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, 2009


or





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





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





Commission
file number 001-32636





SULPHCO, INC.


(Exact
name of registrant as specified in its charter)





Nevada
                  (State
      or other jurisdiction of incorporation or organization)
                
                88-0224817
                  (I.R.S.
      Employer Identification
No.)





4333 W. Sam Houston Pkwy N., Suite
      190
                  Houston, TX
                  (Address
      of principal executive offices)
                
                77043
                  (Zip
      Code)





(713)
896-9100


(Registrant's
telephone number, including area code)





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





Common Stock, ParValue $0.001 Per
    Share
                
                NYSE Amex(Title
      of each class)
                
                (Name
      of each exchange on which
registered)





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
þ





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
þ





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 þ  No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes  ̈  No
þ





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, a non-accelerated filer, or a smaller reporting


company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange


Act.





Large
      accelerated filer  ̈
            
            Accelerated
      filer þNon-accelerated
      filer  ̈
      (Do not check if a smaller reporting company)
            
            Smaller
      Reporting Company  ̈





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





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 common equity was
last sold on June 30, 2009, the last business day of the registrant’s most
recently completed second fiscal quarter, was $63,151,455.





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 February 15, 2010,
was 101,708,741.





Documents
incorporated by reference: portions of the registrant’s proxy statement for its
2010 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.





SULPHCO,
INC.


2009
FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





Page No.PART
      IItem
      1.
                        Business.
                        3Item
      1A.
                        Risk
      Factors.
                        16Item
      1B.
                        Unresolved
      Staff Comments.
                        21Item
      2.
                        Properties.
                        21Item
      3.
                        Legal
      Proceedings.
                        22Item
      4.
                        Submission
      of Matters to a Vote of Security Holders.
                        24PART
      IIItem
      5.
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters
      and
                        25Issuer
      Purchases of Equity Securities.Item
      6.
                        Selected
      Financial Data.
                        27Item
      7.
                        Management’s
      Discussion and Analysis of Financial Condition and Results ofOperation.
                        28Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk.
                        34Item
      8.
                        Financial
      Statements and Supplementary Data.
                        34Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                        34Item
      9A.
                        Controls
      and Procedures.
                        34Item
      9B.
                        Other
      Information.
                        34PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance.
                        35Item
      11.
                        Executive
      Compensation.
                        35Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and
                        35Related
      Stockholder Matters.Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence.
                        35Item
      14.
                        Principal
      Accounting Fees and Services.
                        35PART
      IVItem
      15.
                        Exhibits,
      Financial Statement Schedules.
                        36Financial
      Statements for the Years Ended December 31, 2009, 2008 and
      2007.
                        F-1







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 website, 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.
  2
  PART
I
  Item
1.  Business.
  Overview
  SulphCo
is an energy technology company focused on the development and
commercialization of an oxidative desulfurization (“ODS”) process for crude oil
products, crude oils, and condensate streams. SulphCo’s oxidative
desulfurization process consists of (1) the ultrasound assisted conversion of
the sulfur compounds to their oxidized analogs employing its patented and
proprietary SonocrackingTM technology, and (2) the subsequent removal of these
oxidized compounds by a separation technique such as adsorption (the “SulphCo
Process”).
  Ever
increasing environmental regulations are mandating the reduction of sulfur
content in many fuels, including gasoline, diesel fuel, and bunker
fuel.  For example, the sulfur specification for finished diesel fuel
in certain jurisdictions is less than 10 parts per million (“ppm”), while
typical starting concentrations are in the thousands of ppm. The currently
practiced method for desulfurization is hydrodesulfurization
(“HDS”).  HDS requires a large capital investment and suffers from
high hydrogen and energy consumption as severe operating conditions have to be
employed to treat the most refractory sulfur compounds. In contrast, the SulphCo
Process allows for  comparably mild reaction conditions such as
ambient temperatures and mild pressures, resulting in a potentially more cost
effective and energy efficient alternative to HDS for certain applications
within the refining, transportation, and blending market segments.
  We
maintain our principal executive offices and facilities at 4333 W. Sam Houston
Pkwy N., Suite 190, Houston, Texas 77043.  Our telephone number is
(713) 896-9100.  Our corporate website is
www.sulphco.com.  The information contained on our website is not part
of this report.
  Research
and Development Activities Update
  The
following is an update of the Company’s more significant research and
development activities conducted during 2009.
  Development of Catalyst
Systems and AdsorptionProcess
 Activities in 2009 continued to center
around optimizing additive packages for the sulfur conversion step as well as
establishing key parameters for the adsorption process typically needed for
sulfur removal. For the diesel finishing and transmix applications, a variety of
catalyst systems have been evaluated, with achievement of sulfur content levels
of less than 15 ppm for several streams. Targeted efforts to improve
cost/benefit ratios have led to the identification of several promising catalyst
systems. We also established a dedicated effort on adsorption for sulfur
removal. At least two potential adsorbent alternatives have been identified and
characterized. Ongoing work is oriented towards process
implementation.
  For a
specific condensate application, the primary focus was on the removal of
mercaptan sulfur compounds. We successfully developed a low-cost catalyst system
for this particular application. The catalyst is tunable and allows for
mercaptan and total sulfur reduction depending on the specific requirements.
Equally important, our lab work suggests that sufficient sulfur removal can be
achieved by simple phase separation eliminating the need for an adsorption unit.
Ranges for critical process parameters such as flow rates, reaction temperatures
and pressures have been established.
  3
  Ultrasound Probe, Reactor
and Control Systems
 During 2009, SulphCo and Märkisches
Werk Halver, GmbH (“MWH”) developed a simplified control panel system that is
more conducive to continuous commercial operation. It incorporates an operator
interface to the ultrasound system with real-time process data updating and
automatic probe control.  It is intended to become the primary
interface for operators in a commercial setting, with the ability to integrate
into existing plant control systems. Enhancements include an updated amplitude
measurement device as well as an improved probe mounting assembly. The new
ultrasound probe mounting assembly simplifies field replacement of probes during
commercial operation. Our current state-of-the-art ultrasound probe, reactor and
control system technology is well suited for laboratory, pilot and commercial
use and only minor modifications are expected for the future. High intensity
endurance testing of the current ultrasound probe/transducer assembly was
initiated in September 2009 and is expected to continue into the second quarter
of 2010.  First results indicate probe lifetime of several weeks at
harsh testing conditions.
  Business
Development Activities Update
  The
following is an update on the more significant business development activities
the Company has been pursuing.
  With
respect to the Company’s ongoing commercial efforts, we continue to see a high
level of interest in the SonocrackingTM process as potential customers see the
value that can be driven by the technology.  We are pursuing what we
believe are opportunities presenting the highest likelihood of near-term success
for the technology (i.e., crude oil product streams such as diesel fuel, natural
gasoline, and naptha as well as low to moderate sulfur-containing crude oils and
condensates) and are working with several potential customers to achieve this
goal.
  Europe
 Based on the promising results of
laboratory and field trials conducted in the first quarter of 2009, SulphCo and
OMV Refining and Marketing GmbH (“OMV”) entered into a technology agreement
(the “Technology Agreement”) to jointly evaluate our SonocrackingTM technology in
several of OMV’s refining applications.  In early July 2009 we
completed the first series of detailed technology trials contemplated under the
Technology Agreement in which various petroleum products and crude oil streams
were treated using our SonocrackingTM technology in OMV’s pilot plant facilities
located in Schwechat, Austria. Based on the results of this first series of
technology trials, SulphCo and OMV have agreed to move forward with further
technical and economic evaluations for a select group of specific applications,
focusing on the most compelling economic cases. In the third quarter of 2009,
OMV utilized its linear program refining model to help determine detailed and
specific application economics. In early October 2009, Dr. Ryan, SulphCo’s CEO,
and Dr. Schattenmann, SulphCo’s CTO, traveled to Vienna to discuss the
preliminary results of the linear program refining model with OMV. Dr. Ryan and
Dr. Schattenmann met with OMV again in early November 2009 to discuss the next
steps in SulphCo's work with OMV regarding its project planning process through
which SulphCo’s SonocrackingTM technology could be integrated into a future OMV
investment cycle leading to the potential installation of a commercial
SonocrackingTM unit. Based on these discussions, OMV has decided to move forward
with further technology efforts focused on diesel streams produced from
different crude oil sources.  The goal is to determine the crude oils
that contain the diesel streams that, when treated by the SonocrackingTM process,
produce the highest benefits for OMV. It is expected that OMV will start
collecting the required diesel streams and will begin hydrotreating analysis in
their pilot lab facilities in the first quarter of 2010. While the Company is
encouraged by the recent progress, there can be no assurance that the Company
will be successful in implementing any commercial agreements.
  4
  North
America
 SulphCo
is pursuing a specific condensate application with an integrated major oil
company with a facility located in North America. We have performed several
lab-scale trials to demonstrate the effectiveness of our technology in this
particular application.  Technical representatives from this company
visited our Houston offices in June 2009 to confirm the lab-scale results and
subsequently recommended the installation of a SonocrackingTM unit at this
company’s facility in North America. In November 2009, this potential customer
changed the process requirements associated with this condensate
application. In response to this change, SulphCo formulated a proposed
solution that met the new technical requirements and provided it to this
potential customer.  The customer is currently evaluating investment
and process options that, if approved, could lead to the execution of a
placement and validation agreement to facilitate commercial scale validation of
the SonocrackingTM technology for this application. Additionally, discussions
with technical representatives of this company continue with respect to other
applications of the SonocrackingTM technology in its facilities around the
world.
  We have
presented in-house laboratory and third-party data with respect to the
performance of the SonocrackingTM technology to an independent refiner located in
the United States.  Based on those presentations and discussions, we
are working on samples of various streams from its facility to determine the
best value proposition for the technology in its system.  We have sent
a collaboration proposal to this potential customer and are awaiting results of
further laboratory tests to determine steps forward.  It is
anticipated that this proposal may lead to collaboration on application specific
technology developments and commercial scale demonstrations.
  On
September 15, 2009, SulphCo reported that it had executed a letter of intent
with Laguna Development Corporation ("Laguna") to move toward the installation
of SulphCo's desulfurization technology at Laguna's New Mexico trans-mix
facility. On November 13, 2009, SulphCo reported that it had executed a letter
of intent with Golden Gate Petroleum (“Golden Gate”) to move toward the
installation of SulphCo’s technology at Golden Gate’s Nevada trans-mix
facility.  SulphCo continues to work with Laguna, Golden Gate and
other companies in the trans-mix market to meet their technical and commercial
requirements to produce ultra-low sulfur diesel.
  In
addition to the ongoing discussions described above, we have been contacted by
several new potential customers expressing interest in the SonocrackingTM
technology, including integrated major oil companies, independent oil companies,
and small refiners.  Work continues on samples provided by several of
these potential customers which will form the basis for their evaluation of the
SonocrackingTM technology in their respective systems.
  While the
Company is encouraged by the recent progress in this region, there can be no
assurance that the Company will be successful in implementing any commercial
agreements.
  South
America
 Based on technical data presented by
SulphCo at meetings with a certain company in Argentina earlier this year, the
distribution agreement between SulphCo and J.W. Tecnologia
Servicios Petroleros S.A.C. (“South American Distributor”) has been
expanded to include that certain company in Argentina.  We have also
performed tests on crude oil and petroleum product streams provided by other
South American companies through our South American Distributor and have
achieved results consistent with testing performed on diesel fuels and oils
originating from other areas of the world. Proposals for collaboration were sent
to these potential customers in early 2009 and may lead to additional
discussions and possibly collaborative efforts to utilize the Sonocracking TM
technology on specific customer applications.
  5
  Further,
as a result of laboratory tests on samples provided by a large integrated oil
company in Brazil, technology meetings were held in that country during the
first quarter of 2009 and again during the first quarter of 2010. Based on
positive feedback from these meetings, a proposal for collaboration on
application specific technology and commercial scale demonstrations was sent to
this potential customer.  In response to this proposal,
discussions are being held with this company to identify the value
proposition for site specific applications and determine the appropriate actions
moving forward. It is anticipated these discussions may ultimately
lead to commercial demonstrations.
  While the
Company is encouraged by the recent progress in this region, there can be no
assurance that the Company will be successful in implementing any commercial
agreements.
  Middle
East
 The agreement with Amira Group Company
LLC (“Amira”), a U.S.-based oil and gas services company, granting Amira an
exclusive distributorship in the countries of Kuwait, Qatar, Abu Dhabi, Bahrain,
Saudi Arabia, Libya, Egypt and certain customer specific opportunities (the
"Amira Sales Territories") expired as of July 10, 2009. The parties are
evaluating a possible modification and extension of the previous agreement. As
of December 31, 2009, the Company has not entered into any customer agreements
in the Amira Sales Territories and there can be no assurance that the Company
will enter into any such agreements.
  Southeast
Asia
 On
February 11, 2008, we announced an agreement with Pt. Isis Megah (“Isis”), an
Indonesian oil and gas services company, granting Isis an exclusive
distributorship in the countries of India, Malaysia, Singapore and Indonesia
(the “Isis Sales Territories”). We concurrently announced a customer order
procured through Isis, conditioned upon the execution of an operating
agreement for SonocrackingTM units having at least 30,000 barrels per day
(“Bpd”) of processing capacity to be shipped at our expense from Fujairah to a
designated port within the Isis Sales Territories. Subsequently, the Company
shipped 90,000 Bpd of processing capacity from our facility in Fujairah, UAE, to
Singapore in April 2008.
  Subsequent
to the initial discussions with the potential customer, unanticipated events
occurred which led to delays in reaching a final placement agreement. We
understand, through Isis, that the customer has agreed to deliver samples to our
Houston facility where they will witness testing. To date, those samples have
not been procured and a date has not been set for testing in Houston. Once the
samples have been obtained, we will schedule the appropriate testing in
Houston.  In anticipation of other capacity requirements, the Company
has shipped the 90,000 Bpd of processing capacity previously stored in
Singapore to Houston during the fourth quarter of 2009.  The agreement
with Isis expired in February 2009 and was not renewed by the
Company.
  There can
be no assurance that the Company will be successful in implementing any
commercial agreements in the Isis Sales Territories.
  Fujairah
 As of
December 31, 2009, the Company had 90,000 Bpd of processing capacity at its
facility in Fujairah.  The Company has not conducted any validation
testing at the Fujairah facility during 2009. The ultimate timing of
future testing depends entirely on the requirements of potential customers.
There can be no assurance that the Company will be successful in implementing
any commercial agreements in Fujairah.
  6
  South
Korea
 To date
several attempts have been made by the Company to resolve the outstanding
business issues between it and SulphCo Korasia, but those issues have not been
resolved satisfactorily at this point. While we expect to continue our efforts
to resolve those issues, there can be no assurance that they will be resolved
favorably.
  General
Description of Our Technology
  SulphCo’s
patented and proprietary SonocrackingTM technology is designed to use high power
ultrasound to alter naturally occurring molecular structures. Under certain
conditions, ultrasonic waves can induce cavitation in a
liquid.  Cavitation involves the creation of bubbles at the sites of
refraction owing to the tearing of the liquid from the negative pressure of
intense sound waves in the liquid. The bubbles then oscillate under the effect
of positive pressure, growing to an unstable size as the wave fronts pass. The
ultrasound waves stress these bubbles, leading to their growth, contraction, and
eventual implosion, generating excess heat and pressure in and around every
micrometer and submicrometer-sized bubble. The entire process takes a few
nanoseconds and each bubble can behave as a microreactor, accelerating the
physical reactions owing to the heat released and localized pressures obtained.
The high temperature (estimated to be as high as 5,000 degrees Kelvin) and
pressure (estimated to be as high as 500 atmospheres) reached locally can
potentially cause disruption of molecular bonds.
  The
SulphCo Process applies high-power ultrasonic energy to a mixture of crude oil
products or crude oil in conjunction with a catalyst and an
oxidant.  The ultrasound provides an intense shearing and mixing
environment for the mixture and, along with the effects from cavitation, allows
for efficient oxygen transfer from the oxidant to sulfur-containing and other
compounds in the crude oil product or crude oil stream. Aside from the oxidation
of sulfur compounds, the process may also bring about the disruption of complex
asphaltenic structures and rupturing of bonds of complex hydrocarbons, which in
turn may result in upgrading the overall hydrocarbon content by reducing the
overall density and thereby increasing the API gravity.
  SulphCo's
proprietary SonocrackingTM units are designed to treat large volumes of petroleum
products at relatively low temperatures and pressures. The base design and
capacity for the SonocrackingTM technology consists of skid mounted processing
lines capable of up to 5,000 Bpd of throughput.  Successive lines can
be added to scale capacities in multiples of up to 5,000 Bpd.  SulphCo
has designed and implemented modular units with up to 15,000 Bpd capacity that
are skid mounted and can be transported in a typical shipping container. These
units possess smaller “footprints” and are expected to have lower capital costs
when compared to the conventional hydrotreating equipment and other upgrading
technologies.  This mobility and relative low capital cost make
installation of SonocrackingTM equipment in the upstream (production), midstream
(blending and transportation) and downstream (refining) sectors very flexible,
with the ability to match customer capacity needs while requiring a relatively
small “footprint.”
  The
Market for Our Technology
  Potential Improvements and Benefits
  The
SulphCo Process is designed to produce a number of desirable effects, including
the oxidation and removal of sulfur compounds, improvement in the API gravity
(reduction in relative density), reduction in viscosity, and potentially the
modification and removal of nitrogen-containing compounds.  Other
improvements, such as heavy metal reduction/concentration, may also be
possible.  The degree to which any one or more of these improvements
occur after treatment with the SulphCo Process depends heavily on the feed oil
or fuel characteristics, including molecular makeup of sulfur compounds,
asphaltene level and microstructure, acidity, and several other
factors.  Not all crude oil or crude oil products will respond to the
treatment to the same levels, therefore it is critical to optimize the process
for a given feed stream to maximize the process benefits.
  7
  The
economic benefit derived from the SulphCo Process depends on the overall
improvement imparted to the crude oil products or crude oil in conjunction with
customer and application-based drivers such as, but not limited to, crude oil
and crude oil product pricing spreads, reduction in operating costs including
reduced catalyst loading, lower hydrogen usage and lower carbon footprint,
improved processing flexibility, and other benefits.   Since
different sectors of the oil market have unique individual needs and potential
benefits, it is necessary to evaluate the overall benefit provided by the
SulphCo Process in the context of the customer application, improvement in the
oil or product stream, and market pricing.
  The
Refining Market (downstream)
  The
SulphCo Process is expected to provide economic benefits for oil refiners
through the reduction of sulfur content in either the crude oil feed or crude
oil products such as gasoline, kerosene, diesel fuel, or bunker fuel
oil.  As each refinery is unique, potential benefits of
SonocrackingTM technology to an individual refiner will vary, depending on
such factors as plant configuration, the type of crude oil processed and product
specifications.
  These
potential benefits include:
  ·
              Lower
      raw material (i.e., crude oil) costs due to greater flexibility of
      feeds;
  ·
              Lower
      desulfurization costs when compared to traditional hydrotreating
      processes; and
  ·
              Possible
      reduction of carbon footprint.
  Lower
Raw Material Costs
  While
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, refineries will not
have identical requirements and the 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 least expensive heavy grade oil with the highest sulfur
content that can be refined within its 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
the SulphCo Process is expected to modify and reduce sulfur content, a
refinery which “pre-treats” its crude oil with our units could be expected to be
able to realize cost reductions and improved profit margins by utilizing lower
cost, higher sulfur containing feed oil than would otherwise be
possible without the SulphCo Process.
  8
  Lower
Desulfurization Costs
  The
traditional process for removing sulfur compounds from crude oil products is
hydrotreating.  Hydrotreating is a high temperature, high pressure,
high catalyst cost, and hydrogen consuming process employed in many refineries
around the world.  The intensity of the hydrotreating process is
driven largely by the chemical makeup of the sulfur compounds present in the
crude oil product streams.  Certain types of sulfur molecules (e.g.,
dibenzothiophenes) require very intensive treatment and high catalyst and
hydrogen loadings to remove the latent sulfur.  SulphCo’s oxidative
desulfurization approach modifies dibenzothiophenes by oxidizing the sulfur
which in turn changes the chemical composition to either a sulfoxide or a
sulfone.  The sulfoxides and sulfones can be removed from the streams
via secondary processes such as extraction or adsorption, which in turn
eliminates the need to hydrotreat those compounds.  Alternatively, the
sulfoxides and sulfones can be hydrotreated directly under milder reaction
conditions and in some instances with significantly less
hydrogen.  Therefore, SulphCo’s SonocrackingTM technology has the
potential to reduce the hydrotreating costs associated with crude oil product
streams.
  Reduced
Carbon Footprint
  The
hydrotreating of crude oil products to reduce the sulfur levels to meet
governmental standards and regulations requires a significant amount of
hydrogen.  This hydrogen is typically produced through a process that
utilizes some form of light gas such as propane or methane and produces carbon
dioxide as a by-product.  Therefore, a process that reduces the amount
of sulfur in a crude oil product stream has the potential to reduce the amount
of hydrogen needed to treat that stream to meet the requirements.  In
turn, less hydrogen is required to be produced, thereby leading to lower carbon
dioxide emissions.  SulphCo’s SonocrackingTM process is designed to
reduce the amount of sulfur in crude oil and crude oil products and therefore
has the potential to reduce the carbon footprint at potential customer
facilities.
  The
Transporting and Blending Market (mid-stream)
  SulphCo’s
SonocrackingTM technology can also provide a low cost sulfur reduction
alternative for the transition mixture (“Transmix”) market. Transmix processors
must comply with sulfur regulations currently being phased in over the next
several years.  For the retail diesel market, the Transmix processors
must supply on-road diesel that meets the less than 15 ppm sulfur target by June
2010.  SulphCo’s SonocrackingTM process can reduce the sulfur levels to
the required limits in an economic fashion.  Over the next few years,
applications in non-road diesel, marine, and locomotive markets will all start
requiring diesel fuel that meets the less than 15 ppm sulfur specification
therefore the potential market for SulphCo’s technology should
grow.
  SulphCo’s
SonocrackingTM technology can also potentially improve the blending
economics for mid-stream crude oil blenders and transporters. Treating high
sulfur crude oil using the SulphCo Process is expected to reduce the
sulfur content and allow more of this treated crude oil to be blended into the
crude oil streams, while still meeting the various pipeline specifications.
In addition to the blending economics, in some cases blenders can save on the
high cost of alternative transportation versus crude oil
pipelines.
  9
  The
Oil Producer Market (upstream)
  The
SulphCo Process could potentially provide economic benefits for oil
producers.  These benefits include, among other things, the ability to
obtain higher prices for treated crude oil.
  The price
of crude oil is based primarily on characteristics such as API gravity
(relative density) and sulfur content.  Because the
SulphCo Process is designed to increase the API gravity and remove oxidized
sulfur compounds in a commercial setting, this should allow oil
producers that treat crude oil with the SulphCo Process to obtain a higher
price from distributors and refiners as a result.
  According
to the Energy Information Administration, as of the end of 2008, it was
estimated that the world consumes approximately 85.4 million barrels of oil per
day.  Of this, approximately 60 million barrels per day comes from
medium and heavy crude oil.
  Geographic
Scope of Our Market
  We have a
50% ownership interest in Fujairah Oil Technology LLC in Fujairah, United Arab
Emirates and are actively pursuing commercial opportunities in other parts of
the world including North America, South America, Europe and the Middle East. As
the potential markets for our technology include countries with significant oil
producing or refining activities, we expect to conduct business in other parts
of the world as well.  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.
  10
  Patents,
Trademarks and Copyrights
  We own
nine United States patents and have one pending United States patent
application. Our granted U.S. Patents include:
  ·
              Power
      Driving Circuit for Controlling a Variable Load Ultrasonic Transducer,
      U.S. patent no. 7,408,290;
  ·
              Loop-Shaped
      Ultrasound Generator and Use in Reaction Systems, U.S. patent no.
      7,275,440;
  ·
              Conversion
      of Petroleum Resid to Usable Oils with Ultrasound, U.S. patent no.
      7,300,566;
  ·
              Oxidative
      Desulphurization of Fossil Fuels with Ultrasound, U.S. patent no.
      6,402,939;
  ·
              Continuous
      Process for Oxidative Desulphurization of Fossil Fuels with Ultrasound and
      Products Thereof, U.S. patent no.
6,500,219;
  ·
              Ultrasound-Assisted
      Desulfurization of Fossil Fuels in the Presence of Dialkyl Ethers, U.S.
      patent no. 6,827,844;
  ·
              Corrosion
      Resistant Ultrasonic Horn, U.S. patent no. 6,652,992;
  ·
              High-Power
      Ultrasound Generator and Use in Chemical Reactions, U.S. patent no.
      6,897,628; and
  ·
              High-Throughput
      Continuous-Flow Ultrasound Reactor, U.S. patent no.
    7,559,241.
  We also
have the following pending U.S. Patent application:
  ·
              High-Power
      Ultrasonic Horn. Pending U.S. patent application no. 11/066766 was filed
      on February 24, 2005.
  In
addition, SulphCo has been granted 67 international patents and has applied for
an additional 108 international patents to protect other aspects and
applications of the Company's technologies. These include, but are not limited
to, new processes and procedures, developed by SulphCo personnel, required to
manufacture higher power ultrasound equipment for use in SulphCo's
desulfurization units.
  The
trademarks SulphCoTM, SonocrackingTM, SonocrackerTM, and Sonocracked CrudeTM are
registered in the United States.  We also rely on copyright protection
for the software utilized in our SonocrackingTM units.
  11
  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 could render our technologies or products
obsolete or non-competitive.
  The
SulphCo Process is based upon the novel use of high power ultrasound to
effect beneficial changes in the chemical composition of crude
oil.  We believe this process gives us a competitive advantage because
it is unique in that it “pre-treats” crude oil by both reducing relative density
of oil and reducing sulfur content prior to being fed into the traditional
refinery operation. Other than our proprietary SonocrackingTM 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
SonocrackingTM 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 API 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 research and development expenditures have been
directed toward the upgrading and desulfurization of crude oil and crude oil
products and the improvement of our high power ultrasound
technology.  During the years ended December 31, 2009, 2008 and 2007,
our research and development costs totaled approximately $3.7 million, $4.1
million, and $7.7 million, respectively. During the years ended December 31,
2009, 2008 and 2007, we expended approximately $0.3 million, $0.4 million and
$1.7 million, respectively, for the construction of the building and for the
purchase and installation of equipment at the test facility in Fujairah,
UAE.  Major capital expenditures related to the test facility in
Fujairah, UAE are not anticipated to take place in the future until the
SulphCo Process is commercialized, in which event such expenditures will be
capitalized rather than expensed as research and development.
  During the year ended December 31,
2007, we entered into a license agreement withIndustrial Sonomechanics, LLC
(“ISM”)granting us worldwide rights with
respect to its proprietary patented ultrasonic probe and reactor technology. We
expect to continue working with ISM 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.
  12
  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 the incurrence of 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 required
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 ppm.  The former standard was 500 ppm.  The EPA
has also proposed regulations intended to limit the sulfur content of diesel
fuel used in non-road activities such as in the mining, construction,
agriculture, railroad and marine industries.
  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
SonocrackingTM 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
SonocrackingTM 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 SonocrackingTM 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.  When appropriate, 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.
  13
  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 material 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 February 15, 2010, we had 22 full-time employees.
  Executive
Officers
  The
following table lists our executive officers, their ages, and
positions:
  Name
                
