UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


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





For
the fiscal year ended December 31, 2008





or





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





Commission
file number. 001-32636


SULPHCO, 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 No.)





4333
      W. Sam Houston Pkwy N., Suite 190
                  Houston,
      TX 77043
                (713)
      896-9100(Address
      of principal executive offices) (Zip Code)
                (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
                
                NYSE Alternext US LLC(Title
      of each class)
                
                (Name
      of each exchange on which
registered)





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes ̈Nox





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 ̈Nox





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.  YesxNo ̈





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ̈





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





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





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ̈Nox





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the stock was last
sold on June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, was $142,795,587.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.  The number of shares of
Common Stock outstanding on February 28, 2009, was 89,944,029.





Documents
incorporated by reference: portions of the registrant’s proxy statement for its
2009 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.








SULPHCO,
INC.


2008
FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





Page No.PART
      IItem
      1.
                    Business.
                    4Item
      1A.
                    Risk
      Factors.
                    17Item
      1B.
                    Unresolved
      Staff Comments.
                    23Item
      2.
                    Properties.
                    23Item
      3.
                    Legal
      Proceedings.
                    23Item
      4.
                    Submission
      of Matters to a Vote of Security Holders.
                    26PART
      IIItem
      5.
                    Market for Registrant’s Common
      Equity, Related Stockholder Mattersand Issuer Purchases of Equity
      Securities.
                    27Item
      6.
                    Selected
      Financial Data.
                    29Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.
                    30Item
      7A.
                    Quantitative
      and Qualitative Disclosures About Market Risk.
                    38Item
      8.
                    Financial
      Statements and Supplementary Data.
                    38Item
      9.
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                    39Item
      9A.
                    Controls
      and Procedures.
                    40Item
      9B.
                    Other
      Information.
                    40PART
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance.
                    41Item
      11.
                    Executive
      Compensation.
                    41Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                    41Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence.
                    41Item
      14.
                    Principal
      Accounting Fees and Services.
                    41PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules.
                    42Financial
      Statements for the Years Ended December 31, 2008, 2007 and
      2006.
                    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




SulphCo
is engaged in the business of developing and commercializing its patented and
proprietary SonocrackingTM technology. The SonocrackingTM technology is based upon
the combination of proprietary catalysts, oxidants, and the novel use of high
power ultrasound - the application of high energy, high frequency sound waves -
to alter the molecular structure of crude oil and crude oil fractions. The
overall process is designed to "upgrade" the quality of crude oil and crude oil
products (e.g., diesel fuel, gasoline, fuel oil, etc.) by modifying and reducing
the sulfur and nitrogen content to make those compounds easier to process using
conventional techniques, as well as reducing the density and
viscosity.





The target applications for our
SonocrackingTM technology and our SonocrackerTM units are within the refining,
transportation, and crude oil production market segments.  Environmental
regulations mandate the reduction of sulfur content in many fuels, including
gasoline, diesel fuel, and bunker fuel.  For example, the sulfur
specification for finished diesel fuel is less than 10 parts per million (“ppm”)
in the European Union, while typical starting concentrations are in the
thousands of ppm.  Similar regulations are in effect for the U.S.
market.  Also, the sulfur content of crude oil is an increasing
concern for all facets of the market, and the economic value of crude oil and
crude oil products is driven largely by this value.  Since our
technology is designed to impact the overall quality of crude oil and crude oil
products in a cost effective manner, 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 more 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., crude oil product streams such as diesel fuel, gasoline, and
bunker fuels as well as low to moderate sulfur-containing crude oils) and are
working with several potential customers to achieve that goal.




Houston,
Texas


We
continue to be in discussions with potential North American
customers.  In anticipation of the need for processing capacity in
North America, we shipped a 15,000 barrels per day (“Bpd”) SonocrackingTM unit
from Europe to Houston. The SonocrackingTM unit arrived in Houston during May
2008.  That unit remains available for installation at a facility upon
execution of appropriate customer agreements.  There can be no
assurance that the Company will enter into any such agreements.


4




Research
and development activities in SulphCo’s Houston facility have been centered
around five principal areas: 1) the refinement of catalyst and additive packages
for the SonocrackingTM process to ensure consistent and reproducible results both
in the laboratory and in field testing, 2) the generation of detailed data
packages for customer applications, 3) the building and performance validation
of a laboratory pilot scale unit (with flow rates of 1 – 15 gallons per minute)
which will provide potential customers with laboratory scale data replicating
the performance of a commercial scale SonocrackingTM unit, 4) the building and
commissioning of two mobile units capable of processing up to 5,000 Bpd of
crude oil and petroleum products that can quickly be installed at a potential
customer’s site, and 5) the testing and evaluation of current and
next-generation ultrasound probe, reactor, and control systems developed and
supplied by Maerkisches Werk Halver, GmbH (“MWH”).




