**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, 2007**





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





Commission
      file no. **001-32636**




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


(Exact
      name of registrant as specified in its charter)




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





**4333
                W. Sam Houston Pkwy N., Suite 190**
              **Houston,
                TX 77043**
            **(713)
                896-9100**(Address
                and zip code of principal executive offices)
            (Registrant’s
                telephone number, including area
                code)





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





**Common
                Stock, Par Value $0.001 Per Share**
            **American
                Stock Exchange**(Title
                of 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
o
      No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o
      No x





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





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. o





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





Large
      accelerated filer o  Accelerated
      filer x   Non-accelerated
      filer o  Smaller
      Reporting Company o





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





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the stock was last
      sold on June 29, 2007 (the last business day of the registrant’s most recently
      completed second fiscal quarter), was $177,497,776.





Indicate
      the number of shares outstanding of each of the registrant’s classes of common
      stock, as of the latest practicable date. The
      number of shares of Common Stock outstanding on March 1 ,
      2008,
      was 80,848,416.





Documents
      incorporated by reference: Portions
      of the registrant’s definitive proxy statement for its 2008 Annual Meeting of
      Stockholders, which will be filed with the Securities and Exchange Commission
      within 120 days of December 31, 2007, are incorporated by reference into Part
      III of this Form 10-K.








**SULPHCO,
      INC.**


**2007
      FORM 10-K ANNUAL REPORT**





**TABLE
      OF CONTENTS**





Page
                No.**PART
                I**Item
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            15Item
                1B.
            Unresolved
                Staff Comments.
            21Item
                2.
            Properties
            21Item
                3.
            Legal
                Proceedings
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            25**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters
                andIssuer
                Purchases of Equity
                Securities
            26Item
                6.
            Selected
                Financial Data
            28Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results
                ofOperation
            28Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            37Item
                8.
            Financial
                Statements and Supplementary Data
            37Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and
                FinancialDisclosure
            37Item
                9A.
            Controls
                and Procedures
            38Item
                9B.
            Other
                Information
            39**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            39Item
                11.
            Executive
                Compensation
            39Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management andRelated
                Stockholder
                Matters
            39Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            39Item
                14.
            Principal
                Accounting Fees and Services
            40**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            40Financial
                Statements for the Years Ended December 31, 2007, 2006 and
                2005
            F-1




2





**Forward-Looking
      Statements**




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




In
      addition, these forward-looking statements include, but are not limited to,
      statements regarding implementing our business strategy; development,
      commercialization and marketing of our products; our intellectual property;
      our
      estimates of future revenue and profitability; our estimates or expectations
      of
      continued losses; our expectations regarding future expenses, including research
      and development, sales and marketing, manufacturing and general and
      administrative expenses; difficulty or inability to raise additional financing,
      if needed, on terms acceptable to us; our estimates regarding our capital
      requirements and our needs for additional financing; attracting and retaining
      customers and employees; sources of revenue and anticipated revenue; and
      competition in our market.




Forward-looking
      statements are only predictions. Although we believe that the expectations
      reflected in these forward-looking statements are reasonable, we cannot
      guarantee future results, levels of activity, performance or achievements.
      All
      of our forward-looking information is subject to risks and uncertainties that
      could cause actual results to differ materially from the results expected.
      Although it is not possible to identify all factors, these risks and
      uncertainties include the risk factors and the timing of any of those risk
      factors identified in “Item 1A. Risk Factors” section contained herein, as
      well as the risk factors and those set forth from time to time in our filings
      with the Securities and Exchange Commission (“SEC”). These documents are
      available through our 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.




3




**PART
      I**




**ITEM
      1. BUSINESS**




**Introduction**




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





The
      potential markets for our SonocrackingTM technology and our SonocrackerTM units
      include crude oil producers (upstream markets), transporters and blenders
      (mid-stream markets) and refiners (down stream markets). The economic value
      of
      crude oil is driven largely by characteristics such as API gravity (relative
      density), sulphur content and total acid number (“TAN”). Because our technology
      is designed to decrease the relative density of crude oil and at the same time
      reduce the sulphur content in a cost-effective way, the successful
      commercialization of our technology can be expected to produce economic benefits
      to future customers in these markets.





We
      maintain our principal executive offices and facilities at 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.





**Business
      Development Activities Update**





The
      following is an update on the significant 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 success for the technology
      (i.e., crudes with high sulphur content) and are working with several customers
      to achieve that goal.




On
      February 11, 2008, we announced
      that we had signed an agreement with Pt. Isis Megah (“Isis”), an Indonesian oil
      and gas services company, which grants Isis an exclusive distributorship in
      the
      sales territories of India, Malaysia, Singapore and Indonesia (the “Sales
      Territories”). We concurrently announced a customer order, subject to the
      conditions described below, procured through Isis, for SonocrackingTM units with
      at least thirty thousand barrels per day of processing capacity to be shipped
      at
      our expense from Fujairah to a designated port within the Sales Territories.
      On
      arrival, Isis will pay all entry costs and duties, the cost of transportation
      from the port of entry to the customer’s refinery and all installation costs. We
      will then provide advisory personnel and on-site project management to insure
      proper installation, start-up and commissioning.




4





The
      order
      is conditioned upon the execution of an operating agreement with the customer
      and we have preliminarily agreed that the following material terms and
      conditions must be part of such an operating agreement: i) SulphCo shall receive
      an agreed processing fee for
      each
      barrel of installed processing capacity of the units; ii) the processing fee
      shall be adjusted annually, based on benchmark performance targets; iii)
      th e
      customer shall be responsible for all operating and maintenance expenses
      (including parts replacement) ;
      iv)
      title to the units shall remain with SulphCo, v) the operating agreement shall
      have a term of five years; vi) payment of processing fees shall commence after
      successful completion of a continuous seven day performance test; and vii)
      installation costs will be reimbursed by SulphCo out of operating revenues.
      Neither Isis nor the customer may operate the SonocrackingTM units prior to
      execution of such an agreement.





In
      the
      event, for any reason, we are unable to agree upon the terms of an operating
      agreement, the contingent customer order will be canceled and Isis shall remove
      and return the units to SulphCo at its expense. In addition, should the units,
      after commissioning and completion of trial runs, fail to achieve the
      performance targets established in the operating agreement, the customer order
      may also be canceled.





Fujairah





During
      2007, we completed the first phase of a 180,000 barrel per day SonocrackingTM
test facility in Fujairah, UAE (the “Fujairah Facility”) the construction of
      which commenced in 2006. In August of 2007, we commissioned the first
      SonocrackingTM unit at the Fujairah Facility. The commissioning included the
      completion of infrastructure and ancillary facilities, including electric,
      cooling, water tanks, sludge tanks, pumps, control systems, a water separator
      and external feed lines, sufficient to allow continuous operation of one of
      the
      six commercial scale 30,000 barrels per day SonocrackingTM units installed at the
      Fujairah Facility. Following the commissioning of this unit, we conducted
      several rounds of testing.





The
      purpose of these tests was to evaluate the performance of our equipment during
      trial runs in a working commercial environment. During 2007, we conducted four
      separate sets of trials with several qualities of fuel and crude oil, supplied
      by tanker truck, utilizing both a modified SulphCo probe design as well as
      an
      Industrial Sonomechanics, LLC (“ISM”) based probe designs. Both treated and
      untreated samples were sent to a third party laboratory (Caleb Brett) for
      appropriate analyses. While we encountered some operational issues using a
      prototype of the newly licensed ISM-probe design in one of the trials, the
      results overall were positive and can be summarized as follows: Using heavy
      fuel
      oil as the SonocrackingTM process feed, we were able to demonstrate under certain
      processing conditions, an improvement of up to 3 degrees in the API gravity,
      up
      to 23% sulphur reduction by weight, and up to 20% viscosity reduction. Utilizing
      crude oil as the SonocrackingTM feedstock, we were able to achieve up to 2
      degrees of improvement in the API gravity and up to 18% sulphur reduction by
      weight using the improved SulphCo design probe. In contrast, the new ISM design
      probe significantly outperformed the SulphCo design probe achieving up to a
      47%
      sulphur reduction by weight in the processed crude.




In
      2008
      we plan to continue to utilize the Fujairah Facility as a test and validation
      venue for the Sonocracking TM process as well as for customer demonstration
      purposes.




5




European
      Testing Activities




In
      2006
      we entered into an agreement with a major European oil producer and refiner
      to
      test our Sonocracking
      TM technology.
      Testing commenced in the first quarter of 2007 utilizing a 15,000 barrel per
      day
      unit, initially at a refinery location and subsequently at a remote field
      production site, permitting us to run a variety of light and heavy crude oils.
      Over the following six months we conducted runs utilizing several probe designs.
      Although the trials took longer than planned due to the remote location and
      the
      need to reconfirm the initial test results, we again were able to again
      demonstrate during extended trial runs that the improvements to the SulphCo
      design probe greatly enhanced reliability. The test results with respect to
      API
      gravity and viscosity improvements were consistent with those achieved in
      Fujairah. However, we were not able to conduct meaningful testing for sulphur
      reduction during these trials due to the extremely low sulphur content in the
      crudes tested. Nevertheless, the overall results were encouraging and meetings
      are planned with our European testing partner in early 2008 to discuss the
      go
      forward plan.




South
      Korea





In
      connection with the SulphCo KorAsia project, in January 2008, essential
      equipment was ordered and scheduled for shipment to South Korea in preparation
      for trials in early February. Included among the equipment to be delivered
      were
      the new ISM ultrasonic probe and the SulphCo designed control unit, which should
      allow for precise measurement and understanding of the probe operation during
      the upcoming tests. Due to unforeseen circumstances, some of the equipment
      was
      not received in time to commence testing during February 2008. Although this
      program has been delayed for several reasons, including the need to assure
      protection of our intellectual property and the recently licensed ISM
      technology, we expect to proceed with the testing of Khafji crude (~3% sulphur
      by content) during the latter part of the first quarter of 2008 or the early
      part of the second quarter of 2008.





Houston,
      Texas




Beginning
      in the fall of 2007 and continuing into the first quarter of 2008, we have
      concentrated our engineering efforts on two important projects, the first being
      the development of a reduced scale laboratory version of our 5,000 barrel per
      day prototype commercial scale SonocrackerTM and the second being the conversion
      of a 5,000 barrel per day SonocrackingTM
      skid into a mobile unit. The reduced scale laboratory unit will
      allow for test trials with flow rates as low as 1 gallon per minute, and, should
      permit us to develop meaningful data from as little as one barrel of a customer
      supplied crude oil sample. Our new mobile 5,000 barrel per day skid is in the
      final stages of testing and should be operational by the end of the first
      quarter of 2008. By allowing us immediate and straightforward access to multiple
      customers’ sites in the Southwest U.S., this mobile unit should permit us to
      develop processing windows for a wide range of crude qualities.




Probe
      Development




The
      ultrasound probe and reactor assembly is the key to the SonocrackingTM process.
      Since the Company’s inception, we have focused our efforts on the design and
      development of high power reliable ultrasound probes. Until last year, the
      ultrasonic probes and transducers designed and manufactured by SulphCo failed
      to
      perform to the level of reliability required for commercial applications. As
      a
      result, a new strategy was implemented in the beginning of 2007 shifting from
      the manufacturing of ultrasound probe transducers internally to outsourcing
      to
      capable manufacturing partners. Our new strategy has been successful,
      dramatically increasing probe reliability while simultaneously enhancing power
      output and efficiency. The original Series I probe would sometimes fail in
      a
      matter of minutes. In contrast, the newer generation Series II probe should
      be
      capable of running for weeks at a time. Throughout the remainder of 2007 we
      concentrated our efforts on the improvement of the SulphCo Series II ultrasonic
      probe design, but also investigated in parallel probe designs developed by
      other
      manufacturers.




6




On
      November 15, 2007, we announced an agreement with ISM, granting us an exclusive
      license for ISM’s patented ultrasound horn design as well as the rights to their
      patent pending reactor design. Our relationship with ISM dates back to March
      of
      2007, when initial discussions took place regarding the technology’s potential.
      In furtherence of the ISM relationship, we authorized Märkisches Werk
      (“MWH”) to produce full-scale prototype probes for testing in the laboratory.
      Once comfortable with a performing probe, we sent prototypes to the Fujairah
      Facility for testing on fuel oil and crude oil. Based on promising initial
      results and several discussions with the scientists at ISM, we entered into
      a
      license agreement for the use of ISM’s technology as well as a consulting
      agreement with ISM’s scientists, to enable us to expeditiously adapt these
      probes to our process.




**General
      Description of Our Technology**





SulphCo's
      technology is designed to use high power ultrasound to alter naturally occurring
      molecular structures in water and hydrocarbons. 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 eventually bursting,
      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 atm) reached can potentially cause disruption of molecular
      bonds.





The
      SonocrackingTM technology applies high-power ultrasonic energy to a mixture of
      crude oil and water in conjunction with inexpensive proprietary catalysts.
      In
      accordance with theory, free radicals can be formed as a result of the breaking
      of molecular bonds in the water vapor at the thermolic center of the cavitation
      bubbles. While a large portion of these free radicals rapidly reform into water
      vapor, a few can bring about the oxidation of some sulphur compounds in the
      hydrocarbons. It can also potentially result in cracking the bonds of residuum
      elements, thereby enhancing the crude quality. The transfer of hydrogen and
      hydroxide from water to the numerous petroleum streams can lead to the oxidation
      and subsequent removal from the crude oil of sulphur present in these streams.
      Aside from the potential oxidation of sulphur compounds, the process may also
      bring about the rupturing of the complex hydrocarbon bonds, which in turn may
      result in upgrading the overall hydrocarbon content by reducing the overall
      density and thereby increasing the American Petroleum Institute (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 a 5,000 barrel per day
      processing line. Successive lines can be added to scale capacities in multiples
      of 5,000 barrels per day. SulphCo has designed and implemented modular units
      with a 15,000 barrel per day 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”.




7





**The
      Market for Our Technology**





***Potential
      Improvements and Benefits***





SulphCo’s
      high power ultrasound SonocrackingTM process for treating crude oil and crude oil
      fractions is designed to produce a number of desirable effects, including
      reduction in sulphur levels (and oxidation of sulphur molecules), improvement
      in
      the API Gravity (reduction in relative density), shifting of the molecular
      distribution from higher to lower boiling components, reduction in viscosity,
      and reduction in nitrogen. 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 SonocrackingTM process
      depends heavily on the feed oil characteristics, including: molecular makeup
      of
      sulphur compounds, asphaltene level and microstructure, acidity, and several
      other factors. Not all crude oil or crude oil fractions 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.





The
      economic benefit derived from the SonocrackingTM process depends on the overall
      improvement imparted to the crude oil or crude oil fraction in conjunction
      with
      customer and application-based drivers such as, but not limited to, crude oil
      pricing spreads, higher quality yields, and reduction in other operating costs.
      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 SonocrackingTM process in the context of the customer application,
      improvement in the oil stream, and market pricing.




***The
      Oil Producer Market*** ***(upstream)***




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




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




·
            Improved
                economics by allowing more production of heavier, higher sulphur
                crude oil
                reserves.




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




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




8




***The*** ***Transporting
      and Blending Market (mid-stream)***




Sulphco’s
      SonocrackingTM technology can improve the blending economics for mid-stream crude
      oil blenders and transporters. Treating high sulphur crude oil with the
      SonocrackingTM units is expected to reduce the sulphur 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.




***The
      Refining Market (down stream)***




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




These
      potential benefits include:




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




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




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




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




*Lower
      Raw Material Costs*




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




The
      cost
      of crude oil is generally considered to be the cost component with the greatest
      leverage on the profitability of an oil refinery. Therefore, a refinery will
      normally seek to purchase the most economical grade of crude oil which is
      suitable for its refinery operations. Typically, no two refineries will have
      identical requirements and 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 sulphur
      concentrations. Due to price differentials based upon the density and sulphur
      content of crude oil, a refinery (regardless of complexity) will normally seek
      to purchase the least expensive heavy grade oil with the highest sulphur 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.




9




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




***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 Austria, South Korea, South America, Canada, India,
      Malaysia, Singapore and Indonesia. In February 2008, we entered into an
      agreement with Pt. Isis Megah (“Isis”), which grants Isis an exclusive
      distributorship in the sales territories of India, Malaysia, Singapore and
      Indonesia. As the potential markets for our technology include countries with
      significant oil producing or refining activities, we expect to conduct business
      in other countries 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.




**Development
      and Commercialization Activities**





We
      have
      been in
      the
      development of our SonocrackingTM technology since the formation of GRD, Inc. in
      January 1999. Beginning in mid 2002, we focused our research and development
      activities on the design, upgrading and testing of laboratory scale prototypes
      utilizing more powerful ultrasonic generators, and the adaptation of those
      prototypes to accommodate these more powerful generators. Other than the
      ultrasonic probe improvement program, which has been largely outsourced,
      substantially all of the development work to date has been conducted by SulphCo
      personnel. We continue to conduct testing in-house and through relationships
      with third parties.




During
      2005, we completed construction of a 5,000 bbl/day SonocrackingTM unit and a
      15,000 bbl/day SonocrackingTM unit at our facilities in Sparks, Nevada,
      culminating months of testing the internal components at our facility. These
      units are designed to be modular in order to facilitate both scalability and
      maintenance. Three 5,000 barrel per day skids in parallel comprise a 15,000
      barrel per day prototype unit. These systems are automated using programmable
      logic controllers and come equipped with touch screen interfaces. We also
      designed a SonocrackingTM unit intended to process 30,000 barrels per day of
      crude, comprised of two 15,000 barrel per day units in parallel. Seven 30,000
      barrel per day units were manufactured by NTG for us in 2006, with six units
      installed in our Fujairah Facility.





As
      stated
      above, at the Fujairah
      Facility, we commissioned a 30,000 barrel per day SonocrackingTM unit in August
      of 2007 and have conducted four separate series of trials.





**Patents,
      Trademarks and Copyrights**





We
      own
      seven United States patents, six of which relate to our basic SonocrackingTM
      technology. Our granted U.S. Patents include:





·
            Loop-Shaped
                Ultrasound Generator and Use in Reaction Systems. U.S. patent no.
                7,275,440 was issued on October 2, 2007 to Dr. Rudolf W. Gunnerman
                and
                assigned to SulphCo;




10





·
            Conversion
                of Petroleum Resid to Usable Oils with Ultrasound. U.S. patent no.
                7,300,566 was issued on November 27, 2007 to Dr. Rudolf W. Gunnerman
                and
                assigned to SulphCo;





·
            Oxidative
                Desulphurization of Fossil Fuels with Ultrasound. U.S. patent no.
                6,402,939, issued June 11, 2002 to Dr. Teh Fu Yen and assigned to
                SulphCo;





·
            Continuous
                Process for Oxidative Desulphurization of Fossil Fuels with Ultrasound
                and
                Products Thereof. U.S. patent no. 6,500,219, issued December 31,
                2002 to
                Dr. Rudolf W. Gunnerman, and assigned to
                SulphCo;





·
            Ultrasound-Assisted
                Desulfurization of Fossil Fuels in the Presence of Dialkyl Ethers.
                U.S.
                patent no. 6,827,844 was issued on December 7, 2004. Dr. Rudolf W.
                Gunnerman, listed as the inventor, assigned the patent to
                SulphCo;





·
            Corrosion
                Resistant Ultrasonic Horn. U.S. patent no. 6,652,992, issued November
                25,
                2003 to Dr. Rudolf W. Gunnerman, and assigned to SulphCo, Inc;
                and





·
            High-Power
                Ultrasound Generator and Use in Chemical Reactions. U.S. patent no.
                6,897,628 was issued on May 24, 2005. Dr. Rudolf W. Gunnerman and
                Dr.
                Charles Richman, listed as co-inventors, assigned the patent to
                SulphCo.





We
      also
      have seven pending U.S. Patents including:





·
            Power
                Driving Circuit for Controlling a Variable Load Ultrasonic Transducer.
                U.S. patent application no. 11/069492 was issued on February 28,
                2005.





·
            High-Throughput
                Continuous-Flow Ultrasound Reactor. U.S. patent application no. 10/857444
                was issued on May 27, 2004.





·
            Upgrading
                of Petroleum by Combined Ultrasound and Microwave Treatments. U.S.
                patent
                application no. 11/059115 was issued on February 15,
                2005.





·
            High-Power
                Ultrasonic Horn. U.S. patent application no. 11/066766 was issued
                on
                February 24, 2005.





·
            High
                Resonating Ultrasonic Transducer and Horn. U.S. patent application
                no.
                60/781043 was issued on March 10,
                2006.





·
            Loop-Shaped
                Ultrasound Generator and Use in Reaction Systems. U.S. patent application
                no. 10/994166 was issued on November 18,
                2004.





·
            Loop-Shaped
                Ultrasound Generator and Use in Reaction Systems. U.S. patent application
                no. 11/457575 was issued on July 14,
                2006.





In
      addition, SulphCo has been granted eight international patents and has applied
      for an additional 89 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
      desulphurization units.




