for the remaining term of the agreement.

The Company granted to the Consultant a right of first refusal on all funding the Company seeks, whether in the form of loans or capital infusion. The Company will provide to the Consultant notification of such funding needs and the Consultant shall have twenty (20) days after receipt of such notification to provide to the Company a Letter of Intent, with the proposed term of such funding.

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

In connection with the Consulting Agreement, the Consultant agreed to a $2,000,000 penalty if the Consultant did not provide funding for Nathaniel Energy Corporation (arranging financing for a financial project) in the Financing Services section of the agreement. In connection with a "Compliance Acknowledgement" of June 7, 2002 the Consultant shall be permitted to retain the 13,500,000 shares of the Company's common stock without any penalty related thereto, and the Company agrees that it has no right, title or interest whatsoever in said shares of the Company's common stock.

14. Commitments and Contingencies

Commitments

Nathaniel Energy has an agreement with Regency Gas Services, LLC which requires Nathaniel Energy to purchase all crude helium production from the Lakin processing plant until 2016 at contractual rates and subject to the maximum volumes produced by the plant. Crude helium purchases from Regency Gas Services, LLC under this agreement were approximately, $1,400,000 during 2003.

Nathaniel Energy has an agreement with a group led by Energy Alliance Company, Inc. (EAC) that requires EAC to produce and deliver natural gas to Nathaniel Energy throughout the life of the leases for up to 8,000 Mcf (thousand cubic feet) of natural gas per day. Nathaniel Energy is entitled to remove for its benefit at a cost of $0.10 per Mcf, the gas stream delivered to the plant. During 2003, Nathaniel Energy recorded costs totaling $70,000 under this agreement. Under this agreement, the maximum annual cost through the life of the EAC leases is $292,000.

On January 9, 2004 Nathaniel Energy signed a renewable 10 year agreement with Nexus Energy LLC (an EAC Group member). This agreement provides for the installation of field gas compression at the Company's Spelunker CDP, which will provide up to 4,000 Mcf of natural gas per day. Nathaniel Energy is entitled to extract the helium content for its benefit at a cost of between $0.05 per mcf to $0.10 per mcf based on the percent of helium content in the natural gas. Nexus pays a gathering fee to Nathaniel Energy of $0.05 per mcf, in addition to a compression fee equal to 4% of all the decatherms compressed at the Company's Spelunker CDP. Under this agreement, the maximum annual cost through the life of the Nexus leases is approximately $235,000.

Litigation and Claims

The Company was a defendant in ABM Fabrication and Machining, LLC, vs. Nathaniel Energy Corporation, Case No. 2002 CV 0094, District Court, County of Douglas, Colorado. The plaintiff alleged damages of approximately $100,000 for unpaid labor and materials invoices. Nathaniel Energy settled the claim for $35,000 on December 19, 2003.

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

15. Segment Data

                                                               Year ended December 31, 2003
                                              --------------------------------------------------------------
                                              Helium and Gas               Fuel
                                               Processing               Processing                  Total
                                              ------------             ------------             ------------
Revenue                                       $  7,851,531             $    573,210             $  8,424,741

Significant non cash expenses
  -compensation and
   professional services                              --               $  2,973,745             $  2,973,745
  -depreciation and amortization              $    438,177                  307,261                  745,438
  -interest expense forgiven                                                488,294                  488,294

Net loss                                           (24,743)            $(48,489,526)            $(48,514,269)

Capital expenditures                          $    124,943             $    463,398             $    588,341
Acquisition of assets                         $  9,703,920             $       --               $  9,703,920
Total assets as of Dec 31, 2003               $ 11,763,679             $  3,840,714             $ 15,604,393

Nathaniel Energy Corporation Notes to Consolidated Financial Statements (Continued)

For the year ended December 31, 2002 Nathaniel Energy managed its business as one operating segment. For the year ended December 31, 2003 the alternate energy segment did not generate any revenue and incurred minimal expenses.

16. Intangible Assets

During 2003 the Company capitalized website development costs, pursuant to EITF 00-2. The total costs capitalized were $150,000, which are being amortized over three years. The company also allocated $246,644 of the Keyes Helium purchase price to intangible assets during 2003. Intangible assets acquired represent long term contracts transferred to Nathaniel Energy, which are being amortized over six years. Amortization expense for the twelve months ended December 31, 2003 and December 31, 2002 was $57,171 and $2,000 respectively.

17. Lease Commitments

Nathaniel Energy leases certain office facilities under non cancelable operating leases that expire at various dates through 2008. At December 31, 2003, Nathaniel Energy was obligated for future minimum lease payments under operating leases that have initial or remaining non-cancelable terms in excess of one year, as follows:

        2004                                          $ 58,513
        2005                                            60,268
        2006                                            62,076
        2007                                            63,938
        2008                                            16,102
                                                      --------
        Total minimum lease payments                  $260,897
                                                      --------

Rent  expense  for  operating  leases was  $63,774  and $60 for the years  ended
December 31, 2003 and 2002, respectively.

18. Going Concern as of December 31, 2002

The audit report relating to our audited financial statements for the fiscal year ended December 31, 2002 contained a going concern qualification. This note relates to our audited financial statements for the fiscal year ended December 31, 2002.

The auditors' report relating to our audited financial statements for the fiscal year ended December 31, 2003 does not contain a going concern qualification.

As of December 31, 2002 the Company had experienced repeated operating losses, resulting in minimal capital resources presently available at that time to meet obligations which normally were expected to be incurred by similar companies, and to carry out its then planned operations. It had deficiency in working capital at December 31, 2002 approximating $6.9 million, and a stockholders' deficit approximating $3.7 million. Management has negotiated financing arrangements to provide cash flow for the Company's continued operations. For the first three quarters of 2002, the Company arranged debt financing of approximately $3,500,000, which was used to acquire equipment and an interest in a Helium project, which at that time was expected to generate positive cash flow. In addition, the Company had at that time both formally and informally renegotiated repayment terms for existing obligations which were then in default.

As of April 4, 2003, management had plans to increase revenues in its facilities in its Texas tire recycling plant and in its Oklahoma helium plant and gathering station by expanding current operations. The Hutchins, Texas tire reclamation facility has been outfitted to 90% of its maximum manufacturing capacity by means of new equipment purchased in 2002, innovative design, and strategic placement of existing equipment. These developments will allow the facility to increase its revenue streams. On April 3, 2003 the Nathaniel Energy Corporation acquired the remaining 81.45% of Keyes Helium Company, LLC from Colorado Interstate Gas/ElPaso. The company beneficially owns 51% of Keyes Helium Company, LLC. On the same date, the Company also acquired the Keyes gathering system and the Sturgis gas processing plant and compressor station from Colorado Interstate Gas. These facilities are located in Keyes, OK on a 15 acre site. Keyes Helium Plant operates a three-stage helium extraction, purification, and liquefaction plant that is strategically connected on the Bureau of Land Management's (BLM) helium reserve and pipeline system making it beneficial for companies to utilize our services. On April 3, 2003 the Company executed a "Take and Pay" Operational Agreement with Colorado Interstate Gas (CIG) for a minimum three year term for the processing and sale of low Btu gas for their pipeline needs. As of April 4, 2003, the Company was negotiating new leases to add revenues to the already profitable operation that was to increase cash flow to the Company. As of April 4, 2003, the Company had entered into negotiations with third party companies (Producers) for gathering and processing gas from additional wells and gathering fields.