We have
developed a pilot scale continuous flow laboratory unit for our SonocrackingTM
process. During the third quarter of 2008, we conducted extensive testing
with this unit as well as in a batch reactor environment.  These
trials incorporated new probe and reactor technology along with different
catalysts and additives designed to provide consistent and reproducible results
from the SonocrackingTM process. Potential customers have supplied a variety of
crudes in various quantities for laboratory testing. During October of 2008, we
conducted a series of focused trials on a potential customer’s crude oil for
which we had conducted field trials in May and June of 2008. In these
laboratory trials, we were able to consistently produce a 25%-30% sulfur
reduction with this customer’s crude oil.  Furthermore, we were also
able to demonstrate clearly the chemical conversion of several sulfur compounds
from the thiophenic form to the sulfone form.  This conversion was
borne out by further processing, through which we were able to consistently and
reliably produce more than a 50% sulfur reduction in this crude oil. We
extended the series of tests to several other crude oils and observed in most
streams the same level of sulfur reduction as described above. We have also
produced American Petroleum Institute (“API”) gravity shifts of up to 3 – 4
points in some crude oils which indicates a shift towards lighter, more
valuable streams.  Although those improvements represent an
incremental economic benefit to the overall process, that is not the primary
focus of our current efforts.Additionally,
we have performed several series of tests in the laboratory on diesel fuels from
a variety of crude oils and sources.  In this testing we observed
significant conversion of sulfur compounds to an oxidized form and with complete
treatment attained sulfur reductions in a typical range of 75% or
more.  For example, in one diesel fuel with a starting sulfur value of
3,160 ppm, after treatment the fuel contained only 800 ppm sulfur.  We
also measured a 1-2 points shift upwards in the API gravity of those
streams.We will
continue conducting extensive laboratory testing on potential customers’ crude
oils and products during the first quarter of 2009 and beyond. If such tests are
successful on a laboratory scale, we anticipate moving to field testing and/or
commercial operating agreements with such potential customers.




Construction and commissioning of the
first 5,000 Bpd mobile unit was completed in the first quarter of 2008 and that
unit was evaluated in field validation tests at a potential customer’s site in
May and June of 2008.  Given the increased interest in the first 5,000
Bpd mobile unit, the Company constructed a second 5,000 Bpd mobile unit. 
The construction and commissioning of the second 5,000 Bpd mobile unit was
completed in the third quarter of 2008.   The second 5,000 Bpd
unit is outfitted with the latest generation of the ultrasound probe, reactor,
and control systems supplied by MWH, and employs the newly developed catalyst
and additive packages described above.




In
October 2008, the second unit was deployed at a potential customer’s
facility in the Southeastern United States for a series of field
trials.  These trials were a continuation of the field validation
tests conducted in May and June of 2008.  Operationally, the unit
performed very well and during these recent trials the Company successfully
duplicated, on a commercial scale, the positive results produced in its Houston
laboratory.  While these field trials are a crucial step in the
overall technology validation process, additional technical iterations and
analysis are continuing as we identify, execute, and evaluate the multiple
processes necessary to comply with future customer requirements.  In
addition to process optimization, we continue to focus on minimizing costs
associated with the chemical package and the overall material and mass balance
to achieve the economics as highlighted in our business plan.  There
can be no assurance that the Company will be successful in achieving such
goals.


