**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**Form
      10-Q**





**[** **Ö** **]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934**





For
      the
      quarterly period ended................................................. March
      31, 2006




OR





**[
       ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      transition period
      from..........................to.............................


Commission
      file number 001-32636





**S** **ULPH** **C** **O, INC.** ****


(Exact
      Name of Registrant as Specified in its Charter)




**Nevada**
              (State
                or other jurisdiction of incorporation or organization)
            
            **88-0224817**
              (I.R.S.
                Employer Identification Number)




**850
                Spice Islands Drive, Sparks, NV**
              (Address
                of principal executive offices)
            
            **89431**
              (Zip
                Code)





**(775)
      829-1310**


Registrant's
      telephone number, including area code





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No
      __





Indicate
      by check mark whether the registrant is a large accelerated filer an accelerated
      filer, or a non-accelerated filer. See definition of “accredited filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act:





Large
      Accelerated Filer __   Accelerated Filer x Non-accelerated filer __





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





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      equity, as of the latest practicable date:




Class
              
              Outstanding
                  at May 10, 2006Common
                  Stock, par value $.001
              
              72,470,910
                  shares








**PART
      I.**


**Item
        1. Financial Statements**


SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 BALANCE
        SHEETS
 March
        31,
        2006 and December 31, 2005
 (unaudited)


**March
                  31, 2006**
              
              **December
                  31, 2005****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              35,193,006
              
              $
              6,874,653Loan
                  and accrued interest receivable
              
              
              100,547
              
              
              -Prepaid
                  expenses and other
              
              
              96,572
              
              
              137,577Total
                  current assets
              
              
              35,390,125
              
              
              7,012,230**Property
                  and Equipment (net of accumulated depreciation of
                  $885,786)**
              
              
              5,035,583
              
              
              397,416**Other
                  Assets**Intangible
                  assets (net of accumulated amortization of $23,088)
              
              
              437,626
              
              
              355,218Investment
                  in Joint Venture
              
              
              938,774
              
              
              139,550Deposits
              
              
              48,672
              
              
              140,822Deferred
                  tax asset (net of valuation allowance of $8,269,435)
              
              
              -
              
              
              -Total
                  other assets
              
              
              1,425,072
              
              
              635,590Total
                  assets
              
              $
              41,850,780
              
              $
              8,045,236**Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              
              $
              1,570,077
              
              $
              779,413Refundable
                  deposit
              
              
              550,000
              
              
              550,000Accrued
                  fees and interest
              
              
              1,231,595
              
              
              1,035,572Related
                  party note payable
              
              
              500,000
              
              
              500,000Total
                  current liabilities
              
              
              3,851,672
              
              
              2,864,985**Long
                  Term Related Party Note Payable**
              
              
              7,000,000
              
              
              7,000,000**Commitments
                  and Contingencies**
              
              
              -
              
              
              -Total
                  liabilities
              
              
              10,851,672
              
              
              9,864,985**Stockholders'
                  Equity (Deficiency)**Preferred
                  stock: 10,000,000 shares authorized ($0.001 par value) none
                  issued
              
              
              -
              
              
              -Common
                  stock: 100,000,000 shares authorized ($0.001 par value)72,470,910
                  shares issued and outstanding at March 31, 2006
              
              
              72,471
              
              
              60,537Paid
                  in capital
              
              
              67,473,286
              
              
              30,604,342Stock
                  subscriptions receivable
              
              
              (744,500
              )
              
              (744,500
              )Deficit
                  accumulated during the development stage
              
              
              (35,802,149
              )
              
              (31,740,128
              )Total
                  stockholders' equity (deficiency)
              
              
              30,999,108
              
              
              (1,819,749
              )Total
                  liabilities and stockholders' equity (deficiency)
              
              $
              41,850,780
              
              $
              8,045,236
 The
          Accompanying Notes are an Integral Part of the Financial
          Statements




1


SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF OPERATIONS
 For
        the
        Three Months ended March 31, 2006 and 2005 and from Inception
 (unaudited)
  **Three
                    Months Ended**
                  **March
                    31**
              
              **Inception****2006**
              
              **2005**
              
              **to
                  date****Revenue**Sales
              
              $
              -
              
              $
              -
              
              $
              42,967**Expenses**Selling,
                  general, and administrative expenses
              
              
              (3,770,144
              )
              
              (1,478,634
              )
              
              (30,661,257
              )Research
                  and development expenses
              
              
              (219,771
              )
              
              (141,515
              )
              
              (3,402,580
              )Loss
                  on disposal of asset
              
              
              -
              
              
              -
              
              
              (221,711
              )Loss
                  on impairment of asset
              
              
              -
              
              
              (233,900
              )
              
              (233,900
              )Total
                  operating expenses
              
              
              (3,989,915
              )
              
              (1,854,049
              )
              
              (34,519,448
              )Loss
                  from operations
              
              
              (3,989,915
              )
              
              (1,854,049
              )
              
              (34,476,481
              )**Other
                  income (expense)**Interest
                  income
              
              
              53,092
              
              
              39,377
              
              
              303,691Interest
                  expense
              
              
              (125,199
              )
              
              (70,750
              )
              
              (869,119
              )Late
                  registration fees
              
              
              -
              
              
              (438,000
              )
              
              (760,240
              )Loss
                  before taxes
              
              
              (4,062,022
              )
              
              (2,323,422
              )
              
              (35,802,149
              )Income
                  tax benefit (provision)
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (4,062,022
              )
              $
              (2,323,422
              )
              $
              (35,802,149
              )Loss
                  per share - basic and diluted
              
              $
              (0.06
              )
              $
              (0.04
              )
              $
              (0.92
              )Weighted
                  average shares - basic and diluted
              
              
              65,354,653
              
              
              56,529,385
              
              
              38,934,386


The
        Accompanying Notes are an Integral Part of the Financial
        Statements




2


SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CASH FLOWS
 For
        the
        Three Months ended March 31, 2006 and 2005 and from Inception
 (unaudited)
  **Three
                  Months Ended****March
                  31**
              
              **Inception****2006**
              
              **2005**
              
              **to
                  date****Cash
                  Flows From Operating Activities**Net
                  loss
              
              $
              (4,062,022
              )
              $
              (2,323,422
              )
              $
              (35,802,149
              )Adjustments
                  to reconcile net loss to cash usedin
                  operating activities:Depreciation
                  & amortization
              
              
              63,312
              
              
              44,519
              
              
              948,678Stock
                  issued for services
              
              
              1,084,050
              
              
              509,675
              
              
              8,453,567Stock
                  issued for interest expense
              
              
              -
              
              
              -
              
              
              296,000Contribution
                  from stockholder
              
              
              -
              
              
              -
              
              
              555,000Loss
                  from joint venture
              
              
              776
              
              
              -
              
              
              776Loss
                  on disposal of subsidiary
              
              
              -
              
              
              -
              
              
              221,711Loss
                  on impairment of asset
              
              
              -
              
              
              233,900
              
              
              233,900(Increase)
                  decrease in receivables
              
              
              (547
              )
              
              317,800
              
              
              (547
              )(Increase)
                  decrease in prepaid expenses
              
              
              41,005
              
              
              11,683
              
              
              (96,572
              )Increase
                  (decrease) in accounts payableand
                  accrued liabilities
              
              
              790,665
              
              
              (354,620
              )
              
              1,570,078Increase
                  in refundable deposit
              
              
              -
              
              
              300,000
              
              
              550,000Increase
                  in accrued fees and interest
              
              
              115,199
              
              
              438,000
              
              
              936,184Net
                  cash used in operating activities
              
              
              (1,967,562
              )
              
              (822,465
              )
              
              (22,133,374
              )**Cash
                  Flows From Investing Activities**Advances
                  for loan receivable
              