11





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




**Competitive
      Business Conditions**




We
      are a
      new entrant in the market for development and sale of upgrading technology
      to
      the oil industry. SulphCo faces well established and well funded competition
      from a number of sources. Our competitors in this area include oil companies,
      oil refineries and manufacturers of conventional oil refinery equipment such
      as
      hydrotreaters. Most of these entities have substantially greater research and
      development capabilities and financial, scientific, manufacturing, marketing,
      sales and service resources than we do. Because of their experience and greater
      research and development capabilities, our competitors might succeed in
      developing and commercializing new competing technologies or products which
      would render our technologies or products obsolete or
      non-competitive.





Our
      patented and proprietary SonocrackingTM process is based upon the novel use of
      high power ultrasound to effect beneficial changes in the chemical composition
      of crude oil. This process gives us a competitive advantage.





We
      believe that our SonocrackingTM technology gives us a competitive advantage
      because it is unique in that it “pre-treats” crude oil by both reducing relative
      gravity of oil and reducing sulphur 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 sulphur 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 sulphur 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 desulphurization of crude oil and the
      improvement of our high power ultrasound technology. During the years ended
      December 31, 2007, 2006 and 2005, our research and development costs totaled
      approximately $7.7 million; $25.4 million, and $2.5 million, respectively.
      During 2007 and 2006, we expended approximately $1.7 million and $21.5 million,
      respectively, for the construction of the building and for the purchase and
      installation of equipment at the Fujairah Facility. Expenditures
      of this magnitude are not anticipated to take place in the future until the
      process is commercialized, in which event such expenditures will be capitalized
      rather than expensed as research and development.




12




During
      the past six months, we have entered into a license agreement with ISM granting
      us worldwide rights with respect to its proprietary patented ultrasonic probe
      and reactor technology, and we are nearing completion of the project to develop
      a reduced scale version of our 5,000 barrel per day commercial prototype SonocrackingTM
      unit.




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





**Effects
      of Government Regulation; Regulatory Approvals**





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





The
      reduction of sulphur 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 sulphur 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 sulphur products entirely. Our technology is expected
      to
      benefit from the impact of existing and proposed government mandates which
      regulate sulphur 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
      sulphur 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 sulphur in the fuel. The regulations required the phase-in of
      gasoline sulphur 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 sulphur content of highway diesel fuel beginning in 2006 to 15 parts per
      million. The former standard was 500 parts-per-million. The EPA has also
      proposed regulations intended to limit the sulphur 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 sulphur 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.




13




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




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




Installation
      and operation of our units at customer sites may subject us to increased risk.
      We intend to address these risks by imposing contractual responsibility on
      third
      party users for maintaining necessary permits and complying with applicable
      environmental laws related to the operation of our units. However, these
      measures may not fully protect us against environmental risks. Furthermore,
      although we may be entitled to contractual indemnification from third parties
      for environmental compliance liabilities, this would not preclude direct
      liability by us to governmental agencies or third parties under applicable
      federal and state environmental laws. We are presently unable to predict the
      nature or amount of additional costs or liabilities which may arise in the
      future. However, future liabilities and costs could be material.




**Employees**





As
      of
      March 10, 2008, we had 15 full-time employees and one part-time
      employee.





**Executive
      Officers**





The
      following table lists our
      executive officers, their ages, and positions:





**Name**
            
            **Age****(1)**
            
            **Present
                Position**Dr.
                Larry D. Ryan
            
            36
            
            Chief
                Executive Officer and DirectorM.
                Clay Chambers
            
            61
            
            Chief
                Operating OfficerStanley
                W. Farmer
            
            40
            
            Vice
                President and Chief Financial Officer**(1)**Age
                is as of March 10, 2008




14





**Business
      Experience of Executive Officers**





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




*M.
      Clay Chambers* has
      served as our Chief Operating Officer since February 2008. Mr. Chambers has
      over
      thirty-five years experience in the refining and petrochemical industry, having
      begun his career with UOP, Inc. and held senior management positions with
      Coastal Corporation, El Paso Corporation and Texas City Refining. At Coastal
      (NYSE, Fortune 40 Company, now El Paso 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 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 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. Farmer* has
      served as our Vice President and Chief Financial Officer since June 2007. 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 earned 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.





**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.** **Our auditors have included a “going concern” emphasis paragraph in their audit
      report.**




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. In addition to this, our
      auditors have included a “going concern” emphasis paragraph in their audit
      report relating to our financial statements as of December 31, 2007, indicating
      that as a result of significant recurring losses, substantial doubt exists
      about
      our ability to continue as a going concern.




15


**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
      desulphurization 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, 2007, we had an accumulated deficit of
      approximately $120 million. These losses are principally associated with the
      research and development of our SonocrackingTM units for desulphurization and
      upgrading crude oil and other petroleum products, research and development
      of
      ultrasound technologies, development of pre-production prototypes and related
      marketing activity, and we expect to continue to incur expenses in the future
      for development, commercialization and sales and marketing activities related
      to
      the commercialization of our technology. We cannot predict when or to what
      extent our technology or resulting products will begin to produce revenues
      on a
      sustained basis, or whether we will ever reach profitability. If we are unable
      to achieve significant levels of revenue on a sustained basis, our losses will
      continue. If this occurs, we may be compelled to significantly curtail our
      business activities or suspend or cease our operations.




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




In
      the
      past we have financed our research and development activities primarily through
      debt and equity financings from our principal shareholder, Rudolf W. Gunnerman,
      and equity financings from third parties. Our existing capital resources will
      not be sufficient to fund our cash requirements for the next 12 months based
      upon current levels of expenditures and anticipated needs. We expect that
      additional working capital will be required in the future. There is substantial
      doubt about our ability to continue as a going concern, as discussed in Note
      1
      to our financial statements. Our ability to continue as a going concern is
      dependent on our ability to implement our business plan and raise additional
      funds.




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




16





·
            Continued
                progress toward commercialization of our
                technologies;


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


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







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




Sources
      of additional capital, other than from future revenues (for which we presently
      have no commitments) include proceeds from the exercise of warrants issued
      to
      the investors in the March 2007 and November 2007 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., includ ing
      the
      United Arab Emirates, Austria, Indonesia, Canada, 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.





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





We
      expect
      to experience significant growth if we are successful in our efforts to rollout
      our SonocrackingTM units in Fujairah, United Arab Emirates and other parts of the
      world. 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:




17





·
            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.




**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 desulphurization
      and
      upgrading technologies on our own. Our success may depend upon partnerships
      and
      strategic alliances with third parties, such as our joint venture with Fujairah
      Oil Technology. Collaborative agreements involving the development or
      commercialization of technology such as ours generally pose such risks
      as:




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


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


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


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


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


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




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




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




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




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




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 desulphurization and upgrading market.**




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




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




Our
      commercial success will depend to a large degree on our ability to protect
      and
      maintain our proprietary technology and know-how and to obtain and enforce
      patents on our technology. We rely primarily on a combination of patent,
      copyright, trademark and trade secrets law to protect our intellectual property.
      Although we have filed multiple patent applications for our technology, and
      we
      have seven 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 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 sulphur
      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 desulphurization 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 sulphur content of petroleum products will continue
      to
      provide an impetus for customers to utilize our SonocrackingTM technology for
      desulphurization, it is possible that the application of existing environmental
      legislation or regulations or the introduction of new legislation or regulations
      could substantially impact our ability to launch and promote our proprietary
      technologies, which could in turn negatively impact our business.




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




To
      date,
      environmental regulation has not had a material adverse effect on our business,
      which is presently in the development stage. However, future activities may
      subject us to increased risk when 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.




20






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


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





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





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




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




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




**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. The lease for this
      space will expire mid-year 2012. We continue to have certain testing equipment
      in Sparks, Nevada in a leased facility consisting of approximately 5,000 square
      feet. The lease for this space will expire in the Spring of 2010. We also have
      approximately 4,200 square feet of office space in Reno, Nevada where our
      executive offices were prior to our relocation to Houston, Texas in July 2007.
      The lease for this space will expire in the spring of 2010 and effective January
      2008 we began the process of attempting to sublease this space for the remaining
      term of the lease.




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




**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. We have and will continue to devote significant resources
      to
      our defense as necessary.





The
      following paragraphs set forth the status of litigation as of December 31,
      2007.


21





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 Plaintiff, Clean Fuels Technology
      later assigned its claims in the lawsuit to EcoEnergy Solutions, Inc., which
      entity was substituted as Plaintiff.  In general, Plaintiff EcoEnergy
      Solutions, Inc. alleged claims relating to ownership of the “sulphur removal
      technology” originally developed by Professor Teh Fu Yen and Dr. Gunnerman with
      financial assistance provided by Dr. Gunnerman, and subsequently assigned to
      the
      Company.  On September 14, 2007, after a jury trial and extensive
      post-trial proceedings, the trial court entered final judgment against Plaintiff
      EcoEnergy Solutions, Inc. on all of its claims.  Per the final judgment,
      all of Plaintiff’s claims were resolved against Plaintiff and were dismissed
      with prejudice.  In addition, the trial court found that the Company was
      the prevailing party in the lawsuit and entered judgment in favor of the Company
      and against Plaintiff of approximately $124,000, with post-judgment interest.
       The Plaintiff appealed the judgment on October 5, 2007.  On December
      19, 2007, and as required by Nevada statute, the Company participated in a
      mandatory settlement conference at which time a settlement was not reached.
      A
      briefing schedule has been issued, but there has been no date set for oral
      arguments. As of December 31, 2007, no 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 alleged claims relating to the Company's ownership and rights to
      develop its "sulphur 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. Trial
      has
      been set for August 4, 2008. As of December 31, 2007, no liability has been
      accrued relative to this action.




McLelland
      Arbitration




In *The
      Matter of the Arbitration between Stan L. McLelland v. SulphCo,
      Inc.* ,
      Mr.
      McLelland, who was the Company's president from August 13, 2001, until he
      resigned on September 12, 2001, sought to exercise options to purchase two
      million (2,000,000) shares of the Company’s common stock at 50 cents per share,
      as well as receive salary payments for the six months following his resignation
      and $20,000 of alleged unpaid commuting expenses. Following the arbitration
      hearings, on July 24, 2007, the Company received notice that the Arbitrator
      had
      denied Mr. McLelland’s claim for the options. The Arbitrator did award salary of
      $125,000 plus interest from October 1, 2001 until paid, and $5,000 (without
      interest) out of the $20,000 of alleged unpaid commuting expenses. In connection
      with the resolution of this matter, the Company recognized a charge for these
      amounts in the quarter ended June 30, 2007 which were later paid during the
      quarter ended September 30, 2007.




22




Neuhaus
      Litigation




On
      October 20, 2006, Mark Neuhaus filed a lawsuit against the Company and Rudolf
      W.
      Gunnerman, *Mark
      Neuhaus v. SulphCo, Inc., Rudolph W. Gunnerman* ,
      in the
      Second Judicial District Court, in and for the County of Washoe, Case No.
      CV06-02502, Dept. No. 1. The lawsuit is based on a purported Non-Qualified
      Stock
      Option Agreement and related Consulting Agreement between Mark Neuhaus and
      the
      Company dated March of 2002. Mark Neuhaus claims that according to the terms
      of
      the Non-Qualified Stock Option Agreement, he was granted an option to purchase
      three million (3,000,000) shares of the Company’s common stock at the exercise
      price per share of $0.01. On or about February of 2006, Mark Neuhaus attempted
      to exercise the option allegedly provided to him under the Non-Qualified Stock
      Option Agreement. At that time, the Company rejected Mr. Neuhaus’s attempt to
      exercise the option. Thereafter, Mr. Neuhaus filed this lawsuit seeking to
      enforce the Non-Qualified Stock Option Agreement. In his suit, Mr. Neuhaus
      includes claims for specific performance, breach of contract, contractual breach
      of the covenant of good faith and fair dealing, and tortious breach of the
      covenant of good faith and fair dealing. He requested that the Court compel
      the
      Company to issue the shares or alternatively to award him damages equal to
      the
      fair market value of the three million (3,000,000) shares of stock when he
      purported to exercise the options, minus the exercise price. On December 7,
      2006, the Company moved to dismiss the lawsuit. On January 4, 2007, the Court
      issued an Order denying the motion on the ground that there were factual issues
      to be resolved which prevented dismissal at that time. The Company filed an
      Answer to the Complaint, as well as a counterclaim against Mr. Neuhaus and
      a
      cross claim against Rudolf W. Gunnerman on March 29, 2007. That cross-claim
      against Dr. Gunnerman was subsequently voluntarily discontinued, without
      prejudice. As of December 31, 2007, no liability has been accrued relative
      to
      this action. The Company regards the claim as without merit.




Mr.
      Neuhaus filed a motion to dismiss the counterclaim on April 11, 2007, which
      the
      Company opposed. On July 20, 2007, the Court issued an Order granting Mr.
      Neuhaus’ Motion to Dismiss. The Court found that Nevada was not the proper venue
      for the counterclaim and that the Nevada Courts did not have jurisdiction over
      the counterclaim. The Company has filed an action in the New York State Supreme
      Court seeking to obtain the same relief as was sought in the counterclaim that
      was dismissed.




On
      December 21, 2007, the Company filed a Motion for Summary Judgment with the
      Court seeking dismissal of Neuhaus's claims. The Company argued that the
      Non-Qualified Stock Option Agreement was not valid in that there was no evidence
      of a board resolution approving the terms of the options, as is required by
      Nevada law. Neuhaus opposed the Motion. On February 4, 2008, the Court denied
      the Motion for Summary Judgment, finding that there remain material issues
      of
      disputed facts relating to the creation of the Non-Qualified Stock Option
      Agreement and the Consulting Agreement. The Company is proceeding with
      discovery.




Trial
      in
      this action has been rescheduled for July 14, 2008.




Hendrickson
      Derivative Litigation




On
      January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
      against certain current and former officers and directors or the Company in
      the
      Second Judicial District Court of the State of Nevada, in and for the County
      of
      Washoe. The case is known as *Thomas
      Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman,
      Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles
      Van
      Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence
      G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph
      Henkel* ,
      Case
      No. CV07-00137, Dept. No. B6. The complaint alleges, among other things, that
      the defendants breached their fiduciary duty to the Company by failing to act
      in
      good faith and diligence in the administration of the affairs of the Company
      and
      in the use and preservation of its property and assets, including the Company’s
      credibility and reputation. The Company and the Board had intended to file
      a
      Motion for Dismissal with the Court, based upon the Plaintiff’s failure to make
      a demand upon the Board. On
      July
      10, 2007, the Company received notice that a stipulation (the “Stipulation”) of
      voluntary dismissal without prejudice had been entered, with an effective date
      of July 3, 2007, regarding this action. The Stipulation provides 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 has received any consideration for the dismissal
      of
      this action, and no future consideration has been promised.


23




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 special committee comprised of three independent directors
      to
      evaluate the Hendrickson Demand Letter and to determine what, if any, action
      should be taken.




Cullen
      Litigation




On
      June
      26, 2006, the Company filed an action, *SulphCo,
      Inc. v. Cullen* ,
      in the
      Second Judicial District Court of the State of Nevada, in and for the County
      of
      Washoe, Case No. CV06-01490, against Mark Cullen arising out of Mr. Cullen’s
      alleged breach of a secrecy agreement that he had executed when employed by
      GRD,
      Inc., whose claims have accrued to the Company. The lawsuit seeks damages,
      a
      constructive trust, and an order requiring Mr. Cullen to assign to the Company
      certain intellectual property in the form of patent applications (as well as
      a
      now-issued patent) that he filed following his departure from the Company.
      On
      October 23, 2006, Mr. Cullen moved to dismiss the Company’s complaint; the
      motion was denied. On February 26, 2007, Mr. Cullen filed an amended answer
      to
      the Company’s complaint. That Answer included counterclaims for breach of
      contract, unfair competition, interference with contractual relations, and
      interference with prospective economic advantage. The entire case was dismissed
      without prejudice on April 25, 2007, but the Company retains the ability to
      revive its claims at a later date.




Nevada
      Heat Treating Litigation




On
      November 29, 2007, Nevada Heat Treating, Inc. (“NHT”) filed at 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 is asserting that certain information, alleged to have been
      disclosed to the Company during the term of the consulting engagement, is the
      subject of a nondisclosure/confidentiality agreement executed at the inception
      of the consulting engagement. NHT is contending 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. A
      hearing for the motion for preliminary injunction has been set for March 24,
      2008. Trial has been set for April 27, 2009. As of December 31, 2007, no
      liability has been accrued relative to this action.




24




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 formalizes
      virtually identical requests the Company received in May, June and August 2007
      and subsequently responded to which requested the 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,
      the
      majority of whom have not been employed by the Company for over a year. We
      have
      been advised by the SEC that, despite the subpoena and formal order of
      investigation authorizing its issuance, neither the SEC nor its staff has
      determined whether the Company or any person has committed any violation of
      law.
      The Company intends to continue to cooperate with the SEC in connection with
      its
      requests for documents and information.





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





Not
      applicable.


25


**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
      American Stock Exchange 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
            
            Low*Fiscal
                2007*First
                Quarter
            
            
            4.76
            
            
            2.25Second
                Quarter
            
            
            5.95
            
            
            3.35Third
                Quarter
            
            
            8.92
            
            
            3.25Fourth
                Quarter
            
            
            9.39
            
            
            3.80*Fiscal
                2006*First
                Quarter
            
            
            19.70
            
            
            6.02Second
                Quarter
            
            
            12.49
            
            
            6.90Third
                Quarter
            
            
            7.39
            
            
            4.15Fourth
                Quarter
            
            
            6.84
            
            
            4.15





There
      were 251 holders of record of our common stock on March 1, 2008. This number
      does not include stockholders whose shares were held in a "nominee" or "street"
      name.





**Dividends**





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


26




**Table
      of Securities Authorized for Issuance under Equity Compensation Plans at the
      End
      of 2007**




The
      following table presents information regarding our securities which are
      authorized for issuance under all of our compensation plans as of December
      31,
      2007.




**Plan
                Category**
            
            **Number of Securities
                to be Issued upon Exercise of
                Outstanding Options,****Warrants and rights**
            
            **Weighted-average
                Exercise Price of
                Outstanding Options,**
              **Warrants and Rights******
            
            **Number of Securities
                Remaining Available for Future Issuance under
                Equity Compensation
                Plans (Excluding Securities**
              **Reflected at Left)**Equity
                Compensation Plans Approved by Security Holders
            
            
            1,790,524
            
            $
            4.20
            
            
            209,476Equity
                Compensation Plans Not Approved by Security Holders
            
            
            50,000
            
            $
            6.025
            
            
            
            **(1**)





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




Under
      compensation plans approved by our security holders, the 1,790,524 securities
      relate to outstanding options granted pursuant to the SulphCo, Inc. 2006 Stock
      Option Plan approved by the Company’s stockholders in 2006.




Under
      compensation plans not approved by our security holders, t he
      50,000
      securities relate to warrants granted in connection with the License Agreement
      between the Company and Industrial Sonomechanics, LLC (“ISM”) dated as of
      November 9, 2007, wherein the Company agreed to issue warrants to purchase
      45,000 shares of common stock share 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.


27




**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, 2007,
      2006
      and 2005 includes research and development expenses totaling approximately
      $7.7
      million, $25.4 million and $2.5 million, respectively, including approximately
      $1.7 million and $21.5 million for the Fujairah Facility in 2007 and 2006,
      respectively.




**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Operating
                revenue
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Loss
                fromoperations
            
            $
            (19,156,217
            )
            $
            (39,131,016
            )
            $
            (8,466,994
            )
            $
            (3,860,970
            )
            $
            (3,144,470
            )Lossper share: basic and diluted
            
            $
            (0.64
            )
            $
            (0.55
            )
            $
            (0.17
            )
            $
            (0.08
            )
            $
            (0.07
            )Total
                assets atyear
                end
            
            $
            9,102,041
            
            $
            7,294,459
            
            $
            8,045,236
            
            $
            11,053,360
            
            $
            1,535,510Long-term
                obligations atyear
                end
            
            $
            3,147,860
            
            
            -
            
            $
            7,000,000
            
            $
            7,000,000
            
            
            -Cash
                dividends declared per share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





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





**Liquidity
      and Capital Resources**





As
      of
      March 1, 2008, we had approximately $5.7 million in available cash reserves.
      We
      anticipate that these cash reserves will be sufficient to fund our cash
      requirements into the the third quarter of 2008. 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.





2007
      Capital Activities





*March
      2007 Financing*





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”) that provided inducements to encourage the Warrant Holders to exercise
      their respective warrants. As consideration for Warrant Holders exercising
      their
      shares, 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 the additional warrants (the “March 2007 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 2004 Warrant Holders and up to 4,000,000 warrants to
                the 2006
                Warrant Holders.