5
  European Testing
Activities
 We met
with our European testing partner in November 2008 and provided a detailed
presentation of our SonocrackingTM technology to its technical
team.  We had conducted several trials with this partner over the
course of the past 18 months, but we were previously unable to provide the
partner with a clear and detailed demonstration of our
technology.  This time, however, by using much of the sulfur
speciation data generated from our laboratory and field trials in the
Southeastern United States, we were able to successfully demonstrate to our
testing partner the positive effects of our process on the properties of the
sulfur compounds in crude oil.  The focus is now centered around the
effect of the changes on the downstream processing in the testing partner’s
refineries.  We were able to successfully present clear benefits in
terms of 1) immediate sulfur reduction in the crude oil, 2) reducing the sulfur
content of the lower boiling and higher value fractions of the crude oil (e.g.,
naphtha, kerosene, diesel), 3) reducing the severity of the hydro-treating
process and 4) potentially reducing the carbon footprint of the downstream
process.  At this technical meeting we immediately agreed to work on
parallel paths in the laboratory and back in the field at the testing partner’s
site.  In late December 2008, the Company shipped a laboratory scale
SonocrackingTM unit from Houston to the facilities of the European testing
partner, where laboratory scale trials were conducted during the week of January
12, 2009 on a variety of crude oils and crude oil products under the supervision
of Dr. Florian J. Schattenmann, SulphCo’s CTO, and a SulphCo senior
chemist.  The purpose of the laboratory trials was to define the
relevant process parameters and appropriate operating conditions for the field
trials that were conducted during the week of January 26, 2009.  While
the Company is encouraged by this recent progress, there can be no assurance
that the Company will be successful in implementing any commercial
agreements.
  Middle
East
 On July 10, 2008, we announced an
agreement with Amira Group Company LLC (“Amira”), a U.S.-based oil and gas
services company, granting Amira an exclusive distributorship in certain regions
of the Middle East and North Africa and certain customer specific opportunities
(the "Amira Sales Territories").  The Company and Amira personnel have
made formal presentations to several prospective customers within the Amira
Sales Territories, providing technical and commercial information on the
SonocrackingTM process.  During the third and fourth quarters, SulphCo
and Amira personnel narrowed these discussions to key, strategic potential
customers, and those discussions have focused primarily on issues relating to
proposed installation of SonocrackingTM units at customer
sites.  Currently, the Company has not entered into any customer
agreements.
  Southeast
Asia
 On
February 11, 2008, we announced an agreement with Pt. Isis Megah (“Isis”), an
Indonesian oil and gas services company, granting Isis an exclusive
distributorship in the sales territories of India, Malaysia, Singapore and
Indonesia (the “Isis Sales Territories”). We concurrently announced a customer
order procured through Isis, conditioned upon the execution of an operating
agreement, for SonocrackingTM units having at least 30,000 Bpd of processing
capacity to be shipped at our expense from Fujairah to a designated port within
the Isis Sales Territories. Subsequently, the Company shipped 90,000 Bpd of
processing capacity from our facility in Fujairah, UAE, which arrived in
Singapore during the week of April 14, 2008.  The SonocrackingTM units
have remained in storage there pending finalization of a refinery placement
agreement.  There can be no assurance that the Company will enter into
any such agreements.
  6
  During
the week of March 31, 2008, SulphCo personnel conducted joint site inspections
with the customer at two of its Southeast Asian refineries to evaluate their
suitability for the proposed SonocrackingTM unit installations. Following these
inspections the parties reached a preliminary understanding as to the placement
of the Company’s first 30,000 Bpd commercial scale SonocrackingTM unit within the
customer’s refinery (the “Placement Agreement”). It was anticipated that upon
execution of the Placement Agreement among Isis, the customer, and SulphCo, the
30,000 Bpd SonocrackingTM unit would be shipped by barge from Singapore to
the customer’s refinery site. An operating agreement cannot be signed
before finalization of the Placement Agreement, since the character
of the crude oil or fractions to be processed are dependent
upon both the selection of and location within the
refinery where the SonocrackingTM unit is to be installed.
  Subsequent
to the initial discussions with the customer, an unanticipated
event occurred which has led to delays in reaching a final Placement
Agreement.  The customer experienced a turnover in key management and
operating personnel, leading to a decision that a further review be conducted
prior to implementing SulphCo’s technology within its
refineries.  That review would require the customer’s
personnel first witness testing of a relevant crude oil at either the
Company’s Houston or Fujairah facilities and based on those results, the
customer would determine how the implementation of the SonocrackingTM process at
its refinery sites would proceed.  In furtherance of this
process, the Company conducted testing at its Houston facility on relevant crude
oils during the third quarter of 2008 and has, through Isis, delivered the test
results to the customer.  In addition, because some of the relevant
crude oils are of Middle Eastern origin, the Company has advised the customer
that the Company is prepared to conduct additional testing in Fujairah,
provided, the customer is able to supply the crude oil to the facility in
Fujairah. Alternatively, the Company has invited the customer’s personnel to
observe the testing of relevant crude oil at the Company’s Houston location. We
understand, through Isis, that the customer has agreed to deliver samples to our
Houston facility where they will witness testing.  We are in the
process of scheduling that visit, through Isis, and expect testing to occur
later in the first quarter of 2009 or in the second quarter of
2009.
  Fujairah
 The
Company had originally scheduled additional rounds of testing at the Fujairah
facility during the second quarter of 2008 for the benefit of potential
customers to allow them to observe the SonocrackingTM technology first
hand.  However, at the request of the potential customers the
scheduled tests were put on hold.  The Company is now prepared to
conduct a new round of validation testing at the Fujairah facility during the
first or second quarters of 2009 utilizing the latest generation probe
technology and employing the newly developed catalyst and additive
packages.  The ultimate timing of those trials depends entirely on the
requirements of the potential customers.  In addition, the Company is
currently in the process of securing sufficient crude oil and residual fuel oil