              
              (100,000
              )
              
              -
              
              
              (100,000
              )Purchase
                  of property and equipment
              
              
              (20,648
              )
              
              (133,565
              )
              
              (1,141,736
              )Investment
                  in construction-in-progress
              
              
              (4,087,440
              )
              
              
              
              
              (4,087,440
              )Investments
                  in joint ventures and subsidiaries
              
              
              (800,000
              )
              
              -
              
              
              (1,161,261
              )Payment
                  of deposits
              
              
              (7,850
              )
              
              -
              
              
              (148,672
              )Investments
                  in intangible assets
              
              
              (88,074
              )
              
              (88,522
              )
              
              (476,556
              )Net
                  cash used in investing activities
              
              
              (5,104,012
              )
              
              (222,087
              )
              
              (7,115,665
              )**Cash
                  Flows from Financing Activities**Proceeds
                  from issuance of stock
              
              
              35,389,927
              
              
              -
              
              
              51,151,685Proceeds
                  from stock subscriptions
              
              
              -
              
              
              -
              
              
              4,240,887Proceeds
                  from issuance of related party notes payable
              
              
              -
              
              
              -
              
              
              11,000,000Proceeds
                  from issuance of line of credit
              
              
              -
              
              
              -
              
              
              750,000Return
                  on capital
              
              
              -
              
              
              -
              
              
              (118,427
              )Principal
                  payments on related party notes payable
              
              
              -
              
              
              -
              
              
              (750,000
              )Decrease
                  in related party receivable
              
              
              -
              
              
              -
              
              
              1,359,185Payments
                  on contract payable
              
              
              -
              
              
              -
              
              
              (250,000
              )Principal
                  payments on line of credit
              
              
              -
              
              
              -
              
              
              (750,000
              )Principal
                  payments on advance from related party
              
              
              -
              
              
              -
              
              
              (2,191,285
              )Net
                  cash provided by financing activities
              
              
              35,389,927
              
              
              -
              
              
              64,442,045Net
                  increase (decrease) in cash and cash equivalents
              
              
              28,318,353
              
              
              (1,044,552
              )
              
              35,193,006Cash
                  and cash equivalents at beginning of period
              
              
              6,874,653
              
              
              9,872,839
              
              
              -Cash
                  and cash equivalents at end of period
              
              $
              35,193,006
              
              $
              8,828,287
              
              $
              35,193,006**Supplemental
                  Information and non cash transactions**Total
                  interest payments included in operations
              
              $
              135,199
              
              $
              70,750
  The
          Company paid no income taxes during the three months ended March 31, 2006
          and
          2005.
 
 Noncash
          investing and financing activity:
 The
          Company incurred fees payable of $411,039 in issuing securities.
 The
          Company issued stock in exchange for a payable of $330,215 .
 The
          Company issued stock and options for a construction-in-progress of
          $487,725.
  The
            Accompanying Notes are an Integral Part of the Financial Statements
   3
  SULPHCO,
            INC.
 (A
            Company in the Development Stage)
 NOTES
            TO THE INTERIM FINANCIAL STATEMENTS
 March
            31,
            2006 (unaudited)
 
 
 **1.**
                  **Basis
                      of Presentation**
  The
            accompanying unaudited interim financial statements of Sulphco, Inc.,
            (the
“Company”) have been prepared by the Company in accordance with generally
            accepted accounting principles for interim financial statements in the
            United
            States of America, pursuant to the Securities and Exchange Commission
            rules and
            regulations. In management’s opinion, all adjustments necessary for a fair
            presentation of the results for the interim periods have been reflected
            in the
            interim financial statements. The results of operations for any interim
            period
            are not necessarily indicative of the results for a full year. All adjustments
            to the financial statements are of a normal recurring nature.
 
 Certain
            information and footnote disclosures normally included in audited financial
            statements prepared in accordance with generally accepted accounting
            principles
            for audited financial statements have been condensed or omitted. Such
            disclosures are those that would substantially duplicate information
            contained
            in the most recent audited financial statements of the Company, such
            as recent
            accounting pronouncements. Management presumes that users of the interim
            statements have read or have access to the audited financial statements
            and
            notes thereto included in the Company’s most recent annual report on Form
            10-KSB.
 
 
 **2.**
                  **Loan
                      and Receivable and Accrued
                      Interest**
 
 On
            February 16, 2006 the Company committed to a loan agreement with SulphCo
            KorAsia
            (formerly known as OIL-SC, Ltd.) of South Korea. The agreement called
            for
            advances of up to $150,000. $100,000 was advanced through March 31, 2006.
            Interest accrues at Prime rate plus 1%. Repayment is contingent upon
            SulphCo
            KorAsia having revenue streams. Although SulphCo KorAsia has never had
            material
            revenue streams, the Company believes that the full amounts of principal
            and
            interest will be collected and that no allowance for doubtful collection
            is
            necessary.
 
 
 **3.**
                  **Prepaid
                      Expenses and Other**
 
 Prepaid
            expenses and other include $85,971 in prepaid insurance which is amortized
            over
            the duration of the policies, a $10,000 retainer for a consulting
            agreement, and an account receivable of $601. The insurance policies
            expire in
            2006 and the consulting agreement expires in October of 2006.
  
 **4.**
                  **Property
                      and Equipment**
 
 Property
            and equipment includes construction-in-progress totaling $4,675,165 for
            equipment to be utilized in Fujairah (see Note 5).
 
  4
  The
            following is a summary of property, plant, and equipment - at cost, less
            accumulated depreciation:
 
 **March
                      31, 2006**
                  
                  **December
                      31, 2005**Equipment
                  
                  $
                  913,306
                  
                  $
                  911,438Computers
                  
                  
                  193,972
                  
                  
                  176,226Office
                      furniture
                  
                  
                  55,551
                  
                  
                  54,517Leasehold
                      improvements
                  
                  
                  83,375
                  
                  
                  83,375Construction-in-progress
                  
                  
                  4,675,1655,921,369
                  
                  
                  1,225,556Less:
                      Accumulated depreciation
                  
                  
                  (885,786
                  )
                  
                  (828,140
                  )Total
                  
                  $
                  5,035,583
                  
                  $
                  397,416
 
 Depreciation
            expense was $57,646 for the three months ended March 31, 2006 and $41,921
            for
            the three months ended March 31, 2005.
 
 
 **5.**
                  **Investment
                      in Joint Venture**
 
 In
            November 2005 the Company and Trans Gulf Petroleum Co., a Government
            of Fujairah
            company, formed Fujairah Oil Technology LLC (“LLC”), a United Arab Emirates
            limited liability company, to implement the Company’s SonocrackingTM
desulfurization technology. The LLC is 50% owned by Trans Gulf Petroleum
            and 50%
            owned by SulphCo, Inc. Fujairah is one of the seven Emirates of the United
            Arab
            Emirates.
 
 The
            formation agreement called for each shareholder to contribute 500,000
            Dirhams
            for a 50% ownership in the LLC. On December 14, 2005, the Company wired
            to the
            LLC its 500,000 Dirhams, which equaled $139,550. The 50% contribution
            by Trans
            Gulf Petroleum was received by the LLC in January, 2006.
 
 The
            LLC’s
            operations began in 2006. In the three months ended March 31, 2006 its
            only
            financial activities were making deposits totaling 151,496 Dirhams, equivalent
            to approximately US $41,000, for acquiring office space and equipment,
            and the
            commencement of the lease on March 15, 2006. There was a loss of which
            50% has
            been reflected by the Company.
 