28





As
      a
      result of the inducements included in Amendment No. 1 described above, during
      the year ended December 31, 2007, 1,952,068 warrants held by the 2004 Warrant
      Holders and 4,000,000 warrants held by the 2006 Warrant Holders were exercised
      resulting in the grant of 5,952,068 March 2007 Warrants. As a result of these
      inducements, the Company raised approximately $13.2 million.





*November
      2007 Financing*





On
      November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
      Agreements and Warrants (“Amendment No. 2”) an agreement (the “Agreement”) 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. The
      Company’s stockholders approved the increase of 10 million authorized common
      shares at the Special Meeting of Stockholders held on February 26, 2008. If
      this
      option is exercised, then SulphCo will issue the Warrant Holders additional
      November 2007 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 resulting in the grant of 1,976,570
      November 2007 Warrants. As a result of this inducement, the Company raised
      approximately $5.3 million.





*Convertible
      Notes Payable*




In
      December 2004, Dr. Gunnerman, the Company’s former Chairman and CEO, advanced $7
      million to us as a loan (the “Note Payable”). The loan is evidenced by a
      promissory note which bears interest at the rate of 0.5% above the 30 day
“LIBOR” rate, adjusted quarterly and payable annually. In 2006, $2 million of
      principal was repaid on this loan and set to mature on December 31,
      2007.





In
      late
      April 2007, two events occurred related to the Note Payable. First, the Note
      Payable was acquired from Dr. Gunnerman by a group of investors (the
“Investors”). Second, the Company negotiated modifications (the “April 2007
      Modifications”) to the terms of Note Payable with the Investors to (1) extend
      the maturity date from December 31, 2007 to December 31, 2008 and (2) to add
      a
      conversion option to the Note Payable making the Note Payable convertible into
      the Company’s common stock at a conversion price of $3.80 per share (hereinafter
      the Note Payable is referred to as the “Convertible Notes
      Payable”).





On
      November 30, 2007, the Company finalized, with an effective date of November
      28, 2007, a Modification Agreement (the “November 2007 Modification Agreement”)
      with the Investors holding approximately $4.7 million of the Company’s then
      outstanding Convertible Notes Payable. The November 2007 Modification Agreement
      provided the following modifications (hereinafter collectively referred to
      as
      the “November 2007 Modifications”):





·
            The
                maturity date of the Convertible Notes Payable was extended from
                December
                31, 2008 to December 31, 2011.


29





·
            The
                Investors acquired the right to accelerate the maturity date of the
                Convertible Notes Payable to any date after July 31, 2009, upon ten
                (10)
                business days written notice to the
                Company.


·
            The
                Company may prepay the Convertible Notes Payable prior to maturity
                (“Prepayment Date”) with ten (10) business days notice in writing to the
                Investors, subject to the right of the Investors to convert all or
                any
                portion of the Convertible Notes Payable prior to the Prepayment
                Date.





2006
      Capital Activities





On
      March
      29, 2006, we completed a private placement to a small number of accredited
      investors for the sale of 4,000,000 units, each unit consisting of one share
      of
      the Company’s common stock and one warrant to purchase a share of common stock.
      Each unit was sold at a price of $6.805 per share, resulting in gross proceeds
      at closing of approximately $27.2 million. The warrants were exercisable, in
      whole or in part, at a fixed price equal to $6.805 per share for a period of
      18
      months following their issuance. As described above, the exercise price of
      these
      warrants was subsequently reduced in connection with the March 2007
      financing.





Late
      Registration Statement Penalty





As
      of
      December 31, 2007 and 2006 ,
      we were
      obligated to pay approximately $1.1 million and $1.0, 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. We plan
      to
      work with our investors to settle this obligation by the issuance of common
      stock in lieu of cash; however, as of the date of this report no formal
      agreements have been entered into with any investors regarding such
      issuances.





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, including the successful implementation of our venture with
      Fujairah Oil Technology and other third parties, and the timing of future
      customer orders.





As
      of
      December 31, 2007, we had an accumulated deficit of approximately $120.0 million
      and we incurred net losses of approximately $24.4 million and $39.1 million
      for
      the years ended December 31, 2007 and 2006, respectively. These losses are
      principally associated with the research and development of our SonocrackingTM
technology, including the construction of the Fujairah Facility, the development
      of prototypes, and related marketing activity. Although we expect to continue
      to
      incur expenses in the future for development, commercialization and sales and
      marketing activities related to the commercialization of our technologies,
      such
      expenditures will not include major construction projects until
      commercialization can be proven to be profitable.





Operation
      and maintenance of the Fujairah 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 expect
      that once the startup and operating plan for the Fujairah Facility is agreed,
      funding of direct expenditures, such as tank storage and pipelines, will be
      available from financing through FOT. For additional discussion regarding the
      Fujairah Facility see “Item 1. Business - Business Development During 2007”
above.


30





In
      addition to activities related to the Fujairah Facility, we intend to continue
      to incur additional expenditures during the next 12 months for 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 March 2007
      Warrants and the November 2007 Warrants issued to investors in the March 2007
      and November 2007 financing transactions, and funding through future
      collaborative arrangements, licensing arrangements and debt and equity
      financings. We do not know whether additional financing will be available on
      commercially acceptable terms when needed. If we cannot raise funds on
      acceptable terms when needed, we may not be able to successfully commercialize
      our technologies, take advantage of future opportunities or respond to
      unanticipated requirements. If we are unable to secure such additional financing
      when needed, we will have to curtail or suspend all or a portion of our business
      activities. Further, if we issue additional equity securities, our shareholders
      may experience severe dilution of their ownership percentage. As a result of
      the
      existence of these uncertainties, our auditor has included a “going concern”
emphasis paragraph in its audit opinion on our financial statements as December
      31, 2007, indicating that there is substantial doubt about our ability to
      continue as a going concern.





**Results
      of Operations**





As
      a
      development stage company, we have not generated any material revenues since
      we
      commenced our current line of business in 1999.





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




**Research
      and Development Expenses**




During
      2007, we incurred approximately $6.0 million in expenses related to research
      and
      development of our SonocrackingTM technology. This compares to approximately $4.0
      million and $2.5 million incurred in 2006 and 2005, respectively. In 2007 and
      2006, approximately $1.7 million and $21.5 million, respectively, were spent
      on
      building construction and construction, purchase, and installation of equipment
      in Fujairah, UAE. In 2007 and 2006, approximately $1.1 million and $0.1 million,
      respectively, was paid to sub-contractors for research and development purposes
      not related to the equipment in Fujairah, UAE. Also in 2007 and 2006, we
      expensed approximately $0.1 million and $1.1 million, respectively, relating
      to
      the construction of a testing unit to be utilized in Austria.


31





During
      2007 and 2006, we paid approximately $234,000 and $331,000, 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 $1.2 million and $2.1 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 remainder of our research
      and development costs are recurring monthly expenses related to 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
      2007, we incurred approximately $11.4 million in selling, general and
      administrative expenses. This compares to approximately $13.6 million and $5.7
      million during 2006 and 2005, respectively.





During
      2007, we incurred approximately $3 million in legal fees. This compares to
      approximately $6.1 million and $2.1 million during 2006 and 2005, respectively.
      The decrease in 2007 relative to 2006 is primarily attributable to the
      resolution of the significant legal matters in 2006. The increase in 2006
      relative to 2005 was primarily due to litigation fees relating to the lawsuits
      against us. We expect to incur similar legal fees in 2008, due to the on-going
      litigation described above in “Item 3. Legal Proceedings.”





Consulting
      fees, payroll and related expenses were approximately $3.2 million in 2007
      which
      compares to approximately $3.7 million and $2.5 million during 2006 and 2005,
      respectively. Consulting fees in 2007 decreased by 13.5% compared to the same
      period in 2006 due to the dismissal of Dr. Gunnerman, the Company’s former
      Chairman and CEO, in January of 2007 as well as an overall reduction in the
      number of employees in 2007. The increase in 2006 relative to 2005 was due
      to
      the addition of several consultants in 2006 as the Company began larger scale
      projects, including SulphCo KorAsia and FOT.





Travel
      and travel related expenses were approximately $0.9 million in 2007 which
      compares to approximately $1.0 million and $0.5 million during 2006 and 2005,
      respectively. There was a slight decrease in travel expenses in 2007 compared
      to
      2006, which was due to less frequent meetings with the European manufacturers
      of
      our equipment and with our joint venture partner in Fujairah, United Arab
      Emirates as we neared completion of stage one at the test facility in Fujairah.
      An increase in travel fees in 2006 relative to 2005 was also due to increased
      activity in projects, such as SulphCo KorAsia and Fujairah Oil
      Technologies.





Director
      fees were approximately $2.7 million in 2007 which compares to approximately
      $1.6 million and $1.1 million during 2006 and 2005, respectively. Director
      fees
      for the year ended December 31, 2007, includes the value of restricted shares
      granted to the Board of Directors in lieu of its annual cash retainer which
      were
      valued at approximately $0.9 million, the value of the annual option grant
      to
      the Board of Directors valued at approximately $1.0 million and the value of
      options granted to new members of the Board of Directors in lieu of restricted
      stock grants normally granted upon joining the Board which were valued at
      approximately $0.8 million. Director fees for the year ended December 31, 2006,
      includes the value option grants which were valued at approximately $0.6 million
      and the value of restricted stock grants which were valued at approximately
      $1.0
      million. Director fees for the year ended December 31, 2005 includes the value
      of restricted stock grants which were valued at approximately $1.1 million.


32





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





**Interest
      Expense**




Interest
      expense was approximately $5.5 million in 2007, which compares to approximately
      $466,000 and $395,000 during 2006 and 2005, respectively. The increase in 2007
      relative to 2006 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. The increase in 2006
      relative to 2005 is a result from a combination of incurring late registration
      fees beginning near the end of 2004 which accrue interest (see “Late
      Registration Penalty” below) and net interest rate increases in our variable
      rate Convertible Notes Payable.





**Late
      Registration Penalty**




As
      of
      December 31, 2007 and 2006, we were obligated to pay approximately $1.1 million
      and $1.0 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. Interest of approximately $0.1 million
      accrues on the unpaid amount at the rate of 18% per annum. We plan to work
      with
      our investors to settle this obligation by the issuance of common stock in
      lieu
      of cash; however, as of the date of this report no formal agreements have been
      entered into with any investors regarding such issuances. As of the date of
      this
      report, no formal demands have been made by investors to pay these
      fees.





**Depreciation
      and Amortization**




During
      the years 2007, 2006, and 2005, exclusive of the Fujairah test facility, we
      expended approximately $0.5 million, $0.2 million and $0.6 million,
      respectively, for equipment and to maintain exclusivity for the sale and/or
      licensing of our SonocrackingTM technology in the United States and abroad. Our
      depreciation expense related to current and previously capitalized equipment
      for
      2007, 2006, and 2005 was approximately $0.1 million, $0.1 million, and $0.2
      million, respectively. Our amortization expenses related to patent and trademark
      rights, for 2007, 2006, and 2005 were approximately $45,000, $28,000 and $17,000
      respectively. We expect to continue our pursuit of exclusive distribution and
      licensing of our technology and purchasing equipment for the manufacture and
      upgrading of our SonocrackingTM technology.




**Loss
      on Impairment of Asset**




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


33





**Deemed
      Dividend**




**March
      2007 Transaction**





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”) that provided inducements to encourage the Warrant Holders to exercise
      their respective warrants. As consideration for Warrant Holders exercising
      their
      shares, 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 the additional warrants (the “March 2007 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 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 March 2007 Warrants. As a result of the
      inducements, the Company recorded a non-cash deemed dividend 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 via 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 Additional Warrants estimated using the Black-Scholes Valuation
      Model.





During
      the quarter ended June 30, 2007, 600,000 warrants held by the 2006 Warrant
      Holders were exercised resulting in the grant of 600,000 March 2007 Warrants.
      Therefore, 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
      March 2007 Warrants. Therefore, the Company recorded additional non-cash deemed
      dividends of approximately $3.9 million that was estimated using the
      Black-Scholes Valuation Model.





During
      the year ended December 31, 2007, the Company recognized total non-cash deemed
      dividends of approximately $17.1 million relative to the March 2007
      transaction.





**November
      2007 Transactions**





On
      November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
      Agreements and Warrants (“Amendment No. 2”) an agreement (the “Agreement”) 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 is exercised, then SulphCo will issue the Warrant Holders additional
      November 2007 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
      resulting in the grant of 1,976,570 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 1,976,570 November 2007 Warrants
      issued to the Warrant Holders (determined using Black-Scholes). Based on the
      Black-Scholes valuation prepared for this transaction, SulphCo has determined
      that the amount of the non-cash deemed dividend was approximately $7.3 million.
      SulphCo will account for the deemed dividend relating to the November 2007
      Warrants issuable upon exercise of the remaining March 2007 Warrants held by
      the
      Warrant Holders at the point in time, if ever, they are
      exercised.


34





On
      November 28, 2007, certain optionees
      (the “Optionees”) holding a stock option (the Gunnerman Option”) to acquire 1.5
      million shares of the Company’s common stock acquired by the Optionees directly
      from Dr. Rudolf W. Gunnerman in April 2007, executed an amendment to the
      Gunnerman Option whereby Dr. Gunnerman agreed to extend the expiration date
      from
      December 27, 2007 to February 29, 2008. Since Dr. Gunnerman is considered to
      be
      a related party and a control person (i.e., since he owns greater than 10%
      of
      SulphCo’s outstanding common stock), it is presumed that any action that he
      takes involving SulphCo common stock is taken on behalf and for the benefit
      of
      SulphCo. Therefore, SulphCo concluded that a deemed dividend should be recorded
      for any excess fair value of the “new” Gunnerman Option relative to the “old”
Gunnerman Option as determined using the Black-Scholes option valuation model.
      Based on the Black-Scholes valuation prepared for this transaction, SulphCo
      has
      determined that the amount of the non-cash deemed dividend was approximately
      $0.4 million.





During
      the year ended December 31, 2007, the Company recognized total non-cash deemed
      dividends of approximately $7.7 million relative to the November 2007
      transactions.





During
      the year ended December 31, 2007 and between the March 2007 and November 2007
      transactions, the Company recognized total non-cash deemed dividends of
      approximately $24.8 million.





**Net
      Loss and Net Loss Attributable to Common Stockholders**




We
      incurred net losses of approximately $24.4 million, $39.1 million and $9.4
      million for the years ended December 31, 2007, 2006 and 2005, respectively.
      The
      substantial increase in net loss in 2006 relative to 2005 is primarily
      attributable to costs incurred in connection with the construction of the
      Fujairah Facility, which were expensed as research and development in 2006,
      as
      indicated above under the heading “Research and Development.”





We
      incurred net losses attributable to common stockholders of approximately $49.7
      million, $39.1 million and $9.4 million for the years ended December 31, 2007,
      2006 and 2005, respectively. The difference for 2007 is solely attributable
      to
      the deemed dividends of approximately $24.8 million recognized during the year
      ended December 31, 2007, as indicated above under the heading “Deemed
      Dividend.”




**Off-Balance
      Sheet Arrangements**





We
      issued
      warrants as part of the financing transactions in March 2007 and November 2007
      financing transactions. As of December 31, 2007, the warrants outstanding from
      those placements were as follows:





Exercise
            
            Option
            
            Total
                ExercisePrice
                / Share
            
            Shares
            
            AmountMarch
                2007 Transaction
            
            $
            2.68
            
            
            3,975,498
            
            $
            10,654,335November
                2007 Transaction
            
            $
            7.00
            
            
            1,976,570
            
            $
            13,835,990





35





**Contractual
      Obligations**





Payments
                due by periodTotal
            
            Less
                than 1
              year
            
            1 –
                3years
            
            3 –
                5years
            
            More
                than5
              yearsLong-term
                obligations
            
            $
            4,680,044
            
            $
            -
            
            $
            4,680,044
            
            $
            -
            
            
            -Operating
                lease obligations
            
            
            1,029,715
            
            
            282,630
            
            
            671,485
            
            
            75,600
            
            
            -**-**
            
            
            -
            
            
            -Total
            
            $
            5,709,759
            
            $
            282,630
            
            $
            5,351,529
            
            $
            75,600
            
            
            -





The
      Company’s contractual obligations include $4,680,044 relating to our Convertible
      Notes Payable and $1,029,716 of operating lease obligations.




**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 12 to our financial
      statements.




*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 projecting 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
      7 to
      our financial statements for additional information.


36




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.




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





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





As
      of
      December 31, 2007, the Company had variable rate convertible notes payable
      totaling $4,680,044. This variable rate debt exposes the Company to the risk
      of
      increased interest expense in the event of increases in near term interest
      rates. If the variable interest rate were to increase by 1% from December 2007
      levels, interest expense would increase by approximately $47,000 annually.
      The
      carrying value of the variable rate convertible notes payable, excluding the
      discount relating to the beneficial conversion feature, approximates fair value
      as it bears interest at current market rates that reset on a quarterly
      basis.





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





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





Our
      audited financial statements as of December 31, 2007, 2006 and 2005 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
      DISCLOSURE**





On
      July
      9, 2007, the Company dismissed Marc Lumer & Company (“Lumer”) as its
      independent auditors, effective immediately. On July 9, 2007, the Registrant
      engaged Hein & Associates LLP (“Hein”) as its successor independent audit
      firm. The Company’s dismissal of Lumer and engagement of Hein was approved by
      its Audit Committee on July 9, 2007.




Lumer’s
      reports on the Company’s financial statements as of December 31, 2006 and 2005
      and for the years then ended did not contain an adverse opinion or a disclaimer
      of opinion and were not qualified or modified as to uncertainty, audit scope
      or
      accounting principles, except that Lumer’s audit report dated April 2, 2007,
      included an explanatory paragraph indicating that there was substantial doubt
      regarding the Company’s ability to continue as a going concern. Lumer’s audit
      report on management’s assessment of the effectiveness of internal control over
      financial reporting as of December 31, 2006 did not contain an adverse opinion
      or disclaimer of opinion, nor was it qualified or modified as to uncertainty,
      audit scope or accounting principles. However, Lumer’s audit report dated April
      2, 2007, did include an explanatory paragraph indicating the following material
      weaknesses resulting from deficiencies in the design or operation of the
      respective controls:


37




·
            The
                Company lacked the technical expertise and processes to ensure compliance
                with Statement of Financial Accounting Standards No. 2, “Accounting for
                Research and Development Costs.” This material weakness resulted in a
                restatement of prior quarterly financial statements and, if not
                remediated, could result in a material misstatement in the
                future.




·
            The
                Company did not maintain a sufficient complement of personnel with
                an
                appropriate level of accounting knowledge, experience, and training
                in the
                application of generally accepted accounting principles commensurate
                with
                the Company’s complex financial accounting and reporting requirements.
                This material weakness contributed to the restatement of prior financial
                statements.




In
      Lumer’s opinion, because of the effect of these material weaknesses on the
      achievement of the objectives of the control criteria, Lumer concluded that
      the
      Company had not maintained effective internal control over financial reporting
      as of December 31, 2006, based on the criteria established in “Internal
      Control – Integrated
      Framework” issued by the Committee of Sponsoring Organizations of the Treadway
      Commission.




In
      connection with the audits of the Company’s financial statements for each of the
      two most recent fiscal years ended December 31, 2006 and 2005 and through July
      9, 2007, there were no disagreements between the Company and Lumer on any
      matters of accounting principles or practices, financial statement disclosure,
      or auditing scope or procedure, which disagreements, if not resolved to Lumer’s
      satisfaction, would have caused Lumer to make reference to the matter in its
      reports on the financial statements for such years.




During
      the two most recent fiscal years and through the date hereof, and, except as
      set
      forth in the preceding paragraphs, there have been no “reportable events” as
      defined in Regulation S-K, Item 304(a)(1)(v).




In
      deciding to select Hein, the Audit Committee reviewed auditor independence
      issues and existing commercial relationships with Hein and concluded that Hein
      had no commercial relationship with the Company that would impair its
      independence. During our two most recent fiscal years ended December 31, 2006
      and 2005 and through July 9, 2007, the Company did not consult with Hein
      regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
      of Regulation S-K.




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




**Evaluation
      of Disclosure Controls and Procedures**




Our
      Chief
      Executive Officer and Chief Financial Officer have evaluated the effectiveness
      of our disclosure controls and procedures (as such term is defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
      end
      of the period covered by this report. Based on this evaluation, these officers
      have concluded that, as of the end of such period, our disclosure controls
      and
      procedures are effective in alerting them on a timely basis to material
      information required to be included in our reports filed or submitted under
      the
      Securities Exchange Act of 1934, as amended.




**Management’s
      Annual Report on Internal Control Over Financial Reporting**




The
      information required by this Item is incorporated by reference from “SulphCo,
      Inc.’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 Securities Exchange Act of 1934, as amended)
      during our fiscal quarter ended December 31, 2007 that has materially affected,
      or is reasonably likely to materially affect, our internal control over
      financial reporting.


38





**ITEM
      9B. OTHER INFORMATION**





Not
      applicable.