for independent validation testing in Fujairah.
  South
America
 Testing on crude oil and petroleum
product streams provided by companies in South America is ongoing in SulphCo’s
Houston, Texas facilities.  Initial observations are consistent with
results achieved in oils originating from other areas of the world. These
results have created interest from refiners and producers.  SulphCo’s
distributor in Colombia, Ecuador, and Peru, J.W. Tecnologia Servicios Petroleros
S.A.C., has arranged meetings with petroleum producers and refiners in that
region to discuss the tests in greater detail.  It is anticipated
these discussions will lead to commercial scale
demonstrations.  Further, as a result of laboratory tests on samples
provided by a large producer/refiner in Brazil, similar meetings are being held
in that country. There can be no assurance that the Company will enter into
any such agreements.
  7
  South
Korea
 The
SulphCo KorAsia project has experienced delays due to unanticipated equipment
problems that occurred during the testing conducted in the first quarter of
2008. During the course of the limited trials, issues arose with a certain
switching component of an electrical driver for the ultrasound probes. Those
issues were ultimately attributed to factors related to the original electrical
equipment supplied with the earlier generation 2,000 Bpd SonocrackingTM unit in
2005.  Given the limited resources of the Company and the higher
priority attached to more immediate opportunities that have presented themselves
elsewhere, the Company has been proceeding in South Korea at a more
measured pace than originally anticipated.  Once the technical updates
are completed and several outstanding business issues are resolved we intend to
resume testing utilizing Khafji crude oil (sulfur content
~2.9%).  Once a full set of trials have been performed and the data
analyzed, we will determine, in conjunction with SulphCo KorAsia, the
appropriate technical and commercial paths forward.  During the third
and fourth quarters, several attempts were made to resolve the outstanding
business issues between the parties, but those issues have not been resolved
satisfactorily at this point.  We expect to continue our efforts to
resolve those issues in 2009.  However, there can be no assurance that
the technical updates or outstanding business issues will be resolved
favorably.
  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
eventual implosion, generating excess heat and pressure in and around every
micrometer and submicrometer-sized bubble. The entire process takes a few
nanoseconds and each bubble can behave as a microreactor, accelerating the
physical reactions owing to the heat released and localized pressures obtained.
The high temperature (estimated to be as high as 5,000 degrees Kelvin) and
pressure (estimated to be as high as 500 atmospheres) reached locally can
potentially cause disruption of molecular bonds.
  The
SonocrackingTM technology applies high-power ultrasonic energy to a mixture of
crude oil in conjunction with proprietary catalysts and an
oxidant.   The ultrasound provides an intense shearing and mixing
environment for the mixture and, along with the effects from cavitation, allows
for efficient oxygen transfer from the oxidant to sulfur-containing and other
compounds in the oil or fuel stream.   Aside from the oxidation
of sulfur compounds, the process may also bring about the disruption of complex
asphaltenic structures and rupturing of bonds of complex hydrocarbon, which in
turn may result in upgrading the overall hydrocarbon content by reducing the
overall density and thereby increasing the API gravity.
  SulphCo's
proprietary SonocrackingTM units are designed to treat large volumes of petroleum
products at relatively low temperatures and pressures. The base design and
capacity for the SonocrackingTM technology consists of a nominal 5,000 Bpd
processing line.  Successive lines can be added to scale capacities in
multiples of 5,000 Bpd.  SulphCo has designed and implemented modular
units with a 15,000 Bpd capacity that are skid mounted and can be transported in
a typical shipping container. These units possess smaller “footprints” and are
expected to have lower capital costs when compared to the conventional
hydrotreating equipment and other upgrading technologies.  This
mobility and relative low capital cost make installation of SonocrackingTM
equipment in the upstream (production), midstream (blending and transportation)
and downstream (refining) sectors very flexible, with the ability to match
customer capacity needs while requiring a relatively small
“footprint.”
  8
  The
Market for Our Technology
  Potential
Improvements and Benefits
  SulphCo’s
high power ultrasound SonocrackingTM process for treating crude oil and crude oil
products is designed to produce a number of desirable effects, including the
modification and reduction of sulfur compounds (oxidation of sulfur molecules),
improvement in the API gravity (reduction in relative density), reduction in
viscosity, and potentially modification and removal
of  nitrogen-containing compounds.  Other improvements, such
as heavy metal reduction/concentration, may also be possible.  The
degree to which any one or more of these improvements occur after treatment with
the SonocrackingTM process depends heavily on the feed oil or fuel
characteristics, including: molecular makeup of sulfur compounds, asphaltene
level and microstructure, acidity, and several other factors.  Not all
crude oil or crude oil products will respond to the treatment to the same
levels, therefore it is critical to optimize the process for a given feed stream
to maximize the process benefits.
  The
economic benefit derived from the SonocrackingTM process depends on the overall
improvement imparted to the crude oil or crude oil products in conjunction with
customer and application-based drivers such as, but not limited to, crude oil
and crude oil product pricing spreads,  reduction in operating costs
including reduced catalyst loading, lower hydrogen usage and lower carbon
footprint, improved processing flexibility, and other
benefits.   Since different sectors of the oil market have unique
individual needs and potential benefits, it is necessary to evaluate the overall
benefit provided by the SonocrackingTM process in the context of the customer
application, improvement in the oil or product stream, and market
pricing.
  The
Refining Market (downstream)
  SulphCo’s
SonocrackingTM processing units are expected to provide economic benefits
for oil refiners through the reduction of sulfur content in either the crude oil
feed or crude oil products such as gasoline, kerosene, diesel fuel, and bunker
fuel oil.  As each refinery is unique, potential benefits of
SonocrackingTM  technology to an individual refiner will vary, depending on
such factors as plant configuration, the type of crude oil processed and product
specifications.
  These
potential benefits include:
  ·
              Lower
      raw material (i.e., crude oil) costs due to greater flexibility of
      feeds.
  ·
              Lower