 The
            Company entered into an agreement to construct a building for $1,600,000
            for the
            LLC operations. It is anticipated that the cost of the building will
            be borne by
            the LLC. The Company paid $800,000 to the construction company. This
            amount has
            been included in the Investment in the LLC. Subsequently the building
            plans were
            expanded which will require an additional $600,000 for construction.
            The Company
            expects that the LLC will reimburse it for half of these costs. However,
            there
            is presently no formal commitment to do so. There is no agreement or
            understanding for the Company to retain title to the building. The building
            site
            is land owned by the Government of Fujairah.
  Equipment
            being constructed by the Company for use in
            Fujairah will be owned by the Company, and the Company anticipates that
            it will
            lease the equipment to the LLC.
 
 The
            Company’s 50% share of distributions made by the joint venture will also be
            subject to other costs and expenses incurred directly by the Company
            from time
            to time, including commissions payable directly by the Company to third
            parties,
            presently estimated at up to 20% of the Company’s net joint venture profits.
  5
  **6.**
                  **Deposits**
 
 The
            Company had the following deposits as of March 31, 2006: $36,822 on the
            lease of
            facilities in Nevada, and $11,850 for architectural design of future
            office
            space in Nevada.
 
 
 **7.**
                  **Notes
                      Payable**
 
 The
            Company’s notes payable consist of the following as of March 31,
            2006:
 
 The
            Company had outstanding a short-term note payable due to the Chairman
            and CEO
            Dr. Rudolf Gunnerman in the amount of $500,000. The note carries an annual
            interest rate of 8%, payable quarterly, and matures on the earlier of
            December
            30, 2006, or upon the demand of Dr. Gunnerman. Interest of $10,000 has
            been paid
            for the three months ended March 31, 2006.
 
 On
            December 31, 2004, under the Board’s approval, the Company borrowed $7,000,000
            in the form of a long-term note from the Chairman and CEO. Interest on
            the note
            is adjusted quarterly based on a London Inter-Bank Offering Rate (“LIBOR”) plus
            0.5% per annum, with payments due on December 31 of 2005, and 2006, and
            the
            remaining accrued interest and principal due on December 31, 2007 when
            the note
            matures. As of March 31, 2006, interest payable of $85,488 has been accrued
            on
            this note at the adjusted rate for the quarter of 4.885%. Beginning April
            1,
            2006 the rate was adjusted to 5.32563%.
 
 
 **8.**
                  **Capital
                      Stock**
 
 Other
            than the related party transactions disclosed in Note 12 and the compensation
            transactions disclosed in Note 10, the Company had the following transactions
            related to its common stock during the three months ended March 31,
            2006:
  Additional
            Investment Rights and Warrants for 7,866,615 shares were exercised in
            2006
            through March 31, generating $8,531,858. These rights and warrants relate
            to a
            June 2004 private placement.
 
 On
            March
            29, 2006, the Company completed a private placement to a small number
            of
            accredited investors for the sale of 4,000,000 units, each unit consisting
            of
            one share of the Company’s Common Stock and one Warrant to purchase a share of
            Common Stock. Each unit was sold at a price of $6.805 per share, resulting
            in
            gross proceeds at closing of $27.2million. The Warrants are exercisable,
            in
            whole or in part, at a fixed price equal to $6.805 per share, and are
            exercisable for a period of 18 months following their issuance. The
            Company filed a Registration Statement with the SEC following the closing
            covering the resale of the shares of Common Stock issued at closing and
            shares
            issuable upon exercise of Warrants. The Company is required to pay a
            late
            registration penalty of 1.5% per month from June 27, 2006, computed on
            the
            amount of the investment, if the registration is not declared effective
            by the
            SEC by June 27, 2006.
 
  6
  A
            fee of
            $100,000 was paid to an unrelated third party in consideration of introducing
            an
            investor to the Company relative to the March 29, 2006 placement. This
            amount
            was reflected as a reduction of the proceeds and a payable at March 31,
            2006. It
            was paid in April.
 
 The
            Company is obligated to pay $760,240 in late registration fees due to
            the
            registration statement related to a private placement in June of 2004
            not having
            become effective on time, as per the agreement with the investors. The
            agreement
            requires the Company to pay late registration fees to the selling security
            holders at the rate of 2% per month of the invested amount if the registration
            covering the placement shares is not declared effective by the SEC within
            90
            days of the date of the investment. As of March 31, 2006, the full amount
            of
            fees has been accrued plus $90,457 of accrued interest at 18% per annum
            on the
            balance of unpaid fees since the registration date. The registration
            statement
            was declared effective by the SEC on June 27, 2005.
 
 
 **9.**
                  **Loss
                      Per Share**
 
 The
            computations of basic and diluted loss per common share are based upon
            the
            weighted average number of common shares outstanding and potentially
            dilutive
            securities. Potentially dilutive securities include stock options and
            unvested
            shares of restricted stock. Options to purchase 6,135,390 and 10,083,106
            shares
            of common stock were not included in the March 31, 2006 and 2005
            computations of diluted net loss per share, respectively, because inclusion
            of
            such shares would have an anti-dilutive effect on net loss per
            share. ****
  
 **10.**
                  **Stock
                      Plans and Share-Based
                      Compensation**
 
 The
            Company records compensation in the form of grants of common stock and
            options
            for common stock at fair value in accordance with the Statement of Financial
            Accounting Standards No. 123 R.
 
 Effective
            January 1, 2006 in consideration of Michael Applegate’s agreement to join the
            Company as Chief Operating Officer, he was granted 50,000 shares of the
            Company’s common stock valued at $636,000 or $12.72 per share, the closing value
            on January 3, 2006, the first trading day after the effective date of
            the
            contract. This grant vested at the end of the 90 day period beginning
            January 1,
            2006, thus is an expense for the first quarter of 2006.
 
 In
            February 2006 the Company granted to Michael Heffner 50,000 restricted
            shares of
            common stock at $8.80 per share, the closing value on February 6, 2005,
            the
            effective date of his appointment to the Board of Directors, for services
            valued
            at $440,000.
 
 Effective
            February 1, 2006, the Company entered into a consulting agreement with
            Thomas J.
            Nardi to provide engineering-construction consulting services on a
            month-to-month basis.  The consulting agreement provides that for each
            month the consulting agreement is in effect, Mr. Nardi will receive options
            to
            purchase 1,000 shares of our common stock, exercisable within one year,
            at an
            exercise price of $7.00 per share. During the quarter ended March 31,
            2006, Mr.
            Nardi earned options to purchase 2,000 shares at $7.00 per share under
            this
            agreement. The fair value of these options totaled $8,050 based on the
            Black-Scholes valuation model using the assumptions described
            below.
 
  7
  On
            March
            29, 2006 the Company entered into a contract with Mustang International,
            L.P.
            (“Mustang”) for program management, engineering, procurement, construction
            management, and other services to be performed. Initially it will oversee
            engineering and construction for the project in Fujairah, United Arab
            Emirates.
            Its fee for these services includes stock grants and options. The Company
            has
            agreed to issue to Mustang for the Fujairah project (i) 17,500 of its
            shares of common stock, with a provision for reimbursement to the Company
            by
            Mustang of the value of the grant if the contract is terminated by Mustang,
            and
            (ii) options to acquire 52,500 shares of common stock at $6.00 per share,
            exercisable by April 1, 2010. The value of these services is included
            in plant
            and equipment as construction-in-progress. The 17,500 shares are valued
            at the
            $7.44 closing price on March 29, 2006, or $130,200. The options were
            valued at
            $357,525 based on the Black-Scholes valuation model using the assumptions
            described below.
 