**PART
      III**





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





See
      “Business—Executive Officers” in Item 1 of this Form 10-K. Pursuant to General
      Instruction G to Form 10-K, we incorporate by reference the information to
      be
      disclosed in our definitive proxy statement for the annual stockholder meeting
      at which we will elect directors (“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 Michael T. Heffner. The Board has determined that Mr.
      Schafran and Mr. van Maasdijk qualify as “audit committee financial experts” as
      defined in applicable SEC rules. The Board 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.





**ITEM
      11. EXECUTIVE COMPENSATION**





Pursuant
      to General Instruction G to Form 10-K, we incorporate by reference into each
      of
      these items the information to be disclosed in our Proxy Statement.





**ITEM
      1** **2.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





Pursuant
      to General Instruction G to Form 10-K, we incorporate by reference into each
      of
      these items the information to be disclosed in our Proxy Statement.





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





Pursuant
      to General Instruction G to Form 10-K, we incorporate by reference into each
      of
      these items the information to be disclosed in our Proxy
      Statement.


39





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





Pursuant
      to General Instruction G to Form 10-K, we incorporate by reference into each
      of
      these items the information to be disclosed in our Proxy Statement.





**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.4.1+
            Form
                of Additional Investment Rights initially issued on June 3,
                2004.4.2++
            Form
                of Additional Investment Rights initially issued on June 15,
                2004.4.3+
            Form
                of Warrant initially issued on June 3, 2004.4.4++
            Form
                of Warrant initially issued on June 15, 2004.4.5#
            Form
                of Warrant dated November 11, 2004, issued to Rubenstein Public Relations,
                Inc.4.6(13)
            Form
                of Warrant dated March 29, 2006.4.7(14)
            Stock
                Option Agreement with Rudolf W. Gunnerman dated May 23,
                2006.4.8(14)
            Director
                Stock Option Agreement with Robert van Maasdijk dated May 23,
                2006.4.9
            Form
                of Warrant dated March 12, 2007.10.1*
            2003
                Non-Officer Limited Stock Appreciation Rights Plan.10.2+
            Securities
                Purchase Agreement dated as of June 1, 2004, by and between SulphCo,
                Inc.
                and the Purchasers parties thereto.10.3++
            Securities
                Purchase Agreement dated as of June 14, 2004, by and between SulphCo,
                Inc.
                and the Purchasers parties thereto.10.4#
            Engagement
                Agreement dated July 1, 2004, by and between SulphCo, Inc. and RWG,
                Inc.10.5#
            Promissory
                Note dated December 30, 2003, from SulphCo, Inc. to Rudolf W. Gunnerman
                and Doris Gunnerman.10.6#
            Promissory
                Note dated December 30, 2003, from SulphCo, Inc. to Erika
                Herrmann.10.7#
            Letter
                dated April 28, 2004, from Rudolf W. Gunnerman to SulphCo,
                Inc.10.8#
            Promissory
                Note dated April 28, 2004, from SulphCo, Inc. to Rudolf W.
                Gunnerman.


40




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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





10.24(7)
            Test
                Agreement by and between SulphCo, Inc. and Total France entered into
                on
                October 10, 2005.




10.25(8)
            Employment
              agreement with Loren J. Kalmen dated November 10,
              2005.  10.26(9)
            Letter
                Agreement by and between SulphCo and OIL-SC and dated as of November
                9,
                2005.




41




10.27(10)
            Memorandum
                of Association dated November 29, 2005, by and between SulphCo, Inc.
                and
                Trans Gulf Petroleum Co., a Government of Fujairah
                company.





10.28(11)
            Employment
                Agreement, dated as of January 1, 2006, by and between SulphCo, Inc.
                and
                Michael Applegate.





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





10.30(13)
            Securities
                Purchase Agreement dated as of March 29, 2006, by and between SulphCo,
                Inc. and the Purchasers parties thereto, including form of Warrant
                as
                Exhibit “A” thereto.





10.31(14)
            SulphCo,
                Inc. 2006 Stock Option Plan approved by stockholders June 19,
                2006.





10.32(15)
            Engagement
                Agreement with RWG, Inc. dated July 1,
                2006.





10.33(16)
            Test
                Agreement between SK Corporation and SulphCo, Inc. dated July 20,
                2006.





10.34(17)
            Memorandum
                of Understanding with Pierson Capital International, Ltd. dated August
                1,
                2006.





10.35(18)
            Memorandum
                of Understanding with Petrobras dated August 31,
                2006.





10.36(19)
            Amendment
                to Agreement of February 22, 2005 between SulphCo KorAsia, Inc. and
                SulphCo, Inc. dated August 18,
                2006.





10.37(20)
            Employment
                Agreement with Larry Ryan dated January 12,
                2007.





10.38(21)
            Amendment
                No. 1 to Securities Purchase Agreements and Warrants dated March
                12, 2007,
                including form of Warrant as Exhibit “A”
                thereto.





10.39(22)
            Employment
                Agreement with Brian Savino dated March 9,
                2007.





10.40(23)
            Form
                of Assignment of Promissory Note, dated April, 24,
                2007.





10.41(23)
            Form
                of Allonge to Assignment of Promissory Note, dated April 27,
                2007





10.42(24)
            Employment
                Agreement with Stanley W. Farmer dated May 17,
                2007





10.43(25)
            Master
                Services Agreement between Mustang International, L.P. and SulphCo,
                Inc.
                dated March 29, 2006.





10.44(25)
            Work
                Release between Mustang International, L.P. and SulphCo, Inc. dated
                March
                29, 2006.





10.45(25)
            Amendments
                No. 1 and No. 2 to Master Services Agreement between Mustang
                International, L.P. and SulphCo, Inc. dated September 13, 2006 and
                August
                21, 2007, respectively.





10.46(25)
            Stock
                Option Agreement between Rudolf and Doris Gunnerman and Optionees
                dated
                April 27, 2007 to Acquire 125,000 shares of SulphCo, Inc. stock held
                by
                the Gunnermans.





10.47(25)
            Stock
                Option Agreement between Rudolf and Doris Gunnerman and Optionees
                dated
                April 27, 2007 to Acquire 1,500,000 shares of SulphCo, Inc. stock
                held by
                the Gunnermans.




42




10.48(25)
            Stock
                Purchase Agreement between Rudolf and Doris Gunnerman and Buyers
                dated
                April 27, 2007 to Acquire 125,000 shares of SulphCo, Inc. stock held
                by
                the Gunnermans.





10.49(26)
            Amendment
                No. 2 to Securities Purchase Agreements and Warrants dated November
                28,
                2007, including form of Warrant as Exhibit “A”
                thereto.





10.50(26)
            License
                Agreement between Industrial Sonomechanics, LLC and SulphCo, Inc.
                dated
                November 9, 2007, including form of Warrant as Schedule 4.2
                thereto.





10.51(27)
            Employment
                Agreement with M. Clay Chambers dated February 6,
                2008.





10.52
            Modification
                Agreement to Convertible Notes Payable Among SulphCo, Inc. and Holders
                dated November 28, 2007.





10.53
            Lockup
                Agreement between Rudolf and Doris Gunnerman and SulphCo, Inc. dated
                February 27, 2008.





10.54
            Amendment
                No. 2 to Stock Option Agreements between Rudolf and Doris Gunnerman
                and
                Optionees dated February 12, 2008.





10.55
            Stock
                Option Agreement between Rudolf and Doris Gunnerman and Iroquois
                Master
                Fund Ltd. and Ellis Capital LLC dated February 12,
                2008.





10.56
            Stock
                Option Funds Escrow Agreement among Rudolf and Doris Gunnerman, Iroquois
                Master Fund Ltd. and Ellis Capital LLC and Grushko & Mittman, P.C.
                dated February 12, 2008.





10.57
            Stock
                Purchase Agreement between Rudolf and Doris Gunnerman and Iroquois
                Master
                Fund Ltd. and Ellis Capital LLC dated February 12,
                2008.





10.58
            Stock
                Purchase Escrow Agreement among Rudolf and Doris Gunnerman, Iroquois
                Master Fund Ltd. and Ellis Capital LLC and Grushko & Mittman, P.C.
                dated February 12, 2008.





10.59
            Assignment
                and Consent Agreement between Rudolf and Doris Gunnerman and Iroquois
                Master Fund Ltd. and Ellis Capital LLC dated February 12,
                2008.





14*
            Code
                of Ethics adopted by the Board of Directors on March 12, 2004.





16.1+++
            Letter
                from Forbush and Associates to the SEC dated May 14,
                2004.





16.2++++
            Letter
                from Marc Lumer & Company to the SEC dated July 13,
                2007.




23.1
            Consent
                of Hein & Associates LLP





23.2
            Consent
                of Marc Lumer & Company





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.




43




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 Annual Report on Form 10-KSB
      (SEC File No. 333-27599) as filed with the SEC on March 29, 2004.





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





***
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      filed on June 1, 2007.





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





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





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





++++
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      filed with the SEC on July 13, 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 January 3, 2005.





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





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





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





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





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





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




44





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





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





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





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





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





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





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





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





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





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





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





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





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





(21)
      Incorporated by reference from the registrant’s Form 10-K (SEC File No. 1-32636)
      as filed with the SEC on April 2, 2007.





(22)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on March 14, 2007.





(23)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on May 1, 2007.





(24)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on May 23, 2007.




45





(25)
      Incorporated by reference from the registrant’s Form S-3 (SEC File No.
      333-146418) as filed with the SEC on October 1, 2007.





(26)
      Incorporated by reference from the registrant’s Form S-3 (SEC File No.
      333-148499) as filed with the SEC on January 7, 2008.





(27)
      Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
      as filed with the SEC on February 8, 2008.




46


**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.March
                12, 2008
            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/
                Larry D. Ryan
            
            Chief
                Executive Officer, Director
            March
                12, 2008Larry
                D. Ryan
            
            (Principal Executive Officer)/s/
                Stanley W. Farmer
            
            Vice
                President and Chief Financial Officer
            March
                12, 2008Stanley
                W. Farmer
            
            (Principal Financial Officer andPrincipal Accounting Officer)/s/
                Robert H. C. van Maasdijk
            
            Chairman
                of the Board, Director
            March
                12, 2008Robert
                H. C. van Maasdijk/s/
                Edward G. Rosenblum
            
            Director
            March
                12, 2008Edward
                G. Rosenblum/s/
                Lawrence G. Schafran
            
            Director
            March
                12, 2008Lawrence
                G. Schafran/s/
                Dr. Hannes Farnleitner
            
            Director
            March
                12, 2008Dr.
                Hannes Farnleitner/s/
                Edward E. Urquhart
            
            Director
            March
                12, 2008Edward
                E. Urquhart/s/
                Michael T. Heffner
            
            Director
            March
                12, 2008Michael
                T. Heffner




47





**SULPHCO,
      INC.’S REPORT**


**ON**


**INTERNAL
      CONTROL OVER FINANCIAL REPORTING**




The
      management of SulphCo, Inc. (the “Company”) is responsible for establishing and
      maintaining adequate internal control over financial reporting. The Company’s
      internal control system was designed to provide reasonable assurance to our
      management and Board of Directors regarding the preparation and fair
      presentation of published financial statements.




All
      internal control systems, no matter how well designed, have inherent
      limitations. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to financial statement
      preparation and presentation.




Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, our management
      used the criteria set forth in Internal ** Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Based on our assessment we believe that, as of December 31, 2007,
      our internal control over financial reporting is effective based on those
      criteria.




Our
      independent auditors have issued an audit report on our assessment of our
      internal control over financial reporting. This report appears on page
      F-2.




/s/
                Larry D. Ryan
            
            /s/
                Stanley W. FarmerLarry
                D. Ryan
            
            Stanley
                W. Farmer*Chief
                Executive Officer*
            
            *Vice
                President and*
              *Chief
                Financial Officer*




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




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, 2007, based on criteria established in *Internal
      Control—Integrated Framework* issued
      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, 2007, based on the criteria
      established in *Internal
      Control—Integrated Framework* issued
      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 sheet of the Company
      as of December 31, 2007, and the related statements of operations, cash flows
      and changes in stockholders’ equity (deficit) for the year ended December 31,
      2007, and our report dated March 7, 2008, expressed an unqualified opinion
      thereon.




/s/
      Hein
& Associates LLP






Houston,
      Texas


March
      7,
      2008




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 sheet of SulphCo, Inc. (a company in the
      Development Stage) (the “Company”) as of December 31, 2007 and the related
      statements of operations, cash flows and changes in stockholders’ equity
      (deficit) for the year ended December 31, 2007. 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 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 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 audit provides 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, 2007,
      and the results of its operations and its cash flows for the year ended December
      31, 2007, 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 the
      year ending December 31, 2007 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, 2007.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations that
      raise
      substantial doubt about its ability to continue as a going concern. Management's
      plans in regard to these matters are also described in Note 1. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




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, 2007, 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 March 7, 2008, expressed an unqualified opinion on the Company’s
      internal control over financial reporting.




/s/
      Hein
& Associates LLP






Houston,
      Texas


March
      7,
      2008




F-3




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders of Sulphco, Inc.:




We
      have
      audited the accompanying balance sheet of SulphCo, Inc. (the “Company”) as of
      December 31, 2006 and 2005 and the related statements of operations,
      stockholders' equity (deficit), and cash flows for each of the two years then
      ended. These financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements and schedule based on our audit.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether 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, 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.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations that
      raise
      substantial doubt about its ability to continue as a going concern. Management's
      plans in regard to these matters are also described in Note 1. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company at December 31, 2006
      and 2005, and the results of its operations and its cash flows for each of
      the
      two years then ended, in conformity with accounting principles generally
      accepted in the United States of America.




/s/
      Marc Lumer & Company


San
      Francisco, California


April
      2,
      2007




F-4




SULPHCO,
      INC.


(A
      Company in the Development Stage)


BALANCE
      SHEETS


December
      31, 2007 and 2006




**2007**
            
            
            **2006****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            7,430,138
            
            $
            6,004,992Loan
                and accrued interest receivable, net
            
            
            -
            
            
            289,099Prepaid
                expenses and other
            
            
            442,934
            
            
            248,373Total
                current assets
            
            
            7,873,072
            
            
            6,542,464**Property
                and Equipment, net**
            
            
            309,323
            
            
            206,957**Other
                Assets**Intangible
                assets, net
            
            
            881,848
            
            
            508,216Deposits
            
            
            37,798
            
            
            36,822Total
                other assets
            
            
            919,646
            
            
            545,038Total
                assets
            
            $
            9,102,041
            
            $
            7,294,459**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)****Current
                Liabilities**Accounts
                payable and accrued expenses
            
            $
            1,515,278
            
            $
            3,709,302Refundable
                deposit
            
            
            550,000
            
            
            550,000Late
                registration penalty (including accrued interest)
            
            
            1,094,671
            
            
            957,828Related
                party note payable
            
            
            -
            
            
            5,000,000Total
                current liabilities
            
            
            3,159,949
            
            
            10,217,130**Long
                Term Liabilities**Convertible
                notes payable, net of discount
            
            
            2,967,802
            
            
            -Other
            
            
            180,058
            
            
            -Total
                long term liabilities
            
            
            3,147,860
            
            
            -Total
                liabilities
            
            
            6,307,809
            
            
            10,217,130**Commitments
                and Contingencies (Note 12)****Stockholders'
                Equity (Deficit)**Preferred
                stock: 10,000,000 shares authorized ($0.001 par value) none issued
            
            
            -
            
            
            -Common
                    stock: 100,000,000 shares authorized ($0.001 par value) 80,848,416
                    and
                    72,620,910 shares issued and outstanding, respectively
            
            
            80,848
            
            
            72,621Additional
                paid-in capital
            
            
            122,700,951
            
            
            67,864,451Deficit
                accumulated during the development stage
            
            
            (119,987,567
            )
            
            (70,856,288
            )Accumlated
                other comprehensive loss
            
            
            -
            
            
            (3,455
            )Total
                stockholders' equity (deficit)
            
            
            2,794,232
            
            
            (2,922,671
            )Total
                liabilities and stockholders' equity (deficit)
            
            $
            9,102,041
            
            $
            7,294,459




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




F-5





SULPHCO,
      INC.


(A
      Company in the Development Stage)


STATEMENTS
      OF OPERATIONS


For
      the
      Years ended December 31, 2007, 2006 and 2005


and
      for
      the Period from Inception through December 31, 2007





**2007**
            
            **2006**
            
            **2005**
            
            **Inception**
              **to
                Date****Revenue**Sales
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            42,967**Expenses**Selling,
                general, and administrative expenses
            
            
            (11,445,749
            )
            
            (13,566,230
            )
            
            (5,715,079
            )
            
            (51,903,093
            )Research
                and development expenses :Fujairah
                test facility
            
            
            (1,694,509
            )
            
            (21,473,129
            )
            
            -
            
            
            (23,167,638
            )Other
            
            
            (6,015,959
            )
            
            (3,955,562
            )
            
            (2,518,015
            )
            
            (13,154,330
            )Loss
                on joint venture
            
            
            -
            
            
            (136,095
            )
            
            -
            
            
            (136,095
            )Loss
                on disposal of asset
            
            
            -
            
            
            -
            
            
            -
            
            
            (221,711
            )Loss
                on impairment of asset
            
            
            -
            
            
            -
            
            
            (233,900
            )
            
            (233,900
            )Total
                operating expenses
            
            
            (19,156,217
            )
            
            (39,131,016
            )
            
            (8,466,994
            )
            
            (88,816,767
            )Loss
                from operations
            
            
            (19,156,217
            )
            
            (39,131,016
            )
            
            (8,466,994
            )
            
            (88,773,800
            )**Other
                income (expense)**Interest
                income
            
            
            290,094
            
            
            477,869
            
            
            193,987
            
            
            1,018,564Interest
                expense
            
            
            (5,487,048
            )
            
            (465,547
            )
            
            (395,123
            )
            
            (6,696,515
            )Late
                registration fees
            
            
            -
            
            
            -
            
            
            (760,240
            )
            
            (760,240
            )Other
            
            
            (9,160
            )
            
            2,532
            
            
            -
            
            
            (6,628
            )**Net
                loss**
            
            
            (24,362,331
            )
            
            (39,116,162
            )
            
            (9,428,370
            )
            
            (95,218,619
            )Deemed
                dividend
            
            
            (24,768,948
            )
            
            -
            
            
            -
            
            
            (24,768,948
            )**Net loss
                attributable to common stockholders**
            
            $
            (49,131,279
            )
            $
            (39,116,162
            )
            $
            (9,428,370
            )
            $
            (119,987,567
            )**Other
                comprehensive income (loss)**Foreign
                currency translation gain (loss)
            
            
            3,455
            
            
            (3,455
            )
            
            -
            
            
            -**Net
                comprehensive income (loss)**
            
            $
            (49,127,824
            )
            $
            (39,119,617
            )
            $
            (9,428,370
            )
            $
            (119,987,567
            )Loss
                per share: basic and diluted
            
            $
            (0.64
            )
            $
            (0.55
            )
            $
            (0.17
            )Weighted
                    average shares basic and diluted
            
            
            77,062,280
            
            
            70,737,679
            
            
            56,973,284




The
      Accompanying Notes are an Integral Part of the Financial Statements




F-6


SULPHCO,
      INC.


(A
      Company in the Development Stage)


STATEMENTS
      OF CASH FLOWS


For
      the
      Years Ended December 31, 2007, 2006 and 2005


and
      for
      the Period from Inception to December 31, 2007





**2007**
            
            **2006**
            
            **2005**
            
            **Inception**
              **To
                Date****Cash
                Flows From Operating Activities**Net
                loss in operating activities:
            
            $
            (24,362,331
            )
            $
            (39,116,162
            )
            $
            (9,428,370
            )
            $
            (95,218,619
            )Depreciation
                and amortization
            
            
            189,880
            
            
            112,198
            
            
            215,478
            
            
            1,187,444Accretion
                of convertible notes payable discount
            
            
            5,024,308
            
            
            -
            
            
            -
            
            
            5,024,308Allowance
                for loan receivable
            
            
            313,451
            
            
            -
            
            
            -
            
            
            313,451Stock-based
                compensation
            
            
            4,335,261
            
            
            2,779,325
            
            
            1,568,225
            
            
            14,484,103Stock
                issued for interest expense
            
            
            -
            
            
            -
            
            
            -
            
            
            296,000Contribution
                from stockholder
            
            
            -
            
            
            -
            
            
            -
            
            
            555,000Loss
                from joint venture
            
            
            -
            
            
            136,096
            
            
            -
            
            
            136,096Impairment
                of assets and other
            
            
            (6,908
            )
            
            -
            
            
            233,900
            
            
            448,703Changes
                in:Receivables
            
            
            -
            
            
            (118,657
            )
            
            317,800
            
            
            (118,657
            )Prepaid
                expenses and other
            
            
            (215,458
            )
            
            (6,239
            )
            
            (98,718
            )
            
            (359,274
            )Accounts
                payable and accrued expenses
            
            
            (2,013,966
            )
            
            2,852,079
            
            
            (1,070
            )
            
            1,617,526Refundable
                deposit
            
            
            -
            
            
            -
            
            
            550,000
            
            
            550,000Accrued
                fees and interest
            
            
            135,867
            
            
            (275,000
            )
            
            820,985
            
            
            681,852Net
                cash used in operating activities
            
            
            (16,599,896
            )
            
            (33,636,360
            )
            
            (5,821,770
            )
            
            (70,402,067
            )**Cash
                Flows From Investing Activities**Purchase
                of property and equipment, net of sales
            
            
            (240,534
            )
            
            105,550
            
            
            (224,962
            )
            
            (1,256,074
            )Investments
                in joint ventures and subsidiaries
            
            
            -
            
            
            -
            
            
            (139,550
            )
            
            (361,261
            )Return/
                (payment) of deposits
            
            
            -
            
            
            104,000
            
            
            (94,000
            )
            
            (36,822
            )Investments
                in intangible assets
            
            
            (418,436
            )
            
            (180,268
            )
            
            (200,011
            )
            
            (987,186
            )Net
                cash used in investing activities
            
            
            (658,970
            )
            
            29,282
            
            
            (658,523
            )
            
            (2,641,343
            )**Cash
                Flows from Financing Activities**Proceeds
                from sales of stock, net of offering costs
            
            
            18,684,012
            
            
            35,237,417
            
            
            3,982,107
            
            
            69,683,188Proceeds
                from related party notes payable
            
            
            -
            
            
            -
            
            
            -
            
            
            11,000,000Proceeds
                from stock subscriptions
            
            
            -
            
            
            -
            
            
            -
            
            
            4,240,887Proceeds
                from issuance of line of credit
            
            
            -
            
            
            -
            
            
            -
            
            
            750,000Return
                on capital
            
            
            -
            
            
            -
            
            
            -
            
            
            (118,427
            )Principal
                payments on related party notes payable
            
            
            -
            
            
            (2,500,000
            )
            
            (500,000
            )
            
            (3,250,000
            )Decrease
                in related party receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            1,359,185Payments
                on contract payable
            
            
            -
            
            
            -
            
            
            -
            
            
            (250,000
            )Principal
                payments on line of credit
            
            
            -
            
            
            -
            
            
            -
            
            
            (750,000
            )Principal
                payments on advance from related party
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,191,285
            )Net
                cash provided by financing activities
            
            
            18,684,012
            
            
            32,737,417
            
            
            3,482,107
            
            
            80,473,548Net
                change in cash and cash equivalents
            
            
            1,425,146
            
            
            (869,661
            )
            
            (2,998,186
            )
            
            7,430,138Cash
                and cash equivalents: beginning of period
            
            
            6,004,992
            
            
            6,874,653
            
            
            9,872,839
            
            
            -Cash
                and cash equivalents: end of period
            
            $
            7,430,138
            
            $
            6,004,992
            
            $
            6,874,653
            
            $
            7,430,138**Supplemental
                information**Cash
                paid for interest
            
            $
            341,545
            
            $
            334,251
            
            $
            334,251
            
            $
            967,760Cash
                paid for income taxes
            
            
            -
            
            
            -
            
            
            -**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 dividends
            
            
            24,768,948
            
            
            -
            
            
            -
            
            
            24,768,948




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




F-7




SULPHCO,
      INC.


(A
      Company in the Development Stage)


STATEMENTS
      OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)


From
      Inception to December 31, 2007




**Stock****Additional**
            
            
            
            **Subscriptions****Common
                Stock**
            
            **Paid-in**
            
            **Accumulated**
            
            **Receivable**
            
            **Total****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **and
                Other**
            
            **Equity**Balance
                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




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, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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 $2.86per 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 $0.50per 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-9
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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 received in July 2002
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              515,500
              
              
              515,500Stock
                  returned in July 2002
              
              
              (1,000,000
              )
              
              (1,000
              )
              
              (499,000
              )
              
              -
              
              
              500,000
              
              
              -Stock
                  issued for services at $0.10per 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 $0.27per 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-10
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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 $0.33per share in March
                  2003
              
              
              50,000
              
              
              50
              
              
              16,450
              
              
              -
              
              
              -
              
              
              16,500Stock
                  issued for services at $0.32per 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 $0.23per 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-11
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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
              
              
              2,978,343
              
              
              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 $2.86per 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-12
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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-13
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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-14
  SULPHCO,
        INC.
 (A
        Company in the Development Stage)
 STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
 From
        Inception to December 31, 2007
 
 **Stock****Additional**
              
              
              
              **Subscriptions****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Receivable**
              
              **Total****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **and
                  Other**
              
              **Equity**Balance
                  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
              
              
              3,952,068
              
              
              3,952
              
              
              7,783,721
              
              
              -
              
              
              -
              
              
              7,787,673Warrants
                  exercised in Q2 2007
              
              
              600,000
              
              
              600
              
              
              1,599,925
              
              
              -
              
              
              -
              
              
              1,600,525Warrants
                  exercised in Q3 2007
              
              
              1,425,412
              
              
              1,425
              
              
              3,767,425
              
              
              -
              
              
              -
              
              
              3,768,850Warrants
                  exercised in Q4 2007
              
              
              2,029,070
              
              
              2,029
              
              
              5,524,935
              
              
              -
              
              
              -
              
              
              5,526,964Deemed
                  Dividends
              
              
              -
              
              
              -
              
              
              24,768,948
              
              
              (24,768,948
              )
              
              -
              
              
              -Convertible
                  Notes Payable - Beneficial Conversion Feature
              
              
              -
              
              
              -
              
              
              6,736,550
              
              
              -
              
              
              -
              
              
              6,736,550Cashless
                  option exercise
              
              
              66,551
              
              
              67
              
              
              (67
              )
              
              -
              
              
              -
              
              
              -Debt
                  Conversion
              
              
              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**
 
 The
        Accompanying Notes are an Integral Part of the Financial
        Statements.
  F-15
  **SULPHCO,
        INC.**
 **(A
        Company in the Development Stage)**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **December
        31, 2007**
 
 **1.**  **Organization
        and Significant Accounting Policies**
  **Business**
  SulphCo,
        Inc. (“SulphCo” or the “Company”) is considered a developmental stage company as
        defined by Statement of Financial Accounting Standards (“FAS”) No. 7, as the
        Company has not recognized significant revenue and is continuing to develop
        and
        market processes for the upgrading of crude oil by reducing its relative
        density, viscosity, and sulphur content.
  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.
  On
        October 7, 2005, the Company’s stock began trading on the American Stock
        Exchange under the symbol “SUF.” Previously the Company’s common stock had been
        quoted on the OTC Bulletin Board under the symbol “SLPH.”
 
 Beginning in
        2006
        and continuing into 2007, the Company continued to make progress towards
        the
        completion of a test facility in Fujairah, United Arab Emirates. This test
        facility will be instrumental in the validation of the Sonocracking Ô process
        and allowing the Company to continue to its transition towards
        commercialization.
 
 **Going
        Concern**
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the settlement of liabilities
        and commitments in the normal course of business.  As reflected in the
        accompanying financial statements, the Company has no revenues, has incurred
        substantial losses from operations and has an accumulated deficit of
        approximately $120.0 million.  These factors raise substantial doubt about
        its ability to continue as a going concern.  The ability of the Company to
        continue as a going concern is dependent on the Company’s ability to implement
        its business plan and raise additional funds.
  F-16
  **Use
        of Estimates in the Preparation of Financial
        Statements**
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosures of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates. The markets for the Company’s
        potential products and services will be impacted by the price of oil,
        competition, rapid technological development, regulatory changes, and new
        product introductions, all of which may impact the future value of the Company’s
        assets.
  **Cash
        and Cash Equivalents**
  All
        highly liquid investments with maturities of three months or less are considered
        to be cash equivalents .
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amounts of financial instruments held by the Company, which include
        cash, accounts receivable, accounts payable, and accrued liabilities,
        approximate fair values due to their short maturity. The carrying value of
        the
        convertible notes payable reasonably approximates its fair value as it has
        a
        variable interest rate that resets 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 3 to 7 years. Leasehold improvements are
        depreciated over the lesser of the terms of the lease or the estimated useful
        lives of the assets. Depreciation is computed using the straight line method.
        Expenditures for maintenance and repairs are expensed when incurred, while
        betterments are capitalized. Gains and losses on the sale of property and
        equipment are reflected in the statement of operations.
  **Intangible
        Assets**
  Intangible
        assets include patents, tradenames 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 one 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.
  **Equity
        method**
 
 Investments
        in joint ventures and other entities over which the Company does not have
        control, but does have the ability to exercise significant influence over
        the
        operating and financial policies, are carried under the equity method. The
        Investment in Fujairah Oil Technology LLC, in which the Company owns a 50%
        interest, is carried at cost and adjusted for the Company's 50% share of
        undistributed earnings or losses. There was no activity in the entity prior
        to
        2006.
  F-17
  **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**
  The
        Company provides for income taxes pursuant
        an asset and liability based approach.
  Deferred
        income tax assets and liabilities are recorded to reflect the tax consequences
        in future years of temporary differences between revenue and expense items
        for
        financial statement and income tax purposes. Valuation allowances are provided
        against assets that are not likely to be realized. Deferred tax assets and
        liabilities are measured using the enacted tax rates expected to apply to
        taxable income in the years in which those temporary differences are expected
        to
        be recovered or settled. The effect on deferred tax assets and liabilities
        of a
        change in tax rates is recognized in income in the period that includes the
        enactment date.
  **Loss
        Per Share**
  The
        computations of basic and diluted loss per common share are based upon the
        weighted average number of common shares outstanding and potentially dilutive
        securities. Potentially dilutive securities include options and warrants
        to
        acquire the Company’s common stock and convertible debt. As of December 31,
        2007, 2006 and 2005, there were approximately 9.0
        million, 7.3 million and 7.8 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, 2007, 2006 and 2005, respectively,
        because inclusion of such potentially dilutive securities would have been
        anti-dilutive.
  **Stock-Based
        Compensation**
  We
        adopted SFAS No. 123R (SFAS 123R), “Share-based Payment,” effective January 1,
        2006. This pronouncement requires companies to measure the cost of employee
        services received in exchange for an award of equity instruments (typically
        stock options) based on the grant-date fair value of the award. The fair
        value
        is estimated using option-pricing models. The resulting cost is recognized
        over
        the period during which an employee is required to provide service in exchange
        for the awards, usually the vesting period. Prior to the adoption of SFAS
        123R,
        this accounting treatment was optional with pro forma disclosures required.
        During the years ended December 31, 2007, 2006 and 2005, the Company recognized
        non-cash general and administrative expenses for stock options and restricted
        stock awards of approximately $4.3 million, $2 .8
        million and $1.6 million, respectively. The expense related to 2005 was solely
        attributable to restricted stock awards. There were no options granted to
        employees in 2005.
  **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
        with current year presentation .
  F-18


**New
        Accounting Pronouncements**
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, *Accounting
        for Uncertainty in Income Taxes — an Interpretation of FASB Statement
        No. 109* (FIN 48).
        This interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with
        FAS No. 109, *Accounting
        for Income Taxes* and will
        require that companies determine whether it is more-likely-than-not that
        a tax
        positions taken or expected to be taken in tax returns would be sustained
        based
        on their technical merits.  The Company adopted FIN 48 beginning January 1,
        2007.  The adoption of FIN 48 did not have a material impact on the
        Company’s financial position, results of operations, or cash flows.
  In
        September 2006, the FASB issued
        Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value
        Measurements,” which defines fair value, establishes guidelines for measuring
        fair value and expands disclosures regarding fair value measurements. SFAS
        157
        does not require any new fair value measurements but rather eliminates
        inconsistencies in guidance found in various prior accounting pronouncements.
        SFAS 157 is effective for fiscal years beginning after November 15, 2007.
        In
        February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date
        of FASB Statement No. 157,” which defers the effective date of Statement 157 for
        nonfinancial assets and nonfinancial liabilities, except for items that are
        recognized or disclosed at fair value in an entity’s financial statements on a
        recurring basis (at least annually), to fiscal years beginning after November
        15, 2008, and interim periods within those fiscal years. Earlier adoption
        is
        permitted, provided the company has not yet issued financial statements,
        including for interim periods, for that fiscal year. As of January 1, 2008,
        the
        Company does not have any recurring fair value measurements and has opted
        for
        the deferral. Accordingly, the Company has not implemented and is currently
        evaluating the impact of SFAS 157, but does not expect the adoption of SFAS
        157
        to have a material impact on its results from operations or financial position.
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial
        Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159
        permits entities to measure eligible assets and liabilities at fair value.
        Unrealized gains and losses on items for which the fair value option has
        been
        elected are reported in earnings. SFAS 159 is effective for fiscal years
        beginning after November 15, 2007. As of January 1, 2008, the Company did
        not
        elect the fair value option on any financial instruments or certain other
        items
        as permitted by SFAS 159.
  In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        141 (revised 2007) (SFAS 141R), “Business Combinations,” which replaces SFAS
        141. SFAS 141R establishes principles and requirements for how an acquirer
        recognizes and measures in its financial statements the identifiable assets
        acquired, the liabilities assumed, any non-controlling interest in the acquiree
        and the goodwill acquired. The Statement also establishes disclosure
        requirements that will enable users to evaluate the nature and financial
        effects
        of the business combination. SFAS 141R is effective for fiscal years beginning
        after December 15, 2008. The adoption of SFAS 141R is not expected to have
        a
        material impact on the Company’s results from operations or financial position.
  In
        December 2007, the FASB also issued Statement of Financial Accounting Standards
        No. 160 (SFAS 160), “Non-controlling Interests in Consolidated Financial
        Statements — an amendment of ARB No. 51.” SFAS 160 requires that accounting and
        reporting for minority interests be re-characterized as non-controlling
        interests and classified as a component of equity. SFAS 160 also establishes
        reporting requirements that provide sufficient disclosures that clearly identify
        and distinguish between the interests of the parent and the interests of
        the
        non-controlling owners. SFAS 160 applies to all entities that prepare
        consolidated financial statements, except not-for-profit organizations, but
        will
        affect only those entities that have an outstanding non-controlling interest
        in
        one or more subsidiaries or that deconsolidate a subsidiary. This statement
        is
        effective for fiscal years beginning after December 15, 2008. The adoption
        of
        SFAS 160 is not expected to have a material impact on our results from
        operations or financial position.
  F-19
 
 **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 $38,000. 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 concluded that it is appropriate to establish an
        allowance for doubtful collection. Therefore, as of December 31, 2007, the
        Company established an allowance equal to the total principal balance and
        accrued interest thereon of approximately $313,000.
 
 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
        8).
 
 **3.**  **Property
        and Equipment**
  The
        following is a summary of property and equipment – at cost, less
        accumulated depreciation:
  **2007**
              
              **2006**Equipment
              
              $
              868,172
              
              $
              772,385Computers
              
              
              230,177
              
              
              199,582Office
                  furniture
              
              
              57,116
              
              
              57,116Leasehold
                  improvements
              
              
              70,965
              
              
              90,9411,226,430
              
              
              1,120,024Less:
                  Accumulated depreciation
              
              
              (917,107
              )
              
              (913,067
              )Total
              
              $
              309,323
              
              $
              206,957
  Depreciation
        expense was approximately $145,000, $194,000 and 198,000 for 2007, 2006 and
        2005, respectively. In 2006, assets with accumulated depreciation totaling
        approximately $109,000 were sold or abandoned.
  F-20
  **4.**  **Loss
        On Impairment of Asset**
 
 The
        Company had a desulphurization unit (“unit”) consisting of a trailer containing
        equipment to be used to remove sulphur from crude oil. The Company spent
        approximately $4,000 in the year ended December 31, 2004, upgrading the unit.
        At
        December 31, 2004 the cost of the unit was approximately $0.4 million. No
        depreciation expense related to the unit was recognized in 2004 as it was
        considered work in process.
  In
        March
        2005 the unit was determined to be obsolete based on the Company’s current
        technological improvements. The estimated value of the reusable components
        as of
        March 31, 2005 was approximately $0.2 million, resulting in an impairment
        loss
        of approximately $0.2 million. The Company included the remaining $0.2 million
        in equipment and began depreciating it in 2005. In 2006, the equipment was
        sold.
 
 **5.**  **Intangible
        Assets**
 
 The
        Company has seven U.S. patents, seven U.S. patents pending, seven foreign
        patents, several foreign patents pending, and six U.S. trademarks pending.
        At
        December 31, 2007 and 2006 the Company had capitalized approximately $1.0
        million and $0.6 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, 2007 and 2006 was
        approximately $0.1 million and $45,000, respectively. During the years ended
        December 31, 2007, 2006 and 2005 the Company capitalized intangible assets
        of
        approximately $0.4 million, $0.2 million, and $0.2 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, 2007, 2006, and 2005 was approximately $45,000, $28,000,
        and
        $17,000, respectively. Maintenance costs of approximately $59,000 and $36,000
        were expensed throughout 2007 and 2006, respectively.
 
 The
        following table reflects management’s estimate for amortization expense, using
        the straight-line method, for the next five years based on current capitalized
        amounts and estimated lives:
  Year
              
              
              Estimated Amortization Expense2008
              
              
              $
              45,0002009
              
              
              
              45,0002010
              
              
              
              45,0002011
              
              
              
              45,0002012
              
              
              
              45,000
 
 **6.**  **Investment
        in Joint Venture**
  In
        November 2005, the Company and Trans Gulf Petroleum Co. (“Trans
        Gulf”), a Government of Fujairah company, formed Fujairah Oil Technology LLC
        (the “LLC”), a United Arab Emirates limited liability company, to implement the
        Company’s SonocrackingTM desulphurization technology. The LLC is 50% owned by
        Trans Gulf Petroleum 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 the LLC.
        Until the LLC generates revenues, operating expenses of the facility are
        expected to be funded from capital contributions of the
        Company.
  F-21
 
 The
        LLC’s
        operations began in 2006. For the year ended December 31, 2007, its activities
        have consisted primarily of leasing office space and acquiring leasehold
        improvements and office furniture and equipment. The lease commenced March
        15,
        2006. For the year ended December 31, 2007, the LLC had losses of approximately
        $92,000. The Company has expensed these amounts as research and development
        costs.
 
 Once
        the
        LLC begins generating revenues, the LLC 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 the LLC. Accordingly, the carrying value of the investment has been reduced
        to zero at December 31, 2007 and 2006, respectively. Going forward, and to
        the
        extent that the Company continues to incur costs in excess of its investment
        in
        the LLC, these costs will be recognized by the Company as research and
        development costs.
 
 **7.**  **Income
        Taxes**
 
 The
        Company is currently subject to income taxation only in the jurisdiction
        of the
        United States. Foreign jurisdictions will impose income taxes if and when
        income
        is generated subject to their laws, but there is currently no such related
        income. The significant components of the Company’s deferred tax assets and
        liabilities at December 31, 2007 and 2006 were as follows:
 
 December 31, 2007
              
              December 31, 2006Deferred
                  tax assets relative to the following:Net
                  operating loss carry-forwards
              
              $
              16,854,734
              
              $
              11,966,683Construction
                  of test facilities
              
              
              7,579,496
              
              
              7,003,363Deferred
                  share-based compensation
              
              
              1,334,844
              
              
              730,320Expensed
                  receivables
              
              
              157,573
              
              
              348,500Plant
                  constructed for sale
              
              
              186,622
              
              
              186,622Depreciable
                  assets
              
              
              91,936
              
              
              91,936Other
              
              
              51,328
              
              
              43,866Total
                  deferred tax assets prior to offsets
              
              $
              26,256,533
              
              $
              20,371,290Current
                  portion
              
              $
              -
              
              $
              13,053,051Non-current
                  portion
              
              
              26,256,533
              
              
              7,318,239$
              26,256,533
              
              $
              20,371,290LiabilitiesDeferred
                  tax liabilities relative to the following:Patent
                  costs
              
              $
              (315,062
              )
              $
              (172,793
              )Depreciable
                  assets
              
              
              (13,925
              )
              
              (5,282
              )Total
                  deferred tax liabilities (all non-current)
              
              $
              (328,987
              )
              $
              (178,075
              )Current
                  portion
              
              $
              -
              
              $
              13,053,051Non-current
                  portion
              
              
              25,927,546
              
              
              7,140,164Total
                  deferred tax assets prior to offsets
              
              $
              25,927,546
              
              $
              20,193,215Valuation
                  allowance
              
              $
              (25,927,546
              )
              $
              (20,193,215
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
  F-22
  For
        the
        years ended December 31, 2007 and 2006, the valuation allowance was increased
        by
        approximately $5.7 million and $13 million, respectively due to the
        uncertainties surrounding the realization of the deferred tax assets resulting
        from the Company’s net losses of approximately $24.4 million and $39.1 million
        in 2007 and 2006, respectively, and accumulated deficits of approximately
        $120.0
        million and $70.9 million at December 31, 2007 and 2006,
        respectively.
 
 The
        provision (benefit) for income taxes differs from the provision (benefit)
        amount
        computed by applying the statutory federal tax rate (34%) to the loss before
        taxes due to the following:
 
 December 31, 2007
              
              
              December 31, 2006Computed
                  expected benefit
              
              $
              (8,283,193
              )
              
              $
              (13,301,260
              )Permanent
                        differences: discount accretion and Registration statement
                        penalty
                        interest
              
              
              1,754,791
              
              
              
              -Book
                  related deductions not expensed for tax:Construction
                  of test facilities
              
              
              576,133
              
              
              
              7,003,363Deferred
                  share-based compensation
              
              
              1,101,094
              
              
              
              560,150Expensed
                  receivables
              
              
              106,573
              
              
              
              348,500Research
                  credit amount
              
              
              -
              
              
              
              91,350Other
              
              
              7,463
              
              
              
              173,479Tax
                  related deductions not expensed on financial statements:Patent
                  costs
              
              
              (142,268
              )
              
              
              (52,019
              )Depreciation
              
              
              (8,643
              )
              
              
              (24,458
              )Increase
                  in benefit from net operating loss
              
              
              (4,888,050
              )
              
              
              (5,200,895
              )(Increase)
                  decrease in other deferred tax assets
              
              
              (997,193
              )
              
              
              (7,918,255
              )Increase
                  (decrease) in deferred tax liabilities
              
              
              150,912
              
              
              
              42,303Increase
                  in valuation allowance
              
              
              5,734,331
              
              
              
              13,076,847Provision
                  (benefit) for income taxes
              
              $
              -
              
              
              $
              **-**
 
 As
        of
        December 31, 2007 and 2006, the Company had net operating loss carry-forwards
        for federal income tax purposes of approximately $49.6 million and $35.2
        million, respectively. The net operating loss carry-forwards will begin expiring
        in 2019 and will fully expire in 2027.
 
 The
        valuation allowance for each year has been estimated in an amount equal to
        the
        projected future benefit of the deferred tax asset net of the deferred tax
        liability as it is not certain that the Company will generate sufficient
        income
        to utilize the future tax benefits, due to the lack of earnings in the Company’s
        history.
 
 **8.**  **Refundable
        Deposit**
 
 In
        2005,
        the Company received $550,000 from SulphCo KorAsia (formerly known as OIL-SC,
        Ltd.), pursuant to our Equipment Sale and Marketing Agreement. As this amount
        is
        fully refundable if the pilot plant does not ultimately meet the agreed
        specifications, no portion of the purchase price has been or will be recorded
        as
        revenue in the Company’s financial statements until the pilot plant meets all
        agreed specifications. The Company does not have an equity interest in SulphCo
        KorAsia.
  F-23
  **9.**  **Accrued
        Fees and Interest**
 
 As
        of
        December 31, 2007 and 2006, the Company had accrued late registration fees
        of
        approximately $760,000 and $760,000, respectively, and interest thereon of
        approximately $335,000 and $198,000, respectively, in conjunction with the
        private placements in 2004. In 2007 and 2006, interest expense associated
        with
        accrued late fees was approximately $137,000 and $137,000 respectively.
 
 **10.**  **Convertible
        Notes Payable**
 
 **April
        2007 Modification**
 
 In
        late
        April 2007 two events occurred related to the Company’s then outstanding $5
        million note payable (the “Note Payable”) to Rudolf W. Gunnerman (“Gunnerman”),
        the Company’s former Chairman and CEO. First, the Note Payable was acquired from
        Gunnerman by a group of investors (the “Investors”). Second, the Company
        negotiated modifications (the “April 2007 Modifications”) to the terms of Note
        Payable with the Investors to (1) extend the maturity date from December
        31,
        2007 to December 31, 2008 and (2) to add a conversion option to the Note
        Payable
        making the Note Payable convertible into the Company’s common stock at a
        conversion price of $3.80 per share (hereinafter the Note Payable is referred
        to
        as the “Convertible Notes Payable”).
 
 In
        connection with the first event, the Gunnerman Note Payable was acquired
        directly from Gunnerman by the Investors. The Company’s participation in this
        event was limited to providing its consent to the assignment of the Note
        Payable
        from Gunnerman to the Investors.  As such, this element of the transaction
        had no impact on the Company and required no accounting in relation
        thereto.
 
 Regarding
        the second event, the provisions of Emerging Issues Task Force (“EITF”) Issue
        No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt
        Instruments” (“EITF 96-19”), provide that a modification of a debt instrument
        that adds a substantive conversion option is always considered a substantial
        change. Therefore, debt extinguishment accounting pursuant to EITF 96-19
        was
        required for this event.  In connection with the conclusion that EITF 96-19
        is applicable to this transaction, SulphCo also made the determination that
        (1)
        the conversion option was substantive on the date it was added pursuant to
        the
        guidance in paragraphs 7-9 of EITF Issue No. 05-1, “Accounting for the
        Conversion of an Instrument That Became Convertible upon the Issuer’s Exercise
        of a Call Option” (“EITF 05-1”), (2) the conversion option would not be
        separately accounted for as a derivative under SFAS Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” since the
        Convertible Notes Payable are considered to be “conventional” or “traditional”
debt as contemplated in EITF Issue No. 00-19, “Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in , a Company’s Own
        Stock” (“EITF 00-19”) and (3) the modification is not within the scope of SFAS
        Statement No. 15, “Accounting by Debtors and Creditors for Troubled Debt
        Restructurings” as contemplated in paragraph 11 of EITF Issue No. 02-04,
“Determining Whether a Debtor’s Modification of Exchange of Debt Instruments Is
        within the Scope of FASB Statement No. 15” (“EITF 02-04”) since the Investors
        are not deemed to have granted a concession (i.e., because the Company’s
        effective borrowing rate on the Convertible Notes Payable is not less than
        the
        effective borrowing rate of the original Note Payable). Since the Convertible
        Notes Payable had a variable interest rate structure, the fair value of the
        Note
        Payable approximated the carrying value of the Convertible Notes Payable.
        As a
        result, there was no gain or loss resulting from these
        modifications.
  F-24
 
 Contemporaneous
        with the acquisition of the Convertible Notes Payable and just prior to the
        modifications, the Investors acquired warrants from Gunnerman to acquire
        1,625,000 shares of the Company’s common stock currently held by
        Gunnerman.  Since Gunnerman is considered to be a related party and a
        control person (i.e., since he owns greater than 10% of the Company’s
        outstanding common stock), these actions are presumed to have been taken
        on
        behalf and for the benefit of the Company.  Therefore, the warrants will be
        accounted for as if the Company had directly issued the warrants to the
        Investors.  Since the warrants were acquired contemporaneous with the
        issuance of convertible debt, the guidance in EITF Issue No. 98-5, “Accounting
        for Convertible Securities with Beneficial Conversion Features of Contingently
        Adjustable Conversion Ratios” (“EITF 98-5”) and EITF Issue No. 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF
        00-27”) must be applied.  Using the Black-Scholes option valuation model,
        the Company has estimated that the fair value of the warrants on the date
        of
        grant was approximately $3.0 million.  The fair value of the Convertible
        Notes Payable on that date was $5 million (since it has a variable interest
        rate
        equal to LIBOR + 0.5% that resets quarterly).  Using these amounts, the
        Company determined that on a relative fair value basis, approximately $1.9
        million of the assumed proceeds of $5 million resulting from the extinguishment
        should be allocated to the warrants.  After taking into account the effect
        of the allocation of proceeds to the warrants, the Company determined that
        the
        conversion feature that was added to the Convertible Notes Payable was a
        beneficial conversion feature (“BCF”) that had to be accounted for pursuant to
        EITF 98-5 and EITF 00-27.  SulphCo determined that the value of the BCF was
        in excess of the remaining unallocated debt proceeds.  Therefore, and as is
        provided in the guidance of EITF 98-5 and EITF 00-27, the extent of the BCF
        discount is limited to the amount of the remaining unallocated proceeds of
        $3.1
        million. As a result of the accounting required for the modification of the
        terms of the Convertible Notes Payable, a 100% (i.e., $5 million) discount
        results. Prior to the November 2007 modifications (discussed below), the
        resulting discount was being accreted into the statement of operations, using
        the effective interest method, over the remaining term of the Convertible
        Notes
        Payable (i.e., through December 31, 2008) as incremental interest
        expense.
 
 **October
        2007 Conversion**
 
 On
        October 22, 2007, one of the Investors holding approximately $320,000 of
        the
        Convertible Notes Payable, elected to convert it into SulphCo common stock.
        Pursuant to the terms of the Convertible Notes Payable, it was converted
        into
        84,199 shares of SulphCo common stock at a conversion price of $3.80 per
        share.
        Since the Convertible Notes Payable are instruments with a beneficial conversion
        feature, the pro rata amount of the unamortized discount remaining at the
        date
        of conversion was recognized as interest expense. The pro rata amount of
        unamortized discount recognized as interest expense upon conversion was
        approximately $318,000.
 
 **November
        2007 Modification**
 
 On
        November 30, 2007, the Company finalized, with an effective date of November
        28, 2007, a Modification Agreement (the “November 2007 Modification Agreement”)
        with the Investors holding approximately $4.7 million of the Company’s then
        outstanding Convertible Notes Payable. The November 2007 Modification Agreement
        provided the following modifications (hereinafter collectively referred to
        as
        the “November 2007 Modifications”):
 
 ·
              The
                  maturity date of the Convertible Notes Payable was extended from
                  December
                  31, 2008 to December 31, 2011.
 ·
              The
                  Investors acquired the right to accelerate the maturity date of
                  the
                  Convertible Notes Payable to any date after July 31, 2009, upon
                  ten (10)
                  business days written notice to the
                  Company.
 ·
              The
                  Company may prepay the Convertible Notes Payable prior to maturity
                  (“Prepayment Date”) with ten (10) business days notice in writing to the
                  Investors, subject to the right of the Investors to convert all
                  or any
                  portion of the Convertible Notes Payable prior to the Prepayment
                  Date.
  F-25
  To
        determine the appropriate accounting for the November 2007 Modifications
        noted
        above, the Company again applied the provisions of EITF 96-19. Under EITF
        96-19,
        a substantial modification of loan terms results in accounting for the
        modification as a debt extinguishment. EITF 96-19 specifies that a modification
        should be considered substantial if the present value of the cash flows under
        the new terms is at least 10% different from the present value of the remaining
        cash flows under the original loan terms. EITF 96-19 requires the use of
        the
        original effective interest rate for calculating the present value of the
        cash
        flows under the modified loan.
 
 In
        order
        to apply EITF 96-19, the Company determined the annual payments (principal
        and
        interest) under the new loan terms. In instances where either debt instrument
        has a floating interest rate, which in this case both debt instruments did,
        the
        variable rate in effect at the date of the modification is used to calculate
        the
        cash flows of the variable rate instrument. The variable rate in effect on
        the
        date of the November 2007 Modifications was 5.6275%. The Company used this
        rate
        to calculate the cash flows for both debt instruments. If either debt instrument
        is callable or putable, EITF 96-19 requires that the present value calculation
        should be made assuming the instrument is called (put) and assuming the
        instrument is not called (put). The cash flow assumptions that generate the
        smaller change are to be used in the 10% test. In this case, the original
        instrument had a face value call option exercisable at any time. The new
        instrument had a put option added as part of the modifications that is
        exercisable at any time after July 31, 2009 and retained the face value call
        option.
 
 Using
        the
        original effective interest rate as the discount factor for each set of cash
        flows, the Company computed the present values under the various scenarios.
        Based on this analysis, the Company determined that the difference between
        the
        cash flows under the original terms and the modified terms was not in excess
        of
        10% which suggested that the November 2007 Modifications were not
        substantial.
 
 However,
        because the November 2007 Modifications involved convertible debt, the Company
        referred to the guidance in EITF No. 06-6, “Debtor’s Accounting for a
        Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”). EITF
        06-6 requires that a separate analysis must be performed if the cash flow
        test
        under EITF 96-19 does not result in a conclusion that a substantial modification
        or exchange has occurred. Under that separate analysis, a substantial
        modification or exchange has occurred and the issuer should apply extinguishment
        accounting if the change in the fair value of the embedded conversion option
        (calculated as the difference between the fair value of the embedded conversion
        option immediately before and after the modification or exchange) is at least
        10
        percent of the carrying amount of the original debt instrument immediately
        prior
        to the modification or exchange.
 
 Pursuant
        to the guidance in EITF 06-6, the Company calculated the fair value of the
        embedded conversion option immediately before and after the modifications
        using
        the Black-Scholes Option Valuation. Based on this analysis, the Company
        determined that the fair value of the conversion option had increased by
        more
        than 10%. Therefore, extinguishment accounting, pursuant to the provisions
        of
        EITF 96-19, applies.
 
 EITF
        96-19 requires that any unamortized discount relating to the extinguished
        debt
        should be written off and included in determining the debt extinguishment
        gain
        or loss to be recognized. In connection with this requirement, the Company
        recorded a journal entry of approximately $4.7 million (recognized as
        incremental interest expense) to accrete the remaining discount associated
        with
        the April 2007 Modification. The Company then determined that an extinguishment
        loss of approximately $22,000 was present. The Company then determined that
        the
        conversion feature that was relating to the Convertible Notes Payable was
        a BCF
        that had to be accounted for pursuant to EITF 98-5 and EITF 00-27.  SulphCo
        determined that the value of the BCF was approximately $1.7 million. The
        resulting discount is being accreted into the statement of operations as
        incremental interest expense using the effective interest method through
        July
        31, 2009, after which time the Investors have the ability to accelerate the
        maturity of the Convertible Notes Payable.
  F-26
  As
        of
        December 31, 2007, the net balance of the Convertible Notes Payable
        is:
 
 **December
                  31, 2007**Assumed
                  proceeds from modified Convertible Notes Payable
              
              
              
              
              $
              4,680,044Less:Discount
                  related to beneficial conversion feature
              
              
              
              
              
              (1,736,550
              )Net
                  Convertible Notes Payable balance at November 2007
              
              
              
              
              
              2,943,494Add:Discount
                  accretion through December 31, 2007
              
              
              
              
              
              24,308Net
                  Convertible Notes Payable balance at December 31, 2007
              
              
              
              
              $
              2,967,802
 
 The
        Convertible Notes Payable represents an unsecured obligation of the
        Company.
 
 Interest
        on the Convertible Notes Payable is adjusted quarterly based on a London
        Inter-Bank Offering Rate (“LIBOR”) plus 0.5% per annum, with interest only
        payments due on December 31 st of each
        year during the remaining term of the Convertible Notes Payable that extends
        through December 31, 2011 when the note matures (unless maturity is otherwise
        accelerated by the Investors to any date after July 31, 2009). As a result
        of
        the November 2007 Modifications, the effective interest rate of the Convertible
        Notes Payable was determined to be approximately 33%. During the years ended
        December 31, 2007, 2006 and 2005, the Company recognized total interest expense
        of approximately $5.5 million, $0.5 million and $0.4 million, respectively.
        For
        the year ended December 31, 2007, total interest expense recognized by the
        Company included approximately $5.0 million of incremental interest expense
        associated with discount accretion.
 
 **11.**  **Deemed
        Dividends**
 
 **March
        2007 Transaction**
 
 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”) that provided inducements to encourage the Warrant Holders to exercise
        their respective warrants. As consideration for Warrant Holders exercising
        their
        shares, 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 the additional warrants (the “March 2007 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 2004 Warrant Holders and up to 4,000,000 warrants to
                  the 2006
                  Warrant Holders.
  F-27
  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 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 via 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 Additional Warrants estimated using the Black-Scholes Valuation
        Model.
 
 During
        the quarter ended June 30, 2007, 600,000 warrants held by the 2006 Warrant
        Holders were exercised resulting in the grant of 600,000 March 2007 Warrants.
        Therefore, the Company recorded an additional non-cash deemed dividend 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
        March 2007 Warrants. Therefore, the Company recorded an additional non-cash
        deemed dividend of approximately $3.9 million that was estimated using the
        Black-Scholes Valuation Model.
 
 During
        the year ended December 31, 2007, the Company recognized total non-cash deemed
        dividends of approximately $17.1 million relative to the March 2007
        transaction.
 
 **November
        2007 Transactions**
 
 On
        November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
        Agreements and Warrants (“Amendment No. 2”) an agreement (the “Agreement”) 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 is exercised, then SulphCo will issue the Warrant Holders additional
        November 2007 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
        resulting in the grant of 1,976,570 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 1,976,570 November 2007 Warrants
        issued to the Warrant Holders (determined using Black-Scholes). Based on
        the
        Black-Scholes valuation prepared for this transaction, SulphCo has determined
        that the amount of the non-cash deemed dividend was approximately $7.3 million.
        SulphCo will account for the deemed dividend relating to the November 2007
        Warrants issuable upon exercise of the remaining March 2007 Warrants held
        by the
        Warrant Holders at the point in time, if ever, they are exercised.
 
 On
        November 28, 2007, certain optionees
        (the “Optionees”) holding a stock option (the Gunnerman Option”) to acquire 1.5
        million shares of the Company’s common stock acquired by the Optionees directly
        from Dr. Rudolf W. Gunnerman in April 2007, executed an amendment to the
        Gunnerman Option whereby Dr. Gunnerman agreed to extend the expiration date
        from
        December 27, 2007 to February 29, 2008. Since Dr. Gunnerman is considered
        to be
        a related party and a control person (i.e., since he owns greater than 10%
        of
        SulphCo’s outstanding common stock), it is presumed that any action that he
        takes involving SulphCo common stock is taken on behalf and for the benefit
        of
        SulphCo. Therefore, SulphCo concluded that a deemed dividend should be recorded
        for any excess fair value of the “new” Gunnerman Option relative to the “old”
Gunnerman Option as determined using the Black-Scholes option valuation model.
        Based on the Black-Scholes valuation prepared for this transaction, SulphCo
        has
        determined that the amount of the non-cash deemed dividend was approximately
        $0.4 million.
  F-28
  During
        the year ended December 31, 2007, the Company recognized total non-cash deemed
        dividends of approximately $7.7 million relative to the November 2007
        transactions.
 
 During
        the year ended December 31, 2007 and between the March 2007 and November
        2007
        transactions, the Company recognized total non-cash deemed dividends of
        approximately $24.8 million.
 
 **12.**  **Commitments
        and Contingencies**
 
 **Commission
        Commitments**
 
 The
        Company entered into an agency agreement with Atlas Commercial Holdings,
        LLC
        (“Atlas”) on July 25, 2006 to advise and assist the Company with establishing
        and implementing an ongoing business venture with Petrobras (Brazil). 
Pursuant to this agreement, the Company has agreed to pay Atlas a transaction
        fee equal to ten percent of the net income received by the Company from any
        transaction with Petrobras in respect of net income which accrues to the
        Company
        through and including December 31, 2016.
 
 **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 sixty months. In July 2007, the Company
        relocated its corporate headquarters from Reno, Nevada to Houston, Texas.
        Also
        in May 2007, the Company entered into operating lease agreements for facilities
        in Reno, Nevada and Sparks, Nevada, with each having a thirty-six month term.
        As
        of December 31, 2007, the Company made the decision to discontinue utilizing
        the
        Reno office space and is attempting to sub-lease this space for the remaining
        term of the lease which extends through May 2010. However, due to the softness
        in the real estate markets in Reno, it is unclear when, if ever, the Company
        will be able to obtain a replacement tenant for the space for its remaining
        term. In connection with its decision to discontinue utilizing the Reno office
        space, the Company recognized a charge of approximately $282,000 which
        represents the total amount of the future minimum lease payments remaining
        under
        the terms of the Reno operating lease agreement.
 
 Following
        is a schedule of future minimum lease payments required under these operating
        lease agreements:
 
 2008
              
              $
              282,6302009
              
              
              288,6572010
              
              
              231,6282011
              
              
              151,2002012
              
              
              75,600Total
                  future minimum lease payments
              
              $
              1,029,715
 
 The
        Company recognized approximately $672,000 (which includes the $282,000 relating
        to the Reno lease discussed above), $439,000, and $435,000 for rent expense
        in
        2007, 2006, and 2005, respectively.
  F-29
 
 **Concentrations
        of Credit Risk**
 
 Financial
        instruments, which potentially subject the Company to concentrations of credit
        risk, consist mainly of cash and cash equivalents. The Company maintains
        amounts
        in an interest bearing U.S. checking account which exceeds federally insured
        limits by approximately $7.3 million at December 31, 2007. The Company has
        not
        experienced any significant losses in such accounts, nor does management
        believe
        it is exposed to any significant credit risk.
 
 **Refundable
        Deposit**
 
 At
        December 31, 2007 and 2006 the Company had a $550,000 refundable deposit
        in
        connection with an agreement with SulphCo KorAsia (“KorAsia”) (formerly OIL-SC)
        for a pilot plant in South Korea. Until KorAsia accepts in writing the results
        of the pilot plant, the $550,000 is refundable at their option. The Company
        has
        agreed to receive the remaining payment of $450,000 within seven days after
        the
        first commercial license agreement for the SonocrackingTM technology between the
        Company and a Korean refining company, provided that KorAsia uses the funds
        for
        continued marketing activities regarding the SonocrackingTM technology in
        Korea.
 