      desulfurization costs when compared to traditional hydrotreating
      processes
  ·
              Possible
      reduction of carbon footprint
  9
  Lower
Raw Material Costs
  While
crude oils have differing characteristics, the relative cost of crude oil is
influenced primarily by its relative density and sulfur
content.  Typically, there is a direct correlation between oil density
and sulfur content, with more dense crude generally containing higher sulfur
concentrations.  Therefore, crude oil with lower density and lower
sulfur concentrations is generally sold at a higher price than higher density
crude oil with higher sulfur concentrations.
  The cost
of crude oil is generally considered to be the cost component with the greatest
leverage on the profitability of an oil refinery. Therefore, a refinery
will normally seek to purchase the most economical grade of crude oil which is
suitable for its refinery operations.  Typically, 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 sulfur concentrations.  Due to price differentials based upon
the density and sulfur content of crude oil, a refinery (regardless of
complexity) will normally seek to purchase the least expensive heavy grade oil
with the highest sulfur content that can be refined within its capabilities. In
turn, as the market “spread” between light sweet crude oil and heavy sour crude
oil increases, so too should a refinery’s profit margin if it has the capability
of processing heavier sour crude oil.
  Because
our SonocrackerTM units are expected to modify and reduce sulfur content, a
refinery which “pre-treats” its crude oil with our units could be expected to be
able to realize cost reductions and improved profit margins by utilizing lower
cost, higher sulfur containing feed oil than would otherwise be
possible without our SonocrackingTM technology.
  Lower
Desulfurization Costs
  The
traditional process for removing sulfur compounds from crude oil products is
hydrotreating.  Hydrotreating is a high temperature, high pressure,
high catalyst cost, and hydrogen consuming process employed in many refineries
around the world.  The intensity of the hydrotreating process is
driven largely by the chemical makeup of the sulfur compounds present in the
crude oil product streams.  Certain types of sulfur molecules (e.g.,
dibenzothiophenes) require very intensive treatment and high catalyst and
hydrogen loadings to remove the latent sulfur.  SulphCo’s oxidative
desulfurization approach modifies dibenzothiophenes by oxidizing the sulfur
which in turn changes the chemical composition to either a sulfoxide or a
sulfone.  The sulfoxides and sulfones can be removed from the streams
via secondary processes such as extraction or absorption, which in turn
eliminates the need to hydrotreat those compounds.  Alternatively, the
sulfoxides and sulfones can be hydrotreated directly under milder reaction
conditions and in some instances with significantly less
hydrogen.  Therefore, SulphCo’s SonocrackingTM technology has the
potential to reduce the hydrotreating costs associated with crude oil product
streams.
  Reduced
Carbon Footprint
  The
hydrotreating of crude oil products to reduce the sulfur levels to meet
governmental standards and regulations requires a significant amount of
hydrogen.  This hydrogen is typically produced through a process that
utilizes some form of light gas such as propane or methane and produces carbon
dioxide as a by-product.  Therefore, a process that reduces the amount
of sulfur in a crude oil product stream has the potential to reduce the amount
of hydrogen needed to treat that stream to meet the requirements.  In
turn, less hydrogen is required to be produced, thereby leading to lower carbon
dioxide emissions.  SulphCo’s SonocrackingTM process is designed to
reduce the amount of sulfur in crude oil and crude oil products and therefore
has the potential to reduce the carbon footprint at potential customer
facilities.
  10
  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 sulfur crude oil with the
SonocrackingTM units is expected to reduce the sulfur content and allow more
of this treated crude oil to be blended into the crude oil streams, while
still meeting the various pipeline specifications. In addition to the blending
economics, in some cases blenders can save on the high cost of alternative
transportation versus crude oil pipelines.
  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, among other things, the ability
to obtain higher prices for crude oil processed by SulphCo’s SonocrackerTM
units.
  The price
of crude oil is based primarily on characteristics such as API gravity
(relative density) and sulfur content.  Because our technology is
designed to increase the API gravity and sulfur 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.
  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.
  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 Isis, which grants Isis an exclusive distributorship in the
sales territories of India, Malaysia, Singapore and Indonesia. In July
2008, we entered into an agreement with Amira, which grants Amira an exclusive
distributorship in certain regions of the Middle East and North Africa. 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.
  Patents,
Trademarks and Copyrights
  We own
eight United States patents and have four pending United States patent
applications. Our granted U.S. Patents include:
  ·
              Power
      Driving Circuit for Controlling a Variable Load Ultrasonic
      Transducer.  U.S. patent no. 7,408,290 was issued on August 5,
      2008 to SulphCo;
  ·
              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;
  ·
              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;
  11
  ·
              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 four pending U.S. Patents including:
  ·
              High-Throughput
      Continuous-Flow Ultrasound Reactor. Two pending U.S. patent application
      no. 10/857444, filed May 27, 2004, and no. 11/597043, filed on
      November 16, 2006.
  ·
              Upgrading
      of Petroleum by Combined Ultrasound and Microwave Treatments. Pending U.S.
      patent application no. 11/059115 was filed on February 15,
      2005.
  ·
              High-Power
      Ultrasonic Horn. Pending U.S. patent application no. 11/066766 was filed
      on February 24, 2005.
  In
addition, SulphCo has been granted 46 international patents and has applied for
an additional 134 international patents to protect other aspects and
applications of the Company's technologies. These include, but are not limited
to, new processes and procedures, developed by SulphCo personnel, required to
manufacture higher power ultrasound equipment for use in SulphCo's
desulfurization units.
  We have
applied to register the trademarks SonocrackingTM, SonocrackerTM, and Sonocracked
CrudeTM with reference to our upgrading and desulfurization
technology.  The trademark “SulphCoTM” was registered in the U.S. on
May 30, 2006.  We also rely on copyright protection for the software
utilized in our 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.
 12
 