 The
            following table describes the assumptions used in the Black-Scholes
            calculations:
 
 Nardi
                  Nardi
                  MustangDate
                      of option
                  2/28/2006
                  3/31/2006
                  3/29/2006Term
                  One
                      year
                  One
                      year
                  Until
                      4/1/2010Expected
                          volatility (based upon calculated
                        historical
                          volatility of stock over the same term)
                  131%
                  129%
                  162%Expected
                      dividends
                  None
                  None
                  NoneRisk-free
                      interest rate
                  5%
                  5%
                  5%Discount
                      for post-vesting restrictions
                  None
                  None
                  None
 
 
 **11.**
                  **Commitments
                      and Contingencies**
 
 Financial
            instruments, which potentially subject the Company to concentrations
            of credit
            risk, consist mainly of cash equivalents. The Company maintains amounts
            in two
            U.S. accounts, a checking account and a money market account, on deposit
            with
            one financial institution which exceed federally insured limits by approximately
            $34.9 million at March 31, 2006, and an account in Saudi Arabia. The
            Company has
            not experienced any significant losses in such accounts, nor does management
            believe it is exposed to any significant credit risk.
 
 At
            March
            31, 2006 the Company has a $550,000 refundable deposit in connection
            with an
            agreement with SulphCo KorAsia (formerly OIL-SC, Ltd) for a pilot
            plant in South Korea. Until SulphCo KorAsia accepts in writing the results
            of
            the pilot plant, the $550,000 is refundable at their option. The Company
            has
            agreed to receive the remaining payment of $450,000 within seven days
            after the
            first commercial license agreement for the SonocrackingTM technology between the
            Company and a Korean refining company, provided that SulphCo
            KorAsia uses the funds for continued marketing activities regarding the
            Sonocracking technology in Korea.
 
 The
            Company has committed to spend approximately $25.5 million for the production
            of
            equipment and building for the Fujairah project. Through March 31, 2006
            $5.5 million has been expended. The Company expects the processors will
            be
            operational prior to December 31, 2006, and has included their costs
            in property
            and equipment construction-in-progress. The building costs are included
            in the
            investment in Fujairah Oil Technology LLC as explained in Note 5.
 
 There
            are
            various claims and lawsuits pending against the Company arising in the
            normal
            course of the Company’s business. Although the amount of liability at March 31,
            2006, cannot be ascertained, management is of the opinion that any resulting
            liability will not materially affect the Company’s financial position. We have
            and will continue to devote significant resources to our defense, as
            necessary.
   8
  **12.**
                  **Related
                      Party Transactions**
 
 The
            CEO
            was paid $90,000 during the quarter, under a consulting agreement. The
            current
            agreement is set to terminate on July 1, 2006.
 
 See
            Note
            10 for share-based payments to Michael Applegate, an officer, and Michael
            Heffner, a director.
  Dr.
            Rudolf Gunnerman personally granted to Mr. Kirk Schumacher, upon his
            termination
            December 28, 2004, an option to acquire 100,000 shares of the Company’s Common
            Stock owned by Dr. Gunnerman at an exercise price of $0.55 per share.
            Those
            100,000 options were exercised in February 2006. As Dr. Gunnerman is
            the
            Chairman, CEO, and controlling shareholder of the Company, the Company
            recognized an expense in 2004 of $555,000, the difference between the
            exercise
            price of the option and the market price on the date of grant, on December
            28,
            2004. Mr.
            Schumacher takes the position that the options received in 2004 were
            not for
            compensation for tax purposes.  The Company is maintaining an accrued
            liability for payroll taxes until it is reasonably certain of its
            position.
 
 In
            March
            2006, an interest payment of $10,000 was made to the Chairman and CEO
            in
            connection with an outstanding note payable.
 
 The
            Company has a consulting agreement with Peak One Consulting, Inc., a
            company
            owned 100% by a Director Richard Masica, which was paid $29,311 in fees
            for
            management and technical consulting and reimbursed $2,784 in travel related
            expenses in the first quarter of 2006.
 
 The
            Company has a consulting arrangement with a Director Michael Heffner
            who was
            reimbursed $5,216 in travel related expenses, and technical consulting
            fees of
            $30,000 were accrued for his services in the first quarter of
            2006.


9




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





**Forward-Looking
      Statements**





This
      report contains forward-looking statements within the meaning of the federal
      securities laws that relate to future events or our future financial
      performance. In some cases, you can identify forward-looking statements by
      terminology, such as "may," "will," "should," "could," "expect," "plan,"
      "anticipate," "believe," "estimate," "project," "predict," "intend," "potential"
      or "continue" or the negative of such terms or other comparable terminology,
      although not all forward-looking statements contain such terms. In addition,
      these forward-looking statements include, but are not limited to, statements
      regarding:


•
              implementing
                  our business strategy;•
              development,
                  commercialization and marketing of our products;•
              our
                  intellectual property;•
              our
                  estimates of future revenue and profitability;•
              our
                  estimates or expectations of continued losses;•
              our
                  expectations regarding future expenses, including research and
                  development, sales and marketing, manufacturing and general and
                  administrative expenses;•
              difficulty
                  or inability to raise additional financing, if needed, on terms
                  acceptable
                  to us;•
              our
                  estimates regarding our capital requirements and our needs for
                  additional
                  financing;•
              attracting
                  and retaining customers and employees;•
              sources
                  of revenue and anticipated revenue; and•
              competition
                  in our market.




These
      statements are only predictions. Although we believe that the expectations
      reflected in these forward-looking statements are reasonable, we cannot
      guarantee future results, levels of activity, performance or achievements.
      In
      light of these risks, uncertainties and assumptions, the forward-looking events
      discussed in this report might not occur. Actual results, levels of activity,
      performance, achievements and events may vary significantly from those implied
      by the forward-looking statements. A description of business risks that could
      cause our results to vary appears under “Risk Factors **”** and
      elsewhere in this report.





**Results
      of Operations**





As
      a
      development stage company, we have not generated any material revenues since
      we
      commenced our current line of business in 1999. We anticipate generating
      material revenue on a sustained basis beginning in fiscal 2006 when we have
      successfully commercialized our SonocrackingTM technology. When we emerge from the development stage, our reporting will change
      to reflect costs of sales against revenues. As revenue increases and prior
      tax
      losses are offset, the deferred tax estimate will require revision.





In
      2005
      we received $550,000 from SulphCo KorAsia (formerly known as OIL-SC, Ltd.),
      pursuant to our Equipment Sale and Marketing Agreement. As this amount is fully
      refundable if the pilot plant does not meet the agreed specifications, no
      portion of the purchase price has been or will be recorded as revenue in our
      financial statements until the pilot plant meets all agreed specifications.
      We
      do not have an equity interest in SulphCo KorAsia.




10


***Three
      months ended March 31, 2006 compared to the three months ended March 31,
      2005***





**Research
      and Development Expenses**




For
      the
      three months ended March 31, 2006, we incurred approximately $220,000, related
      to research and development of our SonocrackingTM technology. This compares to
      approximately $142,000 for the three months ended March 31, 2005. This increase
      reflects our ongoing efforts to transition from research and development
      activities into commercial production.




For
      the
      three months ended March 31, 2006, approximately $98,000 represents amounts
      paid
      to our engineers as wages and related benefits and for design and testing of
      our
      SonocrackerTM units. Approximately $63,000 was paid for the procurement of
      control panels, probes, centrifuges, and generators related to the 2,000 bbl/day
      unit shipped to SulphCo KorAsia and the 5,000 and 15,000 bbl/day units currently
      located at our Sparks, Nevada facility. The remainder of our research and
      development costs relate to recurring monthly expenses related to the
      maintenance of our warehouse facilities.




We
      expect
      our research and development expenses to continue at their current level until
      we successfully transition into generating sustained revenue. Thereafter,
      research and development will continue as needed to enhance our technology.





**Selling,
      General and Administrative Expenses**




For
      the
      three months ended March 31, 2006, we incurred approximately $3,770,000 in
      selling, general and administrative expenses. This compares to approximately
      $1,479,000 for the same period last year.