 **Registration
        Payment Arrangements**
 
 As
        is
        discussed in Note 11 above, the Company executed the Amendment No. 1 and
        Amendment No. 2 with the Warrant Holders. Both amendments contained the
        following registration provisions:
 
 Amendment
        No. 1
 
 Pursuant
        to Amendment No. 1, the Company is required to:
 
 ·
              Use
                  commercially reasonable efforts to prepare and file a registration
                  statement (the “Amendment No. 1 Additional Registration Statement”) to
                  cover all shares of common stock issuable under the Amendment No.1
                  Additional Warrants as soon as possible, but in no event later
                  than 90
                  days after March 12, 2007; and
 
 ·
              Use
                  commercially reasonable efforts to prepare and file a post-effective
                  amendment to the registration statement covering the 2004 Warrants
                  (the
                  “Post-Effective Amendment”) as soon as possible, but in no event later
                  than 5 business days after April 2, 2007, the date the Company
                  filed its
                  2006 Form 10-K.
 
 The
        Amendment No. 1 registration provisions further provided that in the event
        the
        Company does not file the Amendment No.1 Additional Registration Statement
        and
        the Post Effective Amendment within the required time frames (each, an “Event”),
        each of the Warrant Holders shall be entitled to receive on the date of such
        Event (the “Event Date”) an amount in cash, as partial liquidated damages and
        not as a penalty, equal to 1% of the aggregate exercise price paid by the
        Warrant Holders; and on each monthly anniversary of the Event Date thereof
        (if
        the applicable Event had not been cured), the Company shall pay the Warrant
        Holders an amount in cash, as partial liquidated damages and not as a penalty,
        1% of the aggregate purchase price paid by the Warrant Holders (the “Amendment
        No. 1 Liquidated Damages”). The Amendment No. 1 Liquidated Damages shall not
        exceed 12% of the aggregate purchase price paid by the Warrant Holders. The
        maximum amount of Amendment No. 1 Liquidated Damages that the Company could
        be
        required to pay under the Amendment No. 1 registration provisions is
        approximately $950,000.
  F-30
  The
        Company filed both the Amendment No.1 Additional Registration Statement and
        the
        Post-Effective Amendment within the required time frames and therefore does
        not
        expect to incur any Amendment No. 1 Liquidated Damages.
 
 Amendment
        No. 2
 
 Pursuant
        to Amendment No. 2, the Company is required to:
 
 ·
              Use
                  commercially reasonable efforts to prepare and file a registration
                  statement (the “Amendment No. 2 Additional Registration Statement”) to
                  cover all shares of common stock issuable under the Amendment No.
                  2
                  Additional Warrants as soon as possible, but in no event later
                  than 90
                  days after March 12, 2007.
 
 The
        Amendment No. 2 registration provisions further provided that in the event
        the
        Company does not file the Amendment No. 2 Additional Registration Statement
        within the required time frame (an “Amendment No. 2 Event”), each of the Warrant
        Holders shall be entitled to receive on the date of such Amendment No. 2
        Event
        (the “Amendment No. 2 Event Date”) an amount in cash, as partial liquidated
        damages and not as a penalty, equal to 1% of the aggregate exercise price
        paid
        by the Warrant Holders; and on each monthly anniversary of the Event Date
        thereof (if the applicable Event had not been cured), the Company shall pay
        the
        Warrant Holders an amount in cash, as partial liquidated damages and not
        as a
        penalty, 1% of the aggregate purchase price paid by the Warrant Holders (the
        “Amendment No. 2 Liquidated Damages”). The Amendment No. 2 Liquidated Damages
        shall not exceed 12% of the aggregate purchase price paid by the Warrant
        Holders. The maximum amount of Amendment No. 2 Liquidated Damages that the
        Company could be required to pay under the Amendment No. 2 registration
        provisions is approximately $635,000.
 
 The
        Company filed the Amendment No. 2 Additional Registration Statement within
        the
        required time frame and therefore does not expect to incur any Amendment
        No. 2
        Liquidated Damages.
 
 Convertible
        Notes Payable
 
 In
        connection with the addition of the conversion feature to the Convertible
        Notes
        Payable described in Note 10, the Company agreed to the following registration
        provision:
 
 ·
              Use
                  commercially reasonable efforts to prepare and file a registration
                  statement (the “Convertible Notes Payable Registration Statement”) to
                  cover all shares of common stock issuable upon conversion of the
                  Convertible Notes Payable as soon as possible, but in no event
                  later than
                  June 8, 2007.
 
 The
        Convertible Notes Payable registration provisions further provided that in
        the
        event the Company does not file the Convertible Notes Payable Registration
        Statement within the required time frame (a “Convertible Notes Payable Event”),
        each of the Convertible Notes Payable holders shall be entitled to receive
        as
        liquidated damages (payable in cash) (the “Convertible Notes Payable Liquidated
        Damages”) an amount equal to 1% for each thirty days of the principal amount of
        Convertible Notes Payable outstanding and the purchase price of the shares
        issued upon conversion of the Convertible Notes Payable which are subject
        to the
        Convertible Notes Payable Event. The Convertible Notes Payable Liquidated
        Damages shall not exceed 12% of Convertible Notes Payable outstanding and
        the
        purchase price of the shares issued upon conversion of the Convertible Notes
        Payable which are subject to the Convertible Notes Payable Event. The maximum
        amount of Convertible Notes Payable Liquidated Damages that the Company could
        be
        required to pay under these registration provisions is approximately
        $600,000.
  F-31
  The
        Company filed the Convertible Notes Payable Registration Statement within
        the
        required time frame and therefore does not expect to incur any Convertible
        Notes
        Payable Liquidated Damages.
 
 **Litigation
        Contingencies**
 
 There
        are
        various claims and lawsuits pending against the Company arising in the normal
        course of the Company’s business. Although the amount of liability, if any, at
        December 31, 2007, is not reasonably estimable, management is of the opinion
        that these claims and lawsuits will not materially affect the Company’s
        financial position. We have and will continue to devote significant resources
        to
        our defense, as necessary.
 
 The
        following paragraphs set forth the current status of litigation as of December
        31, 2007.
 
 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 Plaintiff, Clean Fuels Technology
        later assigned its claims in the lawsuit to EcoEnergy Solutions, Inc., which
        entity was substituted as Plaintiff.  In general, Plaintiff EcoEnergy
        Solutions, Inc. alleged claims relating to ownership of the “sulphur removal
        technology” originally developed by Professor Teh Fu Yen and Dr. Gunnerman with
        financial assistance provided by Dr. Gunnerman, and subsequently assigned
        to the
        Company.  On September 14, 2007, after a jury trial and extensive
        post-trial proceedings, the trial court entered final judgment against Plaintiff
        EcoEnergy Solutions, Inc. on all of its claims.  Per the final judgment,
        all of Plaintiff’s claims were resolved against Plaintiff and were dismissed
        with prejudice.  In addition, the trial court found that the Company was
        the prevailing party in the lawsuit and entered judgment in favor of the
        Company
        and against Plaintiff of approximately $124,000, with post-judgment interest.
         The Plaintiff appealed the judgment on October 5, 2007.  On December
        19, 2007, and as required by Nevada statute, the Company participated in
        a
        mandatory settlement conference at which time a settlement was not reached.
        A
        briefing schedule has been issued, but there has been no date set for oral
        arguments. As of December 31, 2007, no 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 alleged claims relating to the Company's ownership and rights to
        develop its "sulphur 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. Trial
        has
        been set for August 4, 2008. As of December 31, 2007, no liability has been
        accrued relative to this action.
  F-32
  McLelland
        Arbitration
  In *The
        Matter of the Arbitration between Stan L. McLelland v. SulphCo,
        Inc.* ,
        Mr.
        McLelland, who was the Company's president from August 13, 2001, until he
        resigned on September 12, 2001, sought to exercise options to purchase two
        million (2,000,000) shares of the Company’s common stock at 50 cents per share,
        as well as receive salary payments for the six months following his resignation
        and $20,000 of alleged unpaid commuting expenses. Following the arbitration
        hearings, on July 24, 2007, the Company received notice that the Arbitrator
        had
        denied Mr. McLelland’s claim for the options. The Arbitrator did award salary of
        $125,000 plus interest from October 1, 2001 until paid, and $5,000 (without
        interest) out of the $20,000 of alleged unpaid commuting expenses. In connection
        with the resolution of this matter, the Company recognized a charge for these
        amounts in the quarter ended June 30, 2007 which were later paid during the
        quarter ended September 30, 2007.
  Neuhaus
        Litigation
  On
        October 20, 2006, Mark Neuhaus filed a lawsuit against the Company and Rudolf
        W.
        Gunnerman, *Mark
        Neuhaus v. SulphCo, Inc., Rudolph W. Gunnerman* ,
        in the
        Second Judicial District Court, in and for the County of Washoe, Case No.
        CV06-02502, Dept. No. 1. The lawsuit is based on a purported Non-Qualified
        Stock
        Option Agreement and related Consulting Agreement between Mark Neuhaus and
        the
        Company dated March of 2002. Mark Neuhaus claims that according to the terms
        of
        the Non-Qualified Stock Option Agreement, he was granted an option to purchase
        three million (3,000,000) shares of the Company’s common stock at the exercise
        price per share of $0.01. On or about February of 2006, Mark Neuhaus attempted
        to exercise the option allegedly provided to him under the Non-Qualified
        Stock
        Option Agreement. At that time, the Company rejected Mr. Neuhaus’s attempt to
        exercise the option. Thereafter, Mr. Neuhaus filed this lawsuit seeking to
        enforce the Non-Qualified Stock Option Agreement. In his suit, Mr. Neuhaus
        includes claims for specific performance, breach of contract, contractual
        breach
        of the covenant of good faith and fair dealing, and tortious breach of the
        covenant of good faith and fair dealing. He requested that the Court compel
        the
        Company to issue the shares or alternatively to award him damages equal to
        the
        fair market value of the three million (3,000,000) shares of stock when he
        purported to exercise the options, minus the exercise price. On December
        7,
        2006, the Company moved to dismiss the lawsuit. On January 4, 2007, the Court
        issued an Order denying the motion on the ground that there were factual
        issues
        to be resolved which prevented dismissal at that time. The Company filed
        an
        Answer to the Complaint, as well as a counterclaim against Mr. Neuhaus and
        a
        cross claim against Rudolf W. Gunnerman on March 29, 2007. That cross-claim
        against Dr. Gunnerman was subsequently voluntarily discontinued, without
        prejudice. As of December 31, 2007, no liability has been accrued relative
        to
        this action. The Company regards the claim as without merit.
  Mr.
        Neuhaus filed a motion to dismiss the counterclaim on April 11, 2007, which
        the
        Company opposed. On July 20, 2007, the Court issued an Order granting Mr.
        Neuhaus’ Motion to Dismiss. The Court found that Nevada was not the proper venue
        for the counterclaim and that the Nevada Courts did not have jurisdiction
        over
        the counterclaim. The Company has filed an action in the New York State Supreme
        Court seeking to obtain the same relief as was sought in the counterclaim
        that
        was dismissed.
  On
        December 21, 2007, the Company filed a Motion for Summary Judgment with the
        Court seeking dismissal of Neuhaus's claims. The Company argued that the
        Non-Qualified Stock Option Agreement was not valid in that there was no evidence
        of a board resolution approving the terms of the options, as is required
        by
        Nevada law. Neuhaus opposed the Motion. On February 4, 2008, the Court denied
        the Motion for Summary Judgment, finding that there remain material issues
        of
        disputed facts relating to the creation of the Non-Qualified Stock Option
        Agreement and the Consulting Agreement. The Company is proceeding with
        discovery.
  Trial
        in
        this action has been rescheduled for July 14, 2008.
  F-33
  Hendrickson
        Derivative Litigation
  On
        January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
        against certain current and former officers and directors or the Company
        in the
        Second Judicial District Court of the State of Nevada, in and for the County
        of
        Washoe. The case is known as *Thomas
        Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman,
        Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles
        Van
        Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence
        G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph
        Henkel* ,
        Case
        No. CV07-00137, Dept. No. B6. The complaint alleges, among other things,
        that
        the defendants breached their fiduciary duty to the Company by failing to
        act in
        good faith and diligence in the administration of the affairs of the Company
        and
        in the use and preservation of its property and assets, including the Company’s
        credibility and reputation. The Company and the Board had intended to file
        a
        Motion for Dismissal with the Court, based upon the Plaintiff’s failure to make
        a demand upon the Board. On
        July
        10, 2007, the Company received notice that a stipulation (the “Stipulation”) of
        voluntary dismissal without prejudice had been entered, with an effective
        date
        of July 3, 2007, regarding this action. The Stipulation provides 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 has received any consideration for the dismissal
        of
        this action, and no future consideration has been promised.
  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 special committee comprised of three independent directors
        to
        evaluate the Hendrickson Demand Letter and to determine what, if any, action
        should be taken.
  Cullen
        Litigation
  On
        June
        26, 2006, the Company filed an action, *SulphCo,
        Inc. v. Cullen* ,
        in the
        Second Judicial District Court of the State of Nevada, in and for the County
        of
        Washoe, Case No. CV06-01490, against Mark Cullen arising out of Mr. Cullen’s
        alleged breach of a secrecy agreement that he had executed when employed
        by GRD,
        Inc., whose claims have accrued to the Company. The lawsuit seeks damages,
        a
        constructive trust, and an order requiring Mr. Cullen to assign to the Company
        certain intellectual property in the form of patent applications (as well
        as a
        now-issued patent) that he filed following his departure from the Company.
        On
        October 23, 2006, Mr. Cullen moved to dismiss the Company’s complaint; the
        motion was denied. On February 26, 2007, Mr. Cullen filed an amended answer
        to
        the Company’s complaint. That Answer included counterclaims for breach of
        contract, unfair competition, interference with contractual relations, and
        interference with prospective economic advantage. The entire case was dismissed
        without prejudice on April 25, 2007, but the Company retains the ability
        to
        revive its claims at a later date.
  F-34
  Nevada
        Heat Treating Litigation
  On
        November 29, 2007, Nevada Heat Treating, Inc. (“NHT”) filed at 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 is asserting that certain information, alleged to have been
        disclosed to the Company during the term of the consulting engagement, is
        the
        subject of a nondisclosure/confidentiality agreement executed at the inception
        of the consulting engagement. NHT is contending 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.
        A
        hearing for the motion for preliminary injunction has been set for March
        24,
        2008. Trial has been set for April 27, 2009. As of December 31, 2007, no
        liability has been 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 formalizes
        virtually identical requests the Company received in May, June and August
        2007
        and subsequently responded to which requested the 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,
        the
        majority of whom have not been employed by the Company for over a year. We
        have
        been advised by the SEC that, despite the subpoena and formal order of
        investigation authorizing its issuance, neither the SEC nor its staff has
        determined whether the Company or any person has committed any violation
        of law.
        The Company intends to continue to cooperate with the SEC in connection with
        its
        requests for documents and information.
 
 **13.**  **Common
        Stock**
 
 Other
        than stock based compensation disclosed in Note 14 and related party
        transactions disclosed in Note 17, the Company had the following transactions
        related to its common stock during the years ended December 31, 2007, 2006,
        and
        2005:
 
 **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 and
        the
        Additional Warrants is described in Note 11.
  F-35
  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 the remaining 1,400,000 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
        1,400,000 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 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.
 
 **Year
        Ended December 31, 2006**
 
 On
        March
        29, 2006, the Company completed a private placement to a small number of
        accredited investors for the sale of 4,000,000 units, each unit consisting
        of
        one share of the Company’s common stock and one warrant to purchase a share of
        common stock. Each unit was sold at a price of $6.805 per share, resulting
        in
        gross proceeds at closing of approximately $27.2million. The warrants are
        exercisable, in whole or in part, at a fixed price equal to $6.805 per share,
        and are exercisable for a period of 18 months following their issuance. The
        Company filed a registration statement with the SEC covering the resale of
        the
        shares of common stock issued at closing and shares issuable upon exercise
        of
        warrants. The registration statement was declared effective by the SEC on
        June
        23, 2006.
 
 The
        Company granted 217,500 shares of its common stock during 2006, all of which
        were vested during the year. The weighted-average grant-date fair value of
        those
        shares was $7.94 per share.
 
 A
        fee of
        $100,000 was paid to an unrelated third party in consideration of introducing
        an
        investor to the Company relative to the March 29, 2006 placement. This amount
        was reflected as a reduction of the proceeds.
 
 **Year
        Ended December 31, 2005**
 
 In
        April
        2005 fifteen thousand shares of common stock were issued at $5.91 per share,
        the
        closing price on the date of issue, in exchange for consulting services valued
        at $88,650.
 
 During
        August through December of 2005, additional investment rights and warrants,
        issued in the two private placements during 2004, were exercised for 3,792,410
        shares for net proceeds of approximately $3.8 million. Additional warrants
        for
        1,365,543 shares of Common stock were issued pursuant to the agreements as
        a
        result of exercises of additional investment rights.
  F-36
 
 **Increase
        in Authorized Capital Stock**
 
 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
        (see
        Note 19 for additional discussion).
 
 **14.**  **Stock
        Plans and Share-Based Compensation**
 
 Effective
        January 1, 2006, the Company began recording compensation in the form of
        grants
        of common stock and options for common stock at fair value in accordance
        with
        SFAS 123R, which requires all share-based payments to employees, including
        grants of employee stock options, to be recognized in the income statement
        based
        on their fair values. During 2005, the Company did not make any grants of
        stock
        options to employees. Therefore, pro forma disclosures for 2005 are not
        required.
 
 **Stock
        Option Plans**
 
 At
        December 31, 2007, the Company had outstanding stock options granted under
        the
        SulphCo, Inc. 2006 Stock Option Plan (the “2006 Plan”) for designated employees,
        executive officers, directors, consultants, advisors and other corporate
        and
        divisional officers. The 2006 Plan is administered by the Compensation Committee
        established by the Company’s Board of Directors. The 2006 Plan was approved and
        adopted by the Company’s stockholders in June of 2006 pursuant to which, 2
        million shares were available for issuance. As of December 31, 2007, there
        were
        approximately 209,000 shares available for future grants under the 2006 Plan.
        At
        a Special Meeting of Stockholders held on February 26, 2008, the Company’s
        stockholders approved the SulphCo, Inc. 2008 Omnibus Long-Term Incentive
        Plan
        (the “2008 Plan”) pursuant to which an aggregate of 2.25 million shares of
        common stock are available for issuance to designated employees, executive
        officers, directors, consultants, advisors and other corporate and divisional
        officers (see Note 18 for additional discussion).
 
 The
        exercise price of options granted pursuant to the 2006 Plan and the 2008
        Plan
        shall be at least 100 percent (110 percent for 10 percent or greater
        stockholders) of the fair value of the Company’s common stock on the date of
        grant. Options must be granted within ten years from the inception date of
        the
        2006 Plan and become exercisable at such times as determined by the Compensation
        Committee. Options are exercisable for no longer than five years for certain
        ten
        percent or greater stockholders and for no longer than ten years for others.
  SFAS
        123R
        requires tax benefits relating to excess stock based compensation deductions
        over that recognized in expense to be prospectively presented in the Company’s
        statement of cash flows as financing cash inflows. However, in cases where
        the
        Company has a NOL carry-forward, SFAS 123R states that no amount shall be
        recorded until the deduction reduces income taxes payable on the basis that
        cash
        tax savings have not occurred. Accordingly, for the year ended December 31,
        2007, the Company has not reported any excess tax benefits from the settlement
        (i.e. exercise of options) of stock based compensation as cash provided by
        financing activities on its statement of cash flows.
  The
        Company’s policy of meeting the requirements upon exercise of stock options is
        to issue new shares.
  F-37
  **2006
        Plan**
 
 The
        fair
        value of each option award granted after December 31, 2005, 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 referred to in SEC’s Staff Accounting Bulletin No. 107,
“Share-Based Payment” (“SAB No. 107”) 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
        ability of issuers to continue utilizing the simplified method was set to
        expire
        December 31, 2007. On December 21, 2007, the SEC released SAB 110, “Share-Based
        Payment” wherein it announced that ability of issuers to utilize the simplified
        method described in SAS No. 107 would be extended beyond December 31, 2007.
        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 expected term of options granted to non-employees
        is equal to the contractual term of the option as required by other accounting
        literature. 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. For
        the
        years ended December 31, 2007 and 2006, the Company used the following
        information to value option grants:
 
 **2007**
              
              **2006**Expected
                  Volatility
              
              
              132.5% - 149.5%
              
              
              117% - 147%Expected
                  Dividend Yield
              
              
              -
              
              
              -Expected
                  Term (in years)
              
              
              5.0 – 10.0
              
              
              3.0Risk
                  Free Rate
              
              
              3.58% - 5.10%
              
              
              5.2%
  The
        following table provides additional information related to the 2006
        Plan:
 
 **Number of**
                **Shares**
              
              
              **Weighted** **Average**
                **Exercise** **Price**Options
                  outstanding, December 31, 2005
              
              
              -
              
              
              
              -Options
                  granted
              
              
              1,125,000
              
              
              $
              9.03Options
                  exercised
              
              
              -
              
              
              
              -Options
                  forfeited
              
              
              -
              
              
              
              -Options
                  outstanding, December 31, 2006
              
              
              1,125,000
              
              
              $
              9.03Options
                  granted
              
              
              1,665,524
              
              
              $
              3.83Options
                  exercised
              
              
              -
              
              
              
              -Options
                  forfeited
              
              
              (1,000,000
              )
              
              $
              9.03Options
                  outstanding, December 31, 2007
              
              
              1,790,524
              
              
              $
              4.20Options
                  exercisable and vested
              
              
              1,034,524
              
              
              $
              4.51
 
 The
        weighted average grant date fair value of the 1,665,524 options granted in
        2007
        was $3.49 per share. Options outstanding at December 31, 2007, had a weighted
        average remaining contractual life of 8.9 years and an intrinsic value of
        approximately $1.8 million. Options exercisable at December 31, 2007, had
        a
        weighted average remaining contractual life of 8.6 years and an intrinsic
        value
        of approximately $0.7 million.
  F-38
 
 2006
        Plan – Grants
 
 *Year
        Ended December 31, 2007*
 
 Of
        the
        options to acquire 1,665,524 shares of the Company’s common stock granted during
        the year ended December 31, 2007, options to acquire 300,000 shares relate
        to
        grants of options to acquire 100,000 shares each to three of the Company’s Board
        members to replace restricted stock grants of 50,000 shares each, for a total
        of
        150,000 shares, that were rescinded by the Company. Historically, it has
        been
        the custom of the Company to grant restricted shares of its common stock
        to new
        Board members upon joining the Company’s Board. The grants of the 150,000 shares
        of restricted common stock were made subsequent to the Company having listed
        its
        shares on the American Stock Exchange (the “AMEX”). Included among the AMEX’s
        listing requirements is a requirement that grants of the Company’s common stock
        to Directors and certain other persons be approved by a vote of the Company
        shareholders. In connection with these grants, the Company did not obtain
        prior
        shareholder approval and therefore determined that it was appropriate to
        rescind
        the prior grants in lieu of calling a special meeting of the shareholders
        to
        obtain the requisite approval. The Company recorded a charge of approximately
        $0.4 million relating to the excess of the fair value of the replacement
        options
        granted to replace the rescinded restricted stock grants over the fair value
        of
        the rescinded restricted stock grants on the date the replacement options
        were
        granted. Also included in the options to acquire 1,665,524 shares of the
        Company’s common stock granted during the year ended December 31, 2007, are the
        following grants: (1) an option to acquire 150,000 shares of the Company’s
        common stock that was granted to Edward G. Rosenblum in connection with his
        appointment, on August 1, 2007, to the Company’s Board of Directors for which
        the Company recorded a charge of approximately $0.5 million; (2) an option
        to
        acquire 59,524 shares of the Company’s common stock granted to Edward G.
        Rosenblum to replace a grant of restricted stock granted in connection with
        his
        appointment to the Company’s Board of Directors that was later rescinded for
        which the Company recorded a charge of approximately $44,000 relating to
        the
        excess fair value of the option compared to the fair value of the restricted
        stock on the date of grant (3) options to acquire a total of 300,000 shares
        granted to the Company’s Board of Directors in connection with its annual
        retainer for which the Company recorded a charge of approximately $1.1 million;
        and (4) options to acquire a total of 856,000 shares granted to the Company’s
        officers, employees and third-party consultants for which the Company recorded
        a
        charge of approximately $1.4 million.
 
 *Year
        Ended December 31, 2006*
 
 During
        the year ended December 31, 2006, the Company granted options to acquire
        1,125,000 shares of its common stock. Of this amount, an option to acquire
        125,000 was granted to the then Vice Chairman of the Board of Directors,
        Robert
        van Maasdijk for which the Company recorded a charge of approximately $0.7
        million and an option to acquire 1,000,000 shares was granted the Company’s
        former Chairman and CEO, Dr. Rudolf W. Gunnerman for which the Company recorded
        a charge of approximately $1 million.
 
 2006
        Plan – Forfeitures
 
 In
        connection with his dismissal from the Company in January 2007, Dr. Gunnerman
        forfeited the previously granted option to acquire 1,000,000 share of the
        Company’s common stock and at which time the Company reversed, in 2006, the
        previously recorded charge of approximately $1 million.
  F-39
  **Other
        Options**
 
 In
        addition to options available for issuance under the 2006 Plan, the Company
        has
        previously granted other options and warrants (the “Other Options”) to
        non-employees and consultants. The following table provides additional
        information related to the Other Options:
 
 **Number of**
                **Shares**
              
              
              **Weighted Average**
                **Exercise** **Price**Options
                  outstanding, December 31, 2004
              
              
              50,000
              
              
              $
              1.93Options
                  granted
              
              
              50,000
              
              
              $
              3.85Options
                  exercised
              
              
              -
              
              
              
              -Options
                  forfeited
              
              
              -
              
              
              
              -Options
                  outstanding, December 31, 2005
              
              
              100,000
              
              
              $
              2.89Options
                  granted
              
              
              54,500
              
              
              $
              6.04Options
                  exercised
              
              
              -
              
              
              
              -Options
                  forfeited
              
              
              -
              
              
              
              -Options
                  outstanding, December 31, 2006
              
              
              154,500
              
              
              $
              4.00Options
                  granted
              
              
              153,000
              
              
              $
              4.38Options
                  exercised
              
              
              (152,500
              )
              
              $
              3.10Options
                  forfeited/cancelled
              
              
              (105,000
              )
              
              $
              4.90Options
                  outstanding, December 31, 2007
              
              
              50,000
              
              
              $
              6.03Options
                  exercisable and vested
              
              
              50,000
              
              
              $
              6.03
 
 The
        weighted average grant date fair value of the 153,000 Other Options granted
        in
        2007 was $3.53 per share. Other Options outstanding at December 31, 2007,
        had a
        weighted average remaining contractual life of 2.9 years and no intrinsic
        value.
        Other Options exercisable at December 31, 2007, had a weighted average remaining
        contractual life of 2.9 years and no intrinsic value.
 
 Other
        Options – Grants
 
 *Year
        Ended December 31, 2007*
 
 An
        option
        to acquire 52,500 shares of Company stock granted during the year ended December
        31, 2007 (the “Mustang 2007 Option”), relates to an option that was previously
        granted to Mustang International, L.P. (“Mustang”) by the Company in 2006 (the
“Mustang 2006 Option”). In August of 2007, the Company and Mustang agreed to
        amend the previously granted option and change the exercise price from $6.00
        to
        $3.50 per share. For financial reporting purposes, the Company is deemed
        to have
        reacquired the Mustang 2006 Option by virtue of the issuance of the Mustang
        2007
        Option. On the date of reacquisition, the fair value of the Mustang 2007
        Option
        exceeded the fair value of the Mustang 2006 Option by approximately $27,000.
        This excess fair value was fully expensed since the Mustang 2007 Option was
        fully vested on the date of issuance.
 
 During
        the year ended December 31, 2007, the Company terminated a consulting contract
        that was entered into on June 28, 2007, with Edward G. Rosenblum. As
        consideration for entering into the consulting contract, the Company had
        agreed
        to grant Mr. Rosenblum an option to acquire 50,500 shares of the Company’s
        common stock (the “Rosenblum Option”). On August 1, 2007, Mr. Rosenblum was
        appointed to the Company’s Board of Directors. As a result and in connection
        therewith, the Company and Mr. Rosenblum agreed to mutually terminate this
        consulting contract, including the cancellation of the Rosenblum
        Option.
  F-40
 
 On
        November 9, 2007, the Company entered into an agreement with Industrial
        Sonomechanics, LLC ("ISM"), under which ISM granted exclusive worldwide
        rights to SulphCo to use its patented ultrasound horn and reactor technology
        for
        ultrasound upgrading of crude oil and crude oil fractions. Pursuant to this
        agreement, the Company issued ISM a warrant to purchase 50,000 shares (the
“ISM Warrant”) of SulphCo common stock. The ISM Warrant had an exercise price of
        $6.025 per share and a three year term. In connection with the issuance of
        the
        ISM Warrant, the Company recognized a charge to research and development
        expense
        of approximately $0.2 million.
 
 *Years
        Ended December 31, 2006 and 2005*
 
 During
        the year ended December 31, 2006, the Company granted options to acquire
        54,500
        shares of the Company’s common stock to two third-party consultants. The Mustang
        2006 Option granted the Mustang the right to acquire 52,500 shares of the
        Company’s common stock at an exercise price of $6.00 per share and had a term of
        four years from the date of issuance. In connection with the Mustang 2006
        Option
        the Company recognized a charge of approximately $358,000. As is discussed
        above, the Mustang 2006 Option was replace with the Mustang 2007 Option.
        The
        remaining option to acquire 2,000 shares of the Company’s common stock was
        granted to Thomas J. Nardi (the “Nardi Option”). The Nardi Option had an
        exercise price of $7.00 per share and a one year term.
 
 During
        the year ended December 31, 2005, the Company granted an option to acquire
        50,000 shares to an investor relations consulting firm. The option had an
        exercise price of $3.85 per share and a November 2007 expiration date. This
        option was in addition to another option to acquire 50,000 shares the Company
        granted to the same investor relations consulting firm in 2004 (taken together,
        these two options to acquire a total of 100,000 shares are referred to as
        the
“IR Options”).
 
 Other
        Options – Exercises
 
 During
        the year ended December 31, 2007, 152,500 Other Options were exercised. Of
        this
        amount, options to acquire 100,000 shares related to the IR Options discussed
        above that were exercised on a cashless basis resulting in the issuance of
        66,551 shares of the Company’s common stock. The remaining option to acquire
        52,500 shares related to the Mustang 2007 Option discussed above that were
        exercised at $3.50 per share resulting in proceeds to the Company of
        approximately $0.2 million.
 
 During
        the years ended December 31, 2006 and 2005, there were no exercises of Other
        Options.
 
 Other
        Options – Forfeitures/Cancellations
 During
        the year ended December 31, 2007, 105,000 Other Options were either forfeited
        or
        cancelled. Of this amount, an option to acquire 52,500 shares related to
        the
        cancellation of the Mustang 2006 Option discussed above and an option to
        acquire
        50,500 shares related to the cancellation of the Rosenblum Option discussed
        above. The remaining option to acquire 2,000 shares related to the Nardi
        Option
        that expired unexercised.
 
 During
        the years ended December 31, 2006 and 2005, there were no forfeitures or
        cancellations of Other Options.
  F-41
  **Summary
        Option Information**
 
 The
        following table summarizes information about all stock options outstanding
        as of
        December 31, 2007:
 
 **Options Outstanding**
              
              **Options Exercisable****Range 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**$2.00
                  - $2.99
              
              
              200,000
              
              
              9.2
              
              $
              2.66
              
              
              -
              
              
              -
              
              
              -$3.00
                  - $3.99
              
              
              1,137,500
              
              
              9.4
              
              $
              3.65
              
              
              750,000
              
              
              9.5
              
              $
              3.65$4.00
                  - $4.99
              
              
              200,000
              
              
              10.0
              
              $
              4.96
              
              
              100,000
              
              
              10.0
              
              $
              4.96$5.00
                  - $5.99
              
              
              128,024
              
              
              9.9
              
              $
              5.52
              
              
              59,524
              
              
              10.0
              
              $
              5.04$6.00
                  - $6.99
              
              
              50,000
              
              
              2.9
              
              $
              6.03
              
              
              50,000
              
              
              2.9
              
              $
              6.03$7.00
                  - $9.99
              
              
              125,000
              
              
              1.4
              
              $
              9.03
              
              
              125,000
              
              
              1.4
              
              $
              9.031,840,524
              
              
              
              
              
              
              
              
              1,084,524
 
 The
        total
        intrinsic value of options and warrants exercised during the years ended
        December 31, 2007, 2006 and 2005 was approximately $0.8 million, none and
        none,
        respectively. Cash received from all option and warrant exercises under all
        share-based payment arrangements for the years ended December 31, 2007, 2006
        and
        2005 was approximately $0.2 million, none and none, 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, 2007, there was approximately $1.6 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
        0.8 years.
 
 **Restricted
        Stock Grants – Directors, Officers and Employees**
 
 *Year
        Ended December 31, 2007*
 
 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. Additionally, the Company also made grants of restricted shares
        totaling 93,353 shares to two Board members who joined the Board in 2007.
        In
        connection with these grants, the Company recognized a charge of approximately
        $0.7 million. As is discussed above, 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 was no unrecognized
        compensation costs relating to restricted share grants.
 
 *Years
        Ended December 31, 2006 and 2005*
 
 During
        the years ended December 31, 2006 and 2005, the Company granted 200,000 shares
        and 250,000 shares, respectively, of its restricted stock to officers and
        directors for which it recognized charges of approximately $1.6 million and
        $1.1
        million, respectively. As of December 31, 2006 and 2005, all grants of
        restricted shares were fully vested and there were no unrecognized compensation
        costs relating to restricted share grants.
  F-42
  **Restricted
        Stock Grants – Non-Employees**
 
 *Years
        Ended December 31, 2007, 2006 and 2005*
 
 During
        the years ended December 31, 2007 and 2005, the Company did not grant any
        shares
        of restricted stock to non-employees.
 
 During
        the year ended December 31, 2006, the Company granted 17,500 shares of
        restricted stock to non-employees for which it recognized a charge of
        approximately $0.1 million. As of December 31, 2006, all grants of restricted
        shares were fully vested and there were no unrecognized compensation cost
        relating to restricted share grants.
 
 **Total
        Share Based Compensation**
 
 During
        the years ended December 31, 2007, 2006 and 2005, the Company recognized
        total
        share-based compensation (for grants of stock options, warrants and restricted
        stock) of approximately $4.3 million, $2.8 million and $1.6 million,
        respectively.
 
 **15.**  **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. As of December 31, 2007, the
        Company had an accrued annual minimum contribution of approximately $0.1
        million. In addition to the annual minimum contribution, the Company can
        make
        discretionary contributions. During the year ended December 31, 2007, no
        such
        discretionary contributions were made.
 
 **16.**  **Stock
        Subscriptions**
 
 As
        of
        December 31, 2005, the Company had stock subscriptions receivable of $744,500.
        In January 2004 the Company filed suit to collect $737,000 for a stock
        subscription receivable that is being disputed. At December 31, 2006, the
        Company reversed the receivable against paid in capital due to continued
        uncertainty of collecting it based on the determination of legal
        counsel.
 
 **17.**  **Related
        Party Transactions**
 
 Other
        than share-based compensation as detailed in Note 14, the following discussion
        sets forth related party transactions occurring in the years 2005, 2006,
        and
        2007.
 
 During
        the years ended December 31, 2007 and 2006, the Company made payments to
        totaling approximately $1.3 million and $7,500, respectively to Ma’rkisches Werk
        Halver, GmbH (“MWH”) in connection with ongoing probe development activities.
        Edward E. Urquhart, a member of the Company’s Board of Directors since August
        2006, has been the Chief Executive Officer of MWH since July 2003.
 
 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,
        2007, 2006 and 2005, the total expense recognized by the Company under this
        arrangement was $240,000, $620,000 and $360,000, 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-43
  In
        2005
        the Company had a consulting agreement with Mr. Peter W. Gunnerman’s wholly
        owned company, Global 6 LLC, prior to him becoming the Company’s COO and
        President. During the year ended December 31, 2005, Global 6 LLC was paid
        $50,000 in consulting fees and reimbursed $50,015 in travel related expenses.
        Mr. Gunnerman resigned from his position as the Company’s COO and President in
        December 2006.
 
 Beginning
        in 2005, the Company had a consulting agreement with Peak One Consulting,
        Inc.,
        a company wholly-owned by Richard L. Masica, a Director of the Company until
        his
        retirement from the Company’s Board of Directors in June 2007. No amounts were
        paid to Mr. Masica under this consulting agreement during the year ended
        December 31, 2007. During the years ended December 31, 2006 and 2005, the
        Company paid Mr. Masica approximately $30,000 and $57,000 in fees for management
        and technical consulting and approximately $3,000 and $19,000 in travel related
        expenses, respectively, pursuant to this agreement.
 
 The
        Company had a consulting arrangement with a Director, Michael T. Heffner,
        who
        was paid approximately $49,000 in technical consulting fees and approximately
        $5,000 in travel related expense reimbursements in 2006. This agreement was
        terminated in the second quarter of 2006. On
        April
        15, 2007, the Company entered into a month-to-month operating lease agreement
        with Mr. Heffner. Under the lease agreement, the Company leases a furnished
        apartment for officer’s use in Reno, Nevada for $1,500 per month that can be
        cancelled at anytime by either party. 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.
 
 On
        April
        16, 2007, with a retroactive effective date of February 10, 2007, the Company
        entered into a 30 day consulting contract with Mr. Vincent van Maasdijk,
        the son
        of Mr. Robert van Maasdijk who is the Chairman of the Company’s Board of
        Directors, initially to serve as the Fujairah Operations Manager. After each
        30
        day term, the consulting contract automatically renews for the next 30 days
        unless either party stipulates otherwise in writing. As Fujairah Operations
        Manager, Mr. van Maasdijk’s responsibilities included overseeing the
        construction and operation of the Company’s facility in Fujairah, United Arab
        Emirates. Mr. van Maasdijk completed the Fujairah assignment in late 2007
        and
        has since been providing business development support services to the Company.
        Under the terms of the contract, Mr. van Maasdijk receives a monthly payment
        of
        $5,000 plus reimbursement of all reasonable out-of-pocket expenses, in
        accordance with the Company’s applicable policies and procedures. During the
        year ended December 31, 2007, the total expense recognized by the Company
        under
        this arrangement was approximately $78,000.
 
 During
        the year ended December 31, 2007, the Company paid approximately $10,000
        in
        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.
 
 Total
        related party expenses were approximately $1.6 million, $4.2 million, and
        $1.5
        million in 2007, 2006, and 2005 respectively. Total related party cash payments
        were approximately $1.6 million, $1.9 million and $1.3 million in 2007, 2006,
        and 2005 respectively.
  F-44
 
 **18.**  **Quarterly
        Financial Information (Unaudited)**
 
 Summarized
        unaudited quarterly financial information for the years ended December 31,
        2007,
        2006 and 2005 is noted below (in thousands, except for per share
        amounts):
 
 **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
              )**2006**
              
              
              Mar.
                  31
              
              
              Jun.
                  30
              
              
              Sep.
                  30
              
              
              Dec.
                  31Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  (loss)
              
              $
              (9,180
              )
              $
              (18,452
              )
              $
              (5,724
              )
              $
              (5,766
              )Net
                  (loss) per share – basic and diluted
                  **(a)**
              
              $
              (0.14
              )
              $
              (0.25
              )
              $
              (0.08
              )
              $
              (0.08
              )**2005**
              
              
              Mar.
                  31
              
              
              Jun.
                  30
              
              
              Sep.
                  30
              
              
              Dec.
                  31Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  loss
              
              $
              (2,325
              )
              $
              (2,357
              )
              $
              (1,840
              )
              $
              (2,906
              )Net
                  loss per share – basic and diluted
                  **(a)**
              
              $
              (0.04
              )
              $
              (0.04
              )
              $
              (0.03
              )
              $
              (0.05
              )
  **(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.
  **19.**  **Subsequent
        Events**
 
 **February
        26, 2008 – Special Meeting of Stockholders**
 
 On
        February 26, 2008, the Company held a Special Meeting of Stockholders (the
        “Special Meeting”) to consider the following two proposals:
  F-45
   ·
              To
                  amend the Company’s Articles of Incorporation to increase the number of
                  authorized shares of the Company’s capital stock to 120,000,000 shares by
                  increasing the authorized shares of Common Stock, par value $0.001
                  (the
                  “Common Stock”) from 100,000,000 shares to 110,000,000 shares;
                  and
 
 ·
              To
                  approve and adopt the Company’s 2008 Omnibus Long-Term Incentive Plan (the
                  “Plan”), pursuant to which an aggregate of 2,250,000 shares of Common
                  Stock are available for issuance.
 
 A
        majority of the shares entitled to vote at the Special Meeting voted in favor
        of
        both proposals.
  **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 formalizes
        virtually identical requests the Company received in May, June and August
        2007
        and subsequently responded to which requested the 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,
        the
        majority of whom have not been employed by the Company for over a year. We
        have
        been advised by the SEC that, despite the subpoena and formal order of
        investigation authorizing its issuance, neither the SEC nor its staff has
        determined whether the Company or any person has committed any violation
        of law.
        The Company intends to continue to cooperate with the SEC in connection with
        its
        requests for documents and information.




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