 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.  We believe this process gives us a competitive advantage because
it is unique in that it “pre-treats” crude oil by both reducing
relative density of oil and reducing sulfur content prior to being fed into
the traditional refinery operation. Other than our proprietary SonocrackingTM
process, we are not aware of any process in commercial use which is capable of
both reducing the density of crude oil and reducing sulfur content other than
the conventional refinery process itself.
 
 SulphCo’s
SonocrackingTM units, which are intended to operate in conjunction with
traditional refinery equipment, are expected to provide additional upgrading
benefits at a substantially reduced capital and operating cost compared to
conventional refinery operations.  These units are also expected to
provide a cost-effective method for oil producers to upgrade their crude oil
prior to its sale to refiners.
 
 We believe that our issued and pending
patents and proprietary know-how will provide us with a significant competitive
advantage over other companies seeking to commercialize new methods of
increasing the API gravity of crude oil or reducing its sulfur content which are
more cost-effective or more efficient than the methods which are currently
commercially available.
 
 Research
and Development During the Last Three Years
  During
the past three years, our research and development expenditures have been
directed toward the upgrading and desulfurization of crude oil and crude oil
products and the improvement of our high power ultrasound
technology.  During the years ended December 31, 2008, 2007 and 2006,
our research and development costs totaled approximately $4.1 million, $7.7
million, and $25.4 million, respectively. During the years ended December 31,
2008, 2007 and 2006, we expended approximately $0.4 million, $1.7 million and
$21.5 million, respectively, for the construction of the building and for the
purchase and installation of equipment at the test facility in Fujairah,
UAE.  Major capital expenditures related to the test facility in
Fujairah, UAE are not anticipated to take place in the future until the process
is commercialized, in which event such expenditures will be capitalized rather
than expensed as research and development.
  During the year ended December 31,
2007, we entered into a license agreement withIndustrial Sonomechanics, LLC
(“ISM”)granting us worldwide rights with
respect to its proprietary patented ultrasonic probe and reactor technology. We
expect to continue working with ISM to develop and test our technologies and
prototypes and to explore the expansion of the range of petroleum products that
can be upgraded with our technologies.
  Effects
of Government Regulation; Regulatory Approvals
 
 Government Regulation of Sulfur Levels
in Petroleum Products
 
 The
reduction of sulfur levels in petroleum products has become a major issue for
oil refiners.  Developed countries in recent years have increasingly
mandated the use of low or ultra low sulfur petroleum products.  As a
result, refineries are faced with the incurrence of extremely expensive capital
improvements for their refinery processes, altering their end product mix, or in
some instances ceasing the production of low sulfur products
entirely.  Our technology is expected to benefit from the impact of
existing and proposed government mandates which regulate sulfur content, in both
the U.S. and in developed countries abroad.
  13
  For
example, refinery operations in the U.S. and many of the petroleum products they
manufacture are subject to certain specific requirements of the federal Clean
Air Act (“CAA”) and related state and local regulations and with the
Environmental Protection Agency (“EPA”).  The CAA may direct the EPA
to require modifications in the formulation of the refined transportation fuel
products in order to limit the emissions associated with their final use. In
December 1999, the EPA promulgated national regulations limiting the amount of
sulfur that is to be allowed in gasoline.  The EPA has stated that
such limits are necessary to protect new automobile emission control systems
that may be inhibited by sulfur in the fuel.  The regulations required
the phase-in of gasoline sulfur standards beginning in 2004, with special
extended phase-in provisions over the next few years for refineries meeting
specified requirements.  In addition, the EPA recently promulgated
regulations that limit the sulfur content of highway diesel fuel beginning in
2006 to 15 parts per million.  The former standard was 500
parts-per-million.  The EPA has also proposed regulations intended to
limit the sulfur content of diesel fuel used in non-road activities such as in
the mining, construction, agriculture, railroad and marine
industries.
  Regulatory
Approvals
  The
regulatory environment that pertains to our business is complex, uncertain and
changing rapidly.  Although we anticipate that existing and proposed
governmental mandates regulating the sulfur content of petroleum products will
continue to provide an impetus for customers to utilize our
SonocrackingTM technology, it is possible that the application of existing
environmental legislation or regulations or the introduction of new legislation
or regulations could substantially impact our ability to commercialize our
proprietary technology, which could in turn negatively impact our
business.
  Operation of our
SonocrackingTM units is subject to a variety of federal, state and local
health and environmental laws and regulations governing product specifications,
the discharge of pollutants into the air and water, and the generation,
treatment, storage, transportation and disposal of solid and hazardous waste and
materials.  Permits with varying terms of duration may be required for
the operation of our SonocrackingTM units, and these permits may be subject
to revocation, expiration, modification and renewal.  Governmental
authorities have the power to enforce compliance with these regulations and
permits, and violators are subject to injunctions, civil fines and even criminal
penalties.
  Our activities to date have centered
around the development and testing of our prototype units.  These
activities require the use or storage of materials which are, or in the future
may be, classified as hazardous products or pollutants under federal and state
laws governing the discharge or disposal of hazardous products or
pollutants.  We have undertaken a number of steps intended to ensure
compliance with applicable federal and state environmental
laws.  Regulated materials used or generated by us are stored in
above-ground segregated facilities and are disposed of through licensed
petroleum product disposal companies.  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.
  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.
  14
  Employees
 
 As
of February 28, 2009, we had 22 full-time employees.
 
 Executive
Officers
 
 The
following table lists our executive officers, their ages, and
positions:
 
 Name
                  
                  Age(1)
                  
                  Present PositionDr.
      Larry D. Ryan
                  
                  37
                  
                  Chief
      Executive Officer and DirectorM.
      Clay Chambers
                  
                  62
                  
                  Chief
      Operating OfficerStanley
      W. Farmer
                  
                  41
                  
                  Vice
      President and Chief Financial OfficerDr.
      Florian J. Schattenmann
                  
                  43
                  
                  Vice
      President and Chief Technology Officer(1)Age is as of
      February 28, 2009
 
 Business
Experience of Executive Officers
 
 Dr. Larry D. Ryanhas 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 and
business leadership.
 
 M. Clay Chambers has served
as our Chief Operating Officer since February 2008.  Mr. Chambers has
over 35 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. Farmerhas 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.
  15
  Dr. Florian J. Schattenmann
currently serves as our Vice President and Chief Technology Officer and has been
with the Company since August of 2008. Previously he was the Global Technology
Manager for Elastomers division at Momentive Performance Materials (formerly
General Electric Advanced Materials). Prior to that, Dr. Schattenmann was
Technology Director for GE-Bayer Silicones based in Leverkusen, Germany. Dr.
Schattenmann joined the GE Advanced Materials business from the GE Global
Research Center, where he successively led several laboratories focused on the
development of advanced technologies ranging from electronic materials to
selective catalysis to nano-structured materials. Dr. Schattenmann is a
certified Master Black Belt from GE in Six Sigma process methodology, holds
seven patents and is the (co-)author of numerous peer-reviewed publications. He
has a Ph.D. in Inorganic Chemistry from M.I.T.
 