Legal
      fees were approximately $1,150,000 for the three months ended March 31, 2006,
      reflecting an increase of approximately $1,055,000. This increase was primarily
      due to litigation fees relating to the discovery phase of lawsuits against
      us.
      We expect to continue to incur significant litigation fees relating to these
      lawsuits through at least the second quarter of 2006.





Consulting
      fees, payroll and related expenses were approximately $1.417 million for the
      three months ended March 31, 2006, reflecting an increase of approximately
      $751,000. Salaries in these periods include the grant of 50,000 shares in each
      such quarter to new officers, $636,000 in 2006 and $204,000 in 2005. The
      increase in the amounts recorded for these grants including the related payroll
      taxes was approximately $433,000, which was due to the increase in the value
      of
      our stock. Otherwise our consulting fees, payroll and related expenses increased
      70% which reflects the increased number and quality of our work
      force.





Travel
      and travel related expenses were approximately $280,000 for the three months
      ended March 31, 2006, reflecting an increase of approximately $174,000. This
      increase was due to meetings of the Board of Directors, meetings with the
      European manufacturers of our equipment, and meetings with our joint venture
      partner in Fujairah, United Arab Emirates.





Director
      fees were approximately $440,000 for the three months ended March 31, 2006,
      reflecting an increase of approximately $166,000, from the first quarter of
      2005. Director fees in each of these periods represents the issuance of 50,000
      shares in each such quarter to new directors. Therefore, the increase in the
      amount recorded for these fees was due to the increase in the value of our
      stock.






11





The
      remainder of the amounts incurred relate to normal recurring operating expenses
      such as lease expense, utilities, marketing, and investor
      relations.





**Interest
      Expense**




Interest
      expense was approximately $125,000 for the three months ended March 31, 2006,
      reflecting an increase of approximately $54,000, or 43% from the first quarter
      of 2005. Of the increase, approximately $30,000 is due to the interest on the
      late registration (see “Late Registration” below). In addition, the interest on
      our $7 million note payable to Dr. Rudolf Gunnerman increased in the first
      quarter of 2006 as it is indexed to a LIBOR rate which has
      increased.




**Late
      Registration**




In
      accordance with the terms of our 2004 private placement, we accrued late fees
      of
      approximately $438,000, during the first quarter of 2005, due to a delay in
      the
      effective date of our registration statement filed with the SEC. Our
      registration statement was declared effective by the SEC in June 2005.
      Accordingly, we have not accrued any amounts for the first quarter of 2006
      other
      than interest of approximately $30,000 which accrues on the unpaid amount at
      the
      rate of 18% per annum. However, as of the date of this report no formal demands
      have been made by investors to pay these fees.




**Depreciation
      and Amortization**




For
      the
      three months ended March 31, 2006, we expended approximately
      $109,000 equipment and to maintain exclusivity for the sale and/or
      licensing of our SonocrackingTM technology in the United States and abroad. Our
      depreciation and amortization expense related to these additions, and to our
      previously capitalized equipment and rights, for the three months ended March
      31, 2006 was approximately $63,000, reflecting an increase over the first
      quarter of 2005 of approximately $19,000 or 43%. We expect to continue our
      pursuit of exclusive distribution and licensing of our technology and purchasing
      equipment for the manufacture and upgrading of our Sonocracking
      technology.




**Loss
      on Impairment of Asset**




In
      accordance with SFAS No. 144 *Accounting
      for the Impairment or Disposal of Long Lived Assets* we
      determined in the first quarter of 2005 that a previously capitalized prototype
      no longer reflected the value of our commercially viable technology, resulting
      in an impairment loss of approximately $234,000. There was no comparable item
      in
      the first quarter of 2006.




**Net
      Loss**




We
      incurred a net loss of approximately $4.06 million for the three month period
      ending March 31, 2006, compared to approximately $2.32 million for the
      comparable three-month period in 2005. The increase in net loss in the 2006
      period primarily reflects an increase in selling, general, and administrative
      expense in the first quarter of 2006, and the absence in this period of loss
      on
      impairment of asset and late registration fees.




12


**Liquidity
      and Capital Resources**




As
      of
      March 31, 2006, we had approximately $35 million in available cash reserves,
      which includes $27 million received from the March 2006 private placement
      described below under “Recent Financing Activities.” Also included in this
      amount is approximately $8 million received in the first quarter of 2006 from
      the exercise of warrants and investment rights sold to investors in our 2004
      private placement.




In
      December 2005 we formed Fujairah Oil Technology, a 50/50 joint venture with
      the
      Government of Fujairah, one of the United Arab Emirates. Under the terms of
      the
      joint venture SulphCo is respons ible
      for
      contributing its Sonocracking unit, and operation and maintenance of the
      Fujairah facility is the responsibility of the joint venture. Our present
      timetable calls for commercial operation to begin in the third quarter of 2006.
      Until Fujairah Oil Technology generates revenues, operating expenses of the
      Fujairah Sonocracking facility, estimated initially at $800,000 per month,
      are
      expected to be funded from capital contributions of the partners. We expect
      that
      following the successful rollout of the 210,000 bbl/day facility, funding of
      direct expenditures by SulphCo for equipment will be available from joint
      venture cash distributions.





During
      the first quarter of 2006 we incurred approximately $5.5 million
      of expenditures relating to the startup of the Fujairah facility, including
      $4.7 million related to the construction of Sonocracking equipment and $800,000
      relating to building and infrastructure, and we expect to incur an additional
      $20 million in 2006 in connection with the fabrication and installation of
      our
      Sonocracking equipment and completion of the infrastructure associated with
      the
      210,000 bb/day facility.





Due
      to
      the inherent complexities involved in the installation of a facility of this
      magnitude, and because the Fujairah facility will be the first commercial
      installation of its kind utilizing our Sonocracking technology, there may be
      delays in our current timetable, which will in turn affect the timing and
      availability of revenues. In addition, future costs and expenses are estimates,
      and therefore our costs may vary significantly from current
      estimates.





In
      addition to activities related to the Fujairah joint venture, we intend to
      continue to incur additional expenditures during the next 12 months for
      development and manufacture of Sonocracker units. Additional funding
      requirements during the next 12 months may arise upon the placement of an order
      by a future customer for Sonocracker units or other development or commercial
      activities.





***Recent
      Financing Activities***





On
      March
      29, 2006, we completed a private placement to a small number of accredited
      investors for the sale of 4,000,000 units, each unit consisting of one share
      of
      the Company’s Common Stock and one Warrant to purchase a share of Common Stock.
      Each unit was sold at a price of $6.805 per share, resulting in gross proceeds
      at closing of $27.2million. The Warrants are exercisable, in whole or in part,
      at a fixed price equal to $6.805 per share, and are exercisable for a period
      of
      18 months following their issuance. Up
      to an
      additional $27.2 million may be generated upon exercise of warrants by these
      investors. We
      filed
      a registration statement with the SEC registering the resale of common stock
      acquired by these investors.





In
      2004
      we conducted two private placements with institutional and other third party
      investors for the sale of units consisting of our common stock, warrants, and
      rights to acquire additional stock and warrants, generating net cash proceeds
      of
      approximately $4.6 million. An additional amount of approximately $3.8 million
      was generated in 2005, approximately $7.8 million was generated in the first
      quarter of 2006 from the exercise of outstanding rights and warrants, and up
      to
      approximately $2.6 million may be generated upon exercise of warrants and rights
      in the future if investors in the June 2004 private placements exercise all
      of
      the remaining outstanding warrants.




13





In
      December 2004 Dr. Gunnerman advanced $7 million to us as a loan. The loan is
      evidenced by a promissory note which bears interest at the rate of 0.5% above
      the 30 day “LIBOR” rate, adjusted quarterly and payable annually, and the entire
      principal amount is due and payable in December 2007.





We
      anticipate that our existing capital resources will be sufficient to fund our
      cash requirements through at least the next 12 months from cash presently on
      hand, based upon our expected levels of expenditures and anticipated needs
      during this period. The extent and timing of our future capital requirements
      will depend primarily upon the rate of our progress in the development and
      commercialization of our technologies, including the successful implementation
      of our venture with Fujairah Oil Technology and other third parties, and the
      timing of future customer orders.





To
      date
      we have generated no material revenues from our business operations. We are
      unable to predict when or if we will be able to generate future revenues from
      commercial activities or the amounts expected from such activities. These
      revenue streams may be generated by us or in conjunction with collaborative
      partners or third party licensing arrangements, and may include provisions
      for
      one-time, lump sum payments in addition to ongoing royalty payments or other
      revenue sharing arrangements. We presently have no binding commitments for
      any
      such revenues. Future revenues and profits from Fujairah Oil Technology are
      dependent upon the successful implementation of our Sonocracking
      technology.





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





Not
      applicable.





**Item
      4. Controls and Procedures**





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports filed under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized and reported within the
      specified time periods. As of the end of the period covered by this report,
      our
      management evaluated, with the participation of our Chief Executive Officer
      and
      Chief Financial Officer, the effectiveness of our disclosure controls and
      procedures. Based on the evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that due to a number of material weaknesses our
      disclosure controls and procedures may not have been effective as of the end
      of
      the period covered by this Report.





In
      order
      to correct these material weaknesses in the effectiveness of its disclosure
      controls and procedures, our management, in consultation with the Audit
      Committee, is in the process of reviewing policies and procedures in place
      with
      a view towards supplementing existing procedures and adopting new procedures.
      Our management and Audit Committee have discussed the matters disclosed in
      this
      Item 4 with our independent registered public accounting firm.





There
      were no changes in our internal control over financial reporting that occurred
      during the most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, the our internal control over financial
      reporting.


14


**PART
      II. OTHER INFORMATION**





**Item
      1.**  **Legal Proceedings**





Not
      applicable.





**Item
      1A. Risk Factors**





**We
      are a development stage company with a limited operating history, which makes
      it
      more difficult to predict whether we will be able to successfully commercialize
      our technology and implement our business plan.**





We
      are a
      development stage company with a limited operating history, and our principal
      technologies and products are still under development. Accordingly, there is
      a
      limited operating history upon which to base an assumption that we will be
      able
      to successfully implement our business plan.





**Our
      technologies are not fully developed, are commercially untested, and therefore
      the successful development and commercialization of our technologies remain
      subject to significant uncertainty.**





Our
      activities to date have involved the research and development of our crude
      oil
      desulfurization and upgrading technologies. We have not yet generated any
      material revenues since commencing these activities in January 1999. Commercial
      application of our technologies will require further investment, development
      and
      testing. We may be unable to complete development and commercialization of
      our
      technologies on a timely basis, or at all.





Development
      and commercialization of a new technology, such as our SonocrackingTM process, is
      inherently subject to significant risks. Accordingly, we cannot assure you
      that
      our technology will perform in a commercial scale setting as indicated in
      initial laboratory or small scale testing or that we will be able to
      successfully develop and commercialize our technology. Introducing and enhancing
      a new technology involves numerous technical challenges, substantial financial
      and personnel resources, and often takes many months or years to complete.
      We
      cannot be certain that we will be successful at commercializing our technology
      on a timely basis, or in accordance with milestones, if at all. In addition,
      we
      cannot be certain that, once our processing unit is made operational in a
      commercial setting, the unit will perform as expected. Our technology is complex
      and, despite further vigorous testing and quality control procedures, may
      contain undetected errors. Any inability to timely deliver a commercially viable
      unit could have a negative effect on our business, revenues, financial condition
      and results of operations.





**We
      have a history of operating losses and have not generated material revenues
      to
      date, and we are unable to predict when or if we will generate material revenues
      on a sustained basis or achieve profitability.**





We
      have
      not generated any material revenues, and we have experienced significant
      operating losses in each period since we commenced our current line of business
      in January 1999. As of December 31, 2005, we had an accumulated deficit of
      approximately $31.7 million, including approximately $7.2 million of stock-based
      compensation expense. These losses are principally associated with the research
      and development of our SonocrackingTM units for desulfurization and upgrading
      crude oil and other petroleum products, research and development of ultrasound
      technologies, development of pre-production prototypes and related marketing
      activity, and we expect to continue to incur expenses in the future for
      development, commercialization and sales and marketing activities related to
      the
      commercialization of our technology. We cannot predict when or to what extent
      our technology or resulting products will begin to produce revenues on a
      sustained basis, or whether we will ever reach profitability. If we are unable
      to achieve significant levels of revenue on a sustained basis, our losses will
      likely continue indefinitely. If this occurs, the market price of our common
      stock and our viability as a going concern could suffer, requiring us to
      significantly curtail our business activities or suspend or cease our
      operations.




15





**We
      may not have sufficient working capital in the future, and we may be unable
      to
      obtain additional capital, which could result in the curtailment, suspension
      or
      cessation of our business activity. If we obtain additional financing, you
      may
      suffer significant dilution.**





In
      the
      past we have financed our research and development activities primarily through
      debt and equity financings from our principal shareholder, Rudolf W. Gunnerman,
      and equity financings from third parties. Although we anticipate that our
      existing capital resources will be sufficient to fund our cash requirements
      for
      the next 12 months based upon current levels of expenditures and anticipated
      needs, we expect that additional working capital will be required in the
      future.





The
      extent and timing of our future capital requirements will depend upon several
      factors, including:




·
            Continued
                progress in the development of our
                technologies;




·
            Rate
                of progress and timing of product commercialization activities and
                arrangements, including the implementation of our venture with Fujairah
                Oil Technology;




·
            The
                timing of future customer orders;
                and




·
            Our
                ability to establish and maintain collaborative arrangements with
                others
                for product development, commercialization, marketing, sales and
                manufacturing.




Accordingly,
      our capital requirements may vary materially from those currently planned,
      and
      we may require additional financing sooner than anticipated.





Sources
      of additional capital, other than from future revenues (for which we presently
      have no commitments) include proceeds from the exercise of warrants issued
      to
      the investors in the June 2004 and March 2006 placements, funding through
      collaborative arrangements, licensing arrangements and debt and equity
      financings. We do not know whether additional financing will be available on
      commercially acceptable terms when needed. If we cannot raise funds on
      acceptable terms, we may not be able to successfully commercialize our
      technology, take advantage of future opportunities or respond to unanticipated
      requirements. If we are unable to secure such additional financing, we will
      have
      to curtail, suspend or cease all or a portion of our business activities.
      Further, if we issue equity securities, our shareholders may experience severe
      dilution of their ownership percentage, and the new equity securities may have
      rights, preferences or privileges senior to those of our common stock.





**Commercial
      activities by us in foreign countries could subject us to political and economic
      risks which could impair future potential sources of revenue or impose
      significant costs.**





We
      are
      currently engaged in activities outside the U.S., including the United Arab
      Emirates and South Korea, and we expect to continue to do so in the future,
      either directly, or through partners, licensees or other third parties, in
      connection with the commercialization of our technologies. The transaction
      of
      business by us in a foreign country, either directly or through partners,
      licensees or other third parties, may subject us, either directly or indirectly,
      to a number of risks, depending upon the particular country. These risks may
      include, with respect to a particular foreign country:




16




·
            Government
                activities that may result in the curtailment of contract
                rights;


·
            Government
                activities that may restrict payments or limit the movement of funds
                outside the country;


·
            Confiscation
                or nationalization of assets;


·
            Confiscatory
                or other adverse foreign taxation regulations;


·
            Acts
                of terrorism or other armed conflicts and civil unrest;


·
            Currency
                fluctuations, devaluations and conversion restrictions; and


·
            Trade
                restrictions or embargoes imposed by the U.S. or a foreign country.