                Age(1)
                
                Present PositionLarry
      D. Ryan, Ph.D.
                
                38
                
                Chief
      Executive Officer and DirectorM.
      Clay Chambers
                
                63
                
                Chief
      Operating OfficerStanley
      W. Farmer
                
                42
                
                Vice
      President, Chief Financial Officer, Treasurer and Corporate
      SecretaryFlorian
      J. Schattenmann, Ph.D.
                
                44
                
                Vice
      President and Chief Technology Officer(1)Age
      is as ofFebruary15,2010
  Business
Experience of Executive Officers
  Larry D. Ryan, Ph.D.has
served as SulphCo’s Chief Executive Officer since January 2007 and as a Director
since February 2007.  Previously, he was a senior executive in General
Electric’s Advanced Materials Division, where he spent 9 years in technical and
business leadership roles, most recently as the Business Manager for the
Elastomers and RTV unit. Prior to his role as Business Manager, Dr. Ryan served
as Technology Director for GE-Bayer Silicones and Global Technology Leader for
the Elastomers and RTV division of GE Advanced Materials in Leverkusen, Germany.
He is a graduate of the prestigious General Electric Edison Engineering
Development Program, a technical leadership program focused on process
engineering projects and product quality improvements and has extensive
experience in the Six Sigma business process methodology.  Dr. Ryan has a
Ph.D. in Chemical Engineering from the University of Delaware.
  14
  M. Clay Chambers has
served as our Chief Operating Officer since February 2008.  From March
2003 to February 2008, Mr. Chambers worked for El Paso Corporation (“El Paso”),
a large natural gas pipeline operator and natural gas producer, as a consultant
advising on the sale of El Paso’s chemical assets after the acquisition of
Coastal Corporation by El Paso in 2001. Mr. Chambers has over 35 years
experience in the refining and petrochemical industry, having begun his career
with UOP, Inc. and having held senior management positions with Coastal
Corporation and Texas City Refining. At Coastal Corporation he served as Vice
President of Refining, Senior Vice President of International Project
Development and Senior Vice President of Petroleum Coordination. Mr. Chambers
had overall management responsibility for refineries located in Corpus Christi,
Texas; Eagle Point, New Jersey; Mobile, Alabama; Wichita, Kansas and Aruba, with
a total crude oil capacity of 538,000 barrels/day. He has extensive expertise
regarding the full range of refinery and petrochemical processing units and has
also held senior management positions in the product, crude oil supply and
petroleum marketing areas.  Mr. Chambers holds a professional degree
in Chemical & Petroleum Refining Engineering from Colorado School of Mines
and an MBA from the University of Houston.
  Stanley W. Farmerhas served
as our Vice President and Chief Financial Officer since June 2007. Mr. Farmer
was also appointed as the Company’s Treasurer and Corporate Secretary in March
2009. From June 2005 to June 2007, Mr. Farmer was an audit partner at Malone
& Bailey, PC, a full service certified public accounting firm specializing
in providing audit services to small public companies.  From November 2004
to April 2005, Mr. Farmer was the Chief Financial Officer at Texas Energy
Ventures, L.L.C., a wholesale and retail energy holding company.  From May
2003 to November 2004, Mr. Farmer was an Assistant Controller at Reliant Energy
Wholesale Group, a subsidiary of Reliant Energy, Inc., a provider of electricity
and energy-related products to retail and wholesale customers.  From April
2000 to May 2003, Mr. Farmer was a Senior Director at Enron Corp. in its
accounting transaction support group.  Mr. Farmer has also held management
positions with a focus in the energy sector at Arthur Andersen LLP (May
1997 to April 2000) and KPMG LLP (January 1991 to May 1997).  Mr. Farmer
has a B.B.A in Accounting from Texas A&M University (College Station,
Texas), is a certified public accountant (Texas) and is a member of the American
Institute of Certified Public Accountants and the Texas Society of Certified
Public Accountants.
  Florian J. Schattenmann,
Ph.D. currently serves as our Vice President and Chief Technology Officer
and has been with the Company since August 2008. From December 2006 to July
2008, Mr. Schattenmann was the Global Elastomers and European Technology Leader
at Momentive Performance Materials (formerly General Electric Advanced
Materials), a manufacturer of high-technology material solutions with a product
portfolio that included silicone-based products, fused quartz and ceramics. From
May 2006 to December 2006, Dr. Schattenmann was Technology Director for GE-Bayer
Silicones based in Leverkusen, Germany. Dr. Schattenmann joined the GE Advanced
Materials business from the GE Global Research Center where, from May 2001 to
April 2006, he successively led several laboratories focused on the development
of advanced technologies ranging from electronic materials to selective
catalysis to nano-structured materials. Dr. Schattenmann is a certified Master
Black Belt from GE in Six Sigma process methodology, holds seven patents and is
the (co-)author of numerous peer-reviewed publications. Dr. Schattenmann has a
Ph.D. in Inorganic Chemistry from M.I.T.
  Other
 The Company's internet address is www.sulphco.com. 
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports are available, without charge, on
our website, as soon as reasonably practicable after they are filed with the
U.S. Securities and Exchange Commission (“SEC”).  Copies are also available
without charge, from SulphCo, Inc., 4333 W. Sam Houston Pkwy N., Suite 190,
Houston, TX 77043.  Reports filed with the SEC may be viewed at www.sec.gov or
obtained at the SEC Public Reference Room in Washington, D.C.  Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330.  References to our website addressed in this
report are provided as a convenience and do not constitute, and should not be
viewed as, an incorporation by reference of the information contained on, or
available through, the website.  Therefore, such information should not be
considered part of this report.
  15
  Item
1A.  Risk Factors.
  We
are a development stage company with a limited operating history, which makes it
more difficult to predict whether we will be able to successfully commercialize
our technology and implement our business plan.
  We are a
development stage company with a limited operating history, and our principal
technologies and products are 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 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, 2009, we had an accumulated
deficit of approximately $157.3 million.  These losses are principally
associated with the research and development of our SonocrackingTM units for
desulfurization and upgrading of 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,
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.
  16
  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 third parties.  We expect our existing
capital resources will be sufficient to fund our cash requirements into the
first quarter of 2011 based upon projected levels of expenditures and
anticipated needs.  However, we expect that additional working capital
will be required in the future.
  The
extent and timing of our future capital requirements will depend upon several
factors, including:
  ·
              continued
      progress toward commercialization of our
  technologies;
 ·
              rate
      of progress and timing of product commercialization activities and
      arrangements; 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 March 2007, November 2007, May 2008, and January 2010
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 Middle East,
Austria, Europe, North America, South America 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.
  17
  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; and
 ·
              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 ensure that contract
manufacturing services will be available in sufficient capacity to supply our
product needs on a timely basis.  If we decide to build or acquire
commercial scale manufacturing capabilities, we will require additional
management and technical personnel and additional capital.
  We
rely on third parties to provide certain components for our products. If our
vendors fail to deliver their products in a reliable, timely and cost-efficient
manner, our business will suffer.
  We
currently depend on relationships with third parties such as contract
manufacturing companies and suppliers of components critical for the product we
are developing in our business.  If these providers do not produce these
products on a timely basis, if the products do not meet our specifications and
quality control standards, or if the products are otherwise flawed, we may have
to delay product delivery, or recall or replace unacceptable products.  In
addition, such failures could damage our reputation and could adversely affect
our operating results.  As a result, we could lose potential customers and
any revenues that we may have at that time may decline
dramatically.
  Our
business is subject to the risk of supplier concentration.
  We
depend on a limited number of third party suppliers and vendors for the
manufacturing and development of our SonocrackerTM units.  As a result
of this concentration in our supply chain, our business and operations would be
negatively affected if any of our key suppliers were to experience significant
disruption affecting the price, quality, availability or timely delivery of
their products.  The partial or complete loss of one of these
suppliers, or a significant adverse change in our relationship with any of these
suppliers, could have a material adverse effect on our business, results of
operations and financial condition.
  18
  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 have 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 laws to protect our intellectual
property.  Although we have filed multiple patent applications for our
technology, and we have nine 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 ensure 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 ensure you that third parties will not
infringe, design around, or improve upon our proprietary
technology.
  We also
seek to protect our proprietary intellectual property, including intellectual
property that may not be patented or patentable, in part by utilizing
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.
  19
  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 as we seek to 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.
  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.
  20
  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 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.
  We
may have difficulty managing our growth.
  We expect to experience significant
growth if we are successful in our efforts to rollout our SonocrackingTM
technology.  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
 ·
              continue
      to enhance 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.
  Item
1B.  Unresolved Staff Comments.
  None.
  Item
2.  Properties.
  Since
July 2007, our executive offices and primary facilities have been located at
4333 W. Sam Houston Pkwy N., Suite 190, Houston, Texas 77043 in a leased
facility consisting of approximately 12,000 square feet.  In October
2009 the Company amended the original lease agreement, acquiring approximately
12,000 square feet of additional warehouse and office space located at 11335
Clay Road, Suite 160, Houston, Texas.  The lease for these spaces has
been extended and will expire mid-year 2013.
  We also
have a leased facility in Sparks, Nevada consisting of approximately 5,000
square feet.  The lease for this space will expire in the spring of
2010. We currently have no investment policies in place regarding real
estate interests.
  21
  Item
3.   Legal Proceedings.
  There are various claims and lawsuits
pending against the Company arising in the ordinary course of the Company’s
business. Although the amount of liability, if any, against the Company is not
reasonably estimable, the Company is of the opinion that these claims and
lawsuits will not materially affect the Company’s financial position. In the
past the Company has expended significant resources for its legal
defense.  In the future the Company will devote resources to its legal
defense as necessary.
  The following paragraphs set forth the
status of litigation as of December 31, 2009.
  Clean Fuels
Litigation
  In Clean Fuels Technology v. Rudolf W.
Gunnerman, Peter Gunnerman, RWG, Inc. and SulphCo, Inc., Case No.
CV05-01346 (Second Judicial District, County of Washoe) the Company, Rudolf W.
Gunnerman, Peter Gunnerman, and RWG, Inc., were named as defendants in a legal
action commenced in Reno, Nevada (the “Clean Fuels Litigation”).  The
plaintiff, Clean Fuels Technology later assigned its claims in the lawsuit to
EcoEnergy Solutions, Inc., which entity was substituted as the
plaintiff.  In general, the plaintiff’s alleged claims relate to
ownership of the “sulfur removal technology” originally developed by Professor
Teh Fu Yen and Rudolf Gunnerman with financial assistance provided by Rudolf W.
Gunnerman, and subsequently assigned to the Company.  On September 14,
2007, after a jury trial and extensive post-trial proceedings, the trial court
entered final judgment against the plaintiff EcoEnergy Solutions, Inc. on all of
its claims.  As per the final judgment, all of the plaintiff’s claims
were resolved against the plaintiff and were dismissed with
prejudice.  In addition, the trial court entered judgment in favor of
the Company and against the plaintiff for reimbursement of legal fees and costs
of approximately $124,000, with post-judgment interest.  The plaintiff
appealed the judgment on October 5, 2007. On August 3, 2009, the Nevada Supreme
Court affirmed the court’s Order and judgment in its entirety.  The
Nevada Supreme Court then denied EcoEnergy’s request for a rehearing on
September 25, 2009 and further denied EcoEnergy’s Petition for En Banc
Reconsideration on November 17, 2009.  On December 15, 2009, the
Nevada Supreme Court restored jurisdiction to the district court for any
post-appeal issues. Since that time, the Company received legal fees, costs, and
interest awarded to it under the judgment from EcoEnergy. The Company then moved
the district court for an award of legal fees and cost incurred on appeal. No
asset or liability has been accrued relative to this action.
  Talisman
Litigation
  In Talisman Capital Talon Fund, Ltd. v.
Rudolf W. Gunnerman and SulphCo, Inc., Case No. 05-CV-N-0354-BES-RAM, the
Company and Rudolf W. Gunnerman were named as defendants in a legal action
commenced in federal court in Reno, Nevada. The plaintiff’s claims relate to the
Company's ownership and 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. On September 28, 2007, the court granted, in part,
the defendants' motion for summary judgment and dismissed the plaintiff's claims
for bad faith breach of contract and unjust enrichment that had been asserted
against Rudolf Gunnerman. The court denied the plaintiff's motion for partial
summary judgment. The trial for this matter commenced on December 1, 2008 and
continued through December 12, 2008.  The court recessed the trial on
December 12, 2008 prior to hearing closing arguments.  Post trial
briefs were filed with the court on February 20, 2009, and closing arguments
were heard on March 3, 2009. On May 14, 2009, the court entered a judgment in
favor of the Company and dismissed all claims with prejudice. The plaintiff
appealed the judgment on June 11, 2009. The plaintiff’s appeal brief
was filed with the court in late December 2009.  The Company’s
answering brief was filed with the court in early February 2010 after which the
plaintiff may file a reply brief thereto within 14 days.  No date has
been set for argument or submission of the appeal. No liability has been accrued
relative to this action.
  22
  Hendrickson Derivative
Litigation
  On January 26, 2007, Thomas Hendrickson
filed a shareholder derivative claim against certain current and former officers
and directors of the Company in the Second Judicial District Court of the State
of Nevada, in and for the County of Washoe. The case was 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. CV07-00187,
Dept. No. B6.  The complaint alleged, 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.  On April 12, 2007 the Company and
individual defendants filed a motion to dismiss, based upon the plaintiff’s
failure to make a demand upon the Board of Directors and failure to state a
claim.  On July 3, 2007, the parties filed a Stipulation of Voluntary
Dismissal Without Prejudice (the “Stipulation”).  The Stipulation
provided that in connection with the dismissal of this action each of the
parties will bear their own costs and attorney fees and thereby waive their
rights, if any, to seek costs and attorney fees from the opposing
party.  Further, neither the plaintiff nor his counsel received any
consideration for the dismissal of this action.
  In September of 2007, the Company’s
Board of Directors received a demand letter (the “Hendrickson Demand Letter”)
from Mr. Hendrickson’s attorney reasserting the allegations contained in the
original derivative claim and requesting that the Board of Directors conduct an
investigation of these matters in response thereto.  In response to
the Hendrickson Demand Letter, the Company’s Board of Directors formed a
committee comprised of three independent directors (the “Committee”) to evaluate
the Hendrickson Demand Letter and to determine what action, if any, should be
taken. The Committee retained independent counsel to advise it.
  On September 2, 2008, the Company’s
Board of Directors held a special meeting for the purpose of hearing and
considering the Committee’s report and recommendation.  At that
meeting, the Committee reported on its investigation and presented the
Committee’s unanimous recommendation that no actions be brought by the Company
based upon the matters identified in the Hendrickson Demand
Letter.  The Board of Directors unanimously adopted the Committee’s
recommendation. SulphCo communicated this conclusion to Mr. Hendrickson’s
counsel in mid-September 2008.
  On November 6, 2008, Mr. Hendrickson
re-filed the shareholder derivative claim in the 127th Judicial District Court
of Harris County, Texas. 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.
200866743.  The Company has responded to this litigation by moving to
dismiss and the individual defendants have responded by moving to dismiss for
lack of personal jurisdiction.  No relief is sought against the
Company and no liability has been accrued relative to this
action.
  23
  Nevada Heat Treating
Litigation
  On November 29, 2007, Nevada Heat
Treating, Inc. (“NHT”) filed a lawsuit against the Company, Nevada Heat
Treating, Inc., d/b/a California Brazing, in the Second Judicial District Court
of the State of Nevada, in and for the County of Washoe, Case No.
CV07-02729.  In its complaint, NHT alleged trade secret
misappropriation and breach of contract relative to certain information alleged
to have been disclosed to the Company beginning in late 2006 and continuing
through early 2007 pursuant to a consulting engagement with
NHT.  Among other things, NHT asserted that certain information,
alleged to have been disclosed to the Company during the term of the consulting
engagement, is the subject of a non-disclosure/confidentiality agreement
executed at the inception of the consulting engagement.  NHT contended
that this certain information represents a trade secret that should no longer be
available for use by the Company following the termination of the consulting
engagement with NHT in the spring of 2007.  In connection with filing
this action, NHT also filed a motion for preliminary injunction against the
Company seeking to enjoin it from using certain information until the matter can
be resolved through the courts. Hearings on the preliminary injunction motion
took place on March 24 and 25, 2008, and May 8, 2008.  On May 8, 2008,
the court ruled from the bench, at the conclusion of the hearing on the motion
for preliminary injunction.  The court denied the plaintiff’s motion
on grounds that the plaintiff had failed to demonstrate a probability of success
on the merits of its claims.  On November 18, 2008, the Company
accepted a formal settlement offer from NHT wherein it was agreed that NHT would
dismiss its claims and each party would bear its own costs and fees, but that
NHT would preserve any claims that it might have in the future relating to its
patent application.  On March 2, 2009, the Company filed notice with
the Court that it had accepted the formal settlement offer.  On April
1, 2009, the Court entered a judgment consistent with the terms of the formal
settlement offer and the matter has been concluded.  No liability was
accrued relative to this action.
  Securities and Exchange
Commission Subpoena
  On February 25, 2008, the Company
received a subpoena from the Denver office of the Securities and Exchange
Commission (the “SEC”).  The subpoena formalized virtually identical
requests the Company received in May, June and August 2007 to which the Company
responded to the request for voluntary production of documents and information,
including financial, corporate, and accounting information related to the
following subject matters:  Fujairah Oil Technology LLC, the Company’s
restatements for the first three quarterly periods of 2006 and the non-cash
deemed dividend for the quarter ended March 31, 2007, and information and
documents related to certain members of former management, none of whom have
been employed by the Company since March 2007.  On June 15, 2009, the
Company was advised by the SEC that this investigation has been completed as to
SulphCo, against which the SEC does not intend to recommend any enforcement
action.
  Item
4.  Submission of Matter to a Vote of Security Holders.
  Not
applicable.
  24
  PART
II
  Item
5.  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
  Market
Information
  Our
common stock trades on the NYSE Amex under the symbol “SUF.”
  The
following table sets forth the high and low sale prices for our common stock for
each of the quarterly periods indicated.
  High
                    