 Other
 
 The Company's internet address is www.sulphco.com. 
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports are available, without charge, on
our website, as soon as reasonably practicable after they are filed with the
U.S. Securities and Exchange Commission (SEC).  Copies are also available
without charge, from SulphCo, Inc., 4333 W. Sam Houston Pkwy N., Suite 190,
Houston, TX 77043.  Reports filed with the SEC may be viewed at www.sec.gov or
obtained at the SEC Public Reference Room in Washington, D.C.  Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330.  References to our website addressed in this
report are provided as a convenience and do not constitute, or should be viewed
as, an incorporation by reference of the information contained on, or available
through, the website.  Therefore, such information should not be considered
part of this report.
  16
  Item
1A.  Risk Factors.
  We
are a development stage company with a limited operating history, which makes it
more difficult to predict whether we will be able to successfully commercialize
our technology and implement our business plan.
  We are a
development stage company with a limited operating history, and our principal
technologies and products are not yet commercially
proven.  Accordingly, there is a limited operating history upon which
to base an assumption that we will be able to successfully implement our
business plan.
  Our
technologies are not fully developed, are commercially untested, and therefore,
the successful development and commercialization of our technologies remain
subject to significant uncertainty.
  Our
activities, to date, have involved the research and development of our crude oil
desulfurization and upgrading technologies and the construction of a test
facility. We have not yet generated any material revenues since commencing these
activities in January 1999.  Commercial application of our
technologies will require further investment, development and
testing.  We may be unable to complete the commercialization of our
technologies on a timely basis, or at all.
  Development
and commercialization of a new technology, such as our SonocrackingTM process, is
inherently subject to significant risks.  Accordingly, we cannot
assure that our technology will perform in a commercial scale setting as
indicated in initial laboratory or small scale testing or that we will be able
to successfully commercialize our technology.  Introducing and
enhancing a new technology involves numerous technical challenges, substantial
financial and personnel resources, and often takes many years to
complete.  We cannot be certain that we will be successful at
commercializing our technology on a timely basis, or in accordance with
milestones, if at all.  In addition, we cannot be certain that, once
our processing unit is made operational in a commercial setting, the unit will
perform as expected.  Our technology is complex and, despite further
vigorous testing and quality control procedures, may contain undetected
errors.  Any inability to timely deliver a commercially viable unit
could have a negative effect on our business, revenues, financial condition and
results of operations.
  We
have a history of operating losses and have not generated material revenues to
date, and we are unable to predict when or if we will generate material revenues
on a sustained basis or achieve profitability.
  We have
not generated any material revenues, and we have experienced significant
operating losses in each period since we commenced our current line of business
in January 1999.  As of December 31, 2008, we had an accumulated
deficit of approximately $145.2 million.  These losses are principally
associated with the research and development of our SonocrackingTM units for
desulfurization and upgrading of crude oil and other petroleum products,
research and development of ultrasound technologies, development of
pre-production prototypes and related marketing activity, and we expect to
continue to incur expenses in the future for development, commercialization 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.
  17
  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.  We expect our existing
capital resources will be sufficient to fund our cash requirements for the next
12 months based upon current levels of expenditures and anticipated
needs.  However, we expect that additional working capital will be
required in the future.
  The
extent and timing of our future capital requirements will depend upon several
factors, including:
 
 ·
                continued
      progress toward commercialization of our
  technologies;
 ·
                rate
      of progress and timing of product commercialization activities and
      arrangements, 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, November 2007, and May 2008 placements,
sales of the Company’s common stock under the equity line of credit with Azimuth
Opportunity Ltd. (“Azimuth”), funding through collaborative arrangements,
licensing arrangements and debt and equity financings.  We do not know
whether additional financing will be available on commercially acceptable terms
when needed.   If we cannot raise funds on acceptable terms, we
may not be able to successfully commercialize our technology, or respond to
unanticipated requirements. If we are unable to secure such additional
financing, we may have to curtail, suspend or cease all or a portion of our
business activities.  Further, if we issue equity securities, our
shareholders may experience severe dilution of their ownership percentages, and
the new equity securities may have rights, preferences or privileges senior to
those of our common stock.
  Commercial
activities by us in foreign countries could subject us to political and economic
risks which could impair future potential sources of revenue or impose
significant costs.
  We are
currently engaged in activities outside the U.S., including the United Arab
Emirates, 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.
  18
  Our
strategy for the development and commercialization of our technologies
contemplates collaborations with third parties, making us dependent on them for
our success.
  We do not
possess all of the capabilities to fully commercialize our desulfurization and
upgrading technologies on our own.  Our success may depend upon
partnerships and strategic alliances with third parties, such as our joint
venture with Fujairah Oil Technology.  Collaborative agreements
involving the development or commercialization of technology such as ours
generally pose such risks as:
  ·
                collaborators
      may not pursue further development or commercialization of products
      resulting from collaborations or may elect not to continue or renew
      research and development programs;
 ·
                collaborators
      may delay development activities, underfund development activities, stop
      or abandon development activities, repeat or conduct new testing or
      require changes to our technologies for
testing;
 ·
                collaborators
      could independently develop, or develop with third parties, products that
      could compete with our future
products;
 ·
                the
      terms of our agreements with collaborators may not be favorable to
      us;
 ·
                a
      collaborator may not commit enough resources, thereby delaying
      commercialization or limiting potential revenues from the
      commercialization of a product; and
 ·
                collaborations
      may be terminated by the collaborator for any number of reasons, including
      failure of the technologies or products to perform in line with the
      collaborator’s objectives or expectations, and such termination could
      subject us to increased capital requirements if we elected to pursue
      further activities.
  We
have very limited manufacturing, marketing and sales experience, which could
result in delays to the implementation of our business plan.
  We have very limited manufacturing,
marketing and product sales experience.  We cannot ensure that contract
manufacturing services will be available in sufficient capacity to supply our
product needs on a timely basis.  If we decide to build or acquire
commercial scale manufacturing capabilities, we will require additional
management and technical personnel and additional capital.
  We
rely on third parties to provide certain components for our products. If our
vendors fail to deliver their products in a reliable, timely and cost-efficient
manner, our business will suffer.
  We
currently depend on relationships with third parties such as contract
manufacturing companies and suppliers of components critical for the product we
are developing in our business.  If these providers do not produce these
products on a timely basis, if the products do not meet our specifications and
quality control standards, or if the products are otherwise flawed, we may have
to delay product delivery, or recall or replace unacceptable products.  In
addition, such failures could damage our reputation and could adversely affect
our operating results.  As a result, we could lose potential customers and
any revenues that we may have at that time may decline
dramatically.
  Our business is subject to the risk of supplier
concentration.
  We depend
on a limited number of third party suppliers and vendors for the manufacturing
and development of our SonocrackerTM units.  As a result of this
concentration in our supply chain, our business and operations would be
negatively affected if any of our key suppliers were to experience significant
disruption affecting the price, quality, availability or timely delivery of
their products.  The partial or complete loss of one of these
suppliers, or a significant adverse change in our relationship with any of these
suppliers, could have a material adverse effect on our business, results of
operations and financial condition.
  19
  We
are highly dependent on our key personnel to manage our business, and because of
competition for qualified personnel, we may not be able to recruit or retain
necessary personnel.   The loss of key personnel or the inability
to retain new personnel could delay the implementation of our business
plan.
  Our
success depends to a significant degree on the continued services of our senior
management and other key employees, and our ability to attract and retain highly
skilled and experienced scientific, technical, managerial, sales and marketing
personnel.  We cannot assure you that we will be successful in recruiting
new personnel or in retaining existing personnel.  None of our senior
management or key personnel have long term employment agreements with
us.  We do not maintain key person insurance on any members of our
management team or other personnel.  The loss of one or more key
employees or our inability to attract additional qualified employees could delay
the implementation of our business plan, which in turn could have a material
adverse effect on our business, results of operations and financial condition.
 In addition, we may experience increased compensation costs in order to
attract and retain skilled employees.
  Because
the market for products utilizing our technologies is still developing and is
highly competitive, we may not be able to compete successfully in the highly
competitive and evolving desulfurization and upgrading market.
  The
market for products utilizing our technologies is still developing and there can
be no assurance that our products will ever achieve market acceptance.
 Because we presently have no customers for our business, we must convince
petroleum producers, refiners and distributors to utilize our products or
license our technology.  To the extent we do not achieve market
penetration, it will be difficult for us to generate meaningful revenue or to
achieve profitability.
  The
success of our business is highly dependent on our patents and other proprietary
intellectual property, and we cannot assure you that we will be able to protect
and enforce our patents and other intellectual property.
  Our
commercial success will depend to a large degree on our ability to protect and
maintain our proprietary technology and know-how and to obtain and enforce
patents on our technology.  We rely primarily on a combination of
patent, copyright, trademark and trade secrets laws to protect our intellectual
property.  Although we have filed multiple patent applications for our
technology, and we have eight issued patents in the U.S., our patent position is
subject to complex factual and legal issues that may give rise to uncertainty as
to the validity, scope and enforceability of a particular patent.
 Accordingly, we cannot assure you that any patents will be issued pursuant
to our current or future patent applications or that patents issued pursuant to
such applications will not be invalidated, circumvented or
challenged.  Also, we cannot ensure you that the rights granted under
any such patents will provide the competitive advantages we anticipate or be
adequate to safeguard and maintain our proprietary rights.  In addition,
effective patent, trademark, copyright and trade secret protection may be
unavailable, limited or not applied for in certain foreign
countries.  Moreover, we cannot ensure you that third parties will not
infringe, design around, or improve upon our proprietary
technology.
  We also
seek to protect our proprietary intellectual property, including intellectual
property that may not be patented or patentable, in part by utilizing
confidentiality agreements and, if applicable, inventor's rights agreements with
our employees and third parties.  We cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any
breach or that such persons will not assert rights to intellectual property
arising out of these relationships.
  20
  We
are a new entrant in our business and we face significant
competition.
  We are a
new entrant in the market for development and sale of upgrading and sulfur
reduction technology to the oil industry.  We face well-established
and well-funded competition from a number of sources.  Our competitors
in this area include manufacturers of conventional refinery desulfurization
equipment and major integrated oil companies and oil refineries.  Most
of these entities have substantially greater research and development
capabilities and financial, scientific, manufacturing, marketing, sales and
service resources than we do.
 
 Because
of their experience and greater research and development capabilities, our
competitors might succeed in developing and commercializing competing
technologies or products which would render our technologies or products
obsolete or non-competitive.
  Regulatory
developments could have adverse consequences for our business.
  The
regulatory environment that pertains to our business is complex, uncertain and
changing rapidly.  Although we anticipate that existing and proposed
governmental mandates regulating the sulfur content of petroleum products will
continue to provide an impetus for customers to utilize our SonocrackingTