**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**




**FORM
      10-K**




[X ]
      ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





**For
      the fiscal year ended December 31, 2006**




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





Commission
      file no. **001-32636**





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


(Exact
      name of registrant as specified in its charter)




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





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





Registrant’s
      telephone number **(775)
      829-1310**





Securities
      registered pursuant to Section 12(b) of the Act: ****





**Common
      Stock, Par Value $0.001 Per Share**


(Title
      of
      class)





Securities
      registered pursuant to Section 12(g) of the Act: **None**





Indicate
                  by check mark if the registrant is a
                  well-known seasoned issuer, as defined in Rule 405 of the Securities
                  Act.Yes
                  [  ] No [X]Indicate
                  by check mark if the registrant is not
                  required to file reports pursuant to Section 13 or Section 15(d)
                  of the
                  Act.Yes
                  [   ] No [X]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 if disclosure of
                  delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
                  this chapter) is not contained herein, and will not be contained,
                  to the
                  best of registrant’s knowledge, in definitive proxy or information
                  statements incorporated by reference in Part III of this Form 10-K
                  or any
                  amendment to this Form 10-K.[ 
 ]Indicate
                  by check mark whether the registrant
                  is a large accelerated filer, an accelerated filer, or a non-accelerated
                  filer. See definition of “accelerated filer and large accelerated filer”
                  in Rule 12b-2 of the Exchange Act. (Check one):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
                Act).Yes
                  [   ] No
                  [X]


The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the stock was last
      sold on June 30, 2006, was $518,411,995.





Indicate
      the number of shares outstanding of each of the registrant’s classes of common
      stock, as of the latest practicable date. The
      number of shares of Common Stock outstanding on March 21 ,
      2007,
      was 76,355,478.





Documents
      incorporated by reference: None.





Transitional
      Small Business Disclosure Format (Check One): Yes [   ] No
      [X]









**SULPHCO,
      INC.**


**2006
      FORM 10-K ANNUAL REPORT**





**TABLE
      OF CONTENTS**





Page
                No.PART
                IItem
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            19Item
                2.
            Properties
            19Item
                3.
            Legal
                Proceedings
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            22PART
                IIItem
                5.
            Market
                  for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities
            23Item
                6.
            Selected
                Financial Data
            25Item
                7.
            Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
            25Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            31Item
                8.
            Financial
                Statements and Supplementary Data
            31Item
                9.
            Changes
                  in and Disagreements with Accountants on Accounting and FinancialDisclosure
            31Item
                9A.
            Controls
                and Procedures
            32Item
                9B.
            Other
                Information
            32PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate Governance
            33Item
                11.
            Executive
                Compensation
            36Item
                12.
            Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
            40Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            43Item
                14.
            Principal
                Accountant Fees and Services
            44PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            45










Financial
      Statements for the Years Ended December 31, 2006, December 31, 2005, and
      December 31, 2004 with Audit Reports.




2


**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.




Forward-looking
      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.
      All
      of our forward-looking information is subject to risks and uncertainties that
      could cause actual results to differ materially from the results expected.
      Although it is not possible to identify all factors, these risks and
      uncertainties include the risk factors and the timing of any of those risk
      factors identified in “Item 1A. Risk Factors” section contained herein, as
      well as the risk factors and those set forth from time to time in our filings
      with the Securities and Exchange Commission (“SEC”). These documents are
      available through our web site, http://www.sulphco.com,
      or through the SEC’s Electronic Data Gathering and Analysis Retrieval System
      (“EDGAR”) at http://www.sec.gov.




References
      in this report to “we,” us,” “our company,” and “SulphCo” refer to SulphCo,
      Inc., a Nevada corporation.




3




**PART
      I**






**ITEM
      1.BUSINESS**




**Introduction**




We
      are
      engaged in the business of developing and commercializing our patented and
      proprietary technology for the “upgrading” of crude oil by reducing its relative
      density, its viscosity, and its sulfur and nitrogen content. Our patented and
      proprietary process, which we refer to as Sonocracking,TM is based upon the novel
      use of high power ultrasonics - the application of high energy, high frequency
      sound waves - which alters the molecular structure of the crude oil. This
      decreases the relative density and the viscosity of crude oil and
      correspondingly increases the amount of lighter oils that can be recovered
      during the refinery processes. Other beneficial changes to the crude oil as
      a
      result of the Sonocracking technology include a reduction in the weight
      percentage of sulfur as well as a reduction in the parts per million of
      nitrogen.





The
      markets for our Sonocracking technology and our SonocrackerTM units are crude oil
      producers and refiners. The economic value of crude oil is driven largely by
      both the relative density of the crude and sulfur content. Because our
      technology is expected to decrease the relative density of crude oil and at
      the
      same time reduce the sulfur content in a cost-effective way, the successful
      commercialization of our technology can be expected to produce economic benefits
      to future customers in these markets.





We
      maintain our principal executive offices and facilities at 850 Spice Islands
      Drive, Sparks, Nevada 89431. Our telephone number is 775-829-1310. Our corporate
      website is www.sulphco.com . Our
      website and the information contained therein are not part of this
      report.





**Business
      Development During the Past Year**





During
      2006, we entered into Memorandums of Understanding (“MOU”), Letters of Intent
      (“LOI”) and testing
      agreements with several major oil companies including Total in France, Petrobras
      in Brazil, SK Corporation in South Korea, Hyundai Oilbank Co., Ltd in South
      Korea, and OMV in Austria. These agreements indicate the market’s interest in
      the SulphCo, Inc. Sonocracking TM technology and provide us several avenues for
      validation testing of the process. Furthermore, these testing agreements lay
      the
      groundwork for future commercial discussions and development options for the
      technology.





In
      2006,
      we entered into an MOU with Pierson Capital International Ltd (“Pierson”). As
      part of the agreement, Pierson accepted the appointment as SulphCo, Inc.’s
      advisor and coordinator for operational logistics associated with the
      Sonocracking TM technology, beginning with the test facility under construction
      in Fujairah, UAE. Included within the scope of Pierson’s involvement in Fujairah
      are marine terminal capabilities, storage and tanker capacities, and import
      and
      export management.





We
      continued construction of a 180,000 bbl/day SonocrackingTM test facility in
      Fujairah, UAE throughout 2006. Over the course of the year, a land lease was
      procured for the production site, and over $20 million was invested in a test
      facility. Although progress in 2006 was hampered with delays due to poor
      execution by our construction contractor, several steps have been taken to
      remediate those issues, and we expect to commission the first Sonocracking
TM
unit in the first half of 2007.





4




The
      following sets forth a detailed summary and timeline of the significant events
      and milestones that have occurred during the construction of the Fujairah test
      facility:




·
            December,
                2005 - Formal request from Fujairah Oil Technology LLC to provide
                processing equipment capable of upgrading 200,000 bbl/day by June
                1,
                2006.




·
            December,
                2005 - Contracted with NTG GmbH (“NTG”) to build seven 30,000 bbl/day
                Sonocracking units to be completed by April 15,
                2006.




·
            February,
                2006 - Finalized contracts with NTG for construction of seven 30,000
                bbl/day Sonocracking units and fourteen oil/water separators for
€1.1
                million Euros, or approximately $1.3 million, per
                unit.




·
            February,
                2006 - Placed an order with M’rkisches Werk GmbH (“MWH”) for the
                manufacture of 60 ultrasonic
                probes.




·
            March,
                2006 - Contracted with Vera Group (“Vera”) to design and construct the
                building to house the Sonocracking
                units.




·
            March,
                2006 - Contracted with Mustang International, LP (“Mustang”) to provide
                overall program and construction
                management.




·
            April,
                2006 - Construction of building
                begun.




·
            May,
                2006 - Change in scope of building
                construction.




·
            May,
                2006 - First shipment of equipment from Germany to
                Fujairah.




·
            June
                through October, 2006 - Building construction continues, but with
                several
                unforeseen delays.




·
            October,
                2006 - Building progressed to the point that processing equipment
                could be
                installed, but there were further delays as Vera failed to implement
                sufficient manpower and had not ordered the equipment required in
                their
                scope.




·
            November,
                2006 - Installation of equipment within the building
                begins.




·
            January,
                2007 - Completion of installation of six 30,000 bbl/day Sonocracking
                units, exclusive of reactors.




5




In
      late
      2006 and early 2007, we engaged two external vendors to facilitate the
      development of ultrasound probes with improved operational performance and
      reliability.  We received and tested the first set of improved probe
      prototypes in January, with encouraging results with respect to
      reliability.  The next set of improved probe prototypes was received
      in late February and has been in reliability and performance testing over
      the past few weeks.  Preliminary results show improved reliability and the
      current research focus centers on the necessary processing performance
      required by the probe to affect the Sonocracking® process.  Subsequent
      improvements in the probe design and reliability are underway and are
      expected to continue throughout 2007.  In addition to these efforts, we
      continue to pursue and evaluate other "off the shelf" solutions that are
      available for ultrasound probes companies.





**General
      Description of Our Technology**





The
      key
      to our technology is the use of high power ultrasound to alter naturally
      occurring molecular structures in hydrocarbons, which are the predominant
      molecular components of crude oil. The altering of these structures includes
      breaking large hydrocarbon structures into smaller hydrocarbon structures,
      thereby reducing the relative
      density, and the viscosity of the crude oil. Carbon bonds that contain sulfur
      and nitrogen are also broken in the same manner, thereby allowing the separation
      through filtration of some of these compounds from the remaining hydrocarbon
      compounds in the crude oil.





**The
      Market for Our Technology**




***The
      Oil Producer Market***




SulphCo
      processing units are expected to provide economic benefits for oil producers
      utilizing these units. These benefits include:




·
            The
                ability to obtain higher prices for crude oil processed by SulphCo’sSonocrackerunits; and




·
            Improved
                economics of producing heavier, higher sulfur content crude oil
                reserves.




The
      price
      of crude oil is based primarily on its relative density and sulfur content.
      Because our technology is expected to reduce both the density and sulfur content
      in crude oil in a commercial setting, this will allow a producer who treats
      crude oil with our Sonocracking technology to obtain a higher price for its crude oil from distributors and
      refiners as a result of its lower density and sulfur content. In addition,
      crude
      oil reserves which are underutilized due to higher sulfur content may become
      more economically viable as a result of treating extracted crude oil with our
      processing units. Producers would operate these units to process crude oil
      in
      conjunction with oilfield collection points or crude storage tank
      facilities.




The
      world
      consumes approximately 85 million barrels of oil per day, according to the
      Energy Information Administration as of the end of 2006. Of this, approximately
      60 million barrels per day comes from medium and heavy crude oil.




***The
      Refinery Market***




SulphCo’s Sonocracking processing
      units are expected to provide economic benefits for oil refiners through the
      reduction of crude oil density and sulfur content. As each refinery is unique,
      potential benefits of Sonocracking
      technology to an
      individual refiner will vary, depending on such factors as plant configuration,
      the type of crude oil processed and product specifications.




6




These
      potential benefits include:




·
            The
                ability to produce a higher yield of higher value refinery end
                product;




·
            Lower
                raw material (i.e. crude oil) costs;
                and




·
            Improved
                operation of conventional desulfurization
                equipment.




*Upgrading
      of Crude Oil Results in Higher Yield of Higher Margin End
      Products*




When
      refined, a lighter crude oil usually produces a higher yield of higher margin
      refined products such as gasoline, diesel and jet fuel. Therefore, it is more
      expensive than heavy crude oil. In contrast, heavy crude oil produces more
      low
      margin by-products and heavy residual oils. Because our Sonocracker units
      are expected to upgrade the quality of crude oil by reducing crude oil density,
      a refinery which “pre-treats” its feed crude oil with our Sonocracking technology is expected to be able to produce a higher yield of higher value
      end
      products than would otherwise be the case without our Sonocracker units.




*Lower
      Raw Material Costs*




While
      all
      crude oils have differing characteristics, the relative cost of crude oil is
      influenced primarily by its relative density and sulfur content. Typically,
      there is a direct correlation between oil density and sulfur content, with
      more
      dense crude generally containing higher sulfur concentrations. Therefore, crude
      oil with lower density and lower sulfur concentrations is generally sold at
      a
      higher price than higher density crude oil with higher sulfur
      concentrations.




The
      cost
      of crude oil is generally considered to be the cost component with the greatest
      leverage on the profitability of an oil refinery. Therefore, a refinery will
      normally seek to purchase the most economical grade of crude oil which is
      suitable for its refinery operations. Typically, no two refineries will have
      identical requirements and suitability of a particular grade of crude oil will
      normally depend upon the refining capabilities of a particular refinery and
      the
      types of finished products it produces. For example, complex refineries, (i.e.
      refineries which have more extensive refining capabilities) can more readily
      process heavier grades of crude oil containing higher sulfur concentrations.
      Due
      to price differentials based upon the density and sulfur content of crude oil,
      a
      refinery (regardless of complexity) will normally seek to purchase the most
      economical heavy grade oil with the highest sulfur content that can be refined
      within it’s capabilities. In turn, as the market “spread” between light sweet
      crude oil and heavy sour crude oil increases, so too should a refinery’s profit
      margin if it has the capability of processing heavier sour crude
      oil.




Because
      our Sonocracker  units
      are
      expected to reduce crude oil density and sulfur content, a refinery which
“pre-treats” its crude oil with our units would be expected to be able to
      realize cost reductions and improved profit margins by utilizing lower cost,
      higher density, higher sulfur containing feed oil than would otherwise be
      possible without our Sonocracking
      technology .




7




*Improved
      Operation of Conventional Desulfurization Equipment*




The
      reduction of sulfur levels is an integral part of most refinery processes.
      This
      is most commonly accomplished through refinery equipment generally referred
      to
      in the industry as “hydrotreaters.” Hydrotreating is a refinery process in which
      hydrogen gas is mixed with the hydrocarbon stream and exposed to a catalyst
      under high temperature and pressure to effect the hydrotreating process. The
      greater the temperature and pressure, the faster the hydrotreating process
      will
      go. Typically, the higher boiling point fractions from lower grade, lower API
      gravity (heavier) crude requires higher temperature and pressure to complete
      the
      hydrotreating process.




By
      utilizing our Sonocracker units, it is expected that the improvement and
      upgrading of the crude oil stream should result in greater operating efficiency
      in conventional hydrotreating operations. This is expected to give some refiners
      more options with respect to crude oil feed choices, operating rates and other
      refining decisions.




Our Sonocracker units
      may
      also reduce the need for some refineries to revamp existing hydrotreaters.
      In
      some instances, refineries are faced with revamping their existing hydrotreaters
      to meet ever more stringent levels of sulfur reduction in petroleum products.
      Our Sonocracker units
      are
      expected to allow refiners to utilize higher sulfur crude oil more efficiently
      in their existing hydrotreaters, thereby avoiding the cost of revamping their
      existing equipment and the resulting costly downtime for the
      refinery.




For
      additional information regarding capital and operating costs related to our Sonocracker units,
      see “Competitive Business Conditions” below.




***Geographic
      Scope of Our Market***




We
      have a
      50% ownership interest in Fujairah Oil Technology LLC in the United Arab
      Emirates and have entered into Memorandums of Understanding (MOU), Letters
      of
      Intent (LOI) and testing agreements with several major oil companies including
      Total in France, Petrobras in Brazil, SK Corporation in South Korea, Hyundai
      Oilbank Co., Ltd in South Korea, and OMV in Austria. As the potential markets
      for our technology include countries with significant oil producing or refining
      activities, we expect to conduct business in other countries in the future.
      These activities may be conducted by us directly, or through partners, licensees
      or other third parties, in connection with the potential commercialization
      of
      our technologies.




**Development
      and Commercialization Activities**





We
      have
      been developing our Sonocracking technologies on an ongoing basis since the
      formation of GRD, Inc. in January 1999. Beginning
      in mid-2002, our development activities centered around re-designing, upgrading
      and testing of laboratory scale prototypes utilizing more powerful ultrasonic
      generators, and redesigning these prototypes to accommodate the more powerful
      generators. Substantially all of the development work to date has been conducted
      by SulphCo personnel. At this time, testing has been limited to samples produced
      by prototypes which have processed up to 100 gallons per minute of crude oil
      in
      a laboratory setting. We continue to conduct testing in-house and through
      relationships with third parties.




8




During
      2005, we completed construction of a 5,000 bbl/day Sonocracking unit and a
      15,000 bbl/day Sonocracking unit at our facilities in Sparks, Nevada, which
      culminated months of testing the internal components of the unit at our
      facility. These units are designed to be modular in order to facilitate both
      scalability and maintenance. The 15,000 bbl/day unit incorporates three reactor
      probe assemblies and associated equipment as used in the 5,000 bbl/day unit.
      Both the 5,000 and 15,000 bbl/day units are prototypes that could be used for
      demonstration to customers. These systems are automated using programmable
      logic
      controllers and come equipped with touch screen interfaces. We also designed
      a
      Sonocracking unit intended to process 30,000 bbl/day of material. This unit
      is
      based upon the design of the 5,000 and 15,000 bbl/day prototypes, whereby a
      15,000 bbl/day unit consists of three 5,000 bbl/day units, and a 30,000 bbl/day
      unit consists of six 5,000 bbl/day units. Seven 30,000 bbl/day units were
      manufactured by NTG in 2006, with six units installed in our Fujairah facility.





As
      stated
      above, in Fujairah,
      although progress has been delayed, we expect to commission the first
      SonocrackingTM unit in the first half of 2007. The commissioning of this unit
      will allow for further internal development and external demonstration of the
      technology as in parallel we move forward with commercial discussions regarding
      oil supply contracts and pipeline construction in 2007.





The
      following sets forth a detailed summary and timeline of the significant events
      and milestones that need to occur for the Fujairah facility to commence
      commercial testing:




·
            April,
                2007 - Completion of building and infrastructure. $800,000 due to
                The Vera
                Group upon completion.




·
            April,
                2007 - Completion of successful testing of the probe transducer assembly.




·
            April,
                2007 - Contracting for testing oil and trucking
                thereof.




·
            April/May,
                2007 - Begin testing of ultrasonic probes under commercial
                conditions.




·
            June,
                2007 - Completion of commissioning of test unit.




**Patents,
      Trademarks and Copyrights**





We
      own
      five United States patents, four of which relate to our basic Sonocracking
      technology. We
      believe United States Patent Nos. 6,402,939, 6,500,219, 6,827,844, and 6,897,628
      provide substantial protection for our basic Sonocracking technology covering
      the novel use of ultrasound to desulfurize crude oil. The first patent, patent
      6,402,939, was issued on June 11, 2002, and expires on September 28, 2020.
      This
      patent was assigned to us by Dr. Teh Fu Yen of the University of Southern
      California. It covers the oxidation of sulfur compounds in fossil fuels using
      ultrasound. The second patent, No. 6,500,219, was issued on December 31, 2002,
      and expires on March 19, 2021. This patent was based on additional work done
      by
      Dr. Gunnerman and focuses on the continuous process for the oxidation of sulfur
      compounds in fossil fuels using ultrasound. The third patent, No. 6,827,844,
      was
      issued on December 7, 2004, and expires on October 23, 2022. This patent relates
      to ultrasound-assisted desulfurization of fossil fuels in the presence of
      dialkyl ethers. The fourth patent, No. 6,897,628 was issued on May 24, 2005,
      and
      expires on May 16, 2023. This patent relates to high-power ultrasonic generators
      and their use in chemical reactions.





In
      addition to these four issued U.S. patents which cover our basic desulfurization
      process, we have one additional U.S. patent. Patent No. 6,652,992, covers a
      silver coating process on ultrasonic horns which makes the horns corrosion
      resistant. This patent was issued on November 25, 2003, and expires on December
      20, 2022. We have nine other patent applications pending which address specific
      aspects of our upgrading process. We also have one hundred two (102) foreign
      patent applications pending which relate to our U.S. patents.




9




We
      have
      applied to register the trademarks Sonocracking,TM Sonocracker,TM and Sonocracked
      CrudeTM with reference to our upgrading and desulfurization technology. The
      trademark SulphCoTM was registered in the U.S. on May 30, 2006. We also rely on
      copyright protection for the software utilized in our Sonocracking
      units.





**Competitive
      Business Conditions**




We
      are a
      new entrant in the market for development and sale of upgrading technology
      to
      the oil industry. SulphCo faces well established and well funded competition
      from a number of sources. Our competitors in this area include oil companies,
      oil refineries and manufacturers of conventional oil refinery equipment such
      as
      hydrotreaters. 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 new competing technologies or products which
      would render our technologies or products obsolete or
      non-competitive.





Our
      patented and proprietary Sonocracking process is based upon the novel use of
      high power ultrasonics to effect beneficial changes in the chemical composition
      of crude oil. These beneficial changes include an increase in the gravity of
      the
      crude oil and a corresponding increase in the amount of lighter, more valuable
      oils that can be recovered during refining processes. Other beneficial changes
      to the crude oil as a result of the Sonocracking technology include a reduction
      in the weight percentage of sulfur as well as a reduction in the parts per
      million of nitrogen.





We
      believe that our Sonocracking technology is unique in that it “pre-treats” crude
      oil by both reducing relative gravity of oil and reducing sulfur content prior
      to being fed into the traditional refinery operation. Other than our proprietary
      Sonocracking process, we are not aware of any process in commercial use which
      is
      capable of both reducing the density of crude oil and reducing sulfur content
      other than the conventional refinery process itself.





SulphCo’s
      Sonocracking units, which are intended to operate in conjunction with
      traditional refinery equipment, are expected to provide additional upgrading
      benefits at a substantially reduced capital and operating cost compared to
      conventional refinery operations. These units are also expected to provide
      a
      cost-effective method for oil producers to upgrade their crude oil prior to
      its
      sale to refiners.





We
      believe that our issued and pending patents and proprietary know-how will
      provide us with a significant competitive advantage over other companies seeking
      to commercialize new methods of increasing the gravity of crude oil or reducing
      its sulfur content which are more cost-effective or more efficient than the
      methods which are currently commercially available.




**Research
      and Development During the Last Three Years**




During
      the past three years, our business efforts were directed towards research and
      development of upgrading and desulfurization of crude oil, including research
      and development of our high power ultrasound technology. During this time,
      our
      research and development costs totaled approximately $7.1 million; $4 million
      in
      2006, $2.5 million in 2005, and $400,000 in 2004. In 2006, we expended
      approximately $21.5 million for the construction of the building and for
      equipment related to the test facility in Fujairah as discussed under
“ Business
      Development During the Past Year.” Expenditures of this magnitude will not be
      repeated in the future until commercialization can be proven to be profitable,
      whereupon similar expenditures will be capitalized as commercial equipment
      rather than expensed as research and development.




10




In
      2005,
      we completed the design and construction of our first 15,000 bbl/day
      Sonocracking unit, which has not been put into service.





We
      expect
      to continue to develop and test our technologies and prototypes and to explore
      the expansion of the range of petroleum products that can be upgraded with
      our
      technologies.





**Effects
      of Government Regulation; Regulatory Approvals**





***Government
      Regulation of Sulfur Levels in Petroleum Products***





The
      reduction of sulfur levels in petroleum products has become a major issue for
      oil refiners. Developed countries in recent years have increasingly mandated
      the
      use of low or ultra low sulfur petroleum products. As a result, refineries
      are
      faced with incurring extremely expensive capital improvements for their refinery
      processes, altering their end product mix, or in some instances ceasing the
      production of low sulfur products entirely. Our technology is expected to
      benefit from the impact of existing and proposed government mandates which
      regulate sulfur content, in both the U.S. and in developed countries abroad.




For
      example, refinery operations in the U.S. and many of the petroleum products
      they
      manufacture are subject to certain specific requirements of the federal Clean
      Air Act (“CAA”) and related state and local regulations and with the
      Environmental Protection Agency (“EPA”). The CAA may direct the EPA to require
      modifications in the formulation of the refined transportation fuel products
      in
      order to limit the emissions associated with their final use. In
      December 1999, the EPA promulgated national regulations limiting the amount
      of
      sulfur that is to be allowed in gasoline. The EPA has stated that such limits
      are necessary to protect new automobile emission control systems that may be
      inhibited by sulfur in the fuel. The regulations require the phase-in of
      gasoline sulfur standards beginning in 2004, with special extended phase-in
      provisions over the next few years for refineries meeting specified
      requirements. In addition, the EPA recently promulgated regulations that limit
      the sulfur content of highway diesel fuel beginning in 2006 to 15 parts per
      million. The former standard was 500 parts-per-million. The EPA has also
      proposed regulations intended to limit the sulfur content of diesel fuel used
      in
      non-road activities such as mining, construction, agriculture, railroad and
      marine.




***Regulatory
      Approvals***




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 Sonocracking technology, 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 commercialize our proprietary technology,
      which could in turn negatively impact our business.




Operation
      of our Sonocracking units is subject to a variety of federal, state and local
      health and environmental laws and regulations governing product specifications,
      the discharge of pollutants into the air and water, and the generation,
      treatment, storage, transportation and disposal of solid and hazardous waste
      and
      materials. Permits with varying terms of duration may be required for the
      operation of our Sonocracking units, and these permits may be subject to
      revocation, expiration, modification and renewal. Governmental authorities
      have
      the power to enforce compliance with these regulations and permits, and
      violators are subject to injunctions, civil fines and even criminal
      penalties.




Our
      activities to date have centered around the development and testing of our
      prototype units. These activities require the use or storage of materials which
      are, or in the future may be, classified as hazardous products or pollutants
      under federal and state laws governing the discharge or disposal of hazardous
      products or pollutants. We have undertaken a number of steps intended to ensure
      compliance with applicable federal and state environmental laws. Regulated
      materials used or generated by us are stored in above-ground segregated
      facilities and are disposed of through licensed petroleum product disposal
      companies. We also engage independent consultants from time to time to assist
      us
      in evaluating environmental risks. Our costs related to environmental compliance
      have been included as part of our general overhead, and we do not presently
      anticipate any material increase in expenditures relating to environmental
      compliance in the near future based upon our current level of operations. We
      do
      not currently maintain insurance to protect us against risks relating to
      violation of federal or state laws governing the environment.




11




Rules
      and
      regulations implementing federal, state and local laws relating to the
      environment will continue to affect our business, 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.




Installation
      and operation of our units at customer sites may subject us to increased risk.
      We intend to address these risks by imposing contractual responsibility on
      third
      party users for maintaining necessary permits and complying with applicable
      environmental laws 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.




**Employees**





As
      of
      March 1, 2007, we had 24 total employees, including 22 full-time
      employees.




**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.**




12




We
      are a
      development stage company with a limited operating history, and our principal
      technologies and products are not yet commercially proven. 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 and the construction of a test
      facility. 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 the 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 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
      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, 2006, we had an accumulated deficit of
      approximately $70.8 million, including approximately $10.1 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
      continue. If this occurs, we may be compelled to significantly curtail our
      business activities or suspend or cease our operations.




**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. Our existing capital resources will
      not 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. There is substantial
      doubt about our ability to continue as a going concern, as discussed in Note
      1
      to our financial statements. Our ability to continue as a going concern is
      dependent on our ability to implement our business plan and raise additional
      funds.




13




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




·
            Completion
                of the test facility


·
            Continued
                progress toward commercialization of our
                technologies;


·
            Rate
                of progress and timing of product commercialization activities and
                arrangements, including the implementation of our venture with Fujairah
                Oil Technology; 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, or respond to unanticipated requirements. If we are unable to secure
      such additional financing, we may 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 percentages,
      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:




·
            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 the Middle East and South America.





14




**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. 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.




**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.




15




**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
      success depends to a significant degree on the continued services of our senior
      management 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. 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.




**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. Also, 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.




16




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.




**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 related to environmental regulation. However, such future
      liabilities and costs could be material.




17




**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.





**We
      are the defendant in several lawsuits, in which an adverse judgment against
      us
      could result in liabilities which exceed our available assets.**





Details
      of the current status of outstanding litigation involving the Company are
      available herein, under “Item 3. Legal Proceedings.” An adverse judgment in any
      of these cases could result in material harm to our business or result in
      liabilities that 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.




**As
      of December 31, 2005 and in subsequent quarters through December 31, 2006 we
      have concluded that our disclosure controls and procedures regarding information
      required to be included in SEC reports were not effective due to material
      weaknesses, and we might find other material weaknesses in the future which
      may
      adversely affect our ability to provide timely and reliable financial
      information and satisfy our reporting obligations under federal securities
      laws.
      As a result, current and potential stockholders could lose confidence in our
      financial reporting, which would harm our business and the trading price of
      our
      stock.**




As
      of
      December 31, 2005 and in subsequent quarters through December 31, 2006, we
      detected material weaknesses in our disclosure controls and procedures regarding
      information required to be included in SEC reports. As a result of these
      weaknesses management has concluded that as of December 31, 2005, and in
      subsequent quarters through December 31, 2006, our disclosure controls and
      procedures were not effective as of such dates. In particular, management
      concluded that:





·
            There
                were deficiencies in the communications between previous management
                to the
                Board of Directors and the Audit
                Committee;




18




·
            We
                did not have adequate controls over the accounting, review and processing
                of transactions involving decisions to expense or capitalize certain
                items
                involving research and development, fixed assets and patent
                maintenance;





·
            We
                did not have adequate transaction controls over the accounting, review
                and
                processing of liability recognition at the end of accounting
                periods;




·
            We
                did not have adequate controls over the accounting, review and processing
                of transactions involving issuances of stock and options or cash
                commitments; and





·
            We
                lacked personnel with sufficient financial expertise andexperience
                to make appropriate judgments resulting in appropriate accounting
                and
                financial reporting.





The
      Company has attempted to address these issues and continues to address them
      as
      it makes transitions with new management. The Company has hired a new CEO and
      President and intends to hire additional personnel with the financial expertise
      it currently lacks, and we have taken and are taking steps to remediate the
      material weaknesses in our disclosure controls and procedures, including the
      adoption of written policies for the areas found to be deficient. However,
      we
      have not completed our remediation effort and we cannot assure you that we
      will
      completely remediate our material weaknesses. We might find other material
      weaknesses in the future. Our Chief Financial Officer resigned March 23, 2007,
      and we are actively seeking a replacement, but cannot be assured that we will
      easily find a qualified replacement or one who can smoothly assist us in
      strengthening our disclosure controls and procedures.  To the
      extent that any significant or material weaknesses exist in our disclosure
      controls and procedures, such weaknesses may adversely affect our ability to
      provide timely and reliable information necessary for the conduct of our
      business and satisfaction of our reporting obligations under federal securities
      laws, including the preparation of interim and annual financial statements
      in
      accordance with generally accepted accounting principles and SEC rules. As
      a
      result, current and potential stockholders could lose confidence in our
      reporting, which would harm our business and the trading price of our
      stock.





**ITEM
      1B.   UNRESOLVED STAFF COMMENTS**




None.




**ITEM
      2.PROPERTIES**




Our
      executive offices and facilities are located at 850 Spice Islands Drive, Sparks,
      Nevada 89431 in a leased facility consisting of approximately 92,125 square
      feet. The lease for this space will expire at the end of May 2007. We are
      looking at other options prior to the end of the lease.




We
      currently have no investment policies in place regarding real estate
      interests.




19




**ITEM
      3.LEGAL
      PROCEEDINGS**




We
      are
      not party to, and none of our property is subject to any pending or threatened
      legal, governmental, administrative or judicial proceedings that may have a
      material adverse effect upon our financial condition or operations, except
      as
      follows:




On
      January 5, 2004, we filed a lawsuit in the Second Judicial District Court of
      the
      State of Nevada, in and for the County of Washoe, Case No. CV04 00013, Dept.
      No.
      9, against Alexander H. Walker, Jr., the Company’s former general counsel and
      director, and Nevada Agency & Trust Company, the Company’s former transfer
      agent. The lawsuit alleges breaches of fiduciary duty, contract violations,
      conversion, and other related claims, in connection with the sale of shares
      of
      the Company’s common stock to Coldwater Capital, LLC and Mark Neuhaus in 2001.
      The Company claims it did not receive approximately $737,000 of the purchase
      price for the shares sold. The Defendants have answered the Complaint, generally
      denying the allegations and raising affirmative defenses, and cross-complaining
      against Coldwater Capital, LLC and Mark Neuhaus for the payment of the funds
      owed to the Company. The Company subsequently obtained a pre-judgment writ
      of
      attachment requiring Mr. Walker to deposit the proceeds of the sale of the
      Company stock he owned with the court, pending trial. Discovery has been
      completed and trial in this matter is presently scheduled for April 23,
      2007.




In *Clean
      Fuels Technology v. Rudolf W. Gunnerman, Peter Gunnerman, RWG, Inc. and SulphCo,
      Inc.* ,
      the
      Company, Rudolf Gunnerman, Peter Gunnerman, and RWG, Inc., were named as
      defendants in a legal action commenced in Reno, Nevada. The Plaintiff alleged
      claims relating to “sulfur removal technology” originally developed by Professor
      Teh Fu Yen and Dr. Gunnerman with financial assistance provided by Dr.
      Gunnerman, and subsequently assigned to the Company. On December 18, 2006,
      following a trial, the jury found in the Company’s favor on both claims asserted
      against the Company by the Plaintiff. The Plaintiff has since requested
      equitable relief, including the imposition of a constructive trust, from the
      Judge who presided over the trial. The Company views the request for any
      equitable relief as against the Company as without merit. Oral argument on
      the
      request for equitable relief took place on February 22, 2007, and the Company
      is
      awaiting a decision.




In *Talisman
      Capital Talon Fund, Ltd. v. Rudolf Gunnerman and SulphCo, Inc.* ,
      the
      Company and Rudolf Gunnerman were named as Defendants in a legal action
      commenced in federal court in Reno, Nevada. The Plaintiff alleged claims
      relating to the Company’s rights to develop its “sulfur removal technology. The
      Company regards these claims as without merit. Discovery in this case formally
      concluded on May 24, 2006. Motions to compel additional discovery and summary
      judgment motions by both parties are still pending, and no trial date has yet
      been set.




In *The
      Matter of the Arbitration between Stan L. McLelland v. SulphCo,
      Inc.* ,
      Mr.
      McLelland, who was the Company's president from August 13, 2001, until he
      resigned on September 12, 2001, is seeking to exercise options to purchase
      two
      million (2,000,000) shares of the Company’s common stock at 50 cents per share.
      It is the Company’s position that those options had not vested prior to Mr.
      McLelland's resignation. Mr. McLelland also seeks salary for the six months
      following his resignation and $20,000 of alleged unpaid commuting expenses,
      as
      well as attorneys' fees and costs. Discovery is closed, and the arbitrator
      recently denied the parties’ cross-motions for summary judgment on the options
      issue. The arbitration hearing has been set for April 19 and 20, 2007 in Reno,
      Nevada.




On
      October 20, 2006, Mark Neuhaus filed a lawsuit against the Company and Rudolph
      W. Gunnerman, *Mark
      Neuhaus v. SulphCo, Inc., Rudolph W. Gunnerman* ,
      in the
      Second Judicial District Court, in and for the County of Washoe, Case No. CV06
      02502, Dept. No. 1. The lawsuit is based on a purported Non-Qualified Stock
      Option Agreement and related Consulting Agreement between Mark Neuhaus and
      the
      Company dated March of 2002. Mark Neuhaus claims that according to the terms
      of
      the Non-Qualified Stock Option Agreement,




20
 
  he
        was
        granted an option to purchase three million (3,000,000) shares of the Company’s
        common stock at the exercise price per share of $0.01. On or about February
        of
        2006, Mark Neuhaus attempted to exercise the option allegedly provided to
        him
        under the Non-Qualified Stock Option Agreement. At that time, the Company
        rejected Mr. Neuhaus’s attempt to exercise the option. Thereafter, Mr. Neuhaus
        filed this lawsuit seeking to enforce the Non-qualified Stock Option Agreement.
        In his suit, Mr. Neuhaus includes claims for specific performance, breach
        of
        contract, contractual breach of the covenant of good faith and fair dealing,
        and
        tortious breach of the covenant of good faith and fair dealing. He requests
        the
        Court to compel the Company to issue the shares or alternatively to award
        him
        damages equal to the fair market value of the three million (3,000,000) shares
        of stock when he purported to exercise the options, minus the exercise price.
        On
        December 7, 2006, the Company moved to dismiss the lawsuit. On January 4,
        2007,
        the Court issued an Order denying the motion on the ground that there were
        factual issues to be resolved which prevented dismissal at that time. The
        Company is now in the process of preparing an Answer to the Complaint. The
        Company intends to vigorously defend the claims made by Mr. Neuhaus, which
        it
        believes are without merit. Trial in this matter is scheduled for September
        24,
        2007.




On
      January 17, 2007, Rudolf W. Gunnerman filed a lawsuit against four of the
      Company’s independent directors, Richard L. Masica, Robert Van Maasdijk, Edward
      E. Urquhart, and Lawrence G. Schafran. This case is known as *Rudolph
      W. Gunnerman v. Robert Van Maasdijk, Richard L. Masica, Larry G. Schafran,
      Edward E. Urquhart* ,
      and was
      filed in the Second Judicial District Court of the State of Nevada, in and
      for
      the County of Washoe, Case No Case No. CV07 00103, Dept. No. B6. Gunnerman’s
      Complaint seeks declaratory and injunctive relief with respect to the amendments
      to the Company’s bylaws made by the Company’s Board of Directors on Wednesday,
      January 17, 2007. Gunnerman alleges that the independent directors’ amendment to
      the Company’s bylaws which provides that the Board of Directors shall have
      exclusive authority to amend the bylaws was invalid and the bylaw amendment
      should be declared invalid. The independent directors have counterclaimed for
      a
      declaration that the amendment was valid and in the Company’s best interest.
      Discovery in this case has not begun and no trial date has been
      set.




On
      January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
      against certain current and former officers and directors or the Company in
      the
      Second Judicial District Court of the State of Nevada, in and for the County
      of
      Washoe. The case is known as *Thomas
      Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman,
      Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles
      Van
      Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence
      G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph
      Henkel* ,
      Case
      No. CV07 00137, Dept. No. B6. The complaint alleges, among other things, that
      the defendants breached their fiduciary duty to the Company by failing to act
      in
      good faith and diligence in the administration of the affairs of the Company
      and
      in the use and preservation of its property and assets, including the Company’s
      credibility and reputation. The Company and the Board intend to file a Motion
      for Dismissal with the Court, based upon the Plaintiff’s failure to make a
      demand upon the Board.




On
      June
      26, 2006, the Company filed an action, *SulphCo,
      Inc. v. Cullen* ,
      in the
      Second Judicial District Court of the State of Nevada, in and for the County
      of
      Washoe, Case No. CV06-01490, against Mark Cullen arising out of Mr. Cullen’s
      alleged breach of a secrecy agreement that he had executed when employed by
      GRD,
      Inc., whose claims have accrued to the Company. The lawsuit seeks damages,
      a
      constructive trust, and an order requiring Mr. Cullen to assign to the Company
      certain intellectual property in the form of patent applications (as well as
      a
      now-issued patent) that he filed following his departure from the Company.
      On
      October 23, 2006, Mr. Cullen moved to dismiss the Company’s complaint; the
      motion was denied. On February 26, 2007, Mr. Cullen filed an amended answer
      to
      the Company’s complaint. That Answer included counterclaims for breach of
      contract, unfair competition, interference with contractual relations, and
      interference with prospective economic advantage. The Company views Mr. Cullen’s
      counterclaims as without merit and has moved to dismiss them. Discovery in
      this
      case has not yet begun, and no trial date has been set.




21




**ITEM
      4.SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.




22




**PART
      II**




**ITEM
      5.MARKET FOR** **REGISTRANT’S
      COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES**




**Market
      Information**





On
      October 7, 2005, our common stock commenced trading on the American Stock
      Exchange under the symbol “SUF.” Prior to October 7, 2005, our common stock had
      been quoted on the NASD, Inc. OTC Bulletin Board
      under the symbol “SLPH.”




The
      following table sets forth the high and low sale prices for our common stock
      for
      each of the quarterly periods indicated.


High
            
            Low*Fiscal
                2006*First
                Quarter
            
            
            19.70
            
            
            6.02Second
                Quarter
            
            
            12.49
            
            
            6.90Third
                Quarter
            
            
            7.39
            
            
            4.15Fourth
                Quarter
            
            
            6.84
            
            
            4.15*Fiscal
                2005*First
                Quarter
            
            
            5.45
            
            
            2.80Second
                Quarter
            
            
            6.33
            
            
            2.96Third
                Quarter
            
            
            5.35
            
            
            2.68Fourth
                Quarter
            
            
            11.68
            
            
            3.25




There
      were 257 holders of record of our common stock on February 28, 2007. This number
      does not include stockholders whose shares were held in a "nominee" or "street"
      name.





**Dividends**





We
      currently have no contractual restrictions that limit our ability to pay
      dividends on common equity. We currently expect that we will retain future
      earnings, if any, to finance the growth and development of our business and
      we
      will dividend to our stockholders amounts in excess of that required for future
      growth and development.




**Table
      of Securities Authorized for Issuance under Equity Compensation Plans at the
      End
      of 2006**




The
      following table presents information regarding our securities which are
      authorized for issuance under all of our compensation plans as of December
      31,
      2006.




23


**Plan
                Category**
            
            **Number
                of Securities**
              **to
                be Issued upon**
              **Exercise
                of**
              **Outstanding
                Options,**
              **Warrants
                and rights**
            
            **Weighted-average**
              **Exercise
                Price of**
              **Outstanding
                Options,**
              **Warrants
                and Rights******
            
            **Number
                of Securities**
              **Remaining
                Available for**
              **Future
                Issuance under**
              **Equity
                Compensation**
              **Plans
                (Excluding Securities**
              **Reflected
                at Left)******Equity
                Compensation Plans Approved by Security Holders
            
            1,127,000
            
            9.03
            
            873,000Equity
                Compensation Plans Not Approved by Security Holders
            
            152,500
            
            3.96
            
            (1)





(1) Future
      grants are within the discretion of our board of directors and, therefore,
      cannot be determined at this time.




Under
      compensation plans approved by our security holders, the 1,127,000 securities
      relate to outstanding options under the stock option plan approved by the
      shareholders at our annual meeting in June 2006. All of these options had been
      granted prior to approval of the plan and incorporated therein. The options
      include 1,000,000 to Dr. Rudolf Gunnerman which were subsequently terminated
      at
      the termination of his employment with us in January 2007. The balance consists
      of 125,000 to Robert van Maasdijk as reflected below in “Item 11. Executive
      Compensation” and 2,000 options to Tom Nardi, a contractor.




Under
      compensation plans not approved by our security holders, the 152,500 securities
      consist of the following:




Warrants
      for 100,000 shares of our common stock were issued to Rubenstein Public
      Relations, Inc. in conjunction with a consulting agreement for stockholder
      relations executed as of November 11, 2004, which provided for cash compensation
      and warrants. One warrant, issued under the agreement, granted the right to
      purchase 50,000 shares of unregistered common stock at an exercise price of
      $1.93, the closing price of trading common stock at the date of the execution
      of
      the agreement. Provided the agreement had not been terminated as of May 2005
      (which it had not), it provided for an issuance of an additional warrant
      granting the right to purchase 50,000 shares of unregistered common stock
      at an exercise price equal to the closing price of trading common stock on
      May
      11, 2005, which was $3.85. Each of the warrants will expire in November
      2009.




Options
      to acquire
      52,500 shares of our common stock were issued to Mustang International, L.P.
      in
      conjunction with a contract executed March 29, 2006 for program management,
      engineering, procurement, construction management, and other services. The
      option is exercisable at $6.00 per share and expires on April 1,
      2010.





24





**ITEM
      6.** **SELECTED
      FINANCIAL DATA**




**Comparative
      Financial Data**




The
      table
      below sets forth a comparison of the financial data specified for the latest
      five years. The figures for the 2006 loss include approximately $21.5 million
      ($30 per share) for the construction of equipment and building related to the
      project in Fujairah as discussed under "Business Development During the Past
      Year."




2006
            
            2005
            
            2004
            
            2003
            
            2002Operating
                revenue
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            42,967Loss
                from continuing operations
            
            $
            39,122,412
            
            $
            (9,428,370
            )
            $
            (4,146,453
            )
            $
            (3,170,959
            )
            $
            (6,573,627
            )Loss
                from continuing operations per share
            
            $
            .55
            
            $
            (0.17
            )
            $
            (0.08
            )
            $
            (0.07
            )
            $
            (0.15
            )Total
                assets at end of year
            
            $
            7,294,460
            
            $
            8,045,236
            
            $
            11,053,360
            
            $
            1,433,904
            
            $
            831,833Long-term
                obligations at end of year
            
            
            -0-
            
            $
            7,000,000
            
            $
            7,000,000
            
            
            -0-
            
            $
            13,636Cash
                dividends declared per share
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-




**ITEM
      7.MANAGEMENT’S
      DISCUSSION AND ANALYSIS O**   **F
      FINANCIAL CONDITION AND RESULTS OF OPERATION**





**Liquidity
      and Capital Resources**





As
      of
      March 30, 2007, we had approximately $ 9.5 million in available cash reserves
      which includes approximately $7.9 million received from the March 2007 exercise
      of warrants described below. As we have a $5 million note payable to Dr. Rudolf
      Gunnerman due by December 31, 2007, described below, we face uncertainty
      regarding our ability to operate as a going concern beyond that date. Additional
      funding will be necessary. Until that note is due, we anticipate that our
      existing capital resources will be sufficient to fund our cash requirements
      from
      cash presently on hand, based upon our current levels of expenditures and
      anticipated needs during this period. We have historically been able to raise
      capital to continue with our research and development and it is likely that
      we
      will need to raise additional funds before we can generate enough revenue to
      become profitable.





25
 
  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 were exercisable, in whole or in
        part,
        at a fixed price equal to $6.805 per share for a period of 18 months following
        their issuance.





On
      March
      12, 2007, as an incentive for the March 2006 private placement warrant holders
      to exercise half of their warrants for 2,000,000 shares of our common stock,
      we
      agreed to reduce the exercise price of all such warrants to the current trading
      value based on the March 9, 2007 closing price of $2.68 per share of our common
      stock. We also agreed to issue additional warrants with rights to acquire the
      same number of shares as were acquired by the exercise of those warrants in
      March 2007, also at $2.68 per share, to expire in three years. Additional
      warrants on the same terms are also to be issued to investors who exercise
      any
      of their remaining 2006 warrants in 2007. The exercises of these warrants in
      March 2007 generated $5,360,000.





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. Additional amounts of approximately $3.8 million
      in
      2005 and approximately $7.8 million in 2006 were generated from the exercises
      of
      rights and warrants related to the June 2004 private placements





As
      an
      incentive for the warrant holders of the 2004 private placement to exercise
      their remaining warrants in March 2007, we issued additional warrants with
      rights to acquire the same number of shares as were acquired by the exercise
      of
      warrants in March 2007. These additional warrants have an exercise price of
      $2.68 per share and expire in three years. Most of the warrant holders exercised
      their remaining warrants whereby we generated approximately $2.5
      million.





As
      of
      December 31, 2006, we were obligated to pay approximately $ 958,000
      in the aggregate to investors in the 2004 private placements as late
      registration fees and interest due to the fact that the registration statement
      covering the private placement shares was not declared effective by the SEC
      by
      the time required by the investor agreements. We plan to work with our investors
      to issue common stock in lieu of these obligations; however, as of the date
      of
      this report no formal agreements have been entered into with any investors
      regarding such issuances.





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. In 2006, $2
      million of principal was repaid on this loan, and the entire principal amount
      is
      due and payable December 30, 2007.





Because
      of the significant amount of legal proceedings we have experienced, especially
      in the last year, we still owed
      approximately $2 million for attorney fees and related legal costs at the end
      of
      2006. **** On
      March
      29, 2007, we successfully negotiated a reduction in these billings by
      approximately $500,000. ****





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.





26





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.





Other possible
      sources of additional capital include the exercise of the remaining warrants
      issued to investors in the March 2006 private placement and of the additional
      warrants issued in March 2007, and funding through future 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 when needed,
      we
      may not be able to successfully commercialize our technologies, take advantage
      of future opportunities or respond to unanticipated requirements. If we are
      unable to secure such additional financing when needed, we will have to curtail
      or suspend all or a portion of our business activities. Further, if we issue
      equity securities, our shareholders may experience severe dilution of their
      ownership percentage.





**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.





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 ultimately 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. There
      was
      no activity in 2006 with regard to the pilot plant.




**Research
      and Development Expenses**




During
      2006, we incurred approximately $4 million related to research and development
      of our SonocrackingTM technology. This compares to approximately $2.5 million and
      $407,000 during 2005 and 2004, respectively. In 2006, approximately $21.5
      million was spent on building construction and construction, purchase, and
      installation of equipment in Fujairah, UAE. Also in 2006, approximately $1.1
      million in construction of a testing unit to be utilized in Austria was
      expensed.




During
      2006, approximately $331,000 represents amounts paid to our engineers and other
      research and development employees as wages and related benefits and for design
      and testing of our SonocrackerTM units, and approximately $2.1 million was
      incurred for the procurement of control panels, probes, centrifuges, and
      generators related to the ongoing research and development of our units. The
      remainder of our research and development costs are recurring monthly expenses
      related to the maintenance of our warehouse facilities.





We
      expect
      our research and development expenses to decrease significantly upon successful
      transition into generation of sustained revenue. Thereafter, research and
      development will continue as needed to enhance our technology.





**Selling,
      General and Administrative Expenses**




During
      2006, we incurred approximately $13.5 million in selling, general and
      administrative expenses. This compares to approximately $5.7 million and $3.5
      million during 2005 and 2004, respectively.





27




Legal
      fees were approximately $6.1 million during 2006, reflecting substantial
      increases over 2005 and 2004 amounts which were approximately $2.1 million
      and
      $135,000, respectively. These increases were primarily due to litigation fees
      relating to the lawsuits against us. We expect to incur similar legal fees
      in
      2007, due to the on-going litigation described above in “Item 3. Legal
      Proceedings.”





Consulting
      fees, payroll and related expenses were approximately $3.7 million in 2006
      which
      compares to approximately $2.5 million and $1.7 during 2005 and 2004,
      respectively. Salaries include grants of 50,000 shares to new officers, $636,000
      in the first quarter of 2006 and $204,000 in the first quarter of 2005.
      Excluding the stock grants and options, our consulting fees, payroll and related
      expenses increased from the prior year 42% in 2006 and 48% in 2005. These
      increases reflect the quality of our work force.





Travel
      and travel related expenses were approximately $1 million in 2006 which compares
      to approximately $552,000 and $114,000 during 2005 and 2004, respectively.
      The
      percentage increase from the prior year was 81% in 2006 and 384% in 2005. These
      increases were 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, UAE.





Director
      fees were approximately $1.6 million in 2006 which compares to approximately
      $1.1 million and $21,000 during 2005 and 2004, respectively. Director fees
      in
      these periods represent grants to each new director of 50,000 shares each and
      a
      grant of options to Robert van Maasdijk, a director, in the second quarter
      of
      2006. Specifically, the following grants were issued to the following
      directors:




In 2006:
            An
                option valued at $687,500 to acquire 125,000
                shares of common stock was granted to director
                Robert van Maasdijk.
              150,000
                shares of common stock valued at $960,000 were granted to directors
                EdUrquhart,
                Mike Heffner, and Larry Schafran.In 2005:
            200,000
                shares of common stock valued at
                $$927,000 were granted to directors Hannes
                Farnleitner, Robert van Maasdijk, Raad Alkadiri, Christoph
                Henkel.In 2004:
            50,000
                shares of common stock valued at $21,000
                were granted to director, Richard
                Masica.




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 $466,000 in 2006, which compares to approximately
      $395,000 and $303,000 during 2005 and 2004, respectively. These increases result
      from a combination of incurring late registration fees beginning near the end
      of
      2004 which accrue interest (see “Late Registration” below) and net interest rate
      increases in our variable rate debt to Dr. Rudolf Gunnerman. During the second
      quarter of 2006, we paid off a $500,000 note to Dr. Gunnerman bearing interest
      of 8% and paid $2,000,000 against the $7,000,000 note to Dr. Gunnerman which
      has
      a variable interest rate (5.34625% during the third quarter of
      2006).





28
 
  **Late
        Registration**




In
      accordance with the terms of our 2004 private placement, we accrued late fees
      of
      approximately $760,000 during the first two quarters 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. Interest
      of approximately $90,000 ($30,000 per quarter) 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**




During
      the years 2006, 2005, and 2004, exclusive of the Fujairah test facility, we
      expended approximately $3.9 million, $2.5 million and $48,808, respectively,
      for
      equipment and to maintain exclusivity for the sale and/or licensing of our
      SonocrackingTM technology in the United States and abroad. Our depreciation
      expense related to current and previously capitalized equipment for 2006, 2005,
      and 2004 were approximately $84,927, $198,055, and $104,242, respectively.
      Our
      amortization expense related to patent and trademark rights, for 2006, 2005,
      and
      2004 were approximately $0, $ and $0 respectively. 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 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 other
      years.




**Net
      Loss**




We
      incurred net losses of approximately $39.1 million in 2006, $9.4 million in
      2005, and $4.1 million in 2004. The substantial increase in net loss in 2006
      primarily reflects the construction of the Fujairah test facility, which has
      been expensed as research and development in 2006, as indicated above under
      the
      heading “Research and Development.”





As
      of
      December 31, 2006, we had an accumulated deficit of approximately $70.8 million,
      which includes approximately $10.1 million of stock-based compensation expense,
      and we incurred a net loss of approximately $39 million for the 12 month period
      ending December 31, 2006. These losses are principally associated with the
      research and development of our Sonocracking technology, including the
      construction of the test facility in Fujairah, as more thoroughly explained
      below, the construction of the pilot plant in South Korea, development of
      prototypes, and related marketing activity. Although we expect to continue
      to
      incur expenses in the future for development, commercialization and sales and
      marketing activities related to the commercialization of our technologies,
      such
      expenditures will not include major construction projects until
      commercialization can be proven to be profitable.





Operation
      and maintenance of the Fujairah test facility is the responsibility of Fujairah
      Oil Technology LLC (“FOT”) and SulphCo is responsible for contributing its
      Sonocracking units. Our present timetable calls for production to begin by
      the
      end of 2007. Until FOT generates revenues, additional expenses for
      completion of the Sonocracking ® test facility are estimated initially at
      $200,000 per month and will be paid by the Company. The Memorandum of
      Association of Fujairah Oil Technology, which defines certain rights of the
      joint venture




29
 
  partners,
        calls for profits and losses to be shared 50/50, with profits being distributed
        to the partners, subject to a 10% reserve for legal expenses which may be
        waived
        by the partners. SulphCo’s 50% share of distributions made by the joint venture
        to SulphCo will also be subject to other costs and expenses incurred directly
        by
        SulphCo from time to time, including commissions payable directly by SulphCo
        to
        third parties, presently estimated at up to 10% of SulphCo’s net joint venture
        profits. We expect that following the successful commissioning of the first
        Sonocracking unit and probe test, funding of direct expenditures required
        to
        start up the 180,000bbl/day facility, such as tank storage and pipelines,
        will
        be available from financing through the joint venture.





The
      present timetable represents management’s best estimate based upon progress to
      date and presently known circumstances, and all parties are fully committed
      to a
      timely rollout of the Fujairah facility. Due to the inherent complexities
      involved in the installation of a facility of this magnitude, however, there
      may
      be unforeseen 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 we cannot assure you that our cost estimates will
      not
      increase.




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 testing of Sonocracker units.




**Off-Balance
      Sheet Arrangements**





We
      issued
      warrants as part of the private placements of our securities in June 2004 and
      March 2006. As of December 31, 2006, the warrants outstanding from those
      placements were as follows:





Exercise
            
            Option
            
            Total
                ExercisePrice
                / Share
            
            Shares
            
            AmountFrom
                June 2004 placement
            
            $
            1.125
            
            
            1,182,224
            
            $
            1,330,002From
                June 2004 placement
            
            $
            1.5625
            
            
            795,256
            
            
            1,242,588From
                March 2006 placement
            
            $
            6.80*
            
            
            4,000,000
            
            
            27,200,000





*The
      exercise price for the March 2006 warrants was reduced to $2.68 per share under
      an amended agreement of March 12, 2007. See the narrative that
      follows.





On
      March
      12, 2007, as described above under “Liquidity and Capital Resources,” we lowered
      the exercise price to $2.68 per share for the warrants issued in the March
      2006
      placement and issued additional warrants as an incentive for warrant holders
      to
      exercise their warrants. This caused the issuance of approximately an additional
      4 million shares of our common stock and a like number of additional warrants
      in
      exchange for approximately $8 million. Up to 2 million additional shares of
      common stock may be issued in 2007 under this agreement for $2.68 per share,
      which would also require the issuance of additional warrants with rights to
      purchase 2 million shares. After March 12, 2007, if all remaining warrant
      holders under this agreement were to exercise all their warrants, we would
      issue
      approximately an additional 6 million shares in exchange for approximately
      $16
      million.





30





**Contractual
      Obligations**





Payments
                due by periodTotal
            
            Less
                than 1year
            
            1
                -
                3years
            
            3
                -
                5years
            
            More
                than5
                yearsRelated
                party loan
            
            $
            5,000,000
            
            $
            5,000,000
            
            
            -
            
            
            -
            
            
            -Operating
                lease obligations
            
            
            74.393
            
            
            74,393
            
            
            -
            
            
            -
            
            
            -Purchase
                obligations
            
            
            1,405,408
            
            
            1,405,408
            
            
            -
            
            
            -
            
            
            -Total
            
            
            6,479,801
            
            
            6,479,801
            
            
            -
            
            
            -
            
            
            -




**ITEM
      7A.QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





We
      consider our exposure to market risks to be immaterial. Although there is market
      risk involving changes in the interest rates which apply to our note payable
      and
      our cash investments, such risk is minor. Our risk related to foreign currency
      fluctuations is not material at this time, as any accounts payable we have
      in
      foreign denominations are not in themselves material.




Our
      note
      payable is for $5,000,000 and is due December 30, 2007. Its rate is keyed to
      a
      LIBOR rate and adjusted quarterly. Were this rate to increase dramatically,
      its
      impact would terminate at the end of the year when the note is due. The current
      rate is 5.82563% and will be adjusted again based on LIBOR rates at March 29,
      June 28, and September 27 of this year. Even in the event that the rate
      increased 1% per quarter, the impact would be a $75,000 additional outlay for
      interest.




As
      we
      anticipate needing to use the cash we held at year end within a short period,
      we
      have it invested for the most part in money market accounts. The amount of
      fluctuation in interest rates will not expose us to any significant risk due
      to
      market fluctuation as the interest on our note payable would likely decrease
      by
      a greater amount.




**ITEM
      8.FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





Our
      audited financial statements as of December 31, 2006, and December 31, 2005,
      and
      for the years 2006, 2005, and 2004 are included at the end of this report
      following the signature page.




**ITEM
      9.CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





Not
      applicable.





31





**ITEM** **9A.CONTROLS
      AND PROCEDURES**




We strive
      to 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 and that such information is
      accumulated and communicated to management to allow timely decisions on required
      disclosure.





After
      a
      thorough reexamination of the events that led to a restatement of the Company’s
      quarterly financial statements for the first and second quarters of 2006, the
      Chief Executive Officer and Interim Chief Financial Officer believe that the
      Company’s disclosure controls and procedures were not effective during 2006.
      There were deficiencies in the communications between management to the board
      of
      directors and the Audit Committee. The Company also lacked personnel with
      sufficient financial expertise and experience to
      make
      appropriate judgments resulting appropriate accounting and financial reporting. The
      Company has attempted to address these issues as it makes transitions to new
      management. The Company has hired a new CEO and President and intends to hire
      additional personnel with the financial expertise it currently
      lacks.


Management's
        Annual Report on Internal Control Over Financial Reporting
  Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
        Act of 1934, as amended). Management has concluded that, as of December 31,
        2006, in light of the deficiencies uncovered by the new management team as
        stated in this Section above, the Company’s internal control over financial
        reporting was not effective to provide reasonable assurance regarding the
        reliability of financial reporting and the preparation of financial statements
        for external purposes in accordance with generally accepted accounting
        principles.
  The
        Company’s independent registered public accounting firm, Marc Lumer &
Company, has issued an audit report on the Company’s assessment of the
        effectiveness of internal control over financial reporting, which is included
        herein.
  There
        were no changes in the Company’s internal control over financial reporting that
        occurred during the Company’s most recent fiscal quarter that have materially
        affected, or are reasonably likely to materially affect, the Company’s internal
        control over financial reporting.




**ITEM
      9B.OTHER
      INFORMATION**





Not
      applicable.




32




**PART
      III**





**ITEM
      10.DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE**




**Directors
      and Executive Officers**





As
      of
      March 1, 2007, our directors and executive officers, their ages, positions
      with
      SulphCo, and the dates of their initial election or appointment as director
      or
      executive officer are as follows:





**Name**
            
            **Age**
            
            **Position
                With SulphCo**
            
            **Served
                From**
            
            **Expiration**Dr.
                Larry Ryan
            
            35
            
            Chief
                Executive Officer and Director
            
            January
                2007
              February
                2007
            
            N/ABrian
                Savino
            
            52
            
            President
            
            March
                2007Michael
                A. Abend
            
            37
            
            Interim
                Chief Financial Officer
            
            March
                2007Richard
                L. Masica
            
            70
            
            Director
            
            November
                2004Robert
                Henri Charles van Maasdijk
            
            62
            
            Director
            
            April
                2005Dr.
                Hannes Farnleitner
            
            67
            
            Director
            
            November
                2005Edward
                E. Urquhart
            
            39
            
            Director
            
            August
                2006Lawrence
                G. Schafran
            
            68
            
            Director
            
            December
                2006Michael
                T. Heffner (1)
            
            60
            
            Director
            
            January
                2007


____________


1.
            OnJanuary
                24, 2007,
                Michael T. Heffner accepted the offer from the Company’s Board of
                Directors to serve as a member of the Board of Directors.****He
                previously served as aDirector
                from February 6, 2006 until his term expired on June 19,
                2006.





**Business
      Experience of Directors and Executive Officers**





*Dr.
      Larry Ryan,* Chief
      Executive Officer beginning January 2007 and a Director beginning February
      2007,
      was a senior executive leader at General Electric Company, GE Advanced Materials
      Division from 1998 to January, 2007 .
      His
      last role within GE was in the capacity of Business Manager, Elastomers, and
      RTV
      AMR. Dr.
      Ryan
      has a Ph.D. in Chemical Engineering from the University of Delaware, a Six-Sigma
      Blackbelt certification, and a long history of working with chemical
      process-dependent technologies. He is a graduate of the esteemed General
      Electric Edison Engineering Development Program, a technical leadership program
      focused on process engineering projects and product quality improvements. Dr.
      Ryan has a proven track record of delivering results in the area of new
      process-technology development, new development, and business leadership.




*Brian
      Savino,* President beginning March 2007, was Executive Vice President of Pierson Capital
      LLC, where he was accountable for all oil energy projects. From 2002 to 2004,
      Mr. Savino served as Vice President of Energy for RWE Americas. He has also
      held
      managerial positions for William Energy, Texaco Oil Trading Company and Avant
      Petroleum. Early in his career Mr. Savino served as Senior Chartering Contractor
      for Mobil Oil Corporation where he chartered various types of vessels for
      petroleum products and crude oil. Mr. Savino earned a B.S. from the US Merchant
      Marine Academy, a master's degree in finance from Long Island University and
      a
      master's degree of transportation from New York University. He also has an
      advanced training CSE degree from the Advanced Market Profile
      School.




33




*Michael
      A. Abend* was
      appointed our Interim Chief Financial Officer in March 2007, prior to which
      he
      served as our Controller. Mr. Abend received his bachelor's degree in Business
      Administration with an accounting major and computer information systems minor
      from the University of Nevada, Reno in 1994. Mr. Abend was employed from 1997
      to
      2000 as the property accountant for Classic Residence by Hyatt. He was then
      employed by CLP Resources, Inc. from 2000 to 2003 as a financial analyst. Mr.
      Abend joined us in June 2003 as our Assistant Controller and was appointed
      as
      our Treasurer and Interim Controller in August 2004.




*Richard
      L. Masica* ,
      a
      Director since November 2004, served as the President of Texaco Chemical, Inc.
      from 1994 to 1997. During his 39-year career at Texaco (now ChevronTexaco
      Corporation), Mr. Masica also held other positions, including the position
      of
      Vice-President-Business Management of Texaco Chemical Company from 1992 to
      1994,
      and Plant Manager of Texaco Refining & Marketing, Inc. from 1985 to 1992.
      During his tenure with Texaco, Mr. Masica participated in a leadership role
      in
      two major divestitures, as well as other domestic and foreign reorganizations,
      mergers and startups. Since retiring from Texaco in 1998, Mr. Masica founded
      and
      is the President of Peak One Consulting, Inc., a private management consulting
      firm.




*Robert
      Henri Charles van Maasdijk* ,
      Chairman of the Board since January 2007 and a Director since April 2005, is
      also the Chairman of Mulier Capital, an investment bank. During 2006, he sold
      Attica Alternative Investment Fund, Ltd. (AAI), a private investment fund,
      of
      which he was Chairman and CEO and had headed since 1999. For the previous 16
      years, he served as Managing Director and CEO of Lombard Odier Investment
      Portfolio Management Ltd., one of the oldest and largest private banks in
      Switzerland. Over his 36-year career, he has held executive, portfolio
      management and research positions with Ivory & Sime, Edinburgh; Banque
      Lambert, Brussels; Pierson Heldring Pierson, Amsterdam; and with Burham and
      Company, New York.




*Dr.
      Hannes Farnleitner* ,
      a
      Director since November 2005, is a former federal minister for economic affairs
      for the country of Austria. Dr. Farnleitner has served in policy-making roles
      in
      Austria involving economics and international trade for more than 40 years.
      Since 2002, he has served as a member of the Convent of the European Union
      and
      representative of the Federal Chancellor of Austria. He earned his Juris Doctor
      degree at the School of Law of the University of Vienna.




*Edward
      E. Urquhart,* a
      Director since August 2006, is the Chief Executive Officer of Ma’rkisches Werk
      Halver, GmbH (MHW), Halver, Germany, the world’s leading supplier of components
      and systems for large diesel and gas engines operating within the marine
      transportation, oil & gas distribution, stationary power generation,
      locomotive and cruise industries. Mr. Urquhart has been the CEO of MWH since
      July 2003 and is responsible for all aspects of managing the MWH worldwide
      family of companies in Germany, USA, Korea, Japan, and China. Prior to his
      current position, he was the CEO of Maerkisches Werk of North America Inc.
      Mr.
      Urquhart received his Master of Business Administration at Boston University,
      a
      C.D. in Project Management from Worcester Polytechnic Institute and a B.S.
      and
      M.S. in Mechanical Engineering from Worcester Polytechnic Institute and the
      University of Virginia respectively.




*Lawrence
      G. Schafran* a
      Director beginning December 2006, has extensive experience in the financial
      markets and, corporate governance and is a member of the Board of Directors
      of
      several other publicly-traded companies. **** Mr.
      Schafran currently is Managing Director of Providence Capital, Inc., a private
      New York City based activist investment firm, and a Co-Managing Partner of
      Providence Recovery Partners LLC, which manages a New York based investment
      fund. He has filled these positions since July 2003 and March 2003,
      respectively. From 1999 through 2002, Mr. Schafran served as Trustee,
      Chairman/Interim-CEO/President and Co- Liquidating Trustee of the Special
      Liquidating Trust of Banyan Strategic Realty Trust. He also currently serves
      in
      the following roles: Director and Audit Committee Chairman of RemoteMDx, Inc.,
      Tarragon Corporation, and PubliCARD, Inc.; Director and Audit Committee member
      of Nat’l Patent Development Corp. and Electro-Energy Inc. In recent years, Mr.
      Schafran has served in other capacities, including as a Director of COMSAT,
      Inc.
      and Shoppers Food Warehouse, Inc., and Chairman of the Executive Committees
      of
      Dart Group Corporation and its publicly traded subsidiaries.




34




*Michael
      T. Heffner,* a
      Director beginning January 2007, retired from an executive position in BP
      in 2001 after 20 years with the company. From 1996 to 2001, he was president
      of
      BP Algeria, responsible for overseeing a $5 billion division comprising a
      petroleum-producing property and two natural gas developments in Algeria.
      Previously, he served as joint venture manager in Colombia, managing partner
      relationships with the Colombian State Oil Company and private partners Total
      and Triton for a $2 billion Colombian oil and gas development. During his
      career, he also served as British Petroleum's health, safety and environmental
      manager for the Western Hemisphere. Prior to working at BP, Mr. Heffner spent
      ten years with the Bechtel Corporation, where he served in a variety of cost,
      planning and construction roles in that company's petrochemical division in
      the
      U.S. and Canada. Mr. Heffner earned his BS degree in chemical engineering from
      the Georgia Institute of Technology and a master’s degree in business from Rice
      University.





**Family
      Relationships**





None.





**Audit
      Committee Financial Expert**





Our
      audit
      committee consists of Lawrence G. Schafran, Robert Henri Charles van Maasdijk
      and Edward E. Urquhart. The Board has determined that Mr. van Maasdijk and
      Mr.
      Schafran qualify as an “audit committee financial experts,” as defined in
      applicable SEC rules. The Board made a qualitative assessment of Mr. van
      Maasdijk’s and Mr. Schafran’s level of knowledge and experience based on a
      number of factors, including formal education and business experience.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





To
      our
      knowledge the officers, directors and beneficial owners of more than 10% of
      our
      common stock have filed their initial statements of ownership on Form 3 on
      a
      timely basis with respect to fiscal 2006, and the officers, directors and
      beneficial owners of more than 10% of our common stock have also filed the
      required Forms 4 or 5 on a timely basis with respect to fiscal 2005, except
      as
      follows:





Number
                of
              Late
                Reports
            
            Number
                of Transactions NotReported
                TimelyMichael
                T. Heffner
            
            
            1
            
            
            1Michael
                T. Applegate
            
            
            1
            
            
            1Rudolf
                W. Gunnerman
            
            
            1
            
            
            1





**Code
      of Ethics**





Our
      Board
      of Directors has adopted a Code of Ethics applicable to all of its senior
      officers, its principal executive officer and principal financial officer.
      A
      copy of the Code of Ethics is included as an exhibit to this
      report.





35




**ITEM
      1****1.EXECUTIVE
      COMPENSATION**





**Compensation
      Discussion and Analysis**





The
      following discussion concerns compensation awarded to, earned by, and paid
      to
      our executive officers who served in 2006.





The
      primary objectives of our compensation program are to acquire and retain
      qualified management. We reward experience as well as extra efforts which we
      regard as highly valuable to our Company.





As
      the
      number of executives employed by our Company is very small, the Company has
      not
      as yet adopted set policies for compensation. It has been able to use its
      judgment on a case by case basis. In moving forward to provide better forms
      of
      incentive, it proposed the stock option plan which was approved by the
      shareholders in June 2006. For the time being, it has also taken over the role
      of hiring new executives and negotiating their contracts. Prior to 2007,
      executive salaries, bonuses, and stock grants were generally determined by
      executive officers and approved by the Board of Directors.





Salary
      is
      a basic element of compensation that we pay. For each new executive, we
      negotiate a salary based on what the marketplace conditions dictate while
      factoring in any special knowledge, experience, or skill set that the candidate
      may possess.





Stock
      grants have been issued from time to time as compensation for valuable services
      either in lieu of other compensation or as part of the employment contract.
      All
      stock-based compensation requires approval of the Board of Directors and the
      value of the stock is determined by using the closing price of the stock on
      the
      date the stock was granted.





Although
      the compensation paid to Dr. Rudolf W. Gunnerman was arranged from the beginning
      of his employment in 2002 as a consulting contract with RWG, Inc., a Nevada
      corporation owned by him, we regard it the same as salary for all practical
      purposes.





In
      2006,
      Michael Applegate was awarded 50,000 shares of our common stock as part of
      his
      employment contract, which included a ninety day vesting period. He fulfilled
      his vesting period on April 1, 2006. No other grants of stock were issued to
      executive officers in 2006.





The
      shareholders of SulphCo,
      Inc. approved a stock option plan in June 2006. Under that plan, we have
      allocated two million shares of common stock which may be utilized in awarding
      options to employees or contractors. In May 2006, Dr. Rudolf W. Gunnerman was
      awarded an option to acquire one million shares. This option was issued under
      the stock option plan approved by the shareholders the following month. Dr.
      Gunnerman’s option provided that he could not exercise it until the Company had
      reported at least $50 million in annual revenues or a “change in control” of the
      Company occurred as defined in the Plan. The purpose of issuing this option
      was
      to give Dr. Gunnerman the incentive to complete the test facility in Fujairah
      and see that it became fully operational, or otherwise to secure material
      revenues for our Company under his direction. As Dr. Gunnerman’s services were
      terminated in January 2007, no compensation value is given to this option as
      it
      not exercisable due to the termination.





Bonuses
      may be issued as a reward for accomplishments that we value highly. This is
      done
      to encourage extra efforts on the part of our executives. We also issue a small
      holiday bonus as a gesture we believe our executives and other employees
      appreciate.





36




A
      living
      expense allowance primarily for commuting from out of town was included in
      the
      contract with Michael Applegate. The amount was estimated based on such
      additional expenses he would incur. This kind of allowance is of a type that
      would be considered as part of any negotiated employment contract.




Medical
      insurance is generally provided for executives as well as other employees.
      We
      consider this to be a reasonable part of the compensation package.




No
      other
      material compensation elements are currently provided to
      executives.




Each
      element of compensation is considered in light of the others when negotiating
      employment contracts or making awards, in order to assure that we generate
      appropriate incentives to ultimately benefit the Company.




**Summary
      Compensation Table**





The
      following table sets forth information about compensation paid or accrued by
      us
      during the years ended December 31, 2006, 2005 and 2004 to our executive
      officers who served in 2006. No executive officers who served during 2006 have
      been omitted from the table.




**Summary
      Compensation Table**


**Fiscal
      Years 2006, 2005 and 2004**




**All****Other****Stock**
            
            **Option**
            
            **Compen-****Name
                and**
            
            
            
            **Salary**
            
            **Bonus**
            
            **Awards**
            
            **Awards**
            
            **sation**
            
            **Total****Principal
                Position**
            
            **Year**
            
            **(
                $ )**
            
            **(
                $ )**
            
            **(
                $ )**
            
            **(
                $ )**
            
            **(
                $ )**
            
            **(
                $ )**Rudolf
                W. Gunnerman
            
            
            2006
            
            
            620,000
            
            
            500
            
            
            -
            
            
            -
            
            
            -
            
            
            620,500Chairman
                & Chief
            
            
            2005
            
            
            360,000
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            360,000Executive
                Officer
            
            
            2004
            
            
            370,000
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            370,000Peter
                W. Gunnerman
            
            
            2006
            
            
            310,000
            
            
            100,500
            
            
            -
            
            
            -
            
            
            -
            
            
            418,000President
            
            
            2005
            
            
            132,917
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            132,9172004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Loren
                J. Kalmen
            
            
            2006
            
            
            300,000
            
            
            500
            
            
            -
            
            
            -
            
            
            -
            
            
            300,500Chief
                Financial
            
            
            2005
            
            
            42,100
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Officer
            
            
            2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Michael
                Applegate
            
            
            2006
            
            
            160,000
            
            
            -
            
            
            636,000
            
            
            -
            
            
            -
            
            
            796,000Chief
                Operating
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Officer
            
            
            2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





37





**Grants
      of Plan Based Awards in 2006**




The
      following table sets forth certain information regarding plan based awards
      to
      the executives listed in the previous table.





**Estimated
                Future Payouts**
            
            
            
            **Exercise**
            
            **Grant
                Date****Under
                Equity Incentive**
            
            **Stock**
            
            **Price
                of**
            
            **Fair
                Value****Board**
            
            **Plan
                Awards**
            
            **Awards:**
            
            **Option**
            
            **of
                Stock****Grant**
            
            **Approval**
            
            **Threshold**
            
            **Target**
            
            **Maximum**
            
            **Shares**
            
            **Awards**
            
            **and
                Option****Name**
            
            **Date**
            
            **Date**
            
            **(
                # )**
            
            **(
                # )**
            
            **(
                # )**
            
            **(
                # )**
            
            **(
                $/Sh )**
            
            **Awards**Rudolf
                W.Gunnerman
            
            
            5/23/06
            
            
            5/23/06
            
            
            None*
            
            
            None*
            
            
            None*
            
            
            
            
            
            9.03
            
            $
            3,720,000MichaelApplegate
            
            
            1/9/06
            
            
            1/24/06
            
            
            
            
            
            
            
            
            
            
            
            50,000
            
            
            
            
            $
            636,000





***** options
      forfeited
      January 12, 2007





**Compensation
      Narrative Disclosure**





We
      procured the full time services of our Chairman of the Board and Chief Executive
      Officer Dr. Rudolf W. Gunnerman1 pursuant
      to a Consulting Agreement with RWG, Inc., a Nevada corporation owned by him.
      As
      of July 1, 2004, we were obligated to pay a fee of $480,000 annually as a
      consulting payment through July 2006. Effective as of November 1, 2004, this
      amount had been reduced by mutual agreement to $30,000 per month until we
      received substantial additional funds. In May 2006, our Board of Directors
      approved the reinstatement of consulting fees to $40,000 per month effective
      April 1, 2006. The agreement terminated on July 1, 2006, and on July 5, 2006
      the
      Board of Directors approved a new agreement effective July 1, 2006. Dr.
      Gunnerman’s services were terminated for cause on January 12, 2007 and it is the
      opinion of the company that no further payments are due. Under the new
      agreement, RWG, Inc. was also entitled to receive amounts it previously waived
      under prior engagement agreements totaling $170,000, which was paid in July
      2006.





Dr.
      Gunnerman was
      granted an option for one million shares exercisable within three years at
      an
      exercise price of $9.03 per share. The vesting event for the option agreement
      is
      defined as when the Company has reported at least $50 million in annual revenues
      or there is a “change in control” of the Company as defined in the Plan, and
      that his employment continues. This option was valued at $3.72 million under
      the
      assumption that the revenue would be generated and that Dr. Gunnerman’s
      employment would continue. In January 2007, Dr. Gunnerman’s employment with the
      Company was terminated, thus the option grant will not be
      exercisable.




Peter
      Gunnerman2 was
      appointed President and Chief Operating Officer in June 2005. In connection
      with
      his appointment, we executed an employment agreement with him which provided
      for
      a base salary of $220,000 per annum subject to increases. The agreement was
      terminable by either party at any time. Prior to that, from January 2005 through
      May 2005, we maintained a monthly consulting arrangement with Global 6, LLC,
      a
      company owned by Peter Gunnerman, which provided for Global 6 to provide
      management consulting services to us on a month-to-month basis, for a monthly
      consulting fee of $10,000. Near the end of 2005, Mr. Peter Gunnerman’s salary
      was raised to $300,000 per annum.





1  Dr. Gunnerman was dismissed from the offices of Chairman of the Board and Chief
      Executive Officer, effective January 12, 2007.


2  Peter Gunnerman resigned from the Company, effective December 31,
      2006.




38




In
      April
      2006 for extraordinary services provided, Peter Gunnerman received a bonus
      of
      $100,000 approved by the Board of Directors and ratified at their meeting of
      May
      8, 2006. He also received a salary increase to $360,000 per year beginning
      November 2006.





From
      January 1, 2006 to July 2006, Peter Gunnerman served as president only, but
      subsequent to Mr. Applegate’s termination in July 2006, Mr. Gunnerman acted as
      Interim Chief Operating Officer in conjunction with his position as President
      until his resignation effective December 31, 2006.





In
      November 2005, we appointed Loren J. Kalmen as our Chief Financial Officer.
      In
      connection with his appointment, we executed an employment agreement with him
      which is terminable by either party at any time. Under the terms of the
      agreement, Mr. Kalmen is entitled to receive a base salary of $25,000 per month
      ($300,000 on an annualized basis) and additional bonuses as determined by our
      Board of Directors and customary equity compensation and benefits as other
      of
      our similarly situated senior executives. On March 23, 2007 Mr. Kalmen resigned
      from the Company.





In
      January 2006, we appointed Michael Applegate our Chief Operating Officer. In
      connection with his appointment, we executed an employment agreement with him
      which provided for a base salary of $240,000 per annum, effective January 1,
      2006. He was also granted 50,000 shares of the our 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 his first 90 days. Mr. Applegate’s employment was terminated in July
      2006.




**Outstanding
      Equity Awards at Year End 2006**





The
      following table sets forth information on options that were outstanding at
      the
      end of 2006 for our executive officers.





**Name**
            
            **Equity
                Incentive Plan Awards:**
              **Number
                of Securities Underlying Unexercised Unearned Options ( #
                )**
            
            **Option
                Exercise Price ( $ )**
            
            **Option
                Expiration Date**Rudolf
                W. Gunnerman
            
            
            1,000,000
            
            
            9.03
                per share
            
            
            5/22/09





As
      described above, in January 2007 Dr. Gunnerman’s employment with the Company was
      terminated, thus the option grant will not be exercisable. The stock option
      agreement provided for a vesting event, which was defined as when the Company
      reported gross revenues of $50,000,000 or more in a fiscal year.





39





**Option
      Exercises and Stock Vested in 2006**





The
      following table sets forth the stock vested for our executive officers in 2006.
      No stock options were exercised by our executive officers in 2006.





**Stock
                Awards****Name**
            
            **Number
                of Shares**
              **Acquired
                on Vesting ( # )**
            
            **Value
                Realized on**
              **Vesting
                ( $ )**Michael
                Applegate
            
            
            50,000
            
            
            636,000






**Directors
      Compensation Table for 2006**





The
      following table sets forth compensation paid to our Company’s directors in
      2006.





**Name**
            
            **Stock**
              **Awards
                ( $ )**
            
            **Option**
              **Awards
                ( $ )**
            
            **All
                Other**
              **Compensation
                ( $ )**
            
            **Total
                ( $ )**Robert
                van Maasdijk
            
            
            
            
            
            687,500
            
            
            
            
            
            687,500Michael
                Heffner
            
            
            440,000
            
            
            
            
            
            48,871
            
            
            488,871Edward
                Urquhart
            
            
            276,500
            
            
            
            
            
            
            
            
            276,500Lawrence
                Schafran
            
            
            243,500
            
            
            
            
            
            
            
            
            243,500Richard
                Masica
            
            
            
            
            
            
            
            
            29,711
            
            
            29,711





The
      stock
      awards in the above table reflect the standard compensation arrangement for
      directors wherein 50,000 shares of our common stock are awarded to directors
      when they are initially appointed to the Board of Directors. The values used
      are
      based on the closing price for our shares on the date of the
      grant.





The
      option award to Robert van Maasdijk was granted to him on May 23, 2006. The
      option is for 125,000 shares of our common stock, exercisable immediately at
      $9.03 per share, the average value of our common stock on the date the option
      was granted. The option has a term of three years and was valued at $687,500
      based on the Black-Scholes valuation model using the assumptions described
      in
      footnotes to our financial statements. This option award was made in recognition
      of Mr. van Maasdijk’s extraordinary services as a director. The other
      compensation represents consulting contracts we had with Michael Heffner and
      Peak One Consulting, Inc. which is owned by Richard Masica. These amounts were
      for services other than those of a director. For the consulting contract related
      to Rudolf W. Gunnerman, also a director during 2006, see the section above
      in
      this item labeled “Compensation Narrative Disclosure.”




**ITEM
      12.SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





**Table
      of Securities Authorized for Issuance under Equity Compensation Plans at the
      End
      of 2006**





The
      following table presents information regarding our securities which are
      authorized for issuance under all of our compensation plans as of December
      31,
      2006.




40




**Plan
                Category**
            
            **Number
                of Securities**
              **to
                be Issued upon**
              **Exercise
                of**
              **Outstanding
                Options,**
              **Warrants
                and rights**
            
            **Weighted-average**
              **Exercise
                Price of**
              **Outstanding
                Options,**
              **Warrants
                and Rights******
            
            **Number
                of Securities**
              **Remaining
                Available for**
              **Future
                Issuance under**
              **Equity
                Compensation**
              **Plans
                (Excluding Securities**
              **Reflected
                at Left)******Equity
                Compensation Plans Approved by Security Holders
            
            1,127,000
            
            9.03
            
            873,000Equity
                Compensation Plans Not Approved by Security Holders
            
            152,500
            
            3.96
            
            (1)





(1)
      Future grants are within the discretion of our board of directors and,
      therefore, cannot be determined at this time.





Under
      compensation plans approved by our security holders, the 1,127,000 securities
      relate to outstanding options under the stock option plan approved by the
      shareholders at our annual meeting in June 2006. All of these options had been
      granted prior to approval of the plan and incorporated therein. The options
      include 1,000,000 to Dr. Rudolf Gunnerman which were subsequently terminated
      at
      the termination of his employment with us in January 2007. The balance consists
      of 125,000 to Robert van Maasdijk as reflected above in “Item 11. Executive
      Compensation” and 2,000 to Tom Nardi, a contractor.





Under
      compensation plans not approved by our security holders, the 152,500 securities
      consist of the following:





Warrants
      for 100,000 shares of our common stock were issued to Rubenstein Public
      Relations, Inc. in conjunction with a consulting agreement for stockholder
      relations executed November 11, 2004, which provided for cash compensation
      and
      warrants. One warrant, issued at execution of the agreement, evidenced the
      right to purchase 50,000 shares of unregistered common stock at an exercise
      price of $1.93, the closing price of trading common stock at the date of the
      execution of the agreement. Provided the agreement had not been terminated
      as of
      May 2005 (which it had not), it called for issuing another warrant
      evidencing the right to purchase 50,000 shares of unregistered common stock
      at an exercise price equal to the closing price of trading common stock on
      May
      11, 2005, which was $3.85. Each of the warrants will expire in November
      2009.





Options
      to acquire
      52,500 shares of our common stock were issued to Mustang International, L.P.
      (“Mustang”) in conjunction with a contract executed March 29, 2006 for program
      management, engineering, procurement, construction management, and other
      services. The option is exercisable at $6.00 per share by April 1,
      2010.





**Security
      Ownership of Certain Beneficial Owners**





The
      following table presents the ownership of beneficial owners known to us who
      own
      more than five percent of our common stock as of this filing.




41


**Title
                of Class**
            
            **Name
                and Address of Beneficial Owner**
            
            **Amount
                and Nature of**
              **Beneficial
                Ownership**
            
            **Percent**
              **of
                Class**Common
            
            Dr.
                Rudolf W. and Mrs. Doris Gunnerman
            
            28,272,213(1)
            
            38.9%6601
                Windy Hill Way, Reno, NV 89502Common
            
            Blizzard
                Capital Ltd.
            
            4,000,000(2)
            
            5.
                5%Akara
                Bldg 24 Castro Street Wickams Cay RdTown
                Tortola, Virgin Isles





1.
      The
      share ownership of Dr. and Mrs. Gunnerman is reflected pursuant to the
      information contained in Schedule 13D as amended, which was filed with the
      Commission on January 16, 2007. Of these shares 27,697,913 are subject to shared
      voting power between them. The voting power for the remaining 574,300 shares
      is
      held by Dr. Gunnerman.


2.
      Blizzard Capital Ltd. holds 4,000,000 million shares outright and warrants
      to
      acquire an additional 2,000,000 shares.





**Security
      Ownership of Management**





The
      following table presents the ownership of our common stock by directors and
      executive officers as of March 30 , 2007.




**Title
                of Class**
            
            **Name
                of Beneficial Owner**
            
            **Amount
                and Nature of**
              **Beneficial
                Ownership (1)**
            
            **Percent**
              **of
                Class**Common
            
            Richard
                Masica
            
            50,000
            
            0.1%Common
            
            Robert
                van Maasdijk
            
            175,000(2)
            
            0.2%Common
            
            Dr.
                Hannes Farnleitner
            
            50,000
            
            0.1%Common
            
            Edward
                Urquhart
            
            55,500
            
            0.1%Common
            
            Lawrence
                Schafran
            
            104,000
            
            0.1%Common
            
            Michael
                T. Heffner
            
            50,000
            
            0.1%Common
            
            Dr.
                Larry Ryan
            
            -
            
            0.0%Common
            
            Brian
                Savino
            
            -
            
            0.0%Common
            
            All
                Executive Officers and Directorsas
                a Group (8 persons)
            
            484,500
            
            0.7%


1. In
      every
      case the shares are held outright with the exception of 125,000 shares of Robert
      van Maasdijk as explained in note 2.


2.
      Robert
      van Maasdijk owns 50,000 outright and an option to acquire 125,000
      shares.





42




**ITEM
      13.CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





**Certain
      Transactions**





Exclusive
      of transactions reported in Item 11 above, the following are descriptions of
      all
      material transactions since the beginning of 2006 between us and our directors,
      executive officers, or members of their immediate families.




On
      May
      15, 2006 ,
      we
      repaid a $500,000 promissory note to Dr. Rudolf Gunnerman which was originally
      issued on December 30, 2003. In December 2005, Dr. Gunnerman agreed to a second
      extension of the maturity date to December 30, 2006 at an interest rate of
      8%
      per annum. The extension agreement provided for payment on demand. Also accrued
      interest through May 15, 2006 of $15,000 was paid during 2006.





On
      May
      15, 2006, under Board approval, we repaid $2,000,000 in principal on a note
      payable to Dr. Rudolf Gunnerman. In December 2004, Dr. Gunnerman had advanced
      $7,000,000 to us for a promissory note which bears interest at the rate of
      0.5%
      above a “LIBOR” rate adjusted quarterly and payable annually. The entire
      principal amount is due and payable in December 2007. Also the accrued interest
      through May 15, 2006 of $133,809 was paid. Interest accrued through December
      31,
      2006 of $172,167 was paid at the end of December 2006. Thus, total interest
      for
      the year was $305,976. Interest rates on the note ranged from 4.885% per annum
      to 5.84625% per annum. Beginning January 1, 2007, the rate was adjusted to
      5.32563% per annum for a quarterly interest amount of approximately
      $72,000.




For
      additional information regarding related party transactions, see Notes 10,
      12,
      13, and 15 to our audited financial statements which appear elsewhere in this
      report.





43





**ITEM
      14. PRINCIPAL ACCOUNTANT
      FEES AND SERVICES**





**Independent
      Auditors' Fees**




The
      following table represents aggregate fees billed by our independent auditors
      for
      each of our fiscal years ended December 31, 2006, and December 31,
      2005.





**Fiscal
                Year****Independent
                Audit Firm**
            
            **2006**
            
            **2005**Marc
                Lumer & CompanyAudit
                Fees
            
            $
            152,600
            
            $
            114,617Audit-related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
                Fees
            
            $
            152,600
            
            $
            114,617Mark
                Bailey & Company, LtdAudit
                Fees
            
            $
            -
            
            $
            45,975Audit-related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
                Fees
            
            $
            -
            
            $
            45,975




Fees
      for
      audit services included fees associated with the annual audit and reviews of
      our
      quarterly reports, as well as services performed in conjunction with our filings
      of Registration Statements on Form SB-2, Form S-3 and Form S-8. All fees
      described above were approved by the Audit Committee.




44




**PART
      IV**





**ITEM
      15.EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES**





3.1*
            Restated
                Articles of Incorporation, as filed on December 30, 2003, with the
                Nevada
                Secretary of State.





3.2
                **
            Amended
                and Restated Bylaws.





4.1+
            Form
                of Additional Investment Rights initially issued on June 3,
                2004.





4.2++
            Form
                of Additional Investment Rights initially issued on June 15,
                2004.





4.3+
            Form
                of Warrant initially issued on June 3,
                2004.





4.4++
            Form
                of Warrant initially issued on June 15,
                2004.





4.5#
            Form
                of Warrant dated November 11, 2004, issued to Rubenstein Public Relations,
                Inc.





4.6(13)
            Form
                of Warrant dated March 29, 2006.





4.7(14)
            Stock
                Option Agreement with Rudolf W. Gunnerman dated May 23,
                2006.





4.8(14)
            Director
                Stock Option Agreement with Robert van Maasdijk dated May 23,
                2006.





4.9
            Form
                of Warrant dated March 12, 2007.





10.1*
            2003
                Non-Officer Limited Stock Appreciation Rights
                Plan.





10.2+
            Securities
                Purchase Agreement dated as of June 1, 2004, by and between SulphCo,
                Inc.
                and the Purchasers parties thereto.





10.3++
            Securities
                Purchase Agreement dated as of June 14, 2004, by and between SulphCo,
                Inc.
                and the Purchasers parties thereto.





10.4#
            Engagement
                Agreement dated July 1, 2004, by and between SulphCo, Inc. and RWG,
                Inc.





10.5#
            Promissory
                Note dated December 30, 2003, from SulphCo, Inc. to Rudolf W. Gunnerman
                and Doris Gunnerman.





10.6#
            Promissory
                Note dated December 30, 2003, from SulphCo, Inc. to Erika
                Herrmann.





10.7#
            Letter
                dated April 28, 2004, from Rudolf W. Gunnerman to SulphCo,
                Inc.





10.8#
            Promissory
                Note dated April 28, 2004, from SulphCo, Inc. to Rudolf W.
                Gunnerman.





10.9#
            Finder’s
                Fee Agreement made as of May 11, 2004 between SulphCo, Inc. and Vantage
                Investments Group, Inc.





10.10#
            Letter
                Agreement dated May 28, 2004 between SulphCo, Inc. and Olympus Securities,
                LLC.




45




10.11#
            Engagement
                Agreement dated July 1, 2004, by and between SulphCo, Inc. and RWG,
                Inc.





10.12#
            Consulting
                Agreement dated July 15, 2004, by and between SulphCo, Inc. and InteSec
                Group LLC.





10.13#
            Collaboration
                Agreement dated August 6, 2004, by and between SulphCo, Inc. and
                ChevronTexaco Energy Technology
                Company.





10.14#
            Contract
                for Establishment of a Limited Liability Company (SulphCo Oil Technologies
                Kuwait).





10.15#
            Loan
                Extension Agreement, dated for reference the 12thday of December, 2004, between Rudolf W. Gunnerman and SulphCo,
                Inc.





10.16#
            Loan
                Extension Agreement, dated for reference the 12thday of December, 2004, between Erika Herrmann and SulphCo,
                Inc.





10.17(1)
            Separation
                Agreement and General Release dated as of December 28, 2004, by and
                between SulphCo, Inc. and Kirk S.
                Schumacher.





10.18(2)
            Letter
                Agreement dated as of January 6, 2005, by and between SulphCo, Inc.
                and
                Alan L. Austin, Jr.





10.19(3)
            Promissory
                Note from SulphCo, Inc. to Rudolf W. Gunnerman dated December 31,
                2004.





10.20#
            Letter
                Agreement dated February 4, 2005, by and between SulphCo, Inc. and
                ChevronTexaco Energy Technology
                Company.





10.21(4)
            Agreement
                dated February 22, 2005, by and between SulphCo, Inc. and OIL-SC,
                Ltd.





10.22(5)
            Letter
                Agreement dated April 27, 2005, by and between SulphCo, Inc. and
                ChevronTexaco Energy Technology
                Company.





10.23(6)
            Employment
                Agreement dated as of June 1, 2005, by and between SulphCo, Inc.
                and Peter
                Gunnerman.





10.24(7)
            Test
                Agreement by and between SulphCo, Inc. and Total France entered into
                on
                October 10, 2005.  10.25(8)
            Employment
                agreement with Loren J. Kalmen dated November 10,
                2005.  10.26(9)
            Letter Agreement by and between SulphCo and OIL-SC
              and
              dated as of November 9, 2005.  10.27(10)
            Memorandum of Association dated November 29, 2005,
              by and
              between SulphCo, Inc. and Trans Gulf Petroleum Co., a Government of
              Fujairah company.  10.28(11)
            Employment Agreement, dated as of January 1, 2006,
              by and
              between SulphCo, Inc. and Michael
              Applegate.




46




10.29(12)
            2ndLoan Extension and Modification Agreement by and between SulphCo,
                Inc. and
                Dr. Rudolf W. Gunnerman and Doris Gunnerman entered into on January
                30,
                2006.




10.30(13)
            Securities
                Purchase Agreement dated as of March 29, 2006, by and between SulphCo,
                Inc. and the Purchasers parties thereto, including form of Warrant
                as
                Exhibit “A” thereto.  10.31(14)
            SulphCo, Inc. 2006 Stock Option
                Plan
                approved by stockholders June 19, 2006.  10.32(15)
            Engagement Agreement with RWG,
                Inc. dated
                July 1, 2006.  10.33(16)
            Test Agreement between SK Corporation
                and
                SulphCo, Inc. dated July 20, 2006.  10.34(17)
            Memorandum of Understanding with
                Pierson
                Capital International, Ltd. dated August 1,
                2006.  10.35(18)
            Memorandum of Understanding with
                Petrobras
                dated August 31, 2006.  10.36(19)
            Amendment to Agreement of February
                22,
                2005 between SulphCo KorAsia, Inc. and SulphCo, Inc. dated August
                18,
                2006.  10.37(20)
            Employment Agreement with Larry
                Ryan dated
                January 12, 2007.  10.38
            Amendment
                No. 1 to Securities Purchase Agreements and Warrants dated March
                12,
                2007.  10.39(21)
            Employment Agreement with Brian Savino dated March
              9,
              2007.  14*
            Code
                of Ethics adopted by the Board of Directors on March 12,
                2004.  16.1+++
            Letter
                from Forbush and Associates to the SEC dated May 14,
                2004.  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.


________________




*
      Incorporated by reference from the registrant’s Annual Report on Form 10-KSB
      (SEC File No. 333-27599) as filed with the SEC on March 29, 2004.





**
      Incorporated by reference from the registrant’s Form 10-QSB for the quarter
      ended March 31, 2003 (SEC File No. 27599) as filed with the SEC on May 14,
      2003,
      and Form 8-K (SEC File No. 32636) filed with the SEC on January 22,
      2007.





+
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on June 4, 2004.





++
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on June 16, 2004.





+++
      Incorporated by reference from the registrant’s Form 10-QSB for the quarter
      ended March 31, 2004, (SEC File No. 27599) as filed with the SEC on May 17,
      2004.





#
      Incorporated by reference from the registrant’s Registration Statement on form
      SB-2 (SEC File Nos. 333-117061 and 27599).





47




(1)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on January 3, 2005.





(2)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on January 10, 2005.





(3)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on January 4, 2005.





(4)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on February 25, 2005.





(5)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on May 2, 2005.





(6)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
      filed with the SEC on June 10, 2005.





(7)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on October 14, 2005.





(8)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on November 14, 2005.





(9)
      Incorporated by reference from the registrant’s Form 10-QSB (SEC File No.
      1-32636) as filed with the SEC on November 14, 2005.





(10)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on December 2, 2005.





(11)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on January 13, 2006.





(12)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on January 31, 2006.





(13)
      Incorporated by reference from the registrant’s Form 10-KSB (SEC File No.
      1-32636) as filed with the SEC on March 31, 2006.





(14)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on June 23, 2006.





(15)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on July 11, 2006.





(16)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on July 21, 2006.





(17)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on August 3, 2006.





(18)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on September 8, 2006.





(19)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on September 11, 2006.





(20)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on January 18, 2007.





(21)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on March 14, 2007.





48




**SIGNATURES**





Pursuant
      to the requirements of Section 13 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.April
              2,
              2007
            By:
            /s/
              Larry RyanLarry Ryan,Chief
              Executive Officer




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





/s/ Larry
                Ryan
              Larry Ryan
            Chief
                Executive Officer, Director
                (Principal
                  Executive Officer)
            April
                2, 2007/s/ Michael A.
                Abend
              Michael A. Abend
            Interim
                Chief Financial Officer
              (Principal
                Financial Officer and
              Principal
                Accounting Officer)
            April
                2, 2007/s/ Robert Henri Charles van
                Maasdijk
              Robert Henri Charles van Maasdijk
            Chairman
                of the Board, Director
            April
                2, 2007/s/ Lawrence G.
                Schafran
              Lawrence G. Schafran
            Director
            April
                2, 2007/s/ Michael T.
                Heffner
              Michael T. Heffner
            Director
            April
                2,
                2007








49




REPORT
        OF
        MARC LUMER & COMPANY, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM
 The
          Board
          of Directors and Stockholders
 Sulphco,
          Inc.
  We
            have
            audited the accompanying balance sheet of SulphCo, Inc. as of December
            31, 2006
            and 2005 and the related statements of operations, stockholders' equity,
            and
            cash flows for the year then ended. These financial statements and the
            schedule
            are the responsibility of the Company's management. Our responsibility
            is to
            express an opinion on these financial statements and schedule based on
            our
            audit.
  We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those
            standards require that we plan and perform the audit to obtain reasonable
            assurance about whether effective internal control over financial reporting
            was
            maintained in all material respects. Our audit included obtaining an
            understanding of internal control over financial reporting, evaluating
            management’s assessment, testing and evaluating the design and operating
            effectiveness of internal control, and performing such other procedures
            as we
            considered necessary in the circumstances. We believe that our audit
            provides a
            reasonable basis for our opinions.
  A
            company’s internal control over financial reporting is a process designed by,
            or
            under the supervision of, the company’s principal executive and principal
            financial officers, or persons performing similar functions, and effected
            by the
            company’s board of directors, management, and other personnel to provide
            reasonable assurance regarding the reliability of financial reporting
            and the
            preparation of financial statements for external purposes in accordance
            with
            generally accepted accounting principles. A company’s internal control over
            financial reporting includes those policies and procedures that (1) pertain
            to the maintenance of records that, in reasonable detail, accurately
            and fairly
            reflect the transactions and dispositions of the assets of the company;
            (2) provide reasonable assurance that transactions are recorded as
            necessary to permit preparation of financial statements in accordance
            with
            generally accepted accounting principles, and that receipts and expenditures
            of
            the company are being made only in accordance with authorizations of
            management
            and directors of the company; and (3) provide reasonable assurance
            regarding prevention or timely detection of unauthorized acquisition,
            use, or
            disposition of the company’s assets that could have a material effect on the
            financial statements.
  Because
            of the inherent limitations of internal control over financial reporting,
            including the possibility of collusion or improper management override
            of
            controls, material misstatements due to error or fraud may not be prevented
            or
            detected on a timely basis. Also, projections of any evaluation of the
            effectiveness of the internal control over financial reporting to future
            periods
            are subject to the risk that the controls may become inadequate because
            of
            changes in conditions, or that the degree of compliance with the policies
            or
            procedures may deteriorate.
  A
            material weakness is a significant deficiency, or combination of significant
            deficiencies, that results in more than a remote likelihood that a material
            misstatement of the annual or interim financial statements will not be
            prevented
            or detected. The following material weaknesses have been identified and
            included
            in management’s assessment resulting from deficiencies in the design or
            operation of the respective controls:
  (1) The
            Corporation lacked the technical expertise and processes to ensure compliance
            with Statement of Financial Accounting Standards (SFAS) No. 2, Accounting
            for research and development costs. This material weakness resulted in
            a
            restatement of prior financial statements, quarterly financial statements
            and,
            if not remediated, could result in a material misstatement in the future.
  (2) The
            Corporation did not maintain a sufficient complement of personnel with
            an
            appropriate level of accounting knowledge, experience, and training in
            the
            application of generally accepted accounting principles commensurate
            with the
            Corporation’s complex financial accounting and reporting requirements. This
            material weakness contributed to the restatement of prior financial statements.
            This report does not affect our report on such consolidated financial
            statements
            and financial statement schedule.
  In
            our
            opinion, management’s assessment that the Corporation did not maintain effective
            internal control over financial reporting as of December 31, 2006, is
            fairly stated, in all material respects, based on the criteria established
            in
            Internal Control — Integrated Framework issued by the Committee of
            Sponsoring Organizations of the Treadway Commission. Also in our opinion,
            because of the effect of the material weaknesses described above on the
            achievement of the objectives of the control criteria, the Corporation
            has not
            maintained effective internal control over financial reporting as of
            December 31, 2006, based on the criteria established in Internal
            Control — Integrated Framework issued by the Committee of Sponsoring
            Organizations of the Treadway Commission.
  The
            accompanying financial statements have been prepared assuming that the Company
            will continue as a going concern. As discussed in Note 1 to the financial
            statements, the Company has suffered recurring losses from operations that
            raise substantial doubt about its ability to continue as a going concern. Management's
            plans in regard to these matters are also described in Note 1. The financial
            statements do not include any adjustments that might result from the outcome
            of this uncertainty.
  In
            our
            opinion, the financial statements referred to above present fairly, in
            all
            material respects, the financial position of SulphCo, Inc. at December
            31, 2006
            and 2005, and the results of its operations and its cash flows for the
            year then
            ended, in conformity with accounting principles generally accepted in
            the United
            States of America.
 /s/
          Marc
          Lumer & Company
 San
          Francisco, California
  April
          2,
          2007
  F-1
 REPORT
          OF
          MARK BAILEY & COMPANY, LTD., INDEPENDENT AUDITORS
 
 
 March
          4,
          2005
 
 Board
          of
          Directors
 SulphCo,
          Inc.
  We
          have
          audited the accompanying balance sheet of SulphCo, Inc., (a company in
          the
          development stage) as of December 31, 2004, and the related statements
          of
          operations, shareholders’ deficit and cash flows for the years ended December
          31, 2004 and 2003. These financial statements are the responsibility of
          the
          Company's management **.** Our
          responsibility is to express an opinion on these financial statements based
          on
          our audits.
  We
          conducted our audits in accordance with standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
  In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of SulphCo, Inc., (a company
          in the
          development stage), as of December 31, 2004, and the results of its operations
          and its cash flows for the years ended December 31, 2004 and 2003, in conformity
          with accounting principles generally accepted in the United States.
  /s/
          Mark
          Bailey & Company, Ltd.
 Reno,
          Nevada
 
 F-2
  **SULPHCO,
        INC.**
 **(A
        Company in the Development Stage)**
 **BALANCE
        SHEETS**
 December 31, 2006
  **December
                    31, 2006**
                
                **December
                    31, 2005****Current
                    Assets:**Cash
                    and cash equivalents
                
                $
                6,004,992
                
                $
                6,874,653Loan
                    receivable (Note 2)
                
                
                275,000
                
                
                -Advance
                    to related party (Note 15)
                
                
                95,627
                
                
                -Deposits
                
                
                36,822
                
                
                140,822Prepaid
                    expenses and other
                
                
                166,845
                
                
                137,577Total
                    current assets
                
                
                6,579,286
                
                
                7,153,052**Property
                    and Equipment (net of accumulated depreciation of
                    $913,067)******(Notes
                    2&3)
                
                
                206,957
                
                
                397,416**Other
                    Assets**Intangible
                    assets (net of accumulated amortization of $44,692 in 2006 and
                    $17,422 in
                    2005) (Note 5)
                
                
                508,216
                
                
                355,218Investment
                    in Joint Venture (Note 6)
                
                
                -
                
                
                139,550Deferred
                    tax asset (net of valuation allowance of $20,157,917 in 2006
                    and$7,116,368
                    in 2005 (Note 7)
                
                
                -
                
                
                -Total
                    other assets
                
                
                508,216
                
                
                494,768Total
                    assets
                
                $
                7,294,459
                
                $
                8,045,236**Current
                    Liabilities**Accounts
                    payable and accrued liabilities
                
                $
                3,709,302
                
                $
                779,413Refundable
                    deposit (Note 8)
                
                
                550,000
                
                
                550,000Accrued
                    fees and interest (Note 9)
                
                
                957,828
                
                
                1,035,572Related
                    party note payable (Note 10)
                
                
                5,000,000
                
                
                500,000Total
                    current liabilities
                
                
                10,217,130
                
                
                2,864,985**Long
                    Term Related Party Note Payable**(Note 10)
                
                
                -
                
                
                7,000,000Total
                    liabilities
                
                
                10,217,130
                
                
                9,864,985**Commitments
                    and Contingencies**
                
                
                -
                
                
                --
                
                
                -**Stockholders'
                    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)72,620,910
                    and 60,536,795 shares issued and outstanding at December 31,
                    2006 and 2005
                    respectively.
                
                
                72,621
                
                
                60,537Paid
                    in capital
                
                
                67,864,451
                
                
                30,604,342Stock
                    subscriptions receivable (Note 14)
                
                
                -
                
                
                (744,500
                )Deficit
                    accumulated during the development stage
                
                
                (70,856,288
                )
                
                (31,740,128
                )Accumulated
                    other comprehensive loss
                
                
                (3,455
                )
                
                -Total
                    stockholders' deficiency
                
                
                (2,922,671
                )
                
                (1,819,749
                )Total
                    liabilities and stockholders' deficiency
                
                $
                7,294,459
                
                $
                8,045,236
  The Accompanying Notes are an Integral Part of the Financial
        Statements
  F-3
  **SULPHCO,
          INC.**
 **(A
          Company in the Development Stage)**
 **STATEMENTS
          OF OPERATIONS**
 For the Years ended December 31, 2006, 2005
          and 2004
          and from Inception
  **Inception****2006**
                
                **2005**
                
                **2004**
                
                **to
                    date****Revenue**Sales
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                42,967**Expenses**Selling,
                    general, and administrative expenses
                
                
                (13,566,230
                )
                
                (5,715,079
                )
                
                (3,453,357
                )
                
                (40,457,344
                )Research
                    and development expensesFujairah
                    test facility
                
                
                (21,473,129
                )
                
                -
                
                
                -
                
                
                (21,473,129
                )Other
                
                
                (3,955,562
                )
                
                (2,518,015
                )
                
                (407,613
                )
                
                (7,138,371
                )Loss
                    on joint venture
                
                
                (136,095
                )
                
                -
                
                
                -
                
                
                (136,095
                )Loss
                    on disposal of asset
                
                
                -
                
                
                -
                
                
                -
                
                
                (221,711
                )Loss
                    on impairment of asset
                
                
                -
                
                
                (233,900
                )
                
                -
                
                
                (233,900
                )Total
                    operating expenses
                
                
                (39,131,016
                )
                
                (8,466,994
                )
                
                (3,860,970
                )
                
                (69,660,550
                )Loss
                    from operations
                
                
                (39,131,016
                )
                
                (8,466,994
                )
                
                (3,860,970
                )
                
                (69,617,583
                )**Other
                    income (expense)**Interest
                    income
                
                
                477,869
                
                
                193,987
                
                
                17,303
                
                
                728,470Gain
                    on sale of assets
                
                
                2,532
                
                
                -
                
                
                -
                
                
                2,532Interest
                    expense
                
                
                (465,547
                )
                
                (395,123
                )
                
                (302,786
                )
                
                (1,209,467
                )Late
                    registration fees
                
                
                -
                
                
                (760,240
                )
                
                -
                
                
                (760,240
                )Loss
                    before taxes
                
                
                (39,116,162
                )
                
                (9,428,370
                )
                
                (4,146,453
                )
                
                (70,856,288
                )Income
                    tax benefit (provision)
                
                
                -
                
                
                -
                
                
                -
                
                
                -**Net
                    loss**
                
                $
                (39,116,162
                )
                $
                (9,428,370
                )
                $
                (4,146,453
                )
                $
                (70,856,288
                )**Other
                    comprehensive income (loss)**Foreign
                    currency translation loss
                
                $
                (3,455
                )
                $
                -
                
                $
                -
                
                $
                (3,455
                )**Net
                    comprehensive loss**
                
                $
                (39,119,617
                )
                $
                (9,428,370
                )
                $
                (4,146,453
                )
                $
                (70,859,743
                )Loss
                    per share: basic and diluted
                
                $
                (0.55
                )
                $
                (0.17
                )
                $
                (0.08
                )
                $
                (1.68
                )Weighted
                    average sharesbasic
                    and diluted
                
                
                70,737,679
                
                
                56,973,284
                
                
                53,713,346
                
                
                42,084,165
  The Accompanying Notes are an Integral Part of the Financial
        Statements
  F-4
  **SULPHCO,
          INC.**
 **(A
          Company in the Development Stage)**
 **STATEMENTS
          OF CASH FLOWS**
 For the Years Ended December 31
 **December
                    31**
                
                **Inception****2006**
                
                **2005**
                
                **2004**
                
                **to
                    date****Cash
                    Flows From Operating Activities**Net
                    loss
                
                $
                (39,116,162
                )
                $
                (9,428,370
                )
                $
                (4,146,453
                )
                $
                (70,856,288
                )Adjustments
                    to reconcile net loss to cash usedin
                    operating activities:Depreciation
                    & amortization
                
                
                112,198
                
                
                215,478
                
                
                104,242
                
                
                997,564Stock
                    and options issued for services
                
                
                2,779,325
                
                
                1,568,225
                
                
                138,625
                
                
                10,148,842Stock
                    issued for interest expense
                
                
                -
                
                
                -
                
                
                296,000
                
                
                296,000Contribution
                    from stockholder
                
                
                -
                
                
                -
                
                
                555,000
                
                
                555,000Loss
                    from joint venture
                
                
                136,096
                
                
                -
                
                
                -
                
                
                136,096Loss
                    on disposal and impairment of asset
                
                
                -
                
                
                233,900
                
                
                -
                
                
                455,611Decrease
                    in legal settlement
                
                
                -
                
                
                -
                
                
                (13,636
                )
                
                -(Increase)
                    decrease in accounts receivable
                
                
                (118,657
                )
                
                317,800
                
                
                (317,569
                )
                
                (118,657
                )(Increase)
                    decrease in prepaid expenses and other
                
                
                (6,239
                )
                
                (98,718
                )
                
                (27,887
                )
                
                (143,816
                )Increase
                    (decrease) in accounts payable
                
                
                -
                
                
                -
                
                
                -and
                    accrued liabilities
                
                
                2,852,079
                
                
                (1,070
                )
                
                650,468
                
                
                3,631,492Increase
                    in refundable deposit
                
                
                -
                
                
                550,000
                
                
                -
                
                
                550,000Increase
                    in accrued fees and interest
                
                
                (275,000
                )
                
                820,985
                
                
                -
                
                
                545,985Net
                    cash used in operating activities
                
                
                (33,636,360
                )
                
                (5,821,770
                )
                
                (2,761,210
                )
                
                (53,802,171
                )**Cash
                    Flows From Investing Activities**Purchase/sale
                    of property and equipment
                
                
                105,550
                
                
                (224,962
                )
                
                (58,508
                )
                
                (1,015,540
                )Investments
                    in joint ventures and subsidiaries
                
                
                -
                
                
                (139,550
                )
                
                -
                
                
                (361,261
                )Return
                    / (payment) of deposits
                
                
                104,000
                
                
                (94,000
                )
                
                (10,000
                )
                
                (36,822
                )Investments
                    in intangible assets
                
                
                (180,268
                )
                
                (200,011
                )
                
                (172,628
                )
                
                (568,750
                )Net
                    cash used in investing activities
                
                
                29,282
                
                
                (658,523
                )
                
                (241,136
                )
                
                (1,982,371
                )**Cash
                    Flows from Financing Activities**Proceeds
                    from issuance of stock
                
                
                35,237,417
                
                
                3,982,107
                
                
                4,889,452
                
                
                50,999,176Proceeds
                    from stock subscriptions
                
                
                -
                
                
                -
                
                
                -
                
                
                4,240,887Proceeds
                    from issuance of related party notes payable
                
                
                -
                
                
                -
                
                
                7,500,000
                
                
                11,000,000Proceeds
                    from issuance of line of credit
                
                
                -
                
                
                -
                
                
                -
                
                
                750,000Return
                    on capital
                
                
                -
                
                
                -
                
                
                -
                
                
                (118,427
                )Principal
                    payments on related party notes payable
                
                
                (2,500,000
                )
                
                (500,000
                )
                
                (250,000
                )
                
                (3,250,000
                )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
                
                
                32,737,417
                
                
                3,482,107
                
                
                12,139,452
                
                
                61,789,536Net
                    increase (decrease) in cash and cash equivalents
                
                
                (869,661
                )
                
                (2,998,186
                )
                
                9,137,106
                
                
                6,004,992Cash
                    and cash equivalents at beginning of period
                
                
                6,874,653
                
                
                9,872,839
                
                
                735,733
                
                
                -Cash
                    and cash equivalents at end of period
                
                $
                6,004,992
                
                $
                6,874,653
                
                $
                9,872,839
                
                $
                6,004,994**Supplemental
                    Information and non cash transactions**Total
                    interest payments included in operations
                
                $
                334,251
                
                $
                334,251
                
                $
                6,000The
                    Company paid no income taxes during 2005 and 2004.Noncash
                    investing and financing activity: The Company incurred a payable
                    of
                    $214,587 in issuing securities (see Note 11).The
                    Company wrote off a stock subscription receivable in December,
                    2006 (see
                    Note 14).
  The Accompanying Notes are an Integral Part of the Financial
        Statements
  F-5
  **SULPHCO,
          INC.**
 **(A
          Company in the Development Stage)**
 **STATEMENTS
          OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
          2006
 **Additional**
                
                
                
                **Stock
                    issued for**
                
                **Stock
                    issued for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Balance,
                    January 13, 1999Stock
                    issued for cash at $167 per share
                
                
                1,000
                
                $
                1
                
                $
                166,999
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                167,000Restatement
                    for recapitalization GRD, Inc.
                
                
                19,999,000
                
                
                19,999
                
                
                (19,999
                )
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (128,802
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (128,802
                )Balance
                    at December 31, 1999
                
                
                20,000,000
                
                $
                20,000
                
                $
                147,000
                
                $
                (128,802
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                38,198Contributions
                    from stockholdersin
                    December 2000Cash
                
                
                
                
                
                
                
                
                169,168
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                169,168Equipment
                
                
                
                
                
                
                
                
                362,331
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                362,331Acquisition
                    of GRD, Inc.
                
                
                1,200,000
                
                
                1,200
                
                
                (251,200
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (250,000
                )Stock
                    issued for cash and subscriptionreceivable
                    at $0.50 per share
                
                
                820,000
                
                
                820
                
                
                409,180
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (208,500
                )
                
                201,500Stock
                    options granted at $.50 per share inDecember
                    2000
                
                
                
                
                
                
                
                
                919,401
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                919,401Stock
                    options granted at $1.50 per share inDecember
                    2000
                
                
                
                
                
                
                
                
                94,799
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                94,799Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (1,364,393
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,364,393
                )Balance
                    at December 31, 2000
                
                
                22,020,000
                
                $
                22,020
                
                $
                1,850,679
                
                $
                (1,493,195
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (208,500
                )
                $
                171,004
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-6
 **SULPHCO,
              INC.**
 **(A
              Company in the Development Stage)**
 **STATEMENTS
              OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
              2006
 **Additional**
                
                
                
                **Stock
                    issued for**
                
                **Stock
                    issued for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Stock
                    issued for intangible assets at $4.25 per share inJanuary
                    2001
                
                292,800
                
                293
                
                1,244,107
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,244,400Stock
                    issued for intangible assets at $2.85 per share inFebruary
                    2001
                
                400,000
                
                400
                
                1,139,600
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,140,000Stock
                    sold to a related party at $1.47 per shareFebruary
                    2001
                
                24,750
                
                25
                
                36,431
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                36,456Stock
                    issued for marketing servicesat
                    $2.86 per share April 2001
                
                200,000
                
                200
                
                571,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                572,000Issuance
                    ofoptionsto
                    related parties for servicesin
                    June 2001
                
                
                
                
                
                773,931
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                773,931Stock
                    issued in exchange for notes receivable at $0.50per
                    share in May 2001
                
                9,556,000
                
                9,556
                
                4,768,444
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,778,000)
                
                -Stock
                    issued in exchange for notes receivable at $1.50per
                    share in June 2001
                
                425,000
                
                425
                
                637,075
                
                
                
                
                
                
                
                
                
                
                
                
                
                (637,500)
                
                --Stock
                    sold for cash at $2.94 per sharein
                    June 2001
                
                100,000
                
                100
                
                293,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                294,000Stock
                    issued for a note receivable at $1.41 per sharein
                    June 2001
                
                200,000
                
                200
                
                281,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                (282,000)
                
                -Stock
                    issued to a related party for cash at $0.50 pershare
                    in June 2001
                
                350,000
                
                350
                
                174,650
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                175,000Cash
                    received for subscription in July 2001
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                282,000
                
                282,000Cash
                    received for subscriptions inAugust
                    2001
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                340,000
                
                340,000Stock
                    issued for subscription receivable at $0.725per
                    share in September 2001
                
                2,758,620
                
                2,759
                
                1,997,241
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,000,000)
                
                -Stock
                    issued to a related party forconsulting
                    fees at $0.85 per share inNovember
                    2001
                
                4,000,000
                
                4,000
                
                3,396,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,400,000Stock
                    returned in November 2001
                
                (300,000)
                
                (300)
                
                (1,558,147)
                
                
                
                
                
                
                
                
                
                
                
                
                
                784,500
                
                (773,947)Cash
                    received for subscriptions
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                200,000
                
                200,000Stock
                    returned in December 2001
                
                (100,000)
                
                (100)
                
                (49,900)
                
                
                
                
                
                
                
                
                
                
                
                
                
                50,000
                
                -Stock
                    options issued at a weighted averageissue
                    price of $0.75 per share inOctober
                    2001
                
                
                
                
                
                89,020
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                89,020Net
                    loss
                
                
                
                
                
                
                
                (6,927,525)
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,927,524)Balance
                    at December 31, 2001
                
                
                39,927,170
                
                $
                39,928
                
                $
                15,646,631
                
                $
                (8,420,720
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (6,249,500
                )
                $
                1,016,340
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-7
  **SULPHCO,
            INC.**
 **(A
            Company in the Development Stage)**
 **STATEMENTS
            OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
            2006
 **Additional**
                
                
                
                **Stock
                    issued for**
                
                **Stock
                    issued for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Stock
                    issued for related party services at $0.50per
                    share in March 2002
                
                10,000,000
                
                10,000
                
                4,990,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000,000Stock
                    returned in May 2002
                
                (1,000,000)
                
                (1,000)
                
                (499,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                500,000
                
                -Stock
                    returned in June 2002
                
                (100,000)
                
                (100)
                
                (71,900)
                
                
                
                
                
                
                
                
                
                
                
                
                
                72,000
                
                -Stock
                    returned in July 2002
                
                (25,000)
                
                (25)
                
                (37,475)
                
                
                
                
                
                
                
                
                
                
                
                
                
                37,500
                
                -Payment
                    on stock subscription received in July2002
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                515,500
                
                515,500Stock
                    returned in July 2002
                
                (1,000,000)
                
                (1,000)
                
                (499,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                500,000
                
                -Stock
                    issued for services at $0.10 per share inSeptember
                    2002
                
                50,000
                
                50
                
                4,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Stock
                    returned in September 2002
                
                (431,000)
                
                (431)
                
                (440,069)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (440,500)Stock
                    issued for services at $0.27 per share inOctober
                    2002
                
                50,000
                
                50
                
                13,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13,500Stock
                    Options issued in November 2002for
                    $0.10 per share (restated)
                
                
                
                
                
                31,500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                31,500Stock
                    issued to a related party for cash at $0.10 pershare
                    in November 2002
                
                100,000
                
                100
                
                9,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10,000Stock
                    issued to a related party for cash at $0.10 pershare
                    in December 2002
                
                50,000
                
                50
                
                4,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Net
                    loss (restated)
                
                
                
                
                
                
                
                (6,573,627)
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,573,627)Balance
                    at December 31, 2002
                
                
                47,621,170
                
                $
                47,621
                
                $
                19,153,937
                
                $
                (14,994,347
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (4,624,500
                )
                $
                (417,287
                )
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-8
 **SULPHCO,
            INC.**
 **(A
            Company in the Development Stage)**
 **STATEMENTS
            OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
            2006
 **Additional**
                
                
                
                
                **Stock**
                  **issued** **for**
                
                **Stock**
                  **issued** **for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Stock
                    subscribed for services at $0.42 per share inFebruary
                    2003
                
                
                
                
                
                
                
                
                20,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                50
                
                
                
                
                
                
                
                
                21,000Payment
                    on stock subscriptionreceived
                    in February 2003
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,575,000
                
                
                3,575,000Stock
                    issued to a related party for cash at $0.33 pershare
                    in March 2003
                
                
                50,000
                
                
                50
                
                
                16,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,500Stock
                    issued for services at $0.32 per share in June2003
                
                
                50,000
                
                
                50
                
                
                15,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,000Stock
                    returned in August 2003
                
                
                (196,870
                )
                
                (197
                )
                
                (196,678
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                196,875
                
                
                -Stock
                    returned in September 2003
                
                
                (3,130
                )
                
                (3
                )
                
                (3,322
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,325
                
                
                -Stock
                    issued to a related party for cash at $0.23 pershare
                    in November 2003
                
                
                2,173,913
                
                
                2,174
                
                
                497,826
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                500,000Stock
                    returned in December 2003
                
                
                (25,000
                )
                
                (25
                )
                
                (37,275
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                37,300
                
                
                -Stock
                    subscribed for prepaid interest to a related partyat
                    $0.296 per sharein
                    December 2003 (Note 14)
                
                
                
                
                
                
                
                
                295,000
                
                
                
                
                
                (296,000
                )
                
                
                
                
                
                
                
                1,000
                
                
                
                
                
                
                
                
                -Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (3,170,959
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,170,959
                )Balance
                    at December 31, 2003
                
                
                49,670,083
                
                $
                49,671
                
                $
                19,762,838
                
                $
                (18,165,306
                )
                $
                (296,000
                )
                $
                -
                
                $
                -
                
                $
                1,050
                
                $
                -
                
                $
                (812,000
                )
                $
                540,254
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-9
  **SULPHCO,
            INC.**
 **(A
            Company in the Development Stage)**
 **STATEMENTS
            OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
            2006
 **Additional**
                
                
                
                **Stock
                    issued
                    for**
                
                **Stock
                    issued
                    for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                ****
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Restricted
                    stock issued for intereston
                    notes at $0.296 per share inJanuary
                    2004.
                
                1,000,000
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                (1,000)
                
                
                
                
                
                -Stock
                    issued for services at $0.85 per share inJanuary
                    2004
                
                100,000
                
                100
                
                84,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                85,000Issued
                    subscribed stock at $0.42 pershare
                    in March 2004
                
                50,000
                
                50
                
                
                
                
                
                
                
                
                
                
                
                (50)
                
                
                
                
                
                -Private
                    placement stock issuance at $0.90 per sharein
                    June 2004 (See Note 11 forattached
                    rights and warrants)
                
                2,978,342
                
                2,978
                
                2,677,530
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,680,508Private
                    placement stock issuance at $1.25 per sharein
                    June 2004 (See Note 11 forattached
                    rights and warrants)
                
                2,030,960
                
                2,031
                
                1,896,912
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,898,943Stock
                    options exercised at $0.55 per share in July2004
                
                200,000
                
                200
                
                109,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                110,000Stock
                    options exercised at $0.35 per share in July2004
                
                100,000
                
                100
                
                34,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                35,000Stock
                    issued for services at $2.86 per share inAugust
                    2004
                
                45,000
                
                45
                
                128,655
                
                
                
                
                
                (128,700)
                
                
                
                
                
                
                
                
                
                -Cancellation
                    of subscribed stock at $1.50 per share inSeptember
                    2004
                
                (45,000)
                
                (45)
                
                (67,455)
                
                
                
                
                
                
                
                
                
                
                
                
                
                67,500
                
                -Stock
                    options exercised at $0.55 per share inDecember
                    2004
                
                300,000
                
                300
                
                164,700
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                165,000Amortization
                    of prepaid interest
                
                
                
                
                
                
                
                
                
                296,000
                
                
                
                
                
                
                
                
                
                
                
                296,000Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                53,625
                
                
                
                
                
                
                
                
                
                53,625Contribution
                    from related party stockholder ofoption
                    given former employee to buy100,000
                    shares at $0.55 per share(Note
                    12)
                
                
                
                
                
                555,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                555,000Related
                    party receivable for tax withholding onexercise
                    of stock options
                
                
                
                
                
                
                
                
                
                
                
                
                
                (257,750)
                
                
                
                
                
                
                
                (257,750)Net
                    loss
                
                
                
                
                
                
                
                (4,146,453)
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,146,453)Balance
                    at December 31, 2004
                
                
                56,429,385
                
                $
                56,430
                
                $
                25,347,780
                
                $
                (22,311,759
                )
                $
                -
                
                $
                (75,075
                )
                $
                (257,750
                )
                $
                -
                
                $
                -
                
                $
                (744,500
                )
                $
                2,015,127
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-10
  **SULPHCO,
            INC.**
 **(A
            Company in the Development Stage)**
 **STATEMENTS
            OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
            2006
 **Additional**
                
                
                
                **Stock**
                  **issued
                    for**
                
                **Stock
                    issued
                    for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Stock
                    issued to a Director for services at $5.47per
                    share in January 2005
                
                50,000
                
                $
                    50
                
                273,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                273,500Stock
                    issued to an Officer for servicesat
                    $4.08 per share in January 2005
                
                50,000
                
                $
                    50
                
                203,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                204,000Receipt
                    of related Party ReceivablesJanuary
                    2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                257,750
                
                
                
                
                
                
                
                257,750Stock
                    issued to a consultant for services at $5.91per
                    share in April 2005
                
                15,000
                
                $
                    15
                
                88,635
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                88,650Stock
                    issued to a Director for services at $4.99per
                    share in April 2005
                
                50,000
                
                $
                    50
                
                249,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                249,500Stock
                    issued to a Director for services at $3.54per
                    share in May 2005
                
                50,000
                
                $
                    50
                
                176,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                177,000Warrants
                    and Additional Investment Rights("AIR's")
                    exercised - August 2005
                
                79,430
                
                $
                    79
                
                81,151
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                81,230Warrants/AIR's
                    exercised - September 2005
                
                83,230
                
                $
                    83
                
                84,565
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                84,648Warrants/AIR's
                    exercised - October 2005
                
                16,126
                
                $
                    16
                
                21,812
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                21,828Warrants/AIR's
                    exercised - November 2005
                
                585,244
                
                $
                    585
                
                535,094
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                535,679Stock
                    issued to a Director for services at $3.61per
                    share in November 2005
                
                50,000
                
                $
                    50
                
                180,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                180,500Stock
                    issued to a Director for services at $6.40per
                    share in December 2005
                
                50,000
                
                $
                    50
                
                319,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                320,000Warrants/AIR's
                    exercised - December 2005
                
                3,028,380
                
                $
                    3,028
                
                3,041,104
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,044,132Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                75,075
                
                
                
                
                
                
                
                
                
                75,075Net
                    loss
                
                
                
                
                
                
                
                (9,428,367)
                
                
                
                
                
                
                
                
                
                
                
                
                
                (9,428,367)Balance
                    at December 31, 2005
                
                
                60,536,795
                
                $
                60,536
                
                $
                30,604,341
                
                $
                (31,740,126
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (744,500
                )
                $
                (1,819,748
                )
  The Accompanying Notes are an Integral Part of the
          Financial
          Statements
  F-11
 **SULPHCO,
              INC.**
 **(A
              Company in the Development Stage)**
 **STATEMENTS
              OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 From Inception through December 31,
              2006
 **Additional**
                
                
                
                **Stock**
                  **issued
                    for**
                
                **Stock**
                  **issued
                    for**
                
                **Related**
                
                **Common**
                
                **Other**
                
                **Stock****Common
                    Stock**
                
                **Paid-in**
                
                **Accumulated**
                
                **prepaid**
                
                **prepaid**
                
                **party**
                
                **Stock**
                
                **Comprehensive**
                
                **Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Loss**
                
                **Receivable**
                
                **Equity**Warrants/AIR's
                    exercised - January 2006
                
                4,423,624
                
                4,424
                
                4,790,044
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,794,468Warrants/AIR's
                    exercised - February 2006
                
                1,291,660
                
                1,292
                
                1,303,532
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,304,824Warrants/AIR's
                    exercised - March 2006
                
                2,151,327
                
                2,151
                
                2,068,603
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,070,754Private
                    placement - March 2006
                
                4,000,000
                
                4,000
                
                27,063,373
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                27,067,373Stock
                    issued to a consultant for services at $7.44per
                    share in March 2006
                
                17,500
                
                18
                
                130,182
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                130,200Stock
                    option accrued for a consultant forservices
                    at $7.44 per share in March 2006
                
                
                
                -
                
                357,525
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                357,525Stock
                    issued to an Director for services at $8.80per
                    share in March 2006
                
                50,000
                
                50
                
                439,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                440,000Stock
                    issued to an Officer for servicesat
                    $12.72 per share in March 2006
                
                50,000
                
                50
                
                635,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                636,000Stock
                    option accrued for a consultant forservices
                    at $7.44 per share in March 2006
                
                
                
                -
                
                8,050
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,050Accrual
                    of Stock option for Director - June 2006
                
                
                
                
                
                687,500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                687,500Stock
                    issued to an Director for services at $5.53per
                    share in August 2006
                
                50,000
                
                50
                
                276,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                276,501Stock
                    issued to an Director for services at $4.87per
                    share in December 2006
                
                50,000
                
                50
                
                243,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                243,500Accrual
                    of Stock option for Director
                
                
                
                
                
                1,045,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,045,000Options
                    for Director forfeited December 2006 (Note 13)
                
                
                
                
                
                (1,045,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,045,000)Reversal
                    of stock subscriptions receivable (Note 14)
                
                
                
                
                
                (744,500)
                
                
                
                
                
                
                
                
                
                
                
                
                
                744,500
                
                -Foreign
                    Translation Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,455)
                
                
                
                (3,455)Net
                    loss
                
                
                
                
                
                
                
                (39,116,162)
                
                
                
                
                
                
                
                
                
                
                
                
                
                (39,116,162)**Balance
                    at December 31, 2006**
                
                
                **72,620,906**
                
                **$**
                **72,621**
                
                **$**
                **67,864,451**
                
                **$**
                **(70,856,288**
                **)**
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **(3,455**
                **)**
                **$**
                **-**
                
                **$**
                **(2,922,671**
                **)**




The
      Accompanying Notes are an Integral Part of the Financial Statements




F-12


**SULPHCO,
        INC.**
 **(A
        Company in the Development Stage)**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **December
        31, 2006, 2005, and 2004**
  **1.** **Organization
        and Significant Accounting Policies**
 
 **Business**
  The
        Company is considered a developmental stage company as defined by Statement
        of
        Financial Accounting Standards (“FAS”) No. 7, as the Company has not recognized
        significant revenue and is continuing to develop and market processes for
        the
        upgrading of crude oil by reducing its relative density, viscosity, and sulfur
        content.
 
 SulphCo,
        Inc. (the Company), formerly FilmWorld, Inc., was originally organized under
        the
        laws of the State of Nevada on December 23, 1986 under the name Hair Life
        Inc.
        The Company became inactive during 1987 and remained inactive until September
        1994. In September 1994, through a reverse acquisition agreement, the Patterson
        Group became a wholly owned subsidiary of Hair Life, Inc. Operations were
        conducted via two subsidiaries until 1998, at which time all operations were
        discontinued, and the Company remained dormant until January 1999.
 
 In
        July
        1999 the Company acquired film rights and changed the corporate name to
        FilmWorld, Inc. In December 2000 the Company discontinued its film operations
        and distributed all assets and liabilities related to that business to certain
        shareholders in exchange for their stock.
 
 In
        December 2000 the Company entered into an exchange agreement with GRD, Inc.
        (DBA
        SulphCo) and issued 1,200,000 shares in exchange for all of the outstanding
        shares of GRD, Inc. Because the shareholders of GRD, Inc. controlled the
        Company
        after the exchange, the merger was accounted for as a reverse acquisition
        of
        FilmWorld, Inc. The Company’s name was changed to SulphCo, Inc.
 
 On
        October 7, 2005, the Company’s stock began trading on the American Stock
        Exchange under the symbol “SUF.” Previously the Company’s common stock had been
        quoted on the NASD, Inc. OTC Bulletin Board under the symbol “SLPH.”
 
 In
        2006,
        the Company continued to make progress towards the completion of a test facility
        in Fujairah, United Arab Emirates. This test facility will be instrumental
        in
        the validation of the Sonocracking Ô process
        and allowing the Company to continue to its transition towards
        commercialization.
 
 **Going
        Concern**
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the settlement of liabilities
        and commitments in the normal course of business.  As reflected in the
        accompanying financial statements, as of December 31, 2006, the Company had
        cash
        on hand of approximately $6.0 million, negative working capital of approximately
        $3.6 million, and an accumulated deficit of approximately $70.9 million. 
These factors raise substantial doubt about its ability to continue as a
        going
        concern.  In March 2007, the Company received approximately $8 million from
        the exercise of warrants as explained in Note 19, however, the ability of
        the
        Company to continue as a going concern is dependent on the Company’s ability to
        implement its business plan and raise additional funds.
 
 **Use
        of Estimates in the Preparation of Financial
        Statements**
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosures of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates. The markets for the Company’s
        potential products and services will be impacted by the price of oil,
        competition, rapid technological development, regulatory changes, and new
        product introductions, all of which may impact the future value of the Company’s
        assets.
 
 F-13
 
 **Cash
        and Cash Equivalents**
 
 All
        highly liquid investments with maturities of three months or less are considered
        to be cash equivalents. The Company maintains amounts in three U.S. accounts,
        two checking accounts and a money market account, on deposit with two financial
        institutions. These exceed federally insured limits by approximately $5.8
        million at December 31, 2006.
 
 **Foreign
        Currency Translation and Transactions**
 
 The
        financial position and results of operations of the Company's equity ownership
        is determined using local currency as the functional currency. Assets and
        liabilities of the equity ownership in Fujairah Oil Technology LLC (see Note
        6)
        are translated at the prevailing exchange rate in effect at each year end.
        Contributed capital is translated using the historical rate of exchange when
        capital is injected. Income statement accounts are translated at the average
        rate of exchange during the year. Translation adjustments arising from the
        use
        of different exchange rates from period to period are included in the cumulative
        translation adjustment account in stockholders' equity. Gains and losses
        resulting from foreign currency transactions are included in
        operations.
 
 **Accounts
        Receivable and Allowance for Doubtful Accounts**
 
 The
        Company evaluates the collectibility of accounts receivable on a case-by-case
        basis. Based on such evaluation, the Company records allowances for accounts
        at
        such time as they are considered doubtful of collection.
 
 **Fair
        Value of Financial Instruments**
  The
        carrying amounts of financial instruments held by the Company, which include
        cash, accounts receivable, accounts payable, and accrued liabilities,
        approximate fair values due to their short maturity. The carrying value of
        the
        payable to related party and loan receivable reasonably approximate
        their  fair value as the stated interest rates approximate current
        market interest rates.
 
 **Property
        and Equipment**
 
 Property
        and equipment are recorded at cost, less accumulated depreciation. In accordance
        with FAS No. 144, the Company reviews its long-lived assets for impairment.
        Whenever events or changes in circumstances indicate that the carrying amount
        of
        the assets might not be recovered through undiscounted future cash flows,
        such
        impairment losses are recognized in the statement of operations.
 
 The
        cost
        of property, plant, and equipment is depreciated over the remaining estimated
        useful lives of the assets ranging from 3 to 7 years. Leasehold improvements
        are
        depreciated over the lesser of the terms of the lease or the estimated useful
        lives of the assets. Depreciation is computed using the straight line method.
        Expenditures for maintenance and repairs are expensed when incurred, while
        betterments are capitalized. Gains and losses on the sale of property and
        equipment are reflected in the statement of operations.
 
 **Equity
        method**
 
 Investments
        in joint ventures and other entities over which the Company does not have
        control, but does have the ability to exercise significant influence over
        the
        operating and financial policies, are carried under the equity
        method. The
        Investment in Fujairah Oil Technology LLC, in which the Company owns a 50%
        interest, is carried at cost and adjusted for the Company's 50% share of
        undistributed earnings or losses. There
        was no activity in the entity prior to 2006. See Note 6 for activity in
        2006.
 
 F-14
  **Research
        and Development**
 
 The
        Company expenses research and development as incurred.
 
 **Income
        Taxes**
 
 The
        Company provides for income taxes under the provisions of FAS No. 109
“Accounting for Income Taxes,” which requires an asset and liability based
        approach in accounting for income taxes.
 
 Deferred
        income tax assets and liabilities are recorded to reflect the tax consequences
        in future years of temporary differences between revenue and expense items
        for
        financial statement and income tax purposes. Valuation allowances are provided
        against assets that are not likely to be realized. Deferred tax assets and
        liabilities are measured using the enacted tax rates expected to apply to
        taxable income in the years in which those temporary differences are expected
        to
        be recovered or settled. The effect on deferred tax assets and liabilities
        of a
        change in tax rates is recognized in income in the period that includes the
        enactment date.
 
 **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. Computations of diluted net loss per share for
        the
        years ended December 31, 2006, 2005, and 2004 did not include options to
        purchase 7,256,980, 7,806,237, and 13,794,798 shares of common stock,
        respectively, because inclusion of such shares would have an anti-dilutive
        effect on net loss per share.
 
 **Concentrations**
 
 The
        Company has generally been able to obtain component parts from multiple sources
        without difficulty. Nevertheless, because of price and quality considerations,
        in 2005 the Company lined up three manufacturers to supply virtually all
        its
        needs, as the Company's results could be adversely affected if manufacturing
        were delayed or curtailed. The Company has also established two test sites
        overseas, in Fujairah, UAE (Note 6) and in Austria.
 
 **Reclassification**
 
 For
        comparative purposes, certain amounts previously included in selling, general
        and administrative expenses have been reclassified to research and development
        expenses 2005. The reclassifications do not require any adjustments to assets,
        liabilities, equity, or income.
 
 The
        following summarizes the reclassifications made:
 
 2005Sales,
                  general, & administrative expensesOriginal
                  filing
              
              $
              6,790,998Reclassifications
              
              
              -1,075,919Reclassified
              
              $
              5,715,079Research
                  & developmentOriginal
                  filing
              
              $
              1,442,096Reclassifications
              
              
              1,075,919Reclassified
              
              $
              2,518,015
 
 Additionally,
        deposits of $140,000 were reclassified to prepaid expenses in 2005.
  F-15
  **2.** **Loans
        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 $50,000 per month through May 15, 2006. A total of $150,000 was
        advanced through May, 2006. An additional $50,000 was advanced June 6, 2006
        under the same terms as the original note and in November 2006, an additional
        $75,000 was advanced, with a revision to the loan agreement that the full
        $275,000 in advances and related interest would be immediately repaid from
        revenues or from proceeds of any equity financings. Interest accrues at prime
        rate plus 1%. 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. Also
        the
        Company holds a refundable deposit of SulphCo KorAsia as summarized in Note
        8.
 
 In
        July
        2006 the Company advanced $191,352 (690,000 Dirhams) to Fujairah Oil Technology,
        LLC (the “LLC”) to more easily pay for Company expenditures in Fujairah. See
        Note 6. Funds totaling 338,674 Dirhams have been expended by the LLC on behalf
        of the Company. The net amount of 351,326 Dirhams is reflected as a related
        party loan receivable. The dollar amount has been adjusted to $95,627 which
        includes a foreign currency transaction loss of $3,554. As the LLC holds
        this
        amount in cash on behalf of the Company, no allowance has been taken for
        collectibility.
  **3.** **Property
        and Equipment**
 
 The
        following is a summary of property, plant, and equipment - at cost, less
        accumulated depreciation:
 
 **2006**
              
              **2005**Equipment
              
              $
              772,385
              
              $
              911,438Computers
              
              
              199,582
              
              
              176,226Office
                  furniture
              
              
              57,116
              
              
              54,517Leasehold
                  improvements
              
              
              90,941
              
              
              83,3751,120,024
              
              
              1,225,556Less:
                  Accumulated depreciation
              
              
              (913,067
              )
              
              (828,140
              )Total
              
              $
              206,957
              
              $
              397,416
 
 Depreciation
        expense was $194,029 in 2006, $198,056 in 2005, and $104,242 in 2004. In
        2006
        assets with accumulated depreciation totaling $109,102 were sold or
        abandoned.
 
 **4.** **Loss
        On Impairment of Asset**
 
 The
        Company had a desulfurization unit (“unit”) consisting of a trailer containing
        equipment to be used to remove sulfur from crude oil. The Company spent $3,787
        in the year ended December 31, 2004, upgrading the unit. At December 31,
        2004
        the cost of the unit was $431,417. No depreciation expense related to the
        unit
        was recognized in 2004 as it was considered work in process.
 
 In
        March
        2005 the unit was determined to be obsolete based on the Company’s current
        technological improvements. The estimated value of the reusable components
        as of
        March 31, 2005 was $197,517, resulting in an impairment loss of $233,900.
        The
        Company included the $197,517 in equipment and began depreciating it in 2005.
        In
        2006 the equipment was sold.
  **5.** **Intangibles
        Assets**
 
 The
        Company has five U.S. patents, six U.S. patents pending, five foreign patents,
        several foreign patents pending, and six U.S. trademarks pending. At December
        31, 2006 the Company had capitalized $552,908 in costs that were incurred
        in
        connection with filing patents and trademarks related to its internally
        developed technology in accordance with Accounting Principles Board Opinion
        No.
        17 - *Intangible
        Assets* .
        Amounts
        of $185,503, $200,011, and $172,629 were capitalized in 2006, 2005, and 2004,
        respectively. In 2006 $5,235 of costs net of accumulated amortization of
        $679
        were expensed for abandoned trademarks.
 
 F-16
  Patents
        and trademarks are amortized using the straight-line method over their estimated
        period of benefit, ranging from 10 to 20 years with a weighted average of
        16.5
        years. Due to the majority of the 2004 capitalized costs being incurred near
        the
        end of the year, no amortization expense was recognized in 2004. Amortization
        expense related to patents and trademarks for the years ended December 31,
        2006,
        2005, and 2004, and from inception was $27,949, $17,422, $-0-, and $45,371,
        respectively. Maintenance costs totaling $36,261 and $28,972 were expensed
        throughout 2006 and 2005, respectively.
 
 The
        following table reflects management’s estimate for amortization expense, using
        the straight-line method, for the next five years based on current capitalized
        amounts and estimated lives:
  Year
              
              Estimated
                  Amortization Expense2007
              
              $
              33,5002008
              
              
              33,5002009
              
              
              33,5002010
              
              
              33,5002011
              
              
              33,500Thereafter
              
              
              340,716Total
              
              $
              508,216
 
 **6.** **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 SulphCo’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 500 shares for the 50% ownership in the LLC.
 
 The
        LLC
        had no operations in 2005.
 
 The
        LLC’s
        operations began in 2006. For the year ended December 31, 2006 its financial
        activities consisted primarily of leasing office space and acquiring leasehold
        improvements and office furniture and equipment. The lease commenced March
        15,
        2006. There was a loss of 237,171 Dirhams of which 50% (US $32,278) has been
        reflected by the Company.
 
 The
        Company entered into an agreement to construct a test facility for $1,600,000
        for the LLC operations. Subsequently the building plans were expanded to
        require
        additional amounts of $600,000 and $350,000 for construction. The Company
        paid
        $1,900,000 to the construction company for building construction and $875,000
        for pipeline.
 
 The
        test
        facility 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 Facility is on land owned by the Government of Fujairah and the
        Government has leased the land to the LLC.
 
 As
        of
        December 31, 2006, and for the year then ended, the LLC had the following
        condensed balance sheet and operating statement converted to US
        dollars:
 
 F-17
  December
                  31,
              
              December
                  31,Condensed
                  Balance Sheet
              
              2006
              
              2005Current
                  assetsCash
                  and cash equivalents
              
              $
              217,169
              
              $
              279,100Total
                  current assets
              
              $
              217,169
              
              $
              279,100Depreciable
                  assets (net)
              
              
              100,567
              
              
              -Other
                  assets
              
              
              1,633
              
              
              -Total
                  assets
              
              $
              319,369
              
              $
              279,100Current
                  LiabilitiesAdvance
                  - related party
              
              $
              95,647
              
              $
              -0-Other
                  Current liabilities
              
              
              16,088
              
              
              -0-Total
                  current liabilitiesMembers’
                  equity
              
              
              207,634
              
              
              279,100Total
                  liabilities and members’ equity
              
              $
              319,369
              
              $
              279,100Operating
                  Statement for the Year Ended:Revenue
              
              $
              -0-
              
              $
              -0-Operating
                  expenses
              
              
              (61,159
              )
              
              -Non-operating
                  expense
              
              
              (3,397
              )
              
              -Net
                  loss
              
              $
              (64,556
              )
              $
              -0-
 
 A
        foreign
        currency translation loss of $3,455 has also been recognized as other
        comprehensive loss relative to this investment for 2006.
 
 Of
        the
        $111,735 in current liabilities, $95,647 is due to SulphCo, Inc.
 
 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 10% of the Company’s net joint venture profits. The
        Company is uncertain that it will be able to recover it’s investment in the LLC.
        Accordingly, the carrying value of the investment has been reduced to
        $0.
 
 **7.** **Income
        Taxes**
 
 The
        deferred tax assets computed prior to the valuation allowances and the valuation
        allowances were overstated in earlier periods through September 30, 2005.
        The
        valuation allowance has always been set equal to the deferred tax asset prior
        to
        such allowance, and the Company has never reflected an income tax benefit.
        The
        adjustments of the overstatements did not, therefore, require any adjustments
        to
        assets, liabilities, equity, or income. Also, tax credit carryforwards had
        been
        omitted from disclosures in those earlier periods. In 2005 the Company made
        adjustments for previous years to properly recognize net operating losses,
        the
        net effect of which was to reduce the deferred tax assets and the valuation
        allowance by $3,574,419.
 
 F-18
 
 The
        Company is currently subject to income taxation only in the jurisdiction
        of the
        United States. The state of Nevada has no income tax. Foreign jurisdiction
        will
        impose income taxes if and when income is generated subject to their laws,
        but
        there is currently no such related income. The significant components of
        the
        Company’s deferred tax assets and liabilities at December 31, 2006 and 2005 were
        as follows:
 
 December
                  31, 2006
              
              December
                  31, 2005Deferred
                  tax assets relative to the following:Net
                  operating loss carryforwards
              
              $
              11,966,683
              
              $
              6,765,788Construction
                  of test facilities
              
              
              7,003,363Deferred
                  share-based compensation
              
              
              730,320
              
              
              170,170Expensed
                  receivables
              
              
              348,500Plant
                  constructed for sale
              
              
              186,622
              
              
              186,622Depreciable
                  assets
              
              
              91,936
              
              
              122,012Other
              
              
              43,866
              
              
              7,548Total
                  deferred tax assets prior to offsets
              
              
              20,371,290
              
              
              7,252,140Current
                  portion
              
              
              13,053,051
              
              
              6,943,506Non-current
                  portion
              
              
              7,318,239
              
              
              308,63420,371,290
              
              
              7,252,140LiabilitiesDeferred
                  tax liabilities relative to the following:Patent
                  costs
              
              
              (172,793
              )
              
              (120,774
              )Depreciable
                  assets
              
              
              (5,282
              )
              
              (14,998
              )Total
                  deferred tax liabilities (all non-current)
              
              
              (178,075
              )
              
              (135,772
              )Current
                  portion
              
              
              13,053,051
              
              
              6,943,506Non-current
                  portion
              
              
              7,140,164
              
              
              172,822Total
                  deferred tax assets prior to offsets
              
              
              20,193,215
              
              
              7,116,328Valuation
                  allowance
              
              
              (20,193,215
              )
              
              (7,116,368
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
 
 For
        the
        years ended December 31, 2006 and 2005, the valuation allowance was increased
        by
        $13,076,847 and $3,106,598, respectively due to the uncertainties surrounding
        the realization of the deferred tax assets resulting from the Company’s net
        losses of $39,122,412 and $9,428,370 in 2006 and 2005, respectively, and
        accumulated deficits of $70,856,288 and $31,740,128 at December 31, 2006
        and
        2005, respectively.
 
 F-19
 
 The
        provision (benefit) for income taxes differs from the provision (benefit)
        amount
        computed by applying the statutory federal tax rate (34%) to the loss before
        taxes due to the following:
 
 December
                  31, 2006
              
              December
                  31, 2005Computed
                  expected benefit
              
              $
              (13,301,260
              )
              $
              (3,205,646
              )Nondeductible
                  expenses:Construction
                  of test facilities
              
              
              7,003,363Deferred
                  share-based compensation
              
              
              560,150
              
              
              170,170Expensed
                  receivables
              
              
              348,500Research
                  credit amount
              
              
              91,350
              
              
              34,768Equipment
                  expensed as research and development
              
              
              
              
              
              276,686Loss
                  on impairment of asset
              
              
              
              
              
              80,814Other
              
              
              173,479
              
              
              70,202Tax
                  related deductions not expensed on financial statements:Patent
                  costs
              
              
              (52,019
              )
              
              (68,004
              )Depreciation
              
              
              (24,458
              )
              
              (31,691
              )Increase
                  in benefit from net operating loss
              
              
              (5,200,895
              )
              
              (2,672,701
              )(Increase)
                  decrease in other deferred tax assets
              
              
              (7,918,255
              )
              
              (458,424
              )Increase
                  (decrease) in deferred tax liabilities
              
              
              42,303
              
              
              24,527Increase
                  in valuation allowance
              
              
              13,076,847
              
              
              3,106,598Provision
                  (benefit) for income taxes
              
              **$**
              **-**
              
              **$**
              **-**
 
 As
        of
        December 31, 2006 and 2005, the Company had net operating loss carryforwards
        for
        federal income tax purposes of $35,196,126 and $19,899,378, respectively,
        and
        tax credit carryforwards of $502,077 and $233,401, respectively, for incremental
        research expenses. Both the carryforwards for net operating loss and tax
        credit
        will expire beginning in 2019, fully expiring in 2026.
 
 The
        valuation allowance for each year has been estimated in an amount equal to
        the
        projected future benefit of the deferred tax asset net of the deferred tax
        liability as it is not certain that the Company will generate sufficient
        income
        to utilize the future tax benefits, due to the lack of earnings in the Company’s
        history.
 
 **8.** **Refundable
        Deposit**
 
 In
        2005
        the Company 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 ultimately meet the agreed
        specifications, no portion of the purchase price has been or will be recorded
        as
        revenue in the Company’s financial statements until the pilot plant meets all
        agreed specifications. The Company does not have an equity interest in SulphCo
        KorAsia.
  **9.** **Accrued
        Fees and Interest**
 
 As
        of
        December 31, 2006, the Company had accrued late registration fees of $760,240
        and interest thereon of $197,588 in conjunction with the private placements
        in
        2004, as more fully described in Note 12. As of December 31, 2005 the Company
        had accrued late registration fees of $760,240, accrued interest thereon
        of
        $60,745, and additional offering fees of $214,587 in conjunction with the
        same
        private placements. In 2006 and 2005, interest expense associated with accrued
        late fees were $136,843 and $60,745 respectively.
  F-20
 **10.** **Notes
        Payable - Related Party**
 
 The
        Company’s notes payable consist of the following as of December 31,
        2006:
 
 On
        December 30, 2003, the Company issued a $500,000 note to Dr. Gunnerman, the
        Chairman and CEO, and a $500,000 note to Erika Herrmann, sister-in-law of
        the
        Dr. Gunnerman. From each of these notes, $250,000 was obtained before year
        end,
        2003. The balance of $250,000 for each note was obtained during 2004. The
        notes
        were originally issued on December 30, 2003 at an interest rate of 29.6%,
        which
        was paid via the issuance of 1,000,000 shares of restricted stock on January
        1,
        2004 for total consideration of $296,000 or $0.296 per share. On December
        30,
        2004 the notes were renewed at 8% per annum with the interest and principal
        due
        December 30, 2005. The note to Erika Herrmann was paid off December 30, 2005.
        Effective December 30, 2005, the note to Dr. Gunnerman was again renewed
        for
        another year at 8% per annum with interest payable quarterly and principal
        due
        on demand or on December 30, 2006. The note was paid in full including accrued
        interest on May 15, 2006.
 
 On
        December 31, 2004, under the approval of its Board of Directors, the Company
        borrowed $7,000,000 in the form of a long-term note from Dr. Rudolf Gunnerman,
        the Chairman and CEO. Interest on the note is adjusted quarterly based on
        a
        3-month London Inter-Bank Offering Rate (“LIBOR”) plus 0.5% per annum, with
        interest only payments due on December 31, 2005 and 2006 and the remaining
        accrued interest and principal due on December 31, 2007 when the note matures.
        On May 15, 2006, under Board approval, the Company paid $2,000,000 in principal
        on the note and the accrued interest through May 15, 2006. At December 31,
        2006,
        interest on the note was paid through January 8, 2007. $6,250 is included
        in
        prepaid expenses. Beginning January 1, 2007 the rate was adjusted to
        5.82563%.
 
 The
        annual payment obligations related to this note based on the current 2007
        interest rates, assuming no early retirements of principal, are as
        follows:
 
 Principal
              
              Interest
              
              Total2007:Principal
                  due
              
              $
              5,000,000
              
              
              
              
              $
              5,000,000Interest
                  due
              
              
              
              
              $
              291,282
              
              
              291,282Totals
              
              $
              5,000,000
              
              $
              291,282
              
              $
              5,291,282Thereafter
              
              
              None
              
              
              None
              
              
              NoneTotals
              
              $
              5,000,000
              
              $
              291,282
              
              $
              5,291,282
 
 Interest
        expense of $334,954, $333,917, and $302,786 was incurred on the above notes
        during 2006, 2005, and 2004, respectively.
 
 **11.** **Commitments
        and Contingencies**
 
 The
        Company has agreed to a commission for ten percent of the net income to be
        received by the Company from the operations in Fujairah if an oil contract
        is
        secured.
 
 The
        Company entered into an agency agreement with Atlas Commercial Holdings,
        LLC on
        July 25, 2006 to advise and assist the company with establishing and
        implementing an ongoing business venture with Petrobras (Brazil).  The
        Company shall pay to Atlas a transaction fee equal to ten percent of the
        net
        income received by the company from any transaction with Petrobras in respect
        of
        net income which accrues to the company through and including December 31,
        2016.
 
 In
        October 2006 the Company advanced $875,000 to its building contractor in
        Fujairah for pipeline and related infrastructure. By December 31, 2006, it
        was
        not clear how much value would be received from this advance. As the Company
        had
        agreed to pay an additional $350,000 toward construction of the test facility
        in
        Fujairah, the Company has allocated the full $875,000 payment to research
        and
        development expense relating to construction of the test facility which includes
        the building, infrastructure and equipment (see Note 6).
 
 F-21
  Financial
        instruments, which potentially subject the Company to concentrations of credit
        risk, consist mainly of cash and cash equivalents. The Company maintains
        amounts
        in three U.S. accounts, two checking accounts and a money market account
        on
        deposit with two financial institutions, which exceed federally insured limits
        by approximately $5.8 million at December 31, 2006. The Company has not
        experienced any significant losses in such accounts, nor does management
        believe
        it is exposed to any significant credit risk.
 
 At
        December 31, 2006 the Company has a $550,000 refundable deposit in connection
        with an agreement with KorAsia (formerly OIL-SC) for a pilot plant in South
        Korea. Until 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 KorAsia uses the funds for continued
        marketing activities regarding the Sonocracking technology in
        Korea.
 
 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 December
        31, 2006, cannot be ascertained, management is of the opinion that these
        claims
        and lawsuits will not materially affect the Company’s financial position. We
        have and will continue to devote significant resources to our defense, as
        necessary. The following paragraphs set forth the current status of
        litigation.
  On
        January 5, 2004, the Company filed a lawsuit in the Second Judicial District
        Court of the State of Nevada, in and for the County of Washoe, Case No. CV04
        00013, Dept. No. 9, against Alexander H. Walker, Jr., the Company’s former
        general counsel and director, and Nevada Agency & Trust Company, the
        Company’s former transfer agent. The lawsuit alleges breaches of fiduciary duty,
        contract violations, conversion, and other related claims, in connection
        with
        the sale of shares of the Company’s common stock to Coldwater Capital, LLC and
        Mark Neuhaus in 2001. The Company claims it did not receive approximately
        $737,000 of the purchase price for the shares sold. The Defendants have answered
        the Complaint, generally denying the allegations and raising affirmative
        defenses, and cross-complaining against Coldwater Capital, LLC and Mark Neuhaus
        for the payment of the funds owed to the Company. The Company subsequently
        obtained a pre-judgment writ of attachment requiring Mr. Walker to deposit
        the
        proceeds of the sale of the Company stock he owned with the court, pending
        trial. Discovery has been completed and trial in this matter is presently
        scheduled for April 23, 2007.
  In *Clean
        Fuels Technology v. Rudolf W. Gunnerman, Peter Gunnerman, RWG, Inc. and SulphCo,
        Inc.* ,
        the
        Company, Rudolf Gunnerman, Peter Gunnerman, and RWG, Inc., were named as
        defendants in a legal action commenced in Reno, Nevada. The Plaintiff alleged
        claims relating to “sulfur removal technology” originally developed by Professor
        Teh Fu Yen and Dr. Gunnerman with financial assistance provided by Dr.
        Gunnerman, and subsequently assigned to the Company. On December 18, 2006,
        following a trial, the jury found in the Company’s favor on both claims asserted
        against the Company by the Plaintiff. The Plaintiff has since requested
        equitable relief, including the imposition of a constructive trust, from
        the
        Judge who presided over the trial. The Company views the request for any
        equitable relief as against the Company as without merit. Oral argument on
        the
        request for equitable relief took place on February 22, 2007, and the Company
        is
        awaiting a decision.
  In *Talisman
        Capital Talon Fund, Ltd. v. Rudolf Gunnerman and SulphCo, Inc.* ,
        the
        Company and Rudolf Gunnerman were named as Defendants in a legal action
        commenced in federal court in Reno, Nevada. The Plaintiff alleged claims
        relating to the Company’s rights to develop its “sulfur removal technology.” The
        Company regards these claims as without merit. Discovery in this case formally
        concluded on May 24, 2006. Motions to compel additional discovery and summary
        judgment motions by both parties are still pending, and no trial date has
        yet
        been set.
  F-22
  In *The
        Matter of the Arbitration between Stan L. McLelland v. SulphCo,
        Inc.* ,
        Mr.
        McLelland, who was the Company's president from August 13, 2001, until he
        resigned on September 12, 2001, is seeking to exercise options to purchase
        two
        million (2,000,000) shares of the Company’s common stock at 50 cents per share.
        It is the Company’s position that those options had not vested prior to Mr.
        McLelland's resignation. Mr. McLelland also seeks salary for the six months
        following his resignation and $20,000 of alleged unpaid commuting expenses,
        as
        well as attorneys' fees and costs. Discovery is closed, and the arbitrator
        recently denied the parties’ cross-motions for summary judgment on the options
        issue. The arbitration hearing has been set for April 19 and 20, 2007 in
        Reno,
        Nevada.
  On
        October 20, 2006, Mark Neuhaus filed a lawsuit against the Company and Rudolph
        W. Gunnerman, *Mark
        Neuhaus v. SulphCo, Inc., Rudolph W. Gunnerman* ,
        in the
        Second Judicial District Court, in and for the County of Washoe, Case No.
        CV06
        02502, Dept. No. 1. The lawsuit is based on a purported Non-Qualified Stock
        Option Agreement and related Consulting Agreement between Mark Neuhaus and
        the
        Company dated March of 2002. Mark Neuhaus claims that according to the terms
        of
        the Non-Qualified Stock Option Agreement, he was granted an option to purchase
        three million (3,000,000) shares of the Company’s common stock at the exercise
        price per share of $0.01. On or about February of 2006, Mark Neuhaus attempted
        to exercise the option allegedly provided to him under the Non-Qualified
        Stock
        Option Agreement. At that time, the Company rejected Mr. Neuhaus’s attempt to
        exercise the option. Thereafter, Mr. Neuhaus filed this lawsuit seeking to
        enforce the Non-qualified Stock Option Agreement. In his suit, Mr. Neuhaus
        includes claims for specific performance, breach of contract, contractual
        breach
        of the covenant of good faith and fair dealing, and tortious breach of the
        covenant of good faith and fair dealing. He requests the Court to compel
        the
        Company to issue the shares or alternatively to award him damages equal to
        the
        fair market value of the three million (3,000,000) shares of stock when he
        purported to exercise the options, minus the exercise price. On December
        7,
        2006, the Company moved to dismiss the lawsuit. On January 4, 2007, the Court
        issued an Order denying the motion on the ground that there were factual
        issues
        to be resolved which prevented dismissal at that time. The Company is now
        in the
        process of preparing an Answer to the Complaint. The Company intends to
        vigorously defend the claims made by Mr. Neuhaus, which it believes are without
        merit. Trial in this matter is scheduled for September 24, 2007.
  On
        January 17, 2007, Rudolf W. Gunnerman filed a lawsuit against four of the
        Company’s independent directors, Richard L. Masica, Robert Van Maasdijk, Edward
        E. Urquhart, and Lawrence G. Schafran. This case is known as *Rudolph
        W. Gunnerman v. Robert Van Maasdijk, Richard L. Masica, Larry G. Schafran,
        Edward E. Urquhart* ,
        and was
        filed in the Second Judicial District Court of the State of Nevada, in and
        for
        the County of Washoe, Case No Case No. CV07 00103, Dept. No. B6. Gunnerman’s
        Complaint seeks declaratory and injunctive relief with respect to the amendments
        to the Company’s bylaws made by the Company’s Board of Directors on Wednesday,
        January 17, 2007. Gunnerman alleges that the independent directors’ amendment to
        the Company’s bylaws which provides that the Board of Directors shall have
        exclusive authority to amend the bylaws was invalid and the bylaw amendment
        should be declared invalid. The independent directors have counterclaimed
        for a
        declaration that the amendment was valid and in the Company’s best interest.
        Discovery in this case has not begun and no trial date has been
        set.
  On
        January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
        against certain current and former officers and directors or the Company
        in the
        Second Judicial District Court of the State of Nevada, in and for the County
        of
        Washoe. The case is known as *Thomas
        Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman,
        Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles
        Van
        Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence
        G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph
        Henkel* ,
        Case
        No. CV07 00137, Dept. No. B6. The complaint alleges, among other things,
        that
        the defendants breached their fiduciary duty to the Company by failing to
        act in
        good faith and diligence in the administration of the affairs of the Company
        and
        in the use and preservation of its property and assets, including the Company’s
        credibility and reputation. The Company and the Board intend to file a Motion
        for Dismissal with the Court, based upon the Plaintiff’s failure to make a
        demand upon the Board.
  On
        June
        26, 2006, the Company filed an action, *SulphCo,
        Inc. v. Cullen* ,
        in the
        Second Judicial District Court of the State of Nevada, in and for the County
        of
        Washoe, Case No. CV06-01490, against Mark Cullen arising out of Mr. Cullen’s
        alleged breach of a secrecy agreement that he had executed when employed
        by GRD,
        Inc., whose claims have accrued to the Company. The lawsuit seeks damages,
        a
        constructive trust, and an order requiring Mr. Cullen to assign to the Company
        certain intellectual property in the form of patent applications
        (as well as a now-issued patent) that he filed following his departure from
        the
        Company. On October 23, 2006, Mr. Cullen moved to dismiss the Company’s
        complaint; the
  F-23
  motion
        was denied. On February 26, 2007, Mr. Cullen filed an amended answer to the
        Company’s complaint. That Answer included counterclaims for breach of contract,
        unfair competition, interference with contractual relations, and interference
        with prospective economic advantage. The Company views Mr. Cullen’s
        counterclaims as without merit and has moved to dismiss them. Discovery in
        this
        case has not yet begun, and no trial date has been set.
 
 **12.** **Common
        Stock**
 
 Other
        than stock based compensation disclosed in Note 13 and related party
        transactions disclosed in Note 15, the Company had the following transactions
        related to its common stock during the years ended December 31, 2006, 2005,
        and
        2004:
 
 In
        January 2004 the Company issued 100,000 shares of common stock at $0.85 per
        share, the closing value on the date issued, for the services of a consultant
        valued at $85,000.
 
 In
        June
        2004 the Company entered into two private placements. The first private
        placement was to sell 2,978,342 shares of common stock at $0.90 per share,
        warrants exercisable at $1.125 per share for 1,073,690 shares of common stock,
        additional investment rights (“AIR’s”) entitling the purchaser to purchase up to
        6,135,357 shares of common stock at a purchase price of $0.90, and upon exercise
        of AIR’s, additional warrants to purchase up to 2,147,379 shares of common stock
        at $1.125 per share. The additional warrants are issued for shares equal
        to 35%
        of shares issued when the AIR’s are exercised. The AIR’s were exercisable by
        investors for 180 trading days following the date the registration statement
        was
        first declared effective by the Securities and Exchange Commission. That
        occurred June 27, 2005, which caused the expiration date to be March 15,
        2006.
        The warrants are exercisable for up to 30 months after the later of the June
        27,
        2005 effective date or the date of their issuance. All 2,978,342 shares were
        issued for net cash proceeds totaling $2,342,985 during 2004. During 2005
        AIR’s
        for 2,280,229 shares and warrants for 410,403 shares were exercised for proceeds
        of $2,513,909. Additional warrants for 798,080 were issued. At December 31,
        2005
        AIR’s for 3,855,137 shares and warrants for 1,461,368 were outstanding from this
        placement. During 2006, the balance of AIR’s for 3,855,137 shares were
        exercised, resulting in the issuance of additional warrants for 1,349,295shares.
        Warrants for 1,628,438 shares were exercised with adjustments for cashless
        exercises requiring 3,967 fewer shares to be issued. Gross proceeds for 2006
        were $5,235,003. At December 31, 2006 warrants for 1,182,224 shares were
        outstanding from this placement. See Note 19 regarding a subsequent transaction
        relating to this placement.
 
 The
        second private placement was to sell 2,030,960 shares of common stock at
        $1.25
        per share, warrants exercisable at $1.5625 per share for 732,161 shares of
        common stock, AIR’s entitling the purchaser to purchase up to 2,091,889 shares
        of common stock at $1.25 per share, and upon exercise of AIR’s, additional
        warrants to purchase up to 1,464,322 shares of common stock at $1.5625 per
        share. The additional warrants are issued for shares equal to 70% of shares
        issued when the AIR’s are exercised. The AIR’s were exercisable by investors for
        180 trading days following the date the registration statement was first
        declared effective by the Securities and Exchange Commission. As registration
        for both 2004 placements were combined, the expiration date was March 15,
        2006.
        The warrants are exercisable for up to 30 months after the later of the June
        27,
        2005 effective date or the date of their issuance. All 2,030,960 shares were
        issued during 2004 for net cash proceeds totaling $2,236,466. During 2005
        AIR’s
        for 810,656 shares and warrants for 291,121 shares were exercised for proceeds
        of $1,468,198. Additional warrants for 567,460 shares were issued. At December
        31, 2005 AIR’s for 1,281,232 shares and warrants for 1,008,500 were outstanding
        from this placement. During 2006, the balance of AIR’s for 1,281,232 shares were
        exercised, resulting in the issuance of additional warrants for 896,862 shares.
        Warrants for 1,110,105 shares were exercised with adjustments for cashless
        exercises requiring 3,967 fewer shares to be issued. Gross proceeds for 2006
        were $ 3,277,679. At December 31, 2006 warrants for 795,256 shares were
        outstanding from this placement. See Note 19 regarding a subsequent transaction
        relating to this placement.
 
 For
        both
        placements additional fees equal to 7% of proceeds from the exercise of AIR’s
        was payable to Olympus Securities, LLC pursuant to the agreement. At December
        31, 2005 this amount was $214,587 and unpaid. The total fee of $214,587 was
        paid
        in 2006. The fees are accounted for as a charge to Paid-In-Capital.
 
 F-24
  The
        Company is obligated to pay $760,240 in late registration fees due to the
        registration statement related to the private placements in June of 2004
        not
        having become effective on time, as provided in 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 were not declared effective
        by
        the SEC within 90 days of the date of the investment. As of December 31,
        2006,
        accrued interest on these fees totaled $181,243. Additional fees may accrue
        in
        2006 for investors still holding restricted shares due to the registration
        statement becoming inactive and may continue to accrue until the registration
        is
        reactivated. As very few of the shares are still held, the amount involved
        is
        immaterial.
 
 In
        August
        2004 the Company issued 45,000 shares at $2.86 per share, the closing value
        on
        the date issued, for the services of a consultant valued at
        $128,700.
 
 In
        September 2004 the Company received 45,000 subscribed shares which were returned
        to cancel part of a subscription receivable at $1.50 per share or
        $67,500.
 
 In
        April
        2005 fifteen thousand shares of common stock were issued at $5.91 per share,
        the
        closing value on the date issued, in exchange for consulting services valued
        at
        $88,650.
 
 During
        August through December of 2005, additional investment rights and warrants,
        issued in the two private placements of 2004, were exercised for 3,792,410
        shares for net proceeds of $3,767,518. Additional warrants for 1,365,543
        shares
        of Common stock were issued pursuant to the agreements as a result of exercises
        of additional investment rights.
 
 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 covering the resale of the shares
        of
        common stock issued at closing and shares issuable upon exercise of warrants.
        The registration statement was declared effective by the SEC on June 23,
        2006.
        See Note 19 regarding a subsequent transaction relating to this
        placement.
 
 The
        Company granted 217,500 shares of its common stock during 2006, all of which
        were vested during the year. The weighted-average grant-date fair value of
        those
        shares was $7.94 per share.
 
 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.
 
 All
        AIR’s
        and warrants are valued at exercise price when exercised net of any offering
        fees payable.
 
 **13.** **Stock
        Plans and Share-Based Compensation**
 
 Beginning
        in 2006, the Company records compensation in the form of grants of common
        stock
        and options for common stock at fair value in accordance with FAS No. 123(R),
        which requires all share-based payments to employees, including grants of
        employee stock options, to be recognized in the income statement based on
        their
        fair values.
 
 Prior
        to
        2006, the Company had adopted the disclosure provision for stock-based
        compensation of FAS No. 123, “Accounting for Stock-Based Compensation,” and FAS
        No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,”
but continued to account for such items using the intrinsic value method
        as
        outlined under APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
Under APB 25, if the exercise price of the Company’s employee stock options
        equaled or exceeded the fair market value of the underlying stock on the
        date of
        grant, no compensation expense was recognized.
 
 F-25
  For
        purposes of required pro forma disclosures for periods prior to 2006, the
        estimated fair value of employee options was amortized to expense over the
        vesting period of the options. No employee held options at the end of 2004
        and
        2005. No employee stock options were issued in 2005. Kirk Schumacher, whose
        employment had terminated before the end of 2004, held fully vested options
        until February 2006 when he exercised them. The options exercised for employee
        compensation during the year ended December 31, 2004 were included in the
        net
        loss for 2004. Thus the pro forma disclosure applies only to 2004 and is
        presented below under the detailed description of the related
        options.
 
 The
        following sets forth share-based compensation during the years 2004, 2005,
        and
        2006:
 
 In
        February 2003 the Company agreed to issue 50,000 shares of common stock to
        Kirk
        Schumacher, a Director, at $0.42 per share for director services of $21,000.
        These shares were issued in March 2004.
 
 In
        February 2003 the Company entered into an Executive Employment Agreement
        with
        its then President Kirk S. Schumacher who served as President and Secretary
        from
        February 2004 through December 2004. The agreement included a grant of stock
        options for 1,000,000 shares of the Company’s common stock, fully vested, at an
        exercise price of $.55 per share, the value of the stock at grant date, expiring
        February 14, 2006.
 
 In
        July
        2004, the Company issued to Kirk Schumacher, President, Secretary, and Director,
        200,000 shares of common stock at $0.55 per share in connection with the
        exercise of stock options granted in 2003 for cash in the amount of
        $110,000.
  In
        July
        2004, the company issued to Patrick Lacy, Controller and Director, 100,000
        shares of common stock at $0.35 per share in connection with the exercise
        of
        stock options granted in 2003 for cash in the amount of $35,000.
 
 In
        November 2004 the Company entered into a stockholders relations consulting
        agreement with Rubenstein Public Relations, Inc. providing for cash compensation
        of $10,000 per month. Pursuant to this agreement the Company also agreed
        to
        issue: (i) one warrant evidencing the right to purchase 50,000 shares of
        unregistered common stock at an exercise price of $1.93, the closing price
        of
        trading common stock at the date of the execution of the agreement; and (ii)
        provided the agreement had not been terminated as of May 2005 (which it had
        not), one warrant evidencing the right to purchase 50,000 shares of
        unregistered common stock at an exercise price equal to the closing price
        of
        trading common stock on May 11, 2005, which was $3.85. Each of the warrants
        will
        expire in November 2009. No value was given to these warrants as the intrinsic
        value was zero on the dates of grant and the Company was paying a fair value
        charge in cash for the services it received.
 
 Effective
        December 28, 2004 Kirk Schumacher resigned as President and Secretary. In
        connection with Mr. Schumacher's resignation, the Company and Mr. Schumacher
        entered into a Separation Agreement and General Release, dated and effective
        December 28, 2004, which provided for cancellation of 500,000 of the 1,000,000
        million options previously granted to him under his Executive Employment
        Agreement, of which 200,000 had been exercised, and to receive a separation
        payment of $165,000 upon resignation in lieu of the $600,000 severance payment
        provided for under the Executive Employment Agreement. The remaining 500,000
        options previously granted under the Executive Employment Agreement were
        cancelled pursuant to the separation payment. The separation agreement was
        used
        to exercise the remaining 300,000 options.
  In
        addition, on December 28, 2004, Dr. Rudolf Gunnerman personally granted to
        Mr.
        Schumacher an option to acquire 100,000 shares of the Company’s Common Stock
        owned by Dr. Gunnerman at an exercise price of $0.55. This option was exercised
        in February 2006 prior to expiration. The proceeds were paid to Dr.
        Gunnerman.
 
 F-26
  The
        estimated fair value of the options issued at termination of employment of
        Mr.
        Schumacher were $567,000, based on the Black-Scholes option valuation model
        using a volatility of 172%, an interest rate of 3.5%, and assuming no discount
        for restricted shares. The intrinsic value used for recording those options
        was
        $555,000. The pro forma amounts for 2004 are as follows:
 
 2004Net
                  loss - as reported
              
              $
              (4,146,453
              )Net
                  loss - pro forma
              
              $
              (4,158,453
              )Loss
                  per share - as reported
              
              $
              (0.08
              )Loss
                  per share - pro forma
              
              $
              (0.08
              )
 
 In
        January 2005 fifty thousand restricted shares of common stock were issued
        at
        $4.08 per share, the closing value on his effective date of appointment,
        to the
        CFO Alan Austin, Jr. for compensation expense valued at $204,000.
 
 In
        April
        2005 fifty thousand restricted shares of common stock were issued at $4.99
        per
        share, the closing value on April 13, 2005, the effective date of his
        appointment to the Board of Directors, to Robert Van Maasdijk, a Director,
        for
        services valued at $249,500.
 
 In
        May
        2005 fifty thousand restricted shares of common stock were issued at $3.54
        per
        share, the closing value on May 17, 2005, the effective date of his appointment
        to the Board of Directors, to Dr. Raad Alkadiri, a Director, for services
        valued
        at $177,000.
 
 In
        December 2005 fifty thousand restricted shares of common stock were issued
        at
        $3.61 per share, the closing value on November 10, 2005, the effective date
        of
        his appointment to the Board of Directors, to Dr. Hannes Farnleitner, a
        Director, for services valued at $180,500.
 
 In
        December 2005 fifty thousand restricted shares of common stock were issued
        at
        $6.40 per share, the closing value on December 8, 2005, the effective date
        of
        his appointment to the Board of Directors, to Christoph Henkel, a Director,
        for
        services valued at $320,000.
 
 Effective
        January 1, 2006 in consideration of Michael Applegate’s agreement to join the
        Company as Chief Operating Officer, he was granted 50,000 restricted shares
        of
        the Company’s common stock valued at approximately $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 April 1, 2006.
 
 In
        February 2006 the Company granted to Michael Heffner 50,000 restricted shares
        of
        common stock valued at $8.80 per share, the closing price on February 6,
        2006,
        the effective date of his appointment to the Board of Directors, for services
        valued at approximately $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.
 
 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 oversaw engineering
        and construction for the project in Fujairah, United Arab Emirates. The fee
        for
        these services includes grants of stock and options as follows: (i) 17,500
        of
        the Company’s 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 the
        Company’s common stock at $6.00 per share and are fully vested at project
        completion, exercisable by
  F-27
  April
        1,
        2010. This agreement was amended on September 13, 2006 which made it clear
        that
        the grants were fully vested by September 29, 2006. The value of these services
        is included in research and development expense as it relates to plant and
        equipment construction-in-progress. The 17,500 shares were valued at the
        $7.44
        closing price on March 29, 2006, or approximately $130,200. The options were
        valued at $357,525 based on the Black-Scholes valuation model using the
        assumptions described below.
 
 On
        June
        19, 2006 the stockholders of the Company approved the 2006 Stock Option Plan
        (“Plan”), which authorizes the granting of options for up to 2,000,000 shares of
        the Company’s common stock. The Plan is administered by an Option Committee
        comprised of three independent directors. Effective May 23, 2006, subject
        to
        stockholder approval of the Plan, the Option Committee granted an option
        for
        125,000 shares to Vice Chairman of the Board Robert van Maasdijk and an option
        for 1,000,000 shares to Chairman and CEO Rudolf Gunnerman. Each option has
        a
        term of three years and an exercise price of $9.03 per share.
 
 Robert
        van Maasdijk’s option was valued at $687,500 based on the Black-Scholes
        valuation model using the assumptions described below. It was fully vested
        when
        issued and expensed.
 
 Dr.
        Gunnerman’s option provides that he may not exercise it until the Company has
        reported at least $50 million in annual revenues or there is a “change in
        control” of the Company as defined in the Plan. This option was valued at $3.72
        million based on the Black-Scholes valuation model using the assumptions
        described below.
 
 For
        purposes of determining the period over which Dr. Gunnerman’s option was to be
        expensed, the Company had made the assumption in the second quarter of 2006
        that
        it would generate at least $50 million in revenue by the end of the first
        quarter of 2007. The Company assumed at the end of the third quarter 2006
        that
        such revenue would be generated by the end of the second quarter of 2007.
        The
        option value began being expensed pro-rata over implicit vesting periods
        from
        the effective grant date of June 19, 2006. For the second and third quarters
        of
        2006, $1,045,000 had been expensed for these options. At December 31, 2006,
        such
        compensation cost was charged to expense pursuant to Financial Accounting
        Standard No. 123R (Share-Based Payment) as the employment of Dr. Gunnerman
        was
        terminated in January, 2007, which terminated his right to exercise the
        option.
 
 The
        tables below describe the assumptions used in the Black-Scholes calculations
        for
        valuing options granted in 2006. In every case expected volatility is based
        upon
        calculated historical volatility of Company stock over the same term or expected
        term used to calculate the option value.
 
 For
        options fully vested in 2006:
  Nardi
              
              Mustang
              
              van
                  MaasdijkDates
                  of options
              2/28/06
                  & 3/31/06
              
              3/29/06
              
              6/19/06Term
              One
                  year
              
              to
                  4/1/10
              
              to
                  5/22/09Expected
                  volatility
              129%
                  - 131%
              
              162%
              
              147%Expected
                  dividends
              None
              
              None
              
              NoneRisk-free
                  interest rate
              5%
              
              5%
              
              5.2%Discount
                  for post-vesting restrictions
              None
              
              None
              
              None
 
 For
        Dr.
        Gunnerman’s option:
 
 Date
                  of option
              6/19/2006Term
              to
                  5/22/09Expected
                  term used to calculate value
              646
                  DaysExpected
                  volatility
              117%Expected
                  dividends
              NoneRisk-free
                  interest rate
              5.2%Discount
                  for post-vesting restrictions
              None
  F-28
  On
        August
        16, 2006 the Company granted to Edward E. Urquhart 50,000 restricted shares
        of
        common stock valued at $5.53 per share, the closing price that day, the
        effective date of his appointment to the Board of Directors, for services
        valued
        at $276,500.
 
 On
        December 5, 2006 the Company granted to Lawrence G. Schafran 50,000 restricted
        shares of common stock valued at $4.87 per share, the closing price that
        day,
        the effective date of his appointment to the Board of Directors, for services
        valued at $243,500.
  Other
        than the additional investment rights and warrants related to the private
        placements of 2004 and 2006, the following table summarizes the above
        information about stock options related to employees and non-employees which
        were outstanding during 2006, 2005, and 2004:
 
 **2006**
              
              **2005**
              
              **2004**Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Shares
              
              Weighted
                Average
                Exercise
                PriceOutstanding,
                  beginning
              
              
              200,000
              
              $
              1.72
              
              
              150,000
              
              $
              1.01
              
              
              1,100,000
              
              $
              0.53Options
                  exercised
              
              
              (100,000
              )
              
              0.55
              
              
              -
              
              
              -
              
              
              (600,000
              )
              
              0.52Options
                  forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (500,000
              )
              
              0.55Option
                  granted
              
              
              1,179,500
              
              
              8.89
              
              
              50,000
              
              
              3.85
              
              
              150,000
              
              
              1.01Outstanding,
                  ending
              
              
              1,279,500
              
              $
              8.42
              
              
              200,000
              
              $
              1.72
              
              
              150,000
              
              $
              1.01Exercisable
                  12/31/06
              
              
              279,500
              
              $
              6.25
 
 In
        2006
        the Company granted options to acquire 1,179,500 shares of its common stock.
        The
        weighted-average grant-date fair value of stock options issued in 2006 was
        $8.89
        per option share. Options for 100,000 shares were exercised during 2006.
        The
        total fair value of the 179,500 option shares vested during 2006 was
        $1,457,750.
 
 For
        option shares fully vested during 2006, which were both outstanding and
        currently exercisable at December 31, 2006, the weighted average exercise
        price
        was $8.42 per share, the aggregate intrinsic value was zero, and
        weighted-average remaining contractual term of the options was 31
        months.
 
 Total
        compensation cost for share-based payments for each year 2006, 2005, and
        2004
        was $2,779.275, $1,568,225, and $138,625, respectively.
 
 The
        Company has a Non-Officer Limited Stock Appreciation Rights Plan. In August
        2003
        ten employees were granted awards for 2,500 limited stock appreciation rights,
        each with a multiplier of eighteen, at a base price of $0.24, with a maximum
        value of $450,000 per employee. The limited stock appreciation rights are
        exercisable only upon the following two conditions being met: First, the
        closing
        price of the Company’s common stock must have exceeded $10 for at least three
        consecutive trading days, or the stock price in a proposed acquisition must
        exceed $10. Second, the Company must have engaged in an acquisition after
        the
        first condition is met. Under the plan, “acquisition” means that the Company is
        merged or consolidated with another company wherein over 20% of voting control
        is lost by Company shareholders; or that over 50% of the Company is acquired
        by
        an entity owning 20% or less of the Company prior to acquisition; or any
        other
        acquisition determined by the Board of Directors. Rights to awards end upon
        termination of employment. As of December 31, 2006, five of the ten employees
        originally granted rights are still employed and covered under the plan.
        No
        values can be ascribed to these awards unless and until the Company engages
        in
        an acquisition.
  F-29
  **14.** **Stock
        Subscriptions**
 
 As
        of
        December 31, 2005, the Company had stock subscriptions receivable of $744,500.
        In January 2004 the Company filed suit to collect $737,000 for a stock
        subscription receivable that is being disputed (see Note 11). At December
        31,
        2006, the Company reversed the receivable against paid in capital due to
        continued uncertainty of collecting it based on the determination of legal
        counsel.
 
 **15.** **Related
        Party Transactions**
 
 Other
        than share-based compensation as detailed in Note 13, the following sets
        forth
        related party transactions occurring in the years 2004, 2005, and
        2006.
 
 The
        Company paid to RWG, Inc., a corporation wholly owned by Dr. Rudolf Gunnerman
        the Chairman and CEO, consulting fees of $620,000, $360,000 and $370,000
        in
        2006, 2005, and 2004 respectively. The consulting agreement, was set to
        terminate on July 1, 2005, and was renewed until July 1, 2006. It was renewed
        again until July 1, 2007. The agreements called for $480,000 per year; however,
        RWG, Inc. had agreed to take $30,000 per month until the private placement
        financing in March, 2006, whereupon the Company began paying $40,000 per
        month.
        As part of the renewal of the contract in July, 2006, RWG, Inc. was also
        paid
        amounts previously waived, totaling $170,000. The Company did not pay a salary
        to Dr. Gunnerman.
 
 As
        discussed in Note 13, 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. That option was exercised in February 2006. As Dr. Gunnerman
        was 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
        2005
        the Company had a consulting agreement with Peter Gunnerman’s wholly owned
        company Global 6 LLC prior to him becoming the Company’s COO and President.
        Global 6 LLC was paid $50,000 in consulting fees and reimbursed $50,015 in
        travel related expenses.
 
 Beginning
        in 2005, the Company had a consulting agreement with Peak One Consulting,
        Inc.,
        a company owned 100% by a Director, Richard Masica, which was paid $29,711
        and
        $57,313 in fees for management and technical consulting and reimbursed $2,784
        and $18,683 in travel related expenses in 2006 and 2005,
        respectively.
 
 The
        Company had a consulting arrangement with a Director Michael Heffner who
        was
        paid $48,871 in technical consulting fees and $5,216 in travel related expense
        reimbursements in 2006.
 
 Total
        related party expenses were $4,163,920, $1,539,018, and $1,771,887 in 2006,
        2005, and 2004, respectively. Total related party cash payments were $1,880,420,
        $1,277,018, and $755,101 in 2006, 2005, and 2004 respectively. Included in
        these
        figures are amounts disclosed in Notes 10 and 13.
 
 In
        September 2006, the Company advanced approximately $137,000 to the joint
        venture, Fujairah Oil Technology, to be used for expenses relating to
        construction of the Fujairah test facility. Of the funds advanced, approximately
        $96,000 remain for future expenses related to the construction of the test
        facility.
 
 **16.** **Operating
        Lease**
 
 The
        Company leases office and warehouse space in Sparks, Nevada. In February
        2004
        the Company extended its lease term for one additional year through March
        3,
        2005, and in February of 2005, the lease was again extended for two years
        to
        February 28, 2007, and subsequently extended through May 2007. Dr. Rudolf
        Gunnerman, the Chairman and CEO guaranteed the lease.
  F-30
 Following
        is a schedule of payments required under the rental lease
        agreement:
 
 2007
              
              $
              74,393After
                  2007
              
              
              -0-Total
                  minimum lease payments
              
              $
              74,393
 
 The
        Company incurred $439,373, $434,635, and $443,007 for rent expense in 2006,
        2005, and 2004, respectively.
 
 **17.** **Quarterly
        Financial Information (Unaudited)**
 
 Summarized
        unaudited quarterly financial information for the years ended December 31,
        2006,
        2005 and 2004 is noted below (in thousands, except for per share
        amounts):
  **2006**
              
              Mar.
                  31
              
              Jun.
                  30
              
              Sep.
                  30
              
              Dec.
                  31(restated)
              
              (restated)
              
              (restated)Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  (loss)
              
              $
              (9,180
              )
              $
              (18,452
              )
              $
              (5,724
              )
              $
              (5,760
              )Net
                  (loss) per share - basic and diluted
              
              $
              (0.14
              )
              $
              (0.25
              )
              $
              (0.08
              )
              $
              (0.08
              )**2005**
              
              Mar.
                  31
              
              Jun.
                  30
              
              Sep.
                  30
              
              Dec.
                  31Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  (loss)
              
              $
              (2,325
              )
              $
              (2,357
              )
              $
              (1,840
              )
              $
              (2,906
              )Net
                  (loss) per share - basic and diluted
              
              $
              (0.04
              )
              $
              (0.04
              )
              $
              (0.03
              )
              $
              (0.05
              )**2004**
              
              Mar.
                  31
              
              Jun.
                  30
              
              Sep.
                  30
              
              Dec.
                  31Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  loss
              
              $
              (803
              )
              $
              (736
              )
              $
              (915
              )
              $
              (1,692
              )Net
                  loss per share - basic and diluted
              
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.02
              )
 
 F-31
  **18.** **New
        Accounting Pronouncements**
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, *Accounting
        for Uncertainty in Income Taxes — an Interpretation of FASB Statement
        No. 109* (FIN 48).
        This interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with
        FAS No. 109, *Accounting
        for Income Taxes* and will
        require that companies determine whether it is more-likely-than-not that
        a tax
        positions taken or expected to be taken in tax returns would be sustained
        based
        on their technical merits.  FIN 48 is effective for the Company
        beginning January 1, 2007. The
        adoption of this Interpretation is not expected to have a material impact
        on the
        Company’s financial position, results of operations, or cash flows.
  In
        September 2006, the SEC issued SAB No. 108, Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements .
        SAB No.
        108 provides guidance on how prior year misstatements should be considered
        when
        quantifying misstatements in current year financial statements for purposes
        of
        determining whether the current year’s financial statements are materially
        misstated. SAB No. 108 is effective for fiscal years ending after November
        15,
        2006. The application of SAB No. 108 did not have a material impact on the
        Company’s results of operations or financial position.
  In
        July
        2006, the FASB issued FASB Interpretation No. 48, Accounting
        for Uncertainty in Income Taxes (“FIN
        48”). The interpretation clarifies the accounting for uncertainty in income
        taxes recognized in a company’s financial statements in accordance with SFAS No.
        109, Accounting for Income Taxes. Specifically, the pronouncement prescribes
        a
        recognition threshold and a measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. The interpretation also provides guidance on the related
        derecognition, classification, interest and penalties, accounting for interim
        periods, disclosure and transition of uncertain tax positions. This
        interpretation was effective for the Company on January 1, 2007. The Company
        is
        currently evaluating the impact this new standard will have on its future
        results of operations and financial position.
  In
        September 2006, the FASB issued SFAS No. 157, Fair
        Value Measurements (“SFAS
        157”), which defines fair value, establishes a framework for measuring fair
        value in accordance with GAAP, and expands disclosures about fair value
        measurements. SFAS 157 applies where other accounting pronouncements require
        or
        permit fair value measurements; it does not require any new fair value
        measurements under GAAP. SFAS 157 is effective for the Company on January
        1,
        2007. The effects of adoption will be determined by the types of instruments
        carried at fair value in the Company’s financial statements at the time of
        adoption as well as the method utilized to determine their fair values prior
        to
        adoption. Based on the Company’s current use of fair value measurements, SFAS
        157 is not expected to have a material effect on the results of operations
        or
        financial position of the Company.
  The
        FASB
        has issued several new standards which have effective dates subsequent to
        the
        Company’s year end.  Management does not believe that any of these new
        standards will have a material impact on the Company’s financial position,
        results of operations or cash flows in the near future.
  **19.** **Subsequent
        Events**
 
 On
        January 12, 2007, the former CEO, Dr. Rudolf Gunnerman, was dismissed as
        Chief
        Executive Officer and Chairman of the Board. Larry Ryan was named the new
        Chief
        Executive Officer and Robert van Maasdijk was appointed Chairman of the
        Board.
 
 On
        January 24, 2007, a former director, who had previously served on the Board
        of
        Directors in 2005, rejoined the board.
 
 Effective
        March 12, 2007, the Company raised $7,899,689 through an exercise of outstanding
        warrants. Warrants for 1,952,068 shares were exercised at their stated exercise
        prices of $1.125 and $1.5625 pursuant to the Securities Purchase Agreements
        dated as of June 1, 2004 and June 14, 2004, respectively. Half of the warrants
        issued pursuant to the Securities Purchase Agreement, dated as of March 29,
        2006
        (the “2006 Warrants”) were exercised at $2.68, which was a reduction from the
        original exercise price of $6.805. The warrant holders received additional
        warrants (the “Additional Warrants”) to replace all of the warrants that were
        exercised on a one to one basis. Each Additional Warrant expires three years
        from the date of issuance and entitles the holder to purchase one share of
        common stock at $2.68. The issuance of the Additional Warrants is exempt
        from
        registration under the Securities Act of 1933, as amended (the “Securities Act”)
        pursuant to Section 4(2) of the Securities Act, as a transaction by an issuer
        not involving a public offering.
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