                    
                    LowFiscal
      2009First
      Quarter
                    
                    $
                    1.49
                    
                    
                    $
                    0.40Second
      Quarter
                    
                    $
                    1.77
                    
                    
                    $
                    0.80Third
      Quarter
                    
                    $
                    2.18
                    
                    
                    $
                    0.76Fourth
      Quarter
                    
                    $
                    1.45
                    
                    
                    $
                    0.61Fiscal
      2008First
      Quarter
                    
                    $
                    5.80
                    
                    
                    $
                    2.35Second
      Quarter
                    
                    $
                    4.55
                    
                    
                    $
                    2.15Third
      Quarter
                    
                    $
                    3.97
                    
                    
                    $
                    1.48Fourth
      Quarter
                    
                    $
                    2.50
                    
                    
                    $
                    0.74
  There
were 252 holders of record of our common stock on February 15,
2010.  This number does not include stockholders whose shares were
held in a "nominee" or "street" name.
  Dividends
  We have
not declared or paid any cash dividends on our common stock and presently intend
to retain our future earnings to fund the development and growth of our business
and, therefore, do not anticipate paying any cash dividends in the foreseeable
future.
  25
  Table
of Securities Authorized for Issuance under Equity Compensation Plans at the End
of 2009
  The
following table presents information regarding our securities which are
authorized for issuance under all of our compensation plans as of December 31,
2009.
  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
                  
                  
                  4,469,885
                  
                  
                  $
                  2.77
                  
                  
                  
                  4,755,115Equity
      Compensation Plans Not Approved by Security Holders
                  
                  
                  100,000
                  
                  
                  $
                  4.25
                  
                  
                  
                  (1
                  )
 
 (1)  Future grants
are within the discretion of our Board of Directors of directors and, therefore,
cannot be determined at this time.
 Under
compensation plans approved by our stockholders, 1,769,690 shares are issuable
in connection with outstanding options granted pursuant to the SulphCo, Inc.
2006 Stock Option Plan approved by the Company’s stockholders in 2006 and
2,700,195 shares are issuable in connection with outstanding options granted
pursuant to the SulphCo, Inc. 2008 Omnibus Long-Term Incentive Plan (the “2008
Plan”) approved by the Company’s stockholders in 2008. At the 2009 Annual
Meeting of Stockholders, the Company’s stockholders approved an amendment to the
2008 Plan to increase the number of shares available for issuance by 5,000,000
shares from 2,250,000 to 7,250,000.
  Under
compensation plans not approved by our stockholders,
50,000 shares relate to warrants granted in connection with the
License Agreement between the Company and ISM dated as of November 9, 2007,
wherein the Company agreed to issue warrants to purchase 45,000 shares of common
stock to ISM and warrants to purchase 5,000 shares of common stock to JM
Resources LLC, at an exercise price of $6.025 per share.  The warrants
vest immediately and have a three-year term.
  Under
compensation plans not approved by our stockholders,
50,000 shares relate to warrants granted in connection with the
Development and Manufacturing Agreement between the Company and MWH dated as of
June 28, 2008, wherein the Company agreed to issue warrants to purchase 50,000
shares of the Company’s common stock to MWH, at an exercise price of $2.47 per
share.  One half of these warrants vest six-months from the grant date
and the remaining half of the warrants vest one-year from the grant
date.
  26
  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 loss from operations for the years ended December 31,
2009, 2008 and 2007 includes research and development expenses totaling
approximately $3.7 million, $4.1 million and $7.7 million, respectively,
including approximately $0.3 million, $0.4 million and $1.7 million for the
Fujairah Facility in 2009, 2008 and 2007, respectively.
  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Operating
      revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Loss
      from operations
                  
                  $
                  (11,140,425
                  )
                  
                  $
                  (20,087,757
                  )
                  
                  $
                  (19,156,217
                  )
                  
                  $
                  (39,131,016
                  )
                  
                  $
                  (8,466,994
                  )Loss
      per share: basic and diluted
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.29
                  )
                  
                  $
                  (0.64
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.17
                  )Total
      assets at year end
                  
                  $
                  3,617,550
                  
                  
                  $
                  19,656,883
                  
                  
                  $
                  9,102,041
                  
                  
                  $
                  7,294,459
                  
                  
                  $
                  8,045,236Long-term
      obligations at year end
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  3,147,860
                  
                  
                  
                  -
                  
                  
                  $
                  7,000,000Cash
      dividends declared per share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
  27
  Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.
  Liquidity
and Capital Resources
  As of
December 31, 2009, we had approximately $1.7 million in available cash
reserves. Taken together with the approximate $5.5 million of net cash proceeds
from the equity financing completed in January 2010, we anticipate that our cash
reserves will be sufficient to fund our cash requirements into the first quarter
of 2011.  The Company will continue to evaluate various equity financing
alternatives that may include, among other things, additional equity
issuances.  There can be no assurance that the Company will be
successful in raising such financing, if it decides to pursue such an
alternative.
  In
addition, 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. There can be
no assurance that the Company will be able to raise additional
funds.
  January 2010 Equity
Financing
  In
January 2010, the Company completed the sale of 11,764,712 equity units at a
price of $0.51 per unit pursuant to the terms of a Placement Agency Agreement
dated January 25, 2010, resulting in gross proceeds to the Company of
approximately $6.0 million before transaction costs. Each equity unit consists
of (i) one share of common stock, (ii) a 2-year warrant to purchase one half of
a share of common stock at an exercise price of $0.70, and (iii) a 5-year
warrant to purchase one half share of a share of common stock at an exercise
price of $1.00.  The shares of common stock and shares of common stock
issuable upon the exercise of the comprising the equity units are registered on
a shelf registration statement on Form S-3 declared effective by the SEC on
September 4, 2007.
  2009 Capital
Activities
  On July
29, 2009, the Company prepaid in cash the full $4.7 million outstanding
principal balance of the convertible notes payable and all accrued but unpaid
interest thereon.
  2008 Capital
Activities
  During
the quarter ended June 30, 2008, the Company completed two equity
transactions.  The first involved the sale of 6,818,750 shares of its
common stock at a price of $3.20 per share pursuant to the terms of a Securities
Purchase Agreement dated May 27, 2008, resulting in net proceeds to the Company
of approximately $20.3 million before transaction costs.  The shares
are registered on a shelf registration statement on Form S-3 declared effective
by the SEC on September 4, 2007.  The second involved the exercise by
investors of warrants to acquire approximately 1.9 million shares of the
Company’s common stock at an exercise price of $2.68 per share resulting in net
proceeds to the Company of approximately $5.2 million.  Between these
two transactions, the Company raised net proceeds totaling approximately $25.5
million.
  During
the quarter ended June 30, 2008, the Company entered into an equity line of
credit with Azimuth Opportunity Ltd. (“Azimuth”) pursuant to a Common Stock
Purchase Agreement dated April 30, 2008. Subject to the conditions set forth in
that agreement, Azimuth is committed to purchase up to $60,000,000 of the
Company’s common stock pursuant to draw down notices that the Company may give
to Azimuth from time to time at the Company’s discretion until November 1, 2009.
The price of shares sold is determined by reference to the volume weighted
average price of the Company’s common stock during a ten trading day pricing
period at the time of each draw down notice, less a small
discount.
  28
  Late Registration Statement
Penalty
  As of
December 31, 2009 and 2008, we were obligated to pay approximately $0.4 million
and $0.6 million, respectively, in the aggregate for the penalty and accrued
interest, to investors in the 2004 private placements for 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.  During the fourth quarter of
2008 and first quarter of 2009, approximately 70% of the investors in the 2004
private placements tendered payment demands to the Company.
  Future Capital
Requirements
  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 and the timing of future customer orders.
  As of
December 31, 2009, we had an accumulated deficit of approximately $157.3 million
and we incurred net losses of approximately $12.0 million and $21.2 million for
the years ended December 31, 2009 and 2008, respectively. These losses are
principally associated with non-cash stock compensation expense, legal defense
costs and ongoing research and development of our SonocrackingTM technology,
including the development of prototypes, and related marketing
activity.  Although we expect to continue to incur similar expenses in
the future, such expenditures will not include major construction projects until
commercialization of our SonocrackingTM technology.
  Operation and maintenance of the
Fujairah Facility is the responsibility of Fujairah Oil Technology LLC (“FOT”)
and SulphCo is responsible for contributing its SonocrackingTM
units.  The Memorandum of Association of Fujairah Oil Technology,
which defines certain rights of the joint venture 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.
  We intend to continue to incur
additional expenditures during the next 12 months for the continuous development
and testing of SonocrackerTM units.
  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 FOT are dependent upon the successful implementation
of our SonocrackingTM technology.
  Other
possible sources of additional capital include the exercise of the remaining
warrants issued to investors in conjunction with previous financing
transactions, 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 may have to curtail or suspend all or
a portion of our business activities.  Further, if we issue additional
equity securities, our shareholders may experience severe dilution of their
ownership percentage.
  29
  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.
  Research and Development
Expenses
  During
2009, we incurred approximately $3.4 million in expenses related to research and
development of our SonocrackingTM technology.  This compares to
approximately $3.7 million and $6.0 million incurred in 2008 and
2007, respectively. In 2009, 2008 and 2007, approximately $0.3 million,
$0.4 million and $1.7 million, respectively, were spent on the test
facility in Fujairah, UAE.
  During
2009, 2008 and 2007, we paid approximately $1.2 million, $0.7 million and
$0.2 million, respectively, to our engineers and other research and development
employees as wages and related benefits and for design and testing of our
SonocrackerTM units, while approximately $0.6 million, $2.0 million and $1.2
million respectively, was incurred for the procurement of control panels,
probes, centrifuges, and generators related to the ongoing research and
development of our units.  The remainderof our research and
development costs are recurring monthly expenses related to laboratory supplies
and the maintenance of our facilities.
  We expect
that our research and development expenses will moderate 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
2009, we incurred approximately $7.5 million in selling, general and
administrative expenses.  This compares to approximately $16.0 million
and $11.4 million during 2008 and 2007,
respectively.  Non-cash stock-based compensation included in selling,
general and administrative expenses in 2009 was approximately $1.3 million. This
compares to $5.2 million and $4.3 million in 2008 and 2007,
respectively.
  During
2009, we incurred approximately $0.8 million in legal fees.  This
compares to approximately $3.9 million and $3.0 million during 2008 and 2007,
respectively. The decrease in legal fees in 2009 relative to 2008 and 2007 was
primarily attributable to the resolution of outstanding litigation matters that
gave rise to significant legal fees in 2008 and 2007.  For additional
discussion regarding legal matters see “Item 3. Legal Proceedings.”
  Consulting
fees, payroll and related expenses were approximately $2.6 million in 2009
which compares to approximately $3.9 million and $3.2 million during
2008 and 2007, respectively. This represents decreases of approximately
$1.3 million and $0.6 million, respectively. The $1.3 million decrease in 2009
as compared to 2008 was primarily attributable to the reduction in the number of
outside consultants engaged during 2009 and additional expenses recognized in
2008 related to a settlement agreement with a former consultant.  The
increase in 2008 as compared to 2007 is also due to the additional expenses
recognized in 2008 related to a settlement agreement with a former
consultant.
  The
remainder of the amounts incurred relate to normal recurring operating expenses
such as depreciation, insurance, travel, lease expense, utilities, marketing,
and investor relations.
  30
  Interest
Expense
  Interest
expense was approximately $0.9 million in 2009, nearly all of which relates
to non-cash discount accretion.  This compares to approximately
$1.2 million and $5.5 million during 2008 and 2007,
respectively. The decrease in 2009 as compared to 2008 is primarily due to
the July 2009 prepayment in cash of the full $4.7 million outstanding principal
balance of the convertible notes payable. The decrease in 2008 relative to
2007 is primarily due to approximately $5.0 million of non-cash discount
accretion expense relating to the April 2007 and November 2007 Convertible Notes
Payable refinancing transactions.
  Deemed
Dividend
  For the
years ended December 31, 2009, 2008 and 2007, the Company recognized total
non-cash deemed dividends of approximately zero, $4.1 million, and $24.8
million, respectively.
  On March
12, 2007, the Company executed Amendment No. 1 to Securities Purchase Agreements
and Warrants (“Amendment No. 1”) with certain warrant holders (the “Warrant
Holders”) who had been issued warrants by the Company in 2004 (“2004
Warrants,” and holders of 2004 Warrants, “2004 Warrant Holders”) and in 2006
(“2006 Warrants,” and holders of 2006 Warrants, “2006 Warrant Holders”) that
provided inducements to encourage the Warrant Holders to exercise their
respective warrants.  As consideration for Warrant Holders exercising
their respective warrants, the Company agreed that it would:
  ·
              reduce
      the exercise price on warrants to acquire 4,000,000 shares of the
      Company’s common stock held by the 2006 Warrant Holders from $6.805 per
      share to $2.68 per share; and
  ·
              issue
      the Warrant Holders additional warrants, with an exercise price of $2.68
      per share, on a one to one basis for each existing warrant that was
      exercised including granting up to 1,952,068 warrants to the 2004 Warrant
      Holders and up to 4,000,000 warrants to the 2006 Warrant
      Holders.
  As a
result of the inducements included in Amendment No. 1 described above, during
the quarter ended March 31, 2007, 1,952,068 warrants held by the 2004 Warrant
Holders and 2,000,000 warrants held by the 2006 Warrant Holders were exercised
resulting in the grant of 3,952,068 additional warrants (the “March 2007
Warrants”).  As a result of the inducements, the Company recorded a
non-cash deemed dividend of approximately $11.5 million.  The amount
of the deemed dividend was estimated to be equal to the sum of the fair value of
the inducements as the sum of (1) the incremental fair value conveyed to the
2006 Warrant Holders by the reduction of the exercise price of the 2006 Warrants
determined as provided in paragraph 51 of SFAS 123R utilizing the Black-Scholes
Valuation Model and (2) the fair value of the 3,952,068 March 2007 Warrants
estimated using the Black-Scholes Valuation Model.
  During
the quarter ended June 30, 2007, 600,000 2006 Warrants held by the 2006 Warrant
Holders were exercised resulting in the grant of 600,000 additional
warrants.  As a result, the Company recorded additional non-cash
deemed dividends of approximately $1.7 million that was estimated using the
Black-Scholes Valuation Model.
  During
the quarter ended September 30, 2007, the remaining 1,400,000 warrants held by
the 2006 Warrant Holders were exercised resulting in the grant of 1,400,000
additional warrants.  As a result, the Company recorded additional
non-cash deemed dividend of approximately $3.9 million that was estimated using
the Black-Scholes Valuation Model.
  31
  On
November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
Agreements and Warrants (“Amendment No. 2”) with certain of the Warrant Holders
holding approximately 3.95 million of the then outstanding March 2007 Warrants
wherein the Warrant Holders agreed to exercise up to 50% of their March 2007
Warrants.  In exchange, SulphCo agreed to issue the Warrant Holders
additional warrants (the “November 2007 Warrants”) on a one-to-one basis with an
exercise price of $7.00 per share and a term of three years.  In
addition, the Warrant Holders were granted an option to exercise the remaining
50% of their March 2007 Warrants on the later of April 15, 2008, or 30 days
following the 2008 Annual Meeting of Stockholders in which SulphCo’s
stockholders approve an increase of 10 million authorized common
shares.  If this option were exercised, then SulphCo would issue the
Warrant Holders additional warrants on a one-to-one basis with an exercise price
of $7.00 per share and a term of three years.  As a result of the
inducement described above 1,976,570 of the March 2007 Warrants held by the
Warrant Holders were exercised in November 2007 resulting in a grant of
1,976,750 additional warrants (the “November 2007 Warrants”). Based on its
analysis, the Company concluded that a deemed dividend should be recorded to
account for the fair value of the inducement that was transferred to the Warrant
Holders computed as the fair value of the 1,976,750 November 2007 Warrants
issued to the Warrant Holders.  Based on the Black-Scholes valuation
prepared for this transaction, the Company recognized a non-cash deemed dividend
of approximately $7.3 million.
  In May
2008, 1,953,088 of the March 2007 Warrants held by the Warrant Holders were
exercised during the quarter ended June 30, 2008, resulting in the grant of
1,953,088 additional warrants (the “May 2008 Warrants”).  Based on its
analysis, the Company concluded that a deemed dividend should be recorded to
account for the fair value of the inducement that was transferred to the Warrant
Holders computed as the fair value of the 1,953,088 May 2008 Warrants issued to
the Warrant Holders.  Based on the Black-Scholes valuation prepared
for this transaction, the Company recognized a non-cash deemed dividend was
approximately $4.1 million.
  Net Lossand Net Loss Attributable
to Common Stockholders
  The difference between net loss and net
loss attributable to common shareholders for the years ended December 31, 2008
and 2007, is solely attributable to the deemed dividends recorded in those
periods.
  Off-Balance
Sheet Arrangements
  The
Company has not entered into any transactions with unconsolidated entities
whereby the Company has financial guarantees, subordinated retained interests,
derivative instruments, or other contingent arrangements that expose the Company
to material continuing risks, contingent liabilities, or any other obligation
under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company.
  Contractual
Obligations
  Payments due by periodTotal
                      