Many
      of
      these risks may be particularly significant in some oil producing regions,
      such
      as th e
      Middle
      East and South America.





**We
      may have difficulty managing our growth.**





We
      expect
      to experience significant growth if we are successful in our efforts to rollout
      our Sonocracking units in Fujairah, United Arab Emirates, or if we receive
      additional orders for our Sonocracking units. This growth exposes us to
      increased competition, greater operating, marketing and support costs and other
      risks associated with entry into new markets and the development of new
      products, and could place a strain on our operational, human and financial
      resources. To manage growth effectively, we must:





·
            attract
                and retain qualified personnel;


·
            upgrade
                and expand our infrastructure so that it matches our level of
                activity;


·
            manage
                expansion into additional geographic areas;
                and


·
            improve
                and refine our operating and financial systems and managerial controls
                and
                procedures.





If
      we do
      not effectively manage our growth, we will not be successful in executing our
      business plan, which could materially adversely affect our business, results
      of
      operations and financial condition.





**Our
      strategy for the development and commercialization of our technologies
      contemplates collaborations with third parties, making us dependent on them
      for
      our success.**





We
      do not
      possess all of the capabilities to fully commercialize our desulfurization
      and
      upgrading technologies on our own. Our success may depend upon partnerships
      and
      strategic alliances with third parties, such as our joint venture with Fujairah
      Oil Technology. Collaborative agreements involving the development or
      commercialization of technology such as ours generally pose such risks
      as:




·
            Collaborators
                may not pursue further development or commercialization of products
                resulting from collaborations or may elect not to continue or renew
                research and development programs;




·
            Collaborators
                may delay development activities, underfund development activities,
                stop
                or abandon development activities, repeat or conduct new testing
                or
                require changes to our technologies for
                testing;




·
            Collaborators
                could independently develop, or develop with third parties, products
                that
                could compete with our future
                products;




·
            The
                terms of our agreements with collaborators may not be favorable to
                us;




·
            A
                collaborator may not commit enough resources, thereby delaying
                commercialization or limiting potential revenues from the
                commercialization of a product;




·
            Collaborations
                may be terminated by the collaborator for any number of reasons,
                including
                failure of the technologies or products to perform in line with the
                collaborator’s objectives or expectations, and such termination could
                subject us to increased capital requirements if we elected to pursue
                further activities.




17




**We
      have very limited manufacturing, marketing and sales experience, which could
      result in delays to the implementation of our business
      plan.**





We
      have
      very limited manufacturing, marketing and product sales experience. We cannot
      assure you that contract manufacturing services will be available in sufficient
      capacity to supply our product needs on a timely basis. If we decide to build
      or
      acquire commercial scale manufacturing capabilities, we will require additional
      management and technical personnel and additional capital.





**We
      rely on third parties to provide certain components for our products. If our
      vendors fail to deliver their products in a reliable, timely and cost-efficient
      manner, our business will suffer.**





We
      currently depend on relationships with third parties such as contract
      manufacturing companies and suppliers of components critical for the product
      we
      are developing in our business. If these providers do not produce these products
      on a timely basis, if the products do not meet our specifications and quality
      control standards, or if the products are otherwise flawed, we may have to
      delay
      product delivery, or recall or replace unacceptable products. In addition,
      such
      failures could damage our reputation and could adversely affect our operating
      results. As a result, we could lose potential customers and any revenues that
      we
      may have at that time may decline dramatically.





**We
      are highly dependent on our key personnel to manage our business, and because
      of
      competition for qualified personnel we may not be able to recruit or retain
      necessary personnel. The loss of key personnel or the inability to retain new
      personnel could delay the implementation of our business
      plan.**




Our
      continued growth and success depend to a significant degree on the continued
      services of our senior management, including our chairman and CEO, Rudolf W.
      Gunnerman, our President, Peter Gunnerman, and other key employees, and our
      ability to attract and retain highly skilled and experienced scientific,
      technical, managerial, sales and marketing personnel. We cannot assure you
      that
      we will be successful in recruiting new personnel or in retaining existing
      personnel. Other than agreements to retain the services of our chairman and
      CEO,
      Rudolf W. Gunnerman **,** none
      of
      our senior management or key personnel has long term employment agreements
      with
      us. We do not maintain key person insurance on any members of our management
      team or other personnel. The loss of one or more key employees or our inability
      to attract additional qualified employees could delay the implementation of
      our
      business plan, which in turn could have a material adverse effect on our
      business, results of operations and financial condition. In addition, we may
      experience increased compensation costs in order to attract and retain skilled
      employees.




18





**Because
      the market for products utilizing our technologies is still developing and
      is
      highly competitive, we may not be able to compete successfully in the highly
      competitive and evolving desulfurization and upgrading market.**





The
      market for products utilizing our technologies is still developing and there
      can
      be no assurance that our products will ever achieve market acceptance. Because
      we presently have no customers for our business, we must convince petroleum
      producers, refiners and distributors to utilize our products or license our
      technology. To the extent we do not achieve market penetration, it will be
      difficult for us to generate meaningful revenue or to achieve profitability.





**The
      success of our business is highly dependent on our patents and other proprietary
      intellectual property, and we cannot assure you that we will be able to protect
      and enforce our patents and other intellectual property.**





Our
      commercial success will depend to a large degree on our ability to protect
      and
      maintain our proprietary technology and know-how and to obtain and enforce
      patents on our technology. We rely primarily on a combination of patent,
      copyright, trademark and trade secrets law to protect our intellectual property.
      Although we have filed multiple patent applications for our technology, and
      we
      have five issued patents in the U.S., our patent position is subject to complex
      factual and legal issues that may give rise to uncertainty as to the validity,
      scope and enforceability of a particular patent. Accordingly, we cannot assure
      you that any patents will be issued pursuant to our current or future patent
      applications or that patents issued pursuant to such applications will not
      be
      invalidated, circumvented or challenged. Moreover, we cannot assure you that
      the
      rights granted under any such patents will provide the competitive advantages
      we
      anticipate or be adequate to safeguard and maintain our proprietary rights.
      In
      addition, effective patent, trademark, copyright and trade secret protection
      may
      be unavailable, limited or not applied for in certain foreign countries.
      Moreover, we cannot assure you that third parties will not infringe, design
      around, or improve upon our proprietary technology.





We
      also
      seek to protect our proprietary intellectual property, including intellectual
      property that may not be patented or patentable, in part by confidentiality
      agreements and, if applicable, inventor's rights agreements with our employees
      and third parties. We cannot assure you that these agreements will not be
      breached, that we will have adequate remedies for any breach or that such
      persons will not assert rights to intellectual property arising out of these
      relationships.





**We
      are a new entrant in our business and we face significant
      competition.**





We
      are a
      new entrant in the market for development and sale of upgrading and sulfur
      reduction technology to the oil industry. We face well-established and
      well-funded competition from a number of sources. Our competitors in this area
      include manufacturers of conventional refinery desulfurization equipment and
      major integrated oil companies and oil refineries. Most of these entities have
      substantially greater research and development capabilities and financial,
      scientific, manufacturing, marketing, sales and service resources than we do.





Because
      of their experience and greater research and development capabilities, our
      competitors might succeed in developing and commercializing competing
      technologies or products which would render our technologies or products
      obsolete or non-competitive.




19


**Regulatory
      developments could have adverse consequences for our business.**





The
      regulatory environment that pertains to our business is complex, uncertain
      and
      changing rapidly. Although we anticipate that existing and proposed governmental
      mandates regulating the sulfur content of petroleum products will continue
      to
      provide an impetus for customers to utilize our SonocrackingTM technology for
      desulfurization, it is possible that the application of existing environmental
      legislation or regulations or the introduction of new legislation or regulations
      could substantially impact our ability to launch and promote our proprietary
      technologies, which could in turn negatively impact our business.





Rules
      and
      regulations implementing federal, state and local laws relating to the
      environment will continue to affect our business, including laws and regulations
      which may apply to the use and operation of our SonocrackerTM units, and we
      cannot predict what additional environmental legislation or regulations will
      be
      enacted or become effective in the future or how existing or future laws or
      regulations will be administered or interpreted with respect to products or
      activities to which they have not been applied previously. Compliance with
      more
      stringent laws or regulations, as well as more vigorous enforcement policies
      of
      regulatory agencies, could have a materially adverse effect on our
      business.





To
      date,
      environmental regulation has not had a material adverse effect on our business,
      which is presently in the development stage. However, future activities may
      subject us to increased risk when we commercialize our units by reason of the
      installation and operation of these units at customer sites. We intend to
      address these risks by imposing contractual responsibility whenever practicable,
      on third party users for maintaining necessary permits and complying with
      applicable environmental laws governing or related to the operation of our
      units. However, these measures may not fully protect us against environmental
      risks. Furthermore, although we may be entitled to contractual indemnification
      from third parties for environmental compliance liabilities, this would not
      preclude direct liability by us to governmental agencies or third parties under
      applicable federal and state environmental laws. We are presently unable to
      predict the nature or amount of additional costs or liabilities which may arise
      in the future. However, future liabilities and costs could be
      material.





**We
      may be sued for product liability, which could result in liabilities which
      exceed our available assets.**





We
      may be
      held liable if any product we develop, or any product which is made with the
      use
      of any of our technologies, causes injury or is found otherwise unsuitable
      during product testing, manufacturing, marketing, sale or use. We currently
      have
      no product liability insurance. When we attempt to obtain product liability
      insurance, this insurance may be prohibitively expensive, or may not fully
      cover
      our potential liabilities. Inability to obtain sufficient insurance coverage
      at
      an acceptable cost or otherwise to protect against potential product liability
      claims could inhibit the commercialization of products developed by us. If
      we
      are sued for any injury caused by our products, our liability could exceed
      our
      available assets.





**Our
      stock price is volatile, which increases the risk of an investment in our common
      stock.**





The
      trading price for our common stock has been volatile, ranging from a sales
      price
      of $0.21 in October 2003, to a sales price of over $19.00 per share in
      January of 2006. The price has changed dramatically over short periods with
      decreases of more than 50% and increases of more than 100% percent in a single
      day. An investment in our stock is subject to such volatility and, consequently,
      is subject to significant risk.






20





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





During
      the three months ended March 31, 2006, we sold unregistered securities in the
      following transactions.





In
      consideration of Michael Applegate’s agreement to join our company as Chief
      Operating Officer in January 2006, we agreed to grant to Mr. Applegate 50,000
      shares of our common stock valued at $12.72 per share, for an aggregate value
      of
      $636,000.





In
      consideration of Michael T. Heffner’s agreement to join our Board of Directors
      in February 2006, we agreed to grant to Mr. Heffner 50,000 shares of our common
      stock valued at $8.80 per share, for an aggregate value of $440,000. The number
      of shares issued is based our policy of issuing 50,000 shares of our common
      stock to non-employee directors upon joining our board of directors.





Effective
      February 1, 2006, we entered into a consulting agreement with Thomas J. Nardi
      to
      provide engineering-construction consulting services on a month-to-month basis.
       The consulting agreement provides that Mr. Nardi will receive options to
      purchase 1,000 shares of our common stock at an exercise price of $7.00 per
      share for each month that the consulting agreement is in effect. During the
      quarter ended March 31, 2006, Mr. Nardi earned options to purchase 2,000 shares
      at $7.00 under this agreement. The fair value of these options totaled
      $8,050.





During
      the first quarter of 2006, investors in the 2004 private placements were issued
      securities in the following transactions: (1) Additional Investment Rights
      were
      exercised in exchange for 3,854,461 shares of common stock at $0.90 per share
      and Warrants for 1,349,067 shares of common stock exercisable at $1.125 per
      share, resulting in gross proceeds of $3,469,015; (2) Additional Investment
      Rights were exercised in exchange for 1,281,007 shares of common stock at $1.25
      per share and Warrants for 896,706 shares of common stock exercisable at $1.5625
      per share, resulting in gross proceeds of $1,601,259; (3) Warrants issued to
      investors in the 2004 private placements were exercised in exchange for
      1,624,471 shares of common stock at $1.125 per share, resulting in gross
      proceeds of $1,827,530; and (4) Warrants issued to investors in the 2004 private
      placements were exercised in exchange for 1,106,673 shares of common stock
      at
      $1.5625 per share, resulting in gross proceeds of $1,729,177.





On
      March
      29, 2006, we completed a private placement to a small number of accredited
      investors for the sale of 4,000,000 units, each unit consisting of one share
      of
      the Company’s Common Stock and one Warrant to purchase a share of Common Stock.
      Each unit was sold at a price of $6.805 per share, resulting gross proceeds
      at
      closing of $27.2million. The Warrants are exercisable, in whole or in part,
      at a
      fixed price equal to $6.805 per share, and are exercisable for a period of
      18
      months following their issuance. We filed a Registration Statement with the
      SEC
      following the closing covering the resale of the shares of Common Stock issued
      at closing and shares issuable upon exercise of Warrants. We are required to
      pay
      a late registration penalty of 1.5% per month from June 27, 2006, computed
      on
      the amount of the investment, if the registration is not declared effective
      by
      the SEC by June 27, 2006.





On
      March
      29, 2006 we entered into a Master Services Agreement with Mustang International,
      L.P. (“Mustang”) whereby Mustang will provide overall program and construction
      management for our 210,000 bbl/day Sonocracking joint venture in Fujairah,
      United Arab Emirates. As Mustang’s fee for the Fujairah project we have agreed
      to issue to Mustang 17,500 of our shares of common stock and options to acquire
      52,500 shares of common stock at $6.00 per share, exercisable until April 1,
      2010. The fair values of the stock and options totaled $130,200 and $357,525,
      respectively.






21





All
      such
      securities were issued and sold in reliance on the exemption from registration
      contained in Section 4(2) of the Securities Act of 1933, and the certificates
      representing such securities contain a restrictive legend reflecting the
      limitations on future transfer of those securities. The offer and sale of these
      securities was made without public solicitation or advertising. The investors
      represented to us that they were knowledgeable and sophisticated, and were
      experienced in business and financial matters so as to be capable of evaluating
      an investment in our securities and were an “accredited investor” within the
      meaning of Regulation D promulgated under the Securities Act of 1933. Each
      of
      these investors was afforded full access to information regarding our business,
      including reports filed with the SEC.








**Item
      6.**  **Exhibits**




31.1
              Certifications
                  pursuant to Rule 13a-14 under the Securities Exchange Act of
                  1934.31.2
              Certifications
                  pursuant to Rule 13a-14 under the Securities Exchange Act of
                  1934.32.1
              Certification
                  of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906
                  of the Sarbanes-Oxley Act of
                  2002.





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**SIGNATURES**








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





SULPHCO,
                INC.
              (Registrant)Date: May
              15,
              2006
            By:
            /s/ Rudolf
              W.
              GunnermanRudolf
                W. Gunnerman
              Chairman of the Board of Directors
              and Chief Executive
                Officer


By:
            /s/ Loren
              J.
              KalmenChief
                Financial Officer
              (Principal Financial and Accounting
                Officer)






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