                      
                      Less than
                        1 year
                      
                      
                      1-3 years
                      
                      
                      3-5 years
                      
                      
                      More than
                        5 yearsOperating lease obligations
                      
                      $
                      844,000
                      
                      
                      
                      244,000
                      
                      
                      $
                      480,000
                      
                      
                      $
                      120,000
                      
                      
                      
                      -
  32
  New Accounting Pronouncements, Significant Accounting Policies and
Critical Accounting Estimates
  New
Accounting Pronouncements and Significant Accounting Policies
  See Note
1 to our financial statements.
  Critical
Accounting Estimates
 We make a
number of estimates and judgments in preparing our financial statements. These
estimates can differ from actual results and have a significant impact on our
recorded assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We consider an estimate to be a critical
accounting estimate if it requires a high level of subjectivity or judgment and
a significant change in the estimate would have a material impact on our
financial condition or results of operations. The Audit Committee of our Board
of Directors reviews each critical accounting estimate with our senior
management. Further discussion of these accounting policies and estimates is in
the Notes to our financial statements.
  Loss
Contingencies
 We record
loss contingencies when it is probable that a liability has been incurred and
the amount can be reasonably estimated. We consider loss contingency estimates
to be critical accounting estimates because they entail significant judgment
regarding probabilities and ranges of exposure, and the ultimate outcome of the
proceedings is unknown and could have a material adverse effect on our results
of operations, financial condition and cash flows. See Note 11 to our financial
statements for additional information.
  Stock-Based
Compensation
 In
accordance with the Stock Compensation Topic of the FASB Accounting Standards
Codification, the Company records stock-based compensation expense for all
share-based payment arrangements, including stock options, warrants and
restricted stock grants.  The fair value of each option award granted
is estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatilities are based on the historical volatility of the Company’s
stock. The expected term of options granted to employees is derived utilizing
the simplified method which represents the period of time that options granted
are expected to be outstanding. The Company utilizes the simplified method
because it does not have historical exercise data which is sufficient to provide
a reasonable basis to estimate the expected term. The Company expects to
continue utilizing the simplified method to determine the expected term until
such time as it accumulates historical exercise data that will provide a
sufficient basis for the Company to begin estimating the expected term for
option exercises.  The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve at the
time of grant.
  Deferred
Tax Assets, Valuation Allowances and Tax Liabilities
 We
estimate (a) income taxes in the jurisdictions in which we operate, (b) net
deferred tax assets and liabilities based on expected future taxes in the
jurisdictions in which we operate, (c) valuation allowances for deferred tax
assets and (d) uncertain income tax positions. These estimates are considered
critical accounting estimates because they require the projection of future
operating results (which is inherently imprecise) and judgments related to the
ultimate determination of tax positions by taxing authorities. Also, these
estimates depend on assumptions regarding our ability to generate future taxable
income during the periods in which temporary differences are deductible. See
Note 6 to our financial statements for additional information.
  We assess
our future ability to use federal, state and foreign net operating loss
carry-forwards, capital loss carry-forwards and other deferred tax assets using
the more-likely-than-not criteria. These assessments include an evaluation of
our recent history of earnings and losses, future reversals of temporary
differences and identification of other sources of future taxable income,
including the identification of tax planning strategies in certain
situations.
  33
  Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk.
  We are exposed to market risks
arising from changes in market rates and prices, including movements in foreign
currency exchange rates and interest rates. On July 29, 2009, the Company made
full cash payment of the approximately $4.7 million outstanding variable rate
debt that exposed the Company to the risk of increased interest
expense.
  Item
8.  Financial Statements and Supplementary Data.
  Our
audited financial statements as of December 31, 2009, 2008 and 2007 and for the
years then ended are included at the end of this report following the signature
page.
  Item 9.  Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosures.
  None.
  Item
9A.   Controls and Procedures.
  Evaluation
of Disclosure Controls and Procedures
  Our
management, with the participation of the Company’s chief executive officer and
chief financial officer, have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “1934 Act”)) as of
December 31, 2009, the end of the period covered by this report.  Based on
this evaluation, our chief executive officer and chief financial officer
concluded that, as of December 31, 2009, the Company’s disclosure controls and
procedures were effective.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  The
information required by this Item is incorporated by reference from
“Management’s Report on Internal Control Over Financial Reporting” on page
F-1.
  Changes
in Internal Control Over Financial Reporting
  In
connection with the evaluation described above, we identified no change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the 1934 Act) during our fiscal quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  Item 9B.   Other
Information.
  Not
applicable.
  34
  PART
III
  Item
10.   Directors, Executive Officers, and Corporate
Governance.
  See
“Business—Executive Officers” in Item 1 of this Form 10-K. The remaining
information called for by this item is incorporated by reference to “Election of
Directors,” “Corporate Governance,” “Board of Directors and Committees” and
“Additional Information – Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive proxy statement for our 2010 Annual Meeting of
Stockholders, which will be filed within 120 days of the end of our fiscal year
ended December 31, 2009 (the “2010 Proxy Statement”).
  Family Relationships –
None.
  Audit
Committee Financial Expert
  Our audit committee consists of
Lawrence G. Schafran (Chairman of the Audit Committee), Robert van Maasdijk and
Orri Hauksson. The Board of Directors has determined that Mr. Schafran and Mr.
van Maasdijk qualify as “audit committee financial experts” as defined in
applicable SEC rules.  The Board of Directors made a qualitative
assessment of Mr. Schafran’s and Mr. van Maasdijk’s level of knowledge and
experience based on a number of factors, including formal education and business
experience.
  Code
of Ethics
  Our Board of Directors has adopted a
Code of Ethics that is applicable to all Board members and all of the Company’s
senior officers including its principal executive officer and its principal
financial and accounting officer.  A copy of the Code of Ethics is
included as an exhibit to this report.In the event the Company
amends a provision of its Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions or elects to grant a waiver, including
an implicit waiver, from a provision of the Company's Code of Ethics to such
individuals, the Company will provide disclosures of such event on its website
at www.sulphco.com within four business days following the date of the amendment
or waiver.
  Item
11.   Executive Compensation.
  Incorporated
by reference to “Compensation Discussion and Analysis,” “Compensation Committee
Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards,”
“Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock
Vested,” “Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential
Payments Upon Termination” and “Non-management Directors’ Compensation” in the
2010 Proxy Statement.
  Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
  Incorporated
by reference to “Information on Stock Ownership” in the 2010 Proxy
Statement.
  Item
13.   Certain Relationships and Related Transactions, and
Director Independence.
  Incorporated
by reference to “Related Person Transactions” and “Corporate Governance” in the
2010 Proxy Statement.
  Item
14.   Principal Accounting Fees and Services.
  Incorporated
by reference to “Independent Auditor” in the 2010 Proxy Statement.
  35
  PART
IV
  Item
15.   Exhibits, Financial Statement Schedules.
  3.1*
              Restated
      Articles of Incorporation, as amended and filed with the Nevada Secretary
      of State.
  3.2
      **
              Amended
      and Restated Bylaws.
  3.3***
              Amendment
      to Bylaws.
  4.9#
              Form
      of Warrant dated March 12, 2007.
  10.1##
              Contract
      for Establishment of a Limited Liability Company (SulphCo Oil Technologies
      Kuwait).
  10.2(1)
                Agreement
      dated February 22, 2005, by and between SulphCo, Inc. and OIL-SC,
      Ltd.
  10.3(2)
              Letter
      Agreement by and between SulphCo and OIL-SC and dated as of November 9,
      2005.
  10.4(3)
              Memorandum
      of Association dated November 29, 2005, by and between SulphCo, Inc. and
      Trans Gulf Petroleum Co., a Government of Fujairah
  company.
  10.5(4)
                SulphCo,
      Inc. 2006 Stock Option Plan approved by stockholders June 19,
      2006.
  10.6(5)
              Test
      Agreement between SK Corporation and SulphCo, Inc. dated July 20,
      2006.
  10.7(6)
              Amendment
      to Agreement of February 22, 2005 between SulphCo KorAsia, Inc. andSulphCo,
      Inc. dated August 18, 2006.
  10.8(7)
              Employment
      Agreement with Larry Ryan dated January 12,
  2007.
  10.9(8)
              Amendment
      No. 1 to Securities Purchase Agreements and Warrants dated March 12, 2007,
      including form of Warrant as Exhibit “A”
  thereto.
  10.10(9)
                Form
      of Assignment of Promissory Note, dated April, 24,
  2007.
  10.11(9)
              Form
      of Allonge to Assignment of Promissory Note, dated April 27,
      2007
  10.12(10)
              Employment
      Agreement with Stanley W. Farmer dated May 17,
  2007
  10.13(11)
                Amendment
      No. 2 to Securities Purchase Agreements and Warrants dated November 28,
      2007, including form of Warrant as Exhibit “A”
  thereto.
  10.14(11)
              License
      Agreement between Industrial Sonomechanics, LLC and SulphCo, Inc. dated
      November 9, 2007, including form of Warrant as Schedule 4.2
      thereto.
  10.15(12)
              Employment
      Agreement with M. Clay Chambers dated February 6,
    2008.
  10.16(13)
              Modification
      Agreement to Convertible Notes Payable Among SulphCo, Inc. and Holders
      dated November 28, 2007.
  10.23(14)
                Severance
      Agreement with Brian J. Savino effective March 8,
  2008.
  36
  10.24(15)
                Purchase
      Agreement dated May 27, 2008, by and between SulphCo, Inc. and the
      Purchasers parties thereto.
  10.25(16)
              Employment
      Agreement with Florian J. Schattenmann dated January 9,
    2009.
  10.26(17)
              Form
      of Subscription Agreement dated as of January 26, 2010 between SulphCo,
      Inc. and each of the investors in the
offering.
  14.1(18)
                Code
      of Ethics adopted by the Board of Directors on June 12,
    2008.
  23.1
              Consent
      of Hein & Associates LLP
  31.1
              Certification
      of CEO pursuant to Rule 13a-14 under the Securities Exchange Act of
      1934.
  31.2
              Certification
      of CFO pursuant to Rule 13a-14 under the Securities Exchange Act of
      1934.
  32.1
              Certifications
      of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.
  
 *
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
filed with the SEC on June 25, 2008.
  **
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
filed with the SEC on March 30, 2009.
  ***
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
filed on June 1, 2007.
  #
Incorporated by reference from the registrant’s Form 10-K (SEC File No. 1-32636)
filed with the SEC on April 2, 2007.
  ##
Incorporated by reference from the registrant’s Registration Statement on form
SB-2 (SEC File Nos. 333-117061 and 27599).
  (1)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
filed with the SEC on February 25, 2005.
  (2)
Incorporated by reference from the registrant’s Form 10-QSB (SEC File No.
1-32636) as filed with the SEC on November 14, 2005.
  (3)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on December 2, 2005.
  (4)Incorporated
by reference from the registrant’s Form 8-K (SEC File No. 1-32636) as filed with
the SEC on June 23, 2006.
  (5)Incorporated
by reference from the registrant’s Form 8-K (SEC File No. 1-32636) as filed with
the SEC on July 21, 2006.
  (6) Incorporated
by reference from the registrant’s Form 8-K (SEC File No. 1-32636) as filed with
the SEC on September 11, 2006.
  37
  (7)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on January 18, 2007.
  (8)
Incorporated by reference from the registrant’s Form 10-K (SEC File No. 1-32636)
as filed with the SEC on April 2, 2007.
  (9)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on May 1, 2007.
  (10)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on May 23, 2007.
  (11)
Incorporated by reference from the registrant’s Form S-3 (SEC File No.
333-148499) as filed with the SEC on January 7, 2008.
  (12)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on February 8, 2008.
  (13)
Incorporated by reference from the registrant’s Form 10-K (SEC File No. 1-32636)
as filed with the SEC on March 12, 2008.
  (14)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on March 13, 2008.
  (15)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on March 29, 2008.
  (16)
Incorporated by reference from the registrant’s Form 10-K (SEC File No. 1-32636)
as filed with the SEC on March 6, 2009.
  (17) Incorporated by reference from the
registrant’s Form 8-K (SEC File No. 1-32636) as filed with the SEC on January
29, 2010.
  (18)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
filed with the SEC on June 13, 2008.
  38
  SIGNATURES
 
 Pursuant to the requirements of Section
13 of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  SULPHCO,
      INC.February
      25, 2010
                By:
                /s/ Larry D. RyanLarry
      D. RyanChief
      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/LarryD.Ryan
                
                Chief Executive Officer, Director
                
                February 25, 2010Larry D. Ryan
                
                (Principal Executive Officer)/s/StanleyW.Farmer
                
                Vice President, Chief Financial
                
                February 25, 2010Stanley W. Farmer
                
                Officer, Treasurer and CorporateSecretary (Principal Financial Officerand Principal Accounting Officer)/s/FredS.Zeidman
                
                Chairman of the Board, Director
                
                February 25, 2010Fred S. Zeidman/s/RobertJ.Hassler
                
                Director
                
                February 25, 2010Robert J. Hassler/s/OrriHauksson
                
                Director
                
                February 25, 2010Orri Hauksson/s/RobertH.C.vanMaasdijk
                
                Director
                
                February 25, 2010Robert H. C. van Maasdijk/s/LawrenceG.Schafran
                
                Director
                
                February 25, 2010Lawrence G. Schafran
  39
  MANAGEMENT’S
REPORT
 ON
 INTERNAL
CONTROL OVER FINANCIAL REPORTING
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting of the Company. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United Sates of America.
  The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (iii) 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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the polices or procedures may deteriorate.
  Management
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in InternalControl—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2009.
  The
effectiveness of the internal control over financial reporting as of December
31, 2009 has been audited by Hein & Associates LLP, an independent
registered public accounting firm, as stated in their report which appears on
Page F-2.
  February
25, 2010
  /s/ Larry D. Ryan
                
                /s/ Stanley W. FarmerLarry D. Ryan
                  
                  Chief Executive Officer
                
                Stanley W. Farmer
                  
                  Vice President, Chief Financial Officer,
                  Treasurer and Corporate Secretary
  F-1
  REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON INTERNAL
 CONTROL
OVER FINANCIAL REPORTING
  To the
Board of Directors and Stockholders of SulphCo, Inc.:
  We have audited the internal control
over financial reporting of SulphCo, Inc. (the “Company”) as of December 31,
2009, based on criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
Company’s accompanying Report on Internal Control Over Financial Reporting
appearing on page F-1. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
  We conducted our audit 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, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
  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.
  In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.
  We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as of December 31, 2009
and 2008, and the related statements of operations, cash flows and changes in
stockholders’ equity (deficit) for each of the three years in the period ended
December 31, 2009, and our report dated February 25, 2010, expressed an
unqualified opinion thereon.
  /s/ Hein
& Associates
LLP
  Houston,
Texas
 February
25, 2010
  F-2


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of SulphCo, Inc.:




We have audited the accompanying
balance sheets of SulphCo, Inc. (a company in the Development Stage) (the
“Company”) as of December 31, 2009 and 2008, and the related statements of
operations, cash flows and changes in stockholders’ equity (deficit) for each of
the years in the three period ended December 31, 2009.  These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.




We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit 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 the Company at December 31, 2009 and 2008, and the results
of its operations and its cash flows for the each of the years in the three year
period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.




We have also audited the combination in
the statements of operations, cash flows and changes in stockholders’ equity
(deficit) of the amounts as presented for each of the three years in the period
ending December 31, 2009, with the amounts for the corresponding statements for
the period from inception (January 13, 1999) through December 31,
2006.  In our opinion, the amounts have been properly combined for the
period from inception (January 13, 1999) through December 31, 2009.




We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December
31, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 25, 2010, expressed an
unqualified opinion on the Company’s internal control over financial
reporting.




/s/ Hein
& Associates
LLP




Houston,
Texas


February
25, 2010


F-3


SULPHCO,
INC.


(A
Company in the Development Stage)


BALANCE
SHEETS


December
31, 2009 and 2008




2009
                                              
                                              
                                              2008ASSETSCurrent AssetsCash
      and cash equivalents
                                              
                                              $
                                              1,658,823
                                              
                                              
                                              $
                                              17,567,848Prepaid
      expenses and other
                                              
                                              
                                              688,008
                                              
                                              
                                              
                                              546,239Total
      current assets
                                              
                                              
                                              2,346,831
                                              
                                              
                                              
                                              18,114,087Property
      and Equipment, net
                                              
                                              
                                              263,995
                                              
                                              
                                              
                                              294,522Other AssetsIntangible
      assets, net
                                              
                                              
                                              986,124
                                              
                                              
                                              
                                              993,829Other
                                              
                                              
                                              20,600
                                              
                                              
                                              
                                              254,445Total
      other assets
                                              
                                              
                                              1,006,724
                                              
                                              
                                              
                                              1,248,274Total
      assets
                                              
                                              $
                                              3,617,550
                                              
                                              
                                              $
                                              19,656,883LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent LiabilitiesAccounts
      payable and accrued expenses
                                              
                                              $
                                              552,496
                                              
                                              
                                              $
                                              1,823,033Refundable
      deposit
                                              
                                              
                                              550,000
                                              
                                              
                                              
                                              550,000Late
      registration penalty (including accrued interest)
                                              
                                              
                                              389,836
                                              
                                              
                                              
                                              624,811Convertible
      notes payable, net of discount
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,824,282Total
      current liabilities
                                              
                                              
                                              1,492,332
                                              
                                              
                                              
                                              6,822,126Long-TermLiabilities
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Total
      liabilities
                                              
                                              $
                                              1,492,332
                                              
                                              
                                              $
                                              6,822,126Commitments
      and Contingencies(Note11)Stockholders'
      EquityPreferred
      stock: 10,000,000 shares authorized ($0.001 par value) none
      issued
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      stock: 150,000,000 shares authorized ($0.001 par value) 89,944,029
      and 89,919,029 shares issued and outstanding, respectively
                                              
                                              
                                              89,944
                                              
                                              
                                              
                                              89,919Additional
      paid-in capital
                                              
                                              
                                              159,298,891
                                              
                                              
                                              
                                              157,992,101Deficit
      accumulated during the development stage
                                              
                                              
                                              (157,263,617
                                              )
                                              
                                              
                                              (145,247,263
                                              )Total
      stockholders' equity
                                              
                                              
                                              2,125,218
                                              
                                              
                                              
                                              12,834,757Total
      liabilities and stockholders' equity
                                              
                                              $
                                              3,617,550
                                              
                                              
                                              $
                                              19,656,883




The
Accompanying Notes are an Integral Part of the Financial
Statements.


F-4


SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF
OPERATIONS


For the
Years ended December 31, 2009, 2008 and 2007


and for
the Period from Inception through December 31, 2009


Inception2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      to DateRevenueSales
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      42,967ExpensesSelling,
      general, and administrative expenses
                                      
                                      
                                      (7,470,131
                                      )
                                      
                                      
                                      (16,034,049
                                      )
                                      
                                      
                                      (11,445,749
                                      )
                                      
                                      
                                      (75,407,273
                                      )Research
      and development expenses:Fujairah
      test facility
                                      
                                      
                                      (317,362
                                      )
                                      
                                      
                                      (364,904
                                      )
                                      
                                      
                                      (1,694,509
                                      )
                                      
                                      
                                      (23,849,904
                                      )Other
      research and development
                                      
                                      
                                      (3,352,932
                                      )
                                      
                                      
                                      (3,688,804
                                      )
                                      
                                      
                                      (6,015,959
                                      )
                                      
                                      
                                      (20,196,066
                                      )Other
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (591,706
                                      )Total
      operating expenses
                                      
                                      
                                      (11,140,425
                                      )
                                      
                                      
                                      (20,087,757
                                      )
                                      
                                      
                                      (19,156,217
                                      )
                                      
                                      
                                      (120,044,949
                                      )Loss
      from operations
                                      
                                      
                                      (11,140,425
                                      )
                                      
                                      
                                      (20,087,757
                                      )
                                      
                                      
                                      (19,156,217
                                      )
                                      
                                      
                                      (120,001,982
                                      )Other income (expense)Interest
      income
                                      
                                      
                                      44,976
                                      
                                      
                                      
                                      138,151
                                      
                                      
                                      
                                      290,094
                                      
                                      
                                      
                                      1,201,691Interest
      expense
                                      
                                      
                                      (920,905
                                      )
                                      
                                      
                                      (1,222,203
                                      )
                                      
                                      
                                      (5,487,048
                                      )
                                      
                                      
                                      (8,839,623
                                      )Other
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (9,160
                                      )
                                      
                                      
                                      (766,868
                                      )Net
      loss
                                      
                                      
                                      (12,016,354
                                      )
                                      
                                      
                                      (21,171,809
                                      )
                                      
                                      
                                      (24,362,331
                                      )
                                      
                                      
                                      (128,406,782
                                      )Deemed
      dividend
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (4,087,887
                                      )
                                      
                                      
                                      (24,768,948
                                      )
                                      
                                      
                                      (28,856,835
                                      )Net loss
      attributable to common stockholders
                                      
                                      $
                                      (12,016,354
                                      )
                                      
                                      $
                                      (25,259,696
                                      )
                                      
                                      $
                                      (49,131,279
                                      )
                                      
                                      $
                                      (157,263,617
                                      )Other comprehensive income
      (loss)Foreign
      currency translation gain (loss)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,455
                                      
                                      
                                      
                                      -Net
      comprehensive income (loss)
                                      
                                      $
                                      (12,016,354
                                      )
                                      
                                      $
                                      (25,259,696
                                      )
                                      
                                      $
                                      (49,127,824
                                      )
                                      
                                      $
                                      (157,263,617
                                      )Loss
      per share: basic and diluted
                                      
                                      $
                                      (0.13
                                      )
                                      
                                      $
                                      (0.29
                                      )
                                      
                                      $
                                      (0.64
                                      )Weighted
      average sharesbasic
      and diluted
                                      
                                      
                                      89,944,029
                                      
                                      
                                      
                                      85,870,148
                                      
                                      
                                      
                                      77,062,280





The
Accompanying Notes are an Integral Part of the Financial
Statements.


F-5


SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CASH
FLOWS


For the
Years Ended December 31, 2009, 2008 and 2007


and for
the Period from Inception to December 31, 2009


Inception2009
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            To DateCash Flows From Operating
      ActivitiesNet
      loss
                            
                            $
                            (12,016,354
                            )
                            
                            $
                            (21,171,809
                            )
                            
                            $
                            (24,362,331
                            )
                            
                            $
                            (128,406,782
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                            
                            
                            244,664
                            
                            
                            
                            220,401
                            
                            
                            
                            189,880
                            
                            
                            
                            1,652,509Accretion
      of convertible notes payable discount
                            
                            
                            855,762
                            
                            
                            
                            856,480
                            
                            
                            
                            5,024,308
                            
                            
                            
                            6,736,550Stock-based
      compensation
                            
                            
                            1,306,815
                            
                            
                            
                            5,226,632
                            
                            
                            
                            4,335,261
                            
                            
                            
                            21,017,550Other
                            
                            
                            875
                            
                            
                            
                            502,133
                            
                            
                            
                            (6,908
                            )
                            
                            
                            1,359,181Changes
      in:Prepaid
      expenses and other
                            
                            
                            92,076
                            
                            
                            
                            (319,952
                            )
                            
                            
                            97,993
                            
                            
                            
                            (708,608
                            )Accounts
      payable and accrued expenses
                            
                            
                            (1,270,537
                            )
                            
                            
                            127,697
                            
                            
                            
                            (2,013,966
                            )
                            
                            
                            552,496Refundable
      deposit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            550,000Late
      registration penalty (including accrued interest)
                            
                            
                            (234,975
                            )
                            
                            
                            (469,860
                            )
                            
                            
                            135,867
                            
                            
                            
                            389,836Net
      cash used in operating activities
                            
                            
                            (11,021,674
                            )
                            
                            
                            (15,028,278
                            )
                            
                            
                            (16,599,896
                            )
                            
                            
                            (96,857,268
                            )Cash Flows From Investing
      ActivitiesPurchase
      of property and equipment
                            
                            
                            (130,375
                            )
                            
                            
                            (137,259
                            )
                            
                            
                            (240,534
                            )
                            
                            
                            (1,523,708
                            )Investments
      in joint ventures and subsidiaries
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (361,261
                            )Investments
      in intangible assets
                            
                            
                            (76,932
                            )
                            
                            
                            (182,455
                            )
                            
                            
                            (418,436
                            )
                            
                            
                            (1,246,573
                            )Net
      cash used in investing activities
                            
                            
                            (207,307
                            )
                            
                            
                            (319,714
                            )
                            
                            
                            (658,970
                            )
                            
                            
                            (3,131,542
                            )Cash Flows from Financing
      ActivitiesProceeds
      from sales of stock, net of offering costs
                            
                            
                            -
                            
                            
                            
                            25,485,702
                            
                            
                            
                            18,684,012
                            
                            
                            
                            99,409,777Proceeds
      from  related party notes payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            11,000,000Proceeds
      from issuance of line of credit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            750,000Principal
      payments on related party notes payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,441,285
                            )Decrease
      in related party receivable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,359,185Principal
      payments on line of credit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (750,000
                            )Principal
      payments on convertible notes payable
                            
                            
                            (4,680,044
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (4,680,044
                            )Net
      cash provided by (used in) financingactivities
                            
                            
                            (4,680,044
                            )
                            
                            
                            25,485,702
                            
                            
                            
                            18,684,012
                            
                            
                            
                            101,647,633Net
      change in cash and cash equivalents
                            
                            
                            (15,909,025
                            )
                            
                            
                            10,137,710
                            
                            
                            
                            1,425,146
                            
                            
                            
                            1,658,823Cash
      and cash equivalents: beginning of period
                            
                            
                            17,567,848
                            
                            
                            
                            7,430,138
                            
                            
                            
                            6,004,992
                            
                            
                            
                            -Cash
      and cash equivalents at end of period
                            
                            $
                            1,658,823
                            
                            
                            $
                            17,567,848
                            
                            
                            $
                            7,430,138
                            
                            
                            $
                            1,658,823Supplemental informationCash
      paid for interest
                            
                            $
                            124,367
                            
                            
                            $
                            417,673
                            
                            
                            $
                            341,545
                            
                            
                            $
                            1,509,800Cash
      paid for income taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -The
      Company had the following non-cash investing and financing
      activities:Extinguishment
      of related party note payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,000,000
                            
                            
                            
                            5,000,000Extinguishment
      of convertible notes payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,680,044
                            
                            
                            
                            4,680,044Issuance
      of stock for convertible notes payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            319,956
                            
                            
                            
                            319,956Non-cash
      deemed dividend
                            
                            
                            -
                            
                            
                            
                            4,087,887
                            
                            
                            
                            24,768,948
                            
                            
                            
                            28,856,835





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’EQUITY
(DEFICIT)


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at January 13, 1999
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Stock
      issued for cash at $167 per share
                  
                  
                  1,000
                  
                  
                  
                  1
                  
                  
                  
                  166,999
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  167,000Restatement
      for recapitalization of 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 stockholders:Cash
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  169,169
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  169,169Equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  362,331
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  362,331Acquisition
      of GRD, Inc.
                  
                  
                  1,200,000
                  
                  
                  
                  1,200
                  
                  
                  
                  (251,200
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (250,000
                  )Stock
      issued for cash and subscription receivable at $0.50 per
      share
                  
                  
                  820,000
                  
                  
                  
                  820
                  
                  
                  
                  409,180
                  
                  
                  
                  -
                  
                  
                  
                  (208,500
                  )
                  
                  
                  201,500Stock
      options granted at $0.50 per share in December 2000
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  919,401
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  919,401Stock
      options granted at $1.50 per share in December 2000
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  94,799
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  94,799Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,364,390
                  )
                  
                  
                  -
                  
                  
                  
                  (1,364,390
                  )Balance
      at December 31, 2000
                  
                  
                  22,020,000
                  
                  
                  $
                  22,020
                  
                  
                  $
                  1,850,680
                  
                  
                  $
                  (1,493,192
                  )
                  
                  $
                  (208,500
                  )
                  
                  $
                  171,008








F-7




SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CHANGES IN
STOCKHOLDERS’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2000
                  
                  
                  22,020,000
                  
                  
                  $
                  22,020
                  
                  
                  $
                  1,850,680
                  
                  
                  $
                  (1,493,192
                  )
                  
                  $
                  (208,500
                  )
                  
                  $
                  171,008Stock
      issued for intangible assets at $4.25 per share in January
      2001
                  
                  
                  292,800
                  
                  
                  
                  293
                  
                  
                  
                  1,244,107
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,244,400Stock
      issued for intangible assets at $2.85 per share in February
      2001
                  
                  
                  400,000
                  
                  
                  
                  400
                  
                  
                  
                  1,139,600
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,140,000Stock
      sold to related party at $1.47 per share in February
    2001
                  
                  
                  24,750
                  
                  
                  
                  25
                  
                  
                  
                  36,431
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36,456Stock
      issued for marketing services at $2.86 per share  in April
      2001
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  571,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  572,000Stock
      options granted to related parties for services in June
      2001
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  773,931
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  773,931Stock
      issued in exchange for notes receivable at $0.50 per share in May
      2001
                  
                  
                  9,556,000
                  
                  
                  
                  9,556
                  
                  
                  
                  4,768,444
                  
                  
                  
                  -
                  
                  
                  
                  (4,778,000
                  )
                  
                  
                  -Stock
      issued in exchange for notes receivable at $1.50 per share in June
      2001
                  
                  
                  425,000
                  
                  
                  
                  425
                  
                  
                  
                  637,075
                  
                  
                  
                  -
                  
                  
                  
                  (637,500
                  )
                  
                  
                  -Stock
      sold for cash at $2.94 per share in June 2001
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  293,900
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  294,000Stock
      issued in exchange for note receivable at $1.41 per share in June
      2001
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  281,800
                  
                  
                  
                  -
                  
                  
                  
                  (282,000
                  )
                  
                  
                  -Stock
      issued to related party for cash at $0.50 per share  in
      June 2001
                  
                  
                  350,000
                  
                  
                  
                  350
                  
                  
                  
                  174,650
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  175,000Cash
      received for subscription receivable in July 2001
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  282,000
                  
                  
                  
                  282,000Cash
      received for subscription receivable in August 2001
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  340,000
                  
                  
                  
                  340,000Stock
      issued for subscription  receivable at $0.725 per share in
      September 2001
                  
                  
                  2,758,620
                  
                  
                  
                  2,759
                  
                  
                  
                  1,997,241
                  
                  
                  
                  -
                  
                  
                  
                  (2,000,000
                  )
                  
                  
                  -Stock
      issued to related party for consulting fees at $0.85 per
      share  in November 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 at a weighted average price of $0.75 per share in October
      2001
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  89,020
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  89,020Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,927,525
                  )
                  
                  
                  -
                  
                  
                  
                  (6,927,525
                  )Balance
      at December 31, 2001
                  
                  
                  39,927,170
                  
                  
                  $
                  39,928
                  
                  
                  $
                  15,646,632
                  
                  
                  $
                  (8,420,717
                  )
                  
                  $
                  (6,249,500
                  )
                  
                  $
                  1,016,343





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’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                      
                      
                      
                      
                      
                      SubscriptionsCommon
      Stock
                      
                      
                      Paid-in
                      
                      
                      Accumulated
                      
                      
                      Receivable
                      
                      
                      TotalShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      and
      Other
                      
                      
                      EquityBalance
      at December 31, 2001
                      
                      
                      39,927,170
                      
                      
                      $
                      39,928
                      
                      
                      $
                      15,646,632
                      
                      
                      $
                      (8,420,717
                      )
                      
                      $
                      (6,249,500
                      )
                      
                      $
                      1,016,343Stock
      issued for  related party services at $0.50 per 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 receivedin
      July 2002
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      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 in September
    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 in October
2002
                      
                      
                      50,000
                      
                      
                      
                      50
                      
                      
                      
                      13,450
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,500Stock
      options issued in November 2002 for $0.10 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,500Stock
      issued to a related party for cash at $0.10 per share in November
      2002
                      
                      
                      100,000
                      
                      
                      
                      100
                      
                      
                      
                      9,900
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,000Stock
      issued to a related party for cash at $0.10 per share in December
      2002
                      
                      
                      50,000
                      
                      
                      
                      50
                      
                      
                      
                      4,950
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (6,573,627
                      )
                      
                      
                      -
                      
                      
                      
                      (6,573,627
                      )Balance
      at December 31, 2002
                      
                      
                      47,621,170
                      
                      
                      $
                      47,622
                      
                      
                      $
                      19,153,938
                      
                      
                      $
                      (14,994,344
                      )
                      
                      $
                      (4,624,500
                      )
                      
                      $
                      (417,284
                      )





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’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2002
                  
                  
                  47,621,170
                  
                  
                  $
                  47,622
                  
                  
                  $
                  19,153,938
                  
                  
                  $
                  (14,994,344
                  )
                  
                  $
                  (4,624,500
                  )
                  
                  $
                  (417,284
                  )Stock
      subscribed for  services at $0.42 per share in February
      2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,950
                  
                  
                  
                  -
                  
                  
                  
                  50
                  
                  
                  
                  21,000Payment
      on stock subscription received in February 2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,575,000
                  
                  
                  
                  3,575,000Stock
      issued to a related party for cash at $0.33 per share in March
      2003
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  16,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,500Stock
      issued for services at $0.32 per share in June 2003
                  
                  
                  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 per share 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 party at
      $0.42 per share in December 2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  295,000
                  
                  
                  
                  -
                  
                  
                  
                  (295,000
                  )
                  
                  
                  -Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,170,959
                  )
                  
                  
                  -
                  
                  
                  
                  (3,170,959
                  )Balance
      at December 31, 2003
                  
                  
                  49,670,083
                  
                  
                  $
                  49,671
                  
                  
                  $
                  19,762,839
                  
                  
                  $
                  (18,165,303
                  )
                  
                  $
                  (1,106,950
                  )
                  
                  $
                  540,257





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’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2003
                  
                  
                  49,670,083
                  
                  
                  $
                  49,671
                  
                  
                  $
                  19,762,839
                  
                  
                  $
                  (18,165,303
                  )
                  
                  $
                  (1,106,950
                  )
                  
                  $
                  540,257Restricted
      stock issued for interest on notes $0.296 per share in January
      2004
                  
                  
                  1,000,000
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,000
                  )
                  
                  
                  -Stock
      issued for services at $0.85 per share in January
2004
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  84,900
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85,000Issued
      subscribed stock at $0.42 per share in March 2004
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (50
                  )
                  
                  
                  -Private
      placement stock issuance at $0.90 per share in June
    2004
                  
                  
                  2,978,342
                  
                  
                  
                  2,978
                  
                  
                  
                  2,677,530
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,680,508Private
      placement stock issuance at $1.25 per share in June
    2004
                  
                  
                  2,030,960
                  
                  
                  
                  2,031
                  
                  
                  
                  1,896,912
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,898,943Stock
      options exercised at $0.55 per share in July 2004
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  109,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  110,000Stock
      options exercised at $0.35 per share in July 2004
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  34,900
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  35,000Stock
      issued for services at $2.86 per share in August 2004
                  
                  
                  45,000
                  
                  
                  
                  45
                  
                  
                  
                  128,655
                  
                  
                  
                  -
                  
                  
                  
                  (128,700
                  )
                  
                  
                  -Cancellation
      of subscribed stock at $1.50 per share in September
    2004
                  
                  
                  (45,000
                  )
                  
                  
                  (45
                  )
                  
                  
                  (67,455
                  )
                  
                  
                  -
                  
                  
                  
                  67,500
                  
                  
                  
                  -Stock
      options exercised at $0.55 per share in December 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 of option given to former employee to
      by 100,000 shares at $0.55 per share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,000Related
      party receivable for tax withholding on exercise 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
                  
                  
                  $
                  25,347,781
                  
                  
                  $
                  (22,311,756
                  )
                  
                  $
                  (1,077,325
                  )
                  
                  $
                  2,015,130





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’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2004
                  
                  
                  56,429,385
                  
                  
                  $
                  56,430
                  
                  
                  $
                  25,347,781
                  
                  
                  $
                  (22,311,756
                  )
                  
                  $
                  (1,077,325
                  )
                  
                  $
                  2,015,130Stock
      issued to a Director for services at $5.47 per share in January
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  273,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  273,500Stock
      issued to an Officer for services at $4.08 per share in January
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  203,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,000Receipt
      of related party receivable for tax withholding on stock options in
      January 2005
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  257,750
                  
                  
                  
                  257,750Stock
      issued to a consultant for services at $5.91 per share in April
      2005
                  
                  
                  15,000
                  
                  
                  
                  15
                  
                  
                  
                  88,635
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  88,650Stock
      issued to a Director for services at $4.99 per share in April
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  249,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  249,500Stock
      issued to a Director for services at $3.54 per share in May
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  176,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  177,000Warrants
      and Additional Investment Rights exercised in August
    2005
                  
                  
                  79,430
                  
                  
                  
                  79
                  
                  
                  
                  81,151
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  81,230Warrants
      and Additional Investment Rights exercised in September
      2005
                  
                  
                  83,230
                  
                  
                  
                  83
                  
                  
                  
                  84,565
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  84,648Warrants
      and Additional Investment Rights exercised in October
      2005
                  
                  
                  16,126
                  
                  
                  
                  16
                  
                  
                  
                  21,812
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,828Warrants
      and Additional Investment Rights exercised in November
      2005
                  
                  
                  585,244
                  
                  
                  
                  585
                  
                  
                  
                  535,094
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  535,679Stock
      issued to a Director for services at $3.61 per share in November
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  180,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  180,500Stock
      issued to a Director for services at $6.40 per share in December
      2005
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  319,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  320,000Warrants
      and Additional Investment Rights exercised in December
      2005
                  
                  
                  3,028,380
                  
                  
                  
                  3,028
                  
                  
                  
                  3,041,104
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,044,132Amortization
      of prepaid expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  75,075
                  
                  
                  
                  75,075Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,428,370
                  )
                  
                  
                  -
                  
                  
                  
                  (9,428,370
                  )Balance
      at December 31, 2005
                  
                  
                  60,536,795
                  
                  
                  $
                  60,536
                  
                  
                  $
                  30,604,342
                  
                  
                  $
                  (31,740,126
                  )
                  
                  $
                  (744,500
                  )
                  
                  $
                  (1,819,748
                  )




The
Accompanying Notes are an Integral Part of the Financial
Statements.


F-12


SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CHANGES IN
STOCKHOLDERS’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2005
                  
                  
                  60,536,795
                  
                  
                  $
                  60,536
                  
                  
                  $
                  30,604,342
                  
                  
                  $
                  (31,740,126
                  )
                  
                  $
                  (744,500
                  )
                  
                  $
                  (1,819,748
                  )Warrants
      and Additional Investment Rights exercised in January
      2006
                  
                  
                  4,423,628
                  
                  
                  
                  4,424
                  
                  
                  
                  4,790,044
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,794,468Warrants
      and Additional Investment Rights exercised in February
      2006
                  
                  
                  1,291,660
                  
                  
                  
                  1,292
                  
                  
                  
                  1,303,532
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,304,824Warrants
      and Additional Investment Rights exercised in 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 $7.44 per share in March
      2006
                  
                  
                  17,500
                  
                  
                  
                  18
                  
                  
                  
                  130,182
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  130,200Stock
      option accrued for a consultant for services at $7.44 per share in
      March 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  357,525
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  357,525Stock
      issued to a Director for services at $8.80 per share in March
      2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  439,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  440,000Stock
      issued to a Director for services at $12.72 per share in March
      2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  635,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  636,000Stock
      option accrued for a consultant for services 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 a Director for services at $5.53 per share in August
      2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  276,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  276,500Stock
      issued to a Director for services at $4.87 per 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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,045,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,045,000
                  )Reversal
      of stock subscriptions receivable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (744,500
                  )
                  
                  
                  -
                  
                  
                  
                  744,500
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,455
                  )
                  
                  
                  (3,455
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (39,116,162
                  )
                  
                  
                  -
                  
                  
                  
                  (39,116,162
                  )Balance
      at December 31, 2006
                  
                  
                  72,620,910
                  
                  
                  $
                  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-13


SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CHANGES IN
STOCKHOLDERS’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2006
                  
                  
                  72,620,910
                  
                  
                  $
                  72,621
                  
                  
                  $
                  67,864,451
                  
                  
                  $
                  (70,856,288
                  )
                  
                  $
                  (3,455
                  )
                  
                  $
                  (2,922,671
                  )Stock-Based
      Compensation
                  
                  
                  70,206
                  
                  
                  
                  70
                  
                  
                  
                  4,335,191
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,335,261Proceeds
      from Stock Sales (Net of Offering Costs)Warrants
      exercised in Q1 2007 at $1.12 to $2.68 per share
                  
                  
                  3,952,068
                  
                  
                  
                  3,952
                  
                  
                  
                  7,783,721
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,787,673Warrants
      exercised in Q2 2007 at $2.68 per share
                  
                  
                  600,000
                  
                  
                  
                  600
                  
                  
                  
                  1,599,925
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,600,525Warrants
      exercised in Q3 2007 at $2.68 per share
                  
                  
                  1,425,412
                  
                  
                  
                  1,425
                  
                  
                  
                  3,767,425
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,768,850Warrants
      exercised in Q4 2007 at $2.68 per share
                  
                  
                  2,029,070
                  
                  
                  
                  2,029
                  
                  
                  
                  5,524,935
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,526,964Deemed
      Dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  24,768,948
                  
                  
                  
                  (24,768,948
                  )
                  
                  
                  -
                  
                  
                  
                  -Convertible
      Notes Payable - BeneficialConversion
      Feature
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,736,550
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,736,550Cashless
      option exercise
                  
                  
                  66,551
                  
                  
                  
                  67
                  
                  
                  
                  (67
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Debt
      Conversion at $3.80 per share
                  
                  
                  84,199
                  
                  
                  
                  84
                  
                  
                  
                  319,872
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  319,956Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,455
                  
                  
                  
                  3,455Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (24,362,331
                  )
                  
                  
                  -
                  
                  
                  
                  (24,362,331
                  )Balance
      at December 31, 2007
                  
                  
                  80,848,416
                  
                  
                  $
                  80,848
                  
                  
                  $
                  122,700,951
                  
                  
                  $
                  (119,987,567
                  )
                  
                  $
                  -
                  
                  
                  $
                  2,794,232






F-14




SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CHANGES IN
STOCKHOLDERS’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2007
                  
                  
                  80,848,416
                  
                  
                  $
                  80,848
                  
                  
                  $
                  122,700,951
                  
                  
                  $
                  (119,987,567
                  )
                  
                  $
                  -
                  
                  
                  $
                  2,794,232Stock-Based
      Compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,139,632
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,139,632Proceeds
      from Stock Sales (Net of Offering Costs)Warrants
      exercised in Q2 2008 at $2.68 per share
                  
                  
                  1,953,088
                  
                  
                  
                  1,953
                  
                  
                  
                  5,158,714
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,160,667Shelf
      Registration in Q2 2008 at $3.20 per share
                  
                  
                  6,818,750
                  
                  
                  
                  6,819
                  
                  
                  
                  20,318,216
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,325,035Deemed
      Dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,087,887
                  
                  
                  
                  (4,087,887
                  )
                  
                  
                  -
                  
                  
                  
                  -Stock
      Issued to Settle Litigation at $2.02 per share
                  
                  
                  247,525
                  
                  
                  
                  248
                  
                  
                  
                  499,752
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500,000Stock
      Issued for Services and other at $1.70 per share
                  
                  
                  51,250
                  
                  
                  
                  51
                  
                  
                  
                  86,949
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,000Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21,171,809
                  )
                  
                  
                  -
                  
                  
                  
                  (21,171,809
                  )Balance
      at December 31, 2008
                  
                  
                  89,919,029
                  
                  
                  $
                  89,919
                  
                  
                  $
                  157,992,101
                  
                  
                  $
                  (145,247,263
                  )
                  
                  $
                  -
                  
                  
                  $
                  12,834,757





The
Accompanying Notes are an Integral Part of the Financial
Statements.




F-15




SULPHCO,
INC.


(A
Company in the Development Stage)


STATEMENTS OF CHANGES IN
STOCKHOLDERS’EQUITY (DEFICIT)-
Continued


From
Inception to December 31, 2009





StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and
      Other
                  
                  
                  EquityBalance
      at December 31, 2008
                  
                  
                  89,919,029
                  
                  
                  $
                  89,919
                  
                  
                  $
                  157,992,101
                  
                  
                  $
                  (145,247,263
                  )
                  
                  $
                  -
                  
                  
                  $
                  12,834,757Stock-Based
      Compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,291,565
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,291,565Stock
      Grant issued in Q1 2009 at $0.61 per share
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  15,225
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,250Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,016,354
                  )
                  
                  
                  -
                  
                  
                  
                  (12,016,354
                  )Balance
      at December 31, 2009
                  
                  
                  89,944,029
                  
                  
                  $
                  89,944
                  
                  
                  $
                  159,298,891
                  
                  
                  $
                  (157,263,617
                  )
                  
                  $
                  -
                  
                  
                  $
                  2,125,218





The
Accompanying Notes are an Integral Part of the Financial
Statements.


F-16


SULPHCO,
INC.


(A
Company in the Development Stage)


NOTES TO FINANCIAL
STATEMENTS


December
31, 2009





1.
            Organizationand Significant
      Accounting Policies




Business




SulphCo,
Inc. (“SulphCo” or the “Company”) is considered a developmental stage company as
defined in the Research and Development Topic of the FASB Accounting Standards
Codification as the Company has not recognized significant revenue and is
continuing to develop and market processes designed to desulfurize crude oil
products and crude oil.  The overall process is designed to “upgrade”
the quality of crude oil and crude oil products by modifying and reducing sulfur
and nitrogen content to make those compounds easier to process using
conventional techniques.




SulphCo,
formerly Film World, 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
Film World, 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 Film World, Inc.  The Company’s name was changed to
SulphCo, Inc.




The Company’s stock has traded on the
NYSE Amex (formerly known as the American Stock Exchange) since October 2005
under the symbol “SUF.”  Previously the Company’s common stock had
been quoted on the OTC Bulletin Board under the symbol “SLPH.”





Use of Estimates in the
Preparation of Financial Statements




The preparation of financial statements
in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements, and the related reported
amounts of revenues and expenses during the reporting period. The significant
estimates made by management in the accompanying financial statements include
allowances for doubtful accounts, determination of income taxes, contingent
liabilities, useful lives used in depreciation and amortization and the
assumptions utilized to compute stock-based compensation. Actual results could
differ from those estimates.





Cash and Cash
Equivalents




All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents.


F-17


FairValue of Financial
Instruments




The carrying amounts of financial
instruments held by the Company, which include cash, accounts payable, and
accrued liabilities, approximate fair values due to their short
maturity.  The carrying value of the convertible notes payable
reasonably approximated its fair value as it had a variable interest rate that
reset on a quarterly basis.




Property and
Equipment




Property
and equipment are recorded at cost, less accumulated
depreciation.  The Company periodically reviews its long-lived assets
for impairment and 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 and equipment is depreciated over the remaining estimated useful
lives of the assets ranging from three to seven 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.




Intangible
Assets




Intangible assets include patents,
trade names and other intangible assets acquired from an independent
party.  Intangible assets with a definite life are amortized on a
straight-line basis, with estimated useful lives ranging from 10 to 20 years.
Intangible assets with a definite life are tested for impairment whenever events
or circumstances indicate that the carrying amount of an asset (asset group) may
not be recoverable.An impairment loss is
recognized when the carrying amount of an asset exceeds the estimated
undiscounted cash flows used in determining the fair value of the asset. The
amount of the impairment loss to be recorded is calculated by the excess of the
asset’s carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis.




EquityMethod




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 (“FOT”), in which the Company owns a 50% interest, has been reduced to
zero at December 31, 2009 and 2008, respectively. To the extent that the Company
continues to incur costs in excess of its investment in FOT, these costs will be
recognized by the Company as research and development costs.




Research and
Development




The
Company expenses research and development costs as incurred.  Since
the Company has not generated meaningful revenue to date and has yet to validate
the commercial viability of its technology, all costs incurred to date relating
to its current ongoing technology development and commercial validation
efforts  have been expensed as research and development
costs.




Income
Taxes




Income
taxes are accounted for under the asset and liability method. Deferred income
tax assets and liabilities are established for temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities at tax
rates expected to be in effect when such assets or liabilities are realized or
settled. Deferred income tax assets are reduced by a valuation allowance if, in
the judgment of our management, it is more likely than not that such assets will
not be realized.





Income
taxes include the largest amount of tax benefit for an uncertain tax position
that is more likely than not to be sustained upon audit based on the technical
merits of the tax position. Settlements with tax authorities, the expiration of
statutes of limitations for particular tax positions, or obtaining new
information on particular tax positions may cause a change to the effective tax
rate.


F-18




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 options and warrants to acquire the Company’s common
stock and convertible debt.  As of December 31, 2009, 2008 and 2007,
there were approximately 11.0 million, 11.0 million and 9.0 million shares
issuable, respectively, in connection with these potentially dilutive
securities.  These potentially dilutive securities were disregarded in
the computations of diluted net loss per share for the years ended December 31,
2009, 2008 and 2007, respectively, because inclusion of such potentially
dilutive securities would have been anti-dilutive.




Stock-Based
Compensation




In
accordance with the Stock Compensation Topic of the FASB Accounting Standards
Codification, the Company records stock-based compensation expense for all
share-based payment arrangements, including stock options, warrants and
restricted stock grants.  The fair value of each option award granted
is estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatilities are based on the historical volatility of the Company’s
stock. The expected term of options granted to employees is derived utilizing
the simplified method which represents the period of time that options granted
are expected to be outstanding. The Company utilizes the simplified method
because it does not have historical exercise data which is sufficient to provide
a reasonable basis to estimate the expected term. The Company expects to
continue utilizing the simplified method to determine the expected term until
such time as it accumulates historical exercise data that will provide a
sufficient basis for the Company to begin estimating the expected term for
option exercises.  The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve at the
time of grant.




During
the years ended December 31, 2009, 2008 and 2007, the Company recognized
non-cash general and administrative expenses for stock options and restricted
stock awards of approximately $1.3 million, $5.2 million and $4.3 million,
respectively.




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 began utilizing three manufacturers to
supply virtually all of its needs, as the Company's results could be adversely
affected if manufacturing were delayed or curtailed.




Reclassifications




Certain amounts in prior years’
financial statements have been reclassified to conform to current year
presentation.




New Accounting
Pronouncements




Recently
Adopted Accounting Standards




In
January 2009, we adopted authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) on determining whether instruments granted
in share-based payment transactions are participating securities. The guidance
requires that unvested stock-based compensation awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) should be classified as participating securities and should be included
in the computation of earnings per share pursuant to the two-class method as
described by the Earnings Per share Topic of the FASB Accounting Standards
Codification. Adoption of the new guidance did not have a material impact on the
Company’s computation of earnings per share.





In January 2009, we adopted
authoritative guidance issued by the FASB on determining whether an instrument
(or an Embedded Feature) is indexed to an entity’s own stock. The guidance
addresses the determination of whether provisions that introduce adjustment
features (including contingent adjustment features) would prevent treating a
derivative contract or an embedded derivative on a company’s own stock as
indexed solely to the company’s stock. Adoption of the new guidance did not have
a material impact on the Company’s financial statements.


F-19





In May 2009, we adopted authoritative
guidance issued by the FASB on interim disclosures about fair value of financial
instruments. Adoption of the new guidance did not have a material impact on the
Company’s financial statements.





In July 2009, we adopted authoritative
guidance issued by the FASB that provides for the FASB Accounting Standards
Codification (the “Codification”) to become the single official source of
authoritative GAAP. The Codification did not change GAAP but reorganizes the
accounting literature. The adoption of the new guidance did not materially
impact the Company’s financial statements.




Recently
Issued Accounting Standards




In October 2009, the FASB issued
authoritative guidance on revenue arrangements with multiple deliverables that
are outside the scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective evidence or third party evidence
for deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes
new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. The new guidance
will be effective for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. We believe future adoption
of this new guidance will not have a material impact on our financial statements
unless the Company enters into a revenue arrangement with multiple deliverables
that are outside the scope of the software revenue recognition
guidance.


F-20





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 on 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% per annum.
Interest accrued since February 16, 2006 totals approximately $0.1
million.  Based on the fact that SulphCo KorAsia has never had
material revenue streams and considering that there continues to be a high level
of uncertainty regarding when, if ever, it will generate material revenue
streams, the Company has established an allowance for doubtful collection equal
to the total principal balance and accrued interest thereon.





The
Company also holds a refundable deposit of SulphCo KorAsia, which may be
available to offset the loan receivable, should there be a final determination
that SulphCo KorAsia could not repay the loan and accrued interest (see Note
7).





3.
              Property and
      Equipment





The
following is a summary of property and equipment at cost, less accumulated
depreciation:




2009
                  
                  
                  2008Equipment
                  
                  $
                  1,022,491
                  
                  
                  $
                  933,894Computers
                  
                  
                  277,333
                  
                  
                  
                  260,688Office
      furniture
                  
                  
                  62,749
                  
                  
                  
                  61,071Vehicles
                  
                  
                  12,000
                  
                  
                  
                  12,000Leasehold
      improvements
                  
                  
                  94,472
                  
                  
                  
                  92,965$
                  1,469,045
                  
                  
                  $
                  1,360,618Less:
      Accumulated depreciation
                  
                  
                  (1,205,050
                  )
                  
                  
                  (1,066,096
                  )Total
                  
                  $
                  263,995
                  
                  
                  $
                  294,522




Depreciation expense was approximately
$0.2 million, $0.1 million and $0.1 million for the years ended December
31, 2009, 2008 and 2007, respectively.


F-21





4.
            Intangible
      Assets





As of December 31, 2009, the Company
had nine U.S. patents, one U.S. patent pending, 67 foreign patents, and 108
foreign patents pending.  At December 31, 2009 and 2008, the Company
had capitalized approximately $1.2 million and $1.2 million, respectively, in
costs that were incurred in connection with filing patents and trademarks
related to internally developed technology.  Accumulated amortization
as of December 31, 2009 and 2008 was approximately $0.2 million and $0.2
million, respectively.  During the years ended December 31, 2009, 2008
and 2007 the Company capitalized intangible assets of approximately $0.1
million, $0.2 million, and $0.4 million, respectively.





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.  Amortization expense related to patents and trademarks for the
years ended December 31, 2009, 2008, and 2007 was approximately $0.1 million,
$0.1 million and $45,000, respectively.  Maintenance costs of
approximately $0.1 million and $0.1 million were expensed throughout 2009 and
2008, 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:





Years
                  
                  Estimated Amortization
    Expense2010
                  
                  $
                  80,0002011
                  
                  $
                  80,0002012
                  
                  $
                  80,0002013
                  
                  $
                  80,0002014
                  
                  $
                  80,000





5.
            Investment in Joint
      Venture





In
November 2005, the Company and Trans Gulf Petroleum Co. (“Trans Gulf”), a
Government of Fujairah company, formed FOT, a United Arab Emirates limited
liability company, to implement the Company’s SonocrackingTM desulfurization
technology.  FOT is 50% owned by Trans Gulf and 50% owned by the
Company.  Fujairah is one of the seven Emirates of the United Arab
Emirates.  Under the terms of the joint venture, the Company is
responsible for contributing its SonocrackingTM units and the facility that
houses them including bearing all costs relating thereto.  Operation
and maintenance of the Fujairah test facility is the responsibility of
FOT.





The joint
venture agreement contemplates that profits and losses will be shared on a 50/50
basis between Trans Gulf and the Company.  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.  The
Company is uncertain that it will be able to recover its investment in
FOT.  Accordingly, the carrying value of the investment has been
reduced to zero at December 31, 2009 and 2008, respectively.  Going
forward, and to the extent that the Company continues to incur costs in excess
of its investment in FOT, these costs will be recognized by the Company as
research and development costs.


F-22





6.
            Income
      Taxes





The
Company has incurred net operating losses since inception.  As of
December 31, 2009, the Company has net operating loss (“NOL”) carry-forwards for
federal income tax purposes of approximately $71.1 million available to reduce
future taxable income, which expire at various dates beginning in 2019 through
2029.  The Company also has federal research and development tax
credit carry-forwards of approximately $1.0 million available to reduce future
tax liabilities, which expire at various dates beginning in 2009 through
2026.





The
significant components of the Company’s deferred tax assets and liabilities at
December 31, 2009 and 2008 were as follows:





December 31, 2009
                  
                  
                  December 31, 2008Deferred
      tax assets relative to the following:Net
      operating loss carry-forwards
                  
                  $
                  24,362,066
                  
                  
                  $
                  21,142,236Research
      and development credit carry-forwards
                  
                  
                  1,047,242
                  
                  
                  
                  890,139Capitalized
      research and development costs
                  
                  
                  8,242,016
                  
                  
                  
                  8,382,222Deferred
      share-based compensation
                  
                  
                  1,901,115
                  
                  
                  
                  3,122,956Expensed
      receivables
                  
                  
                  170,024
                  
                  
                  
                  163,799Depreciable
      assets
                  
                  
                  43,763
                  
                  
                  
                  39,489Late
      registration payment and accrued interest
                  
                  
                  132,541
                  
                  
                  
                  212,436Other
                  
                  
                  38,340
                  
                  
                  
                  58,706Total
      deferred tax assets prior to offsets
                  
                  $
                  35,937,107
                  
                  
                  $
                  34,011,983Current
      portion
                  
                  $
                  340,905
                  
                  
                  $
                  434,941Non-current
      portion
                  
                  
                  35,596,202
                  
                  
                  
                  33,577,042$
                  35,937,107
                  
                  
                  $
                  34,011,983LiabilitiesDeferred
      tax liabilities relative to the following:Patent
      costs
                  
                  $
                  (334,959
                  )
                  
                  $
                  (337,902
                  )Total
      deferred tax liabilities prior to offsets (all
non-current)
                  
                  $
                  (334,959
                  )
                  
                  $
                  (337,902
                  )Current
      portion
                  
                  $
                  340,905
                  
                  
                  $
                  434,941Non-current
      portion
                  
                  
                  35,261,243
                  
                  
                  
                  33,239,140Total
      deferred tax assets
                  
                  $
                  35,602,148
                  
                  
                  $
                  33,674,081Valuation
      allowance
                  
                  $
                  (35,602,148
                  )
                  
                  $
                  (33,674,081
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -




The Company has evaluated the
positive and negative evidence bearing upon the realizability of its deferred
tax assets, which are comprised principally of NOL carryforwards. The Company
has determined at this time that it is more likely than not that the Company
will not recognize the benefits of its federal deferred tax asset. For the years
ended December 31, 2009 and 2008, the valuation allowance was increased by
approximately $1.9 million and $7.7 million, respectively.


F-23


A reconciliation of the expected income
tax provision (benefit) using the federal statutory income tax rate to the
Company’s effective income tax rate is as follows for the years ended December
31, 2009, 2008, and 2007:





December 31,
                    2009
                  
                  
                  December 31,
                    2008
                  
                  
                  December 31,
                    2007Income
      tax computed at federal statutory rate
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Permanent
      differences
                  
                  
                  (4.7
                  )%
                  
                  
                  (1.7
                  )%
                  
                  
                  (7.2
                  )%Change
      in valuation allowance
                  
                  
                  (29.3
                  )%
                  
                  
                  (32.3
                  )%
                  
                  
                  (26.8
                  )%Provision
      (benefit) for income taxes
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %




The
Company has not taken a tax position that, if challenged, would have a material
effect on the financial statements or the effective tax rate for the years ended
December 31, 2009, 2008 and 2007.




The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of December 31, 2009, it had no accrued interest or
penalties related to uncertain tax positions.




All tax
years up through December 31, 2008 remain open to examination by major taxing
jurisdictions to which the Company is subject.





7.
            Refundable
      Deposit





In 2005,
the Company received $550,000 from SulphCo KorAsia (formerly known as OIL-SC,
Ltd.), pursuant to an 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.





8.
            Accrued Fees and
      Interest





As of December 31, 2009 and 2008, the
Company had accrued late registration fees of approximately $0.2 million and
$0.4 million, respectively, and interest thereon of approximately $0.2 million
and $0.3 million, respectively, in conjunction with the private placements in
2004.  For the years ended December 31, 2009, 2008 and 2007, interest
expense associated with accrued late fees was approximately $38,000, $0.1
million and $0.1 million, respectively.





9.
            Convertible Notes
      Payable





At
December 31, 2008, the Company had outstanding convertible notes payable
of approximately $4.7 million (the “Convertible Notes
Payable”).  The Convertible Notes Payable were presented net of the
unamortized discount related to a beneficial conversion feature present in the
terms of the note.  The discount was accreted into the statement of
operations as incremental interest expense using the effective interest method
through July 29, 2009. Interest on the Convertible Notes Payable adjusted
quarterly based on a London Inter-Bank Offering Rate (“LIBOR”) plus 0.5% per
annum, with interest only payments due on December 31st of each
year during the term of the Convertible Notes Payable. During the years
ended December 31, 2009, 2008 and 2007, the Company recognized total interest
expense of approximately $0.9 million, $1.2 million and $5.5 million,
respectively.  For the years ended December 31, 2009, 2008 and 2007,
total interest expense recognized by the Company included incremental interest
expense associated with discount accretion of approximately $0.8 million, $0.8
million and $5.0 million, respectively.  On July 29, 2009, the Company
made full cash payment of the outstanding principal balance and all accrued but
unpaid interest thereon.


F-24





10.
            Deemed
      Dividends





On March
12, 2007, the Company executed Amendment No. 1 to Securities Purchase Agreements
and Warrants (“Amendment No. 1”) with certain warrant holders (the “Warrant
Holders”) who had been issued warrants by the Company in 2004 (“2004
Warrants,” and holders of 2004 Warrants, “2004 Warrant Holders”) and in 2006
(“2006 Warrants,” and holders of 2006 Warrants, “2006 Warrant Holders”) that
provided inducements to encourage the Warrant Holders to exercise their
respective warrants.  As consideration for Warrant Holders exercising
their respective warrants, the Company agreed that it would:





·
            reduce
      the exercise price on warrants to acquire 4,000,000 shares of the
      Company’s common stock held by the 2006 Warrant Holders from $6.805 per
      share to $2.68 per share; and





·
            issue
      the Warrant Holders additional warrants, with an exercise price of $2.68
      per share, on a one to one basis for each existing warrant that was
      exercised including granting up to 1,952,068 warrants to the 2004 Warrant
      Holders and up to 4,000,000 warrants to the 2006 Warrant
      Holders.





As a
result of the inducements included in Amendment No. 1 described above, during
the quarter ended March 31, 2007, 1,952,068 warrants held by the 2004 Warrant
Holders and 2,000,000 warrants held by the 2006 Warrant Holders were exercised
resulting in the grant of 3,952,068 additional warrants (the “March 2007
Warrants”).  As a result of the inducements, the Company recorded a
non-cash deemed dividend of approximately $11.5 million.  The amount
of the deemed dividend was estimated to be equal to the sum of the fair value of
the inducements as the sum of (1) the incremental fair value conveyed to the
2006 Warrant Holders by the reduction of the exercise price of the 2006 Warrants
determined as provided in paragraph 51 of SFAS 123R utilizing the Black-Scholes
Valuation Model and (2) the fair value of the 3,952,068 March 2007 Warrants
estimated using the Black-Scholes Valuation Model.





During
the quarter ended June 30, 2007, 600,000 2006 Warrants held by the 2006 Warrant
Holders were exercised resulting in the grant of 600,000 additional
warrants.  As a result, the Company recorded additional non-cash
deemed dividends of approximately $1.7 million that was estimated using the
Black-Scholes Valuation Model.





During
the quarter ended September 30, 2007, the remaining 1,400,000 warrants held by
the 2006 Warrant Holders were exercised resulting in the grant of 1,400,000
additional warrants.  As a result, the Company recorded additional
non-cash deemed dividend of approximately $3.9 million that was estimated using
the Black-Scholes Valuation Model.


F-25


On
November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
Agreements and Warrants (“Amendment No. 2”) with certain of the Warrant Holders
holding approximately 3.95 million of the then outstanding March 2007 Warrants
wherein the Warrant Holders agreed to exercise up to 50% of their March 2007
Warrants.  In exchange, SulphCo agreed to issue the Warrant Holders
additional warrants (the “November 2007 Warrants”) on a one-to-one basis with an
exercise price of $7.00 per share and a term of three years.  In
addition, the Warrant Holders were granted an option to exercise the remaining
50% of their March 2007 Warrants on the later of April 15, 2008, or 30 days
following the 2008 Annual Meeting of Stockholders in which SulphCo’s
stockholders approve an increase of 10 million authorized common
shares.  If this option were exercised, then SulphCo would issue the
Warrant Holders additional warrants on a one-to-one basis with an exercise price
of $7.00 a share and a term of three years.  As a result of the
inducement described above 1,976,570 of the March 2007 Warrants held by the
Warrant Holders were exercised in November 2007 resulting in a grant of
1,976,750 additional warrants (the “November 2007 Warrants”). Based on its
analysis, the Company concluded that a deemed dividend should be recorded to
account for the fair value of the inducement that was transferred to the Warrant
Holders computed as the fair value of the 1,976,750 November 2007 Warrants
issued to the Warrant Holders.  Based on the Black-Scholes valuation
prepared for this transaction, the Company recognized a non-cash deemed dividend
of approximately $7.3 million.





In May
2008, 1,953,088 of the March 2007 Warrants held by the Warrant Holders were
exercised resulting in the grant of 1,953,088 additional warrants (the “May 2008
Warrants”).  Based on its analysis, the Company concluded that a
deemed dividend should be recorded to account for the fair value of the
inducement that was transferred to the Warrant Holders computed as the fair
value of the 1,953,088 May 2008 Warrants issued to the Warrant
Holders.  Based on the Black-Scholes valuation prepared for this
transaction, the Company recognized a non-cash deemed dividend was approximately
$4.1 million.





Given the
preferential nature of the modifications to these stock purchase warrants, the
Company concluded that it should present the non-cash deemed dividend amount as
an adjustment to net loss to arrive at net loss available to common shareholders
and similarly adjust earnings per share.  For the years ended December
31, 2009, 2008 and 2007, the Company recognized non-cash deemed dividends of
approximately zero, $4.1 million, and $24.8 million,
respectively.


F-26





11.
            Commitments and
      Contingencies





Commitments
under Operating Leases





In May
2007, the Company entered into an operating lease agreement for office space in
Houston, Texas having a term of 60 months.  In October 2009 the
Company amended the original lease agreement, acquiring additional warehouse and
office space.  The lease for these spaces has been extended and will
expire mid-year 2013. Also in May 2007, the Company entered into operating lease
agreements for facilities in Reno, Nevada and Sparks, Nevada, with each having a
36 month term.  In July 2007, the Company relocated its corporate
headquarters from Reno, Nevada to Houston, Texas.  As of December 31,
2007, the Company made the decision to discontinue utilizing the Reno office
space and attempted to sub-lease this space for the remaining term of the lease
which extends through May 2010.  In connection with its decision to
discontinue utilizing the Reno office space, the Company recognized a charge of
approximately $0.3 million in 2007 which represents the total amount of the
future minimum lease payments remaining under the terms of the Reno operating
lease agreement. In August 2008, the Company agreed to terminate the Reno
operating lease agreement for approximately $75,000, which resulted in the
reversal of the remaining accrued liability for future minimum lease payments of
$0.2 million during 2008.





Following
is a schedule of approximate future minimum lease payments required under
non-cancelable operating lease agreements:





2010
                  
                  $
                  244,0002011
                  
                  
                  240,0002012
                  
                  
                  240,0002013
                  
                  
                  120,0002014
                  
                  
                  -Total
      future minimum lease payments
                  
                  $
                  844,000





The
Company recognized approximately $0.2 million, $0.1 million, and $0.7 million
for net rent expense in 2009, 2008, and 2007, respectively.





Concentrations
of Credit Risk





Substantially
all of the Company’s cash and cash equivalents are maintained with two major
U.S. financial institutions.  The majority of the Company’s cash
equivalents are invested in a money market fund that invests primarily in U.S.
Treasury securities and repurchase agreements relating to those instruments.
Investments in this fund are not insured by or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.  Generally,
these deposits may be redeemed upon demand and therefore, management believes
that they bear minimal risks.  The Company has not experienced any
losses in such accounts, nor does management believe it is exposed to any
significant credit risk.


F-27


Litigation
Contingencies




There are various claims and lawsuits
pending against the Company arising in the ordinary course of the Company’s
business. Although the amount of liability, if any, against the Company is not
reasonably estimable, the Company is of the opinion that these claims and
lawsuits will not materially affect the Company’s financial position. In the
past the Company has expended significant resources for its legal
defense.  In the future the Company will devote resources to its legal
defense as necessary.




The following paragraphs set forth the
status of litigation as of December 31, 2009.




Clean Fuels
Litigation




In Clean Fuels Technology v. Rudolf W. Gunnerman,
Peter Gunnerman, RWG, Inc. and SulphCo, Inc., Case No. CV05-01346 (Second
Judicial District, County of Washoe) the Company, Rudolf W. Gunnerman, Peter
Gunnerman, and RWG, Inc., were named as defendants in a legal action commenced
in Reno, Nevada (the “Clean Fuels Litigation”).  The plaintiff, Clean
Fuels Technology later assigned its claims in the lawsuit to EcoEnergy
Solutions, Inc., which entity was substituted as the plaintiff.  In
general, the plaintiff’s alleged claims relate to ownership of the “sulfur
removal technology” originally developed by Professor Teh Fu Yen and Rudolf
Gunnerman with financial assistance provided by Rudolf W. Gunnerman, and
subsequently assigned to the Company.  On September 14, 2007, after a
jury trial and extensive post-trial proceedings, the trial court entered final
judgment against the plaintiff EcoEnergy Solutions, Inc. (“Eco Energy”) on all
of its claims.  As per the final judgment, all of the plaintiff’s
claims were resolved against the plaintiff and were dismissed with
prejudice.  In addition, the trial court entered judgment in favor of
the Company and against the plaintiff for reimbursement of legal fees and costs
of approximately $124,000, with post-judgment interest.  The plaintiff
appealed the judgment on October 5, 2007. On August 3, 2009, the Nevada Supreme
Court affirmed the court’s Order and judgment in its entirety.  The
Nevada Supreme Court then denied Eco Energy’s request for a rehearing on
September 25, 2009 and further denied EcoEnergy’s Petition for En Banc
Reconsideration on November 17, 2009.  On December 15, 2009, the
Nevada Supreme Court restored jurisdiction to the district court for any
post-appeal issues. Since that time, the Company received legal fees, costs, and
interest awarded to it under the judgment from EcoEnergy. The Company then moved
the district court for an award of legal fees and cost incurred on appeal. No
asset or liability has been accrued relative to this action.




Talisman
Litigation




In Talisman Capital Talon Fund, Ltd. v.
Rudolf W. Gunnerman and SulphCo, Inc., Case No. 05-CV-N-0354-BES-RAM, the
Company and Rudolf W. Gunnerman were named as defendants in a legal action
commenced in federal court in Reno, Nevada. The plaintiff’s claims relate to the
Company's ownership and 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. On September 28, 2007, the court granted, in part,
the defendants' motion for summary judgment and dismissed the plaintiff's claims
for bad faith breach of contract and unjust enrichment that had been asserted
against Rudolf Gunnerman. The court denied the plaintiff's motion for partial
summary judgment. The trial for this matter commenced on December 1, 2008 and
continued through December 12, 2008.  The court recessed the trial on
December 12, 2008 prior to hearing closing arguments.  Post trial
briefs were filed with the court on February 20, 2009, and closing arguments
were heard on March 3, 2009. On May 14, 2009, the court entered a judgment in
favor of the Company and dismissed all claims with prejudice. The plaintiff
appealed the judgment on June 11, 2009. The plaintiff’s appeal brief was filed
with the court in late December 2009.  The Company’s answering brief
was filed with the court in early February 2010 after which the plaintiff may
file a reply brief thereto within 14 days.  No date has been set for
argument or submission of the appeal. No liability has been accrued relative to
this action.


F-28




Hendrickson Derivative
Litigation




On January 26, 2007, Thomas Hendrickson
filed a shareholder derivative claim against certain current and former officers
and directors of the Company in the Second Judicial District Court of the State
of Nevada, in and for the County of Washoe. The case was 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. CV07-00187,
Dept. No. B6.  The complaint alleged, 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.  On April 12, 2007 the Company and
individual defendants filed a motion to dismiss, based upon the plaintiff’s
failure to make a demand upon the Board of Directors and failure to state a
claim.  On July 3, 2007, the parties filed a Stipulation of Voluntary
Dismissal Without Prejudice (the “Stipulation”).  The Stipulation
provided that in connection with the dismissal of this action each of the
parties will bear their own costs and attorney fees and thereby waive their
rights, if any, to seek costs and attorney fees from the opposing
party.  Further, neither the plaintiff nor his counsel received any
consideration for the dismissal of this action.




In September of 2007, the Company’s
Board of Directors received a demand letter (the “Hendrickson Demand Letter”)
from Mr. Hendrickson’s attorney reasserting the allegations contained in the
original derivative claim and requesting that the Board of Directors conduct an
investigation of these matters in response thereto.  In response to
the Hendrickson Demand Letter, the Company’s Board of Directors formed a
committee comprised of three independent directors (the “Committee”) to evaluate
the Hendrickson Demand Letter and to determine what action, if any, should be
taken. The Committee retained independent counsel to advise it.




On September 2, 2008, the Company’s
Board of Directors held a special meeting for the purpose of hearing and
considering the Committee’s report and recommendation.  At that
meeting, the Committee reported on its investigation and presented the
Committee’s unanimous recommendation that no actions be brought by the Company
based upon the matters identified in the Hendrickson Demand
Letter.  The Board of Directors unanimously adopted the Committee’s
recommendation. SulphCo communicated this conclusion to Mr. Hendrickson’s
counsel in mid-September 2008.




On November 6, 2008, Mr. Hendrickson
re-filed the shareholder derivative claim in the 127th Judicial District Court
of Harris County, Texas. 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.
200866743.  The Company has responded to this litigation by moving to
dismiss and the individual defendants have responded by moving to dismiss for
lack of personal jurisdiction.  No relief is sought against the
Company and no liability has been accrued relative to this
action.


F-29




Nevada Heat Treating
Litigation




On November 29, 2007, Nevada Heat
Treating, Inc. (“NHT”) filed a lawsuit against the Company, Nevada Heat Treating, Inc., d/b/a
California Brazing, in the Second Judicial District Court of the State of
Nevada, in and for the County of Washoe, Case No. CV07-02729.  In its
complaint, NHT alleges trade secret misappropriation and breach of contract
relative to certain information alleged to have been disclosed to the Company
beginning in late 2006 and continuing through early 2007 pursuant to a
consulting engagement with NHT.  Among other things, NHT asserted that
certain information, alleged to have been disclosed to the Company during the
term of the consulting engagement, is the subject of a
non-disclosure/confidentiality agreement executed at the inception of the
consulting engagement.  NHT contended that this certain information
represents a trade secret that should no longer be available for use by the
Company following the termination of the consulting engagement with NHT in the
spring of 2007.  In connection with filing this action, NHT also filed
a motion for preliminary injunction against the Company seeking to enjoin it
from using certain information until the matter can be resolved through the
courts. Hearings on the preliminary injunction motion took place on March 24 and
25, 2008, and May 8, 2008.  On May 8, 2008, the court ruled from the
bench, at the conclusion of the hearing on the motion for preliminary
injunction.  The court denied the plaintiff’s motion on grounds that
the plaintiff had failed to demonstrate a probability of success on the merits
of its claims.  On November 18, 2008, the Company accepted a formal
settlement offer from NHT wherein it was agreed that NHT would dismiss its
claims and each party would bear its own costs and fees, but that NHT would
preserve any claims that it might have in the future relating to its patent
application.  On March 2, 2009, the Company filed notice with the
Court that it had accepted the formal settlement offer.  On April 1,
2009, the Court entered a judgment consistent with the terms of the formal
settlement offer and the matter has been concluded.  No liability was
accrued relative to this action.




Securities and Exchange
Commission Subpoena




On February 25, 2008, the Company
received a subpoena from the Denver office of the Securities and Exchange
Commission (the “SEC”).  The subpoena formalized virtually identical
requests the Company received in May, June and August 2007 to which the Company
responded to the request for voluntary production of documents and information,
including financial, corporate, and accounting information related to the
following subject matters:  Fujairah Oil Technology LLC, the Company’s
restatements for the first three quarterly periods of 2006 and the non-cash
deemed dividend for the quarter ended March 31, 2007, and information and
documents related to certain members of former management, none of whom have
been employed by the Company since March 2007.  On June 15, 2009, the
Company was advised by the SEC that this investigation has been completed as to
SulphCo, against which the SEC does not intend to recommend any enforcement
action.





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, 2009, 2008, and
2007:





Year
Ended December 31, 2009





At the
Annual Meeting of Stockholders held on June 17, 2009, the Company’s stockholders
approved an increase in the number of authorized shares of the Company’s capital
stock by 40 million shares by increasing the authorized shares of common stock,
par value $0.001 from 110 million to 150 million shares.


F-30


Year
Ended December 31, 2008





At a
Special Meeting of Stockholders held on February 26, 2008, the Company’s
stockholders approved an increase in the number of authorized shares of the
Company’s capital stock to 120 million shares by increasing the authorized
shares of common stock, par value $0.001 from 100 million to 110
million.





During
the quarter ended June 30, 2008, the Company completed two equity
transactions.  The first involved the sale of 6,818,750 shares of its
common stock at a price of $3.20 per share pursuant to the terms of a Securities
Purchase Agreement dated May 27, 2008, resulting in net proceeds to the Company
of approximately $20.3 million before transaction costs.  The shares
were registered in a shelf registration statement on Form S-3 declared effective
by the SEC on September 4, 2007.  The second involved the exercise by
investors of warrants to acquire approximately 1.9 million shares of the
Company’s common stock at an exercise price of $2.68 per share resulting in net
proceeds to the Company of approximately $5.2 million.  Between these
two transactions, the Company raised net proceeds totaling approximately $25.5
million.





During
the quarter ended June 30, 2008, the Company entered into an equity line of
credit with Azimuth Opportunity Ltd. (“Azimuth”) pursuant to a Common Stock
Purchase Agreement dated April 30, 2008. Subject to the conditions set forth in
that agreement, Azimuth is committed to purchase up to $60,000,000 of the
Company’s common stock pursuant to draw down notices that the Company may give
to Azimuth from time to time at the Company’s discretion until November 1, 2009.
The price of shares sold is determined by reference to the volume weighted
average price of the Company’s common stock during a 10 trading day pricing
period at the time of each draw down notice, less a small discount.





On July
9, 2008, the Company entered into a Confidential Settlement Agreement and
Release with Mark Neuhaus (the “Settlement Agreement”), by which Mr. Neuhaus and
the Company agreed to dismiss the respective legal proceedings each party had
initiated on the other, and by which both parties agreed to a mutual
release.  The total consideration paid by the Company to Mr. Neuhaus
under the Settlement Agreement was $750,000, of which $250,000 was paid in cash
and the remaining $500,000 was settled by issuance of 123,763 shares of the
Company’s common stock to Mr. Neuhaus and 123,762 shares of the Company’s common
stock to Mr. Neuhaus’ attorneys, Erickson, Thorpe & Swainston, Ltd, which
amount was determined by dividing $500,000 by $2.02, the closing price of the
Company’s stock on July 9, 2008.





Year
Ended December 31, 2007





During the first quarter of 2007, the
Company raised approximately $7.8 million, net of offering costs, through an
exercise of outstanding warrants. Investors holding 1,952,068 of the warrants
issued pursuant to the Securities Purchase Agreements, dated as of June 1, 2004
and June 14, 2004 (the “2004 Warrants” and the “2004 Warrant Holders”) exercised
their warrants at their stated exercise prices of $1.125 per share and $1.5625
per share, respectively. Investors holding 2,000,000 warrants issued pursuant to
the Securities Purchase Agreement, dated as of March 29, 2006 (the “2006
Warrants” and the “2006 Warrant Holders” and together with the 2004 Warrant
Holders hereinafter collectively referred to as the “Warrant Holders”) exercised
their warrants at an exercise price of $2.68 per share, which was a reduction
from the original exercise price of $6.805 per share. The Warrant Holders
received 3,952,068 March 2007 Warrants to replace all of the 2004 Warrants
and 2006 Warrants that were exercised on a one to one basis. Each March 2007
Warrant expires three years from the date of issuance and entitles the holder to
purchase one share of common stock at $2.68 per share.  The accounting
for the reduction in the exercise price of the 2006 Warrants is described in
Note 10.


F-31


During
the second quarter of 2007, the Company raised approximately $1.6 million
through an exercise of 600,000 of the remaining 2,000,000 2006 Warrants at an
exercise price of $2.68 per share, which was a reduction from the original
exercise price of $6.805 per share. As previously agreed, the 2006 Warrant
Holders received 600,000 March 2007 Warrants to replace all of the 2006 Warrants
that were exercised on a one to one basis. Each March 2007 Warrant expires three
years from the date of issuance and entitles the holder to purchase one share of
common stock at $2.68 per share.





During
the third quarter of 2007, the Company raised approximately $3.8 million through
the exercise of approximately 1.4 million 2006 Warrants at an exercise price of
$2.68 per share, which was a reduction from the original exercise price of
$6.805 per share. As previously agreed, the 2006 Warrant Holders received
approximately  1.4 million March 2007 Warrants to replace all of the
2006 Warrants that were exercised on a one to one basis. Each March 2007 Warrant
expires three years from the date of issuance and entitles the holder to
purchase one share of common stock at $2.68 per share.





During
the fourth quarter of 2007, the Company raised approximately $5.3 million
through the exercise of 1,976,570 March 2007 Warrants at an exercise price of
$2.68 per share.  In connection with this exercise, the Warrant
Holders received 1,976,570 November 2007 Warrants with an exercise price of
$7.00 per share and a term of three years from the date of
issuance.





During
the year ended December 31, 2007, the Company raised approximately $18.5
million, net of offering costs, through the exercise of warrants held by the
Warrant Holders, as described above.





Warrants
Outstanding at December 31, 2009





As of December 31, 2009, we had
warrants outstanding for 5,952,068 shares of our common stock, at the exercise
prices and expiration dates, set forth below. Warrants entitle the holder to
purchase shares of our common stock, as applicable, at the specified exercise
price at any time prior to the expiration date.





Number of Shares
                  
                  Exercise price
                  
                  Expiration date1,022,410
                  
                  $
                  2.68
                  
                  March
      12, 20101,000,000
                  
                  $
                  2.68
                  
                  July
      2, 20101,976,570
                  
                  $
                  7.00
                  
                  February
      13, 20111,953,088
                  
                  $
                  7.00
                  
                  August
      7, 2011





13.
            Stock Plans and
      Share-Based Compensation





In accordance with the Stock
Compensation Topic of the FASB Accounting Standards Codification, the Company
records stock-based compensation expense for all share-based payment
arrangements, including stock options, warrants and restricted stock
grants.  The fair value of each option award granted is estimated on
the date of grant using a Black-Scholes option valuation model. Expected
volatilities are based on the historical volatility of the Company’s stock. The
expected term of options granted to employees is derived utilizing the
simplified method which represents the period of time that options granted are
expected to be outstanding. The Company utilizes the simplified method because
it does not have historical exercise data which is sufficient to provide a
reasonable basis to estimate the expected term. The Company expects to continue
utilizing the simplified method to determine the expected term until such time
as it accumulates historical exercise data that will provide a sufficient basis
for the Company to begin estimating the expected term for option
exercises.  The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve at the time of
grant.


F-32





For the years ended December 31, 2009,
2008 and 2007, the Company used the following information to value option
grants:





2009
                    
                    
                    2008
                    
                    
                    2007Expected
      Volatility
                    
                    
                    126%-143
                    %
                    
                    
                    93%
      - 151
                    %
                    
                    
                    133%
      - 150
                    %Expected
      Dividend Yield
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Expected
      Term (in years)
                    
                    
                    5.0
      – 6.5
                    
                    
                    
                    1.5
      - 9.5
                    
                    
                    
                    5.0
      – 10.0Risk
      Free Rate
                    
                    
                    1.5%-2.8
                    %
                    
                    
                    1.6%
      - 3.6
                    %
                    
                    
                    3.6%
      - 5.1
                    %





Stock
Option Plans





We maintain the 2006 Stock Option Plan
(the “2006 Plan”) and the 2008 Omnibus Long-Term Incentive Plan (the “2008
Plan”), which are collectively referred to as the “Stock
Plans.”  Under our Stock Plans, incentive and nonqualified stock
options are granted to eligible participants. The exercise price of options
granted pursuant to the Stock Plans shall be at least 100 percent of the fair
value of the Company’s common stock on the date of grant. Options are generally
granted for a term of 10 years and become exercisable at such times as
determined by the Compensation Committee. Certain stock options provide for
accelerated vesting if there is a change in control. As of December 31 2009,
approximately 4.8 million shares are available for future grants of awards under
the Stock Plans.





The
following table summarizes the activity for our options for the 12 months ended
December 31, 2009:





Number of
                      Shares
                    
                    
                    Weighted Average
                      Exercise PriceOptions
      outstanding, December 31, 2008
                    
                    
                    3,694,844
                    
                    
                    $
                    3.80Options
      granted
                    
                    
                    1,451,041
                    
                    
                    $
                    0.89Options
      exercised
                    
                    
                    -
                    
                    
                    
                    -Options
      forfeited
                    
                    
                    (676,000
                    )
                    
                    $
                    4.38Options
      outstanding, December 31, 2009
                    
                    
                    4,469,885
                    
                    
                    $
                    2.77Options
      exercisable and vested
                    
                    
                    3,982,885
                    
                    
                    $
                    2.76




Options
outstanding at December 31, 2009, had a weighted average remaining contractual
life of approximately 8.2 years and are out-of-the money with no intrinsic
value.  Options exercisable at December 31, 2009, had a weighted
average remaining contractual life of approximately 8.2 years and are out-of-the
money with no intrinsic value.  The weighted average grant date fair
value of stock options granted in 2009, 2008 and 2007 was $0.77, $2.97, and
$3.49.





The Company granted 500,000
performance-based stock options to the Company’s CEO on June 18,
2008.  The performance-based stock options had an exercise price of
$3.28, a term of ten years from the grant date and vested in full within 18
months subject to achievement of certain commercial milestones.  The
weighted average fair value of each performance-based stock option was $2.97 and
was estimated using the Black-Scholes option pricing model consistent with the
weighted average assumptions included in the table above. As of December 31,
2008, the Company recorded approximately $0.5 million for the performance-based
stock options as the Company considered it probable that the commercial
milestones would be achieved.  The Company reassessed the probability
of the achievement of the commercial milestones at the end of each reporting
period. At June 30, 2009, the Company determined that achievement of the
commercial milestones by December 18, 2009 was not probable, and a cumulative
adjustment of approximately $0.8 million was recorded to reverse stock-based
compensation recognized since the grant date.  The commercial
milestones were not achieved by December 18, 2009, at which time the entire
award was forfeited by the Company’s CEO.


F-33





Other
Options





In addition to options available for
issuance under the Stock Plans, the Company has previously granted other options
and warrants (the “Other Options”) to non-employees and consultants. At December
31, 2009 there were 100,000 Other Options outstanding, exercisable, and
vested.The weighted average grant date fair value of Other Options granted in
2008 and 2007 was $2.22 per share and $3.97 per
share, respectively.





Summary
Option Information





The
following table summarizes information about all stock options outstanding as
December 31, 2009:





Options Outstanding
                
                
                Options ExercisableRange of
                  Exercise
                  Prices
                
                Number
                  Outstanding
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Life (in Years)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  Exercisable
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Life (in Years)
                
                
                Weighted
                  Average
                  Exercise
                  Price$0.01
      - $0.99
                
                
                1,410,541
                
                
                
                9.2
                
                
                $
                0.83
                
                
                
                1,330,541
                
                
                
                9.2
                
                
                $
                1.00$1.00
      - $1.99
                
                
                72,000
                
                
                
                9.0
                
                
                $
                1.31
                
                
                
                65,000
                
                
                
                8.9
                
                
                $
                1.26$2.00
      - $2.99
                
                
                447,452
                
                
                
                6.7
                
                
                $
                2.64
                
                
                
                324,119
                
                
                
                6.0
                
                
                $
                2.61$3.00
      - $3.99
                
                
                2,269,368
                
                
                
                7.7
                
                
                $
                3.69
                
                
                
                1,992,701
                
                
                
                7.7
                
                
                $
                3.73$4.00
      - $4.99
                
                
                200,000
                
                
                
                8.0
                
                
                $
                4.96
                
                
                
                200,000
                
                
                
                8.0
                
                
                $
                4.96$5.00
      - $5.99
                
                
                120,524
                
                
                
                7.7
                
                
                $
                5.49
                
                
                
                120,524
                
                
                
                7.7
                
                
                $
                5.49$6.00
      - $6.99
                
                
                50,000
                
                
                
                0.9
                
                
                $
                6.03
                
                
                
                50,000
                
                
                
                0.9
                
                
                $
                6.034,569,885
                
                
                
                
                
                
                
                
                
                
                
                4,082,885





The weighted average grant date fair
value of stock options granted in 2009, 2008 and 2007 was $0.77 per share, $2.97
per share and $3.49 per share, respectively. The total intrinsic value of
options and warrants exercised during the years ended December 31, 2009, 2008
and 2007 was approximately zero, zero, and $0.8, respectively.  Cash
received from all option and warrant exercises under all share-based payment
arrangements for the years ended December 31, 2009, 2008 and 2007 was
approximately zero, zero, and $0.2 million, respectively.  There were
no tax benefits realized for tax deductions resulting from option and warrant
exercises of share-based payment arrangements for the year ended December 31,
2007.





As of
December 31, 2009, there was approximately $0.3 million of total
unrecognized compensation cost related to non-vested options.  That
cost is expected to be recognized on a straight line basis over the weighted
average vesting period of approximately 0.8 years.





Restricted
Stock Grants – Directors, Officers and Employees





During
the year ended December 31, 2009, the Company granted 25,000 shares of its
common stock to an employee.





During
the year ended December 31, 2007, the Company granted 220,206 shares of its
restricted common stock to members of the Board of Directors in lieu of its
annual cash retainer.  Additionally, the Company also made grants of
93,353 restricted shares of common stock to two Board members who joined the
Board of Directors in 2007.   In connection with these grants,
the Company recognized a charge of approximately $0.7 million.  The
Company rescinded a total of 193,353 current and prior year restricted stock
grants.  As of December 31, 2007, all grants of restricted shares were
fully vested and there were no unrecognized compensation costs relating to
restricted share grants.


F-34





Restricted
Stock Grants – Non-Employees





During
the year ended December 31, 2008, the Company granted 50,000 shares of
restricted stock to non-employees for which it recognized a charge of
approximately $0.1 million.  As of December 31, 2008, all grants of
restricted shares were fully vested and there were no unrecognized compensation
costs relating to restricted share grants.





Total
Share Based Compensation





During the years ended December 31,
2009, 2008 and 2007, the Company recognized total share-based compensation (for
grants of stock options, warrants and restricted stock) of approximately $1.3
million, $5.2 million and $4.3 million, respectively.





14.
            Employee Benefit
      Plans





During
the year ended December 31, 2007, the Company adopted a qualified defined
contribution retirement plan (the “401(k) Plan”) for full-time
employees.  The 401(k) Plan provides participants the opportunity to
make contributions ranging from 1 percent to 15 percent of their covered
salaries or wages.  The Company makes an annual minimum contribution
to the 401(k) Plan equal to 3 percent of the covered participant’s salaries and
wages. During the years ended December 31, 2009 and 2008, the Company made or
accrued minimum contributions to the 401(k) plan of approximately $0.1 million
and $0.1 million, respectively.  In addition to the annual minimum
contribution the Company can make a discretionary
contribution.  During the years ended December 31, 2009 and 2008, no
such discretionary contributions were made.





15.
            Related Party
      Transactions





Other
than share-based compensation as detailed in Note 13, the following discussion
sets forth related party transactions occurring in the years 2009, 2008, and
2007.





During
the years ended December 31, 2009, 2008 and 2007, the Company made payments
totaling approximately $0.9 million, $1.1 million, and $1.3 million,
respectively, to Märkisches Werk Halver, GmbH (“MWH”) in connection with ongoing
probe development activities under an existing agreement.  Under the
terms of the agreement, MWH will continue to develop and manufacture
high-volume, high-power ultrasound systems for use in SulphCo’s Sonocracking
process (the “Equipment”) through June 2013. MWH will sell Equipment exclusively
to the Company and the Company will purchase a minimum of 60% of its annual
Equipment requirements from MWH.  The Company may purchase a lesser
percentage of Equipment from MWH if the Company can either purchase comparable
equipment at a price that is 25% less than the price charged by MWH or MWH does
not manufacture the Equipment within the Company’s quality control
specifications. In addition to the fees that MWH will receive for its probe
development and manufacturing activities, MWH also received an option to
purchase 50,000 shares of SulphCo common stock.  Edward E. Urquhart,
the Chief Executive Officer of MWH from July 2003 through May 2009, was a member
of the Company’s Board of Directors from August 2006 to April 2009.





Historically,
the Company had maintained a consulting contract with RWG, Inc., a company
wholly-owned by Dr. Rudolf W. Gunnerman, the Company’s former Chairman and
CEO.  This contract was terminated in January 2007 contemporaneous
with Dr. Gunnerman’s dismissal from the Company.  During the years
ended December 31, 2009, 2008 and 2007, the total expense recognized by the
Company under this arrangement was zero, zero, and $0.2 million,
respectively.  Of the amount paid during the year ended December 31,
2007, $200,000 was paid in connection with a settlement in the second quarter of
2007 between the Company and Dr. Gunnerman.


F-35


On April
15, 2007, the Company entered into a month-to-month operating lease agreement
with Michael T. Heffner.  Under the lease agreement, the Company
leased a furnished apartment for the use of Company officers in Reno, Nevada for
$1,500 per month. The Company terminated this agreement effective September 30,
2007.  During the year ended December 31, 2007, the Company
recognized approximately $8,000 in lease expense relative to this
agreement.  In April 2009, Mr. Heffner resigned from the Company’s
Board of Directors.





The
Company had a consulting contract with Vincent van Maasdijk, the son of Robert
van Maasdijk who has been a member of the Company’s Board of Directors since
April 2005 and Chairman of the Board of Directors from January 2007 to April
2009, to serve as a project manager. As a project manager, Mr. van Maasdijk’s
responsibilities included overseeing the installation and testing of commercial
SonocrackingTM units at various locations assigned by the
Company.  Under the terms of the contract, Mr. van Maasdijk received a
monthly payment of approximately $7,000 plus reimbursement of all reasonable
out-of-pocket expenses, in accordance with the Company’s applicable policies and
procedures. In April of 2009, both parties mutually agreed not to renew the
contract. For the years ended December 31, 2009 and 2008, the total expense
recognized by the Company under this arrangement was approximately $30,000 and
$103,000, respectively.





During
the years ended December 31, 2009 the, 2008 and 2007, the Company paid
approximately $0.2 million, $6,000 and $10,000, respectively, in principal and
interest expense to Edward G. Rosenblum, a member of the Company’s Board of
Directors, in connection with approximately $166,000 principal balance of the
Company’s Convertible Notes Payable, held by Mr. Rosenblum.  Mr.
Rosenblum acquired his interest in the Company’s Convertible Notes Payable prior
to joining our Board of Directors in August 2007. Mr. Rosenblum was a member of
the Company’s Board of Directors from August 2007 to October 2009.





Total
related party expenses were approximately $1.2 million, $1.3 million, and $1.6
million in 2009, 2008, and 2007 respectively.  Total related party
cash payments were approximately $1.2 million, $1.3 million and $1.6 million in
2009, 2008, and 2007, respectively.





16.
            Subsequent
      Events





In
January 2010, the Company completed the sale of 11,764,712 equity units at a
price of $0.51 per unit pursuant to the terms of a Placement Agency Agreement
dated January 25, 2010, resulting in gross proceeds to the Company of
approximately $6.0 million before transaction costs. Each equity unit consists
of (i) one share of common stock, (ii) a 2-year warrant to purchase one half of
a share of common stock for an exercise price of $0.70, and (iii) a 5-year
warrant to purchase one half share of a share of common stock for an exercise
price of $1.00.  The shares of common stock and the shares of common
stock issuable upon exercise of the warrants comprising the equity units were
registered were on a shelf registration statement on Form S-3 declared effective
by the SEC on September 4, 2007.


F-36





17.
              Quarterly Financial
      Information
(Unaudited)





Summarized unaudited quarterly
financial information for the years ended December 31, 2009, 2008 and 2007 is
noted below (in thousands, except for per share amounts):





2009
                                  
                                  Mar. 31
                                  
                                  
                                  Jun. 30
                                  
                                  
                                  Sep. 30
                                  
                                  
                                  Dec. 31Net
      revenues
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Gross
      profit
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Net
      (loss)
                                  
                                  $
                                  (4,589
                                  )
                                  
                                  $
                                  (2,704
                                  )
                                  
                                  $
                                  (2,584
                                  )
                                  
                                  $
                                  (2,139
                                  )Net
      (loss) per share – basic and diluted (a)
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.02
                                  )2008
                                  
                                  Mar. 31
                                  
                                  
                                  Jun. 30
                                  
                                  
                                  Sep. 30
                                  
                                  
                                  Dec. 31Net
      revenues
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Gross
      profit
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Net
      (loss)
                                  
                                  $
                                  (6,874
                                  )
                                  
                                  $
                                  (8,973
                                  )
                                  
                                  $
                                  (4,866
                                  )
                                  
                                  $
                                  (4,547
                                  )Net
      (loss) per share – basic and diluted (a)
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  (0.11
                                  )
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  $
                                  (0.05
                                  )2007
                                  
                                  Mar. 31
                                  
                                  
                                  Jun. 30
                                  
                                  
                                  Sep. 30
                                  
                                  
                                  Dec. 31Net
      revenues
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Gross
      profit
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Net
      (loss)
                                  
                                  $
                                  (14,513
                                  )
                                  
                                  $
                                  (8,883
                                  )
                                  
                                  $
                                  (8,367
                                  )
                                  
                                  $
                                  (9,719
                                  )Net
      (loss) per share – basic and diluted (a)
                                  
                                  $
                                  (0.20
                                  )
                                  
                                  $
                                  (0.12
                                  )
                                  
                                  $
                                  (0.11
                                  )
                                  
                                  $
                                  (0.22
                                  )




(a) The
sum of the individual quarterly earnings (loss) per share may not agree with
year-to-date earnings (loss) per share as each quarterly computation is based on
the income or loss for that quarter and the weighted average number of common
shares outstanding during that period.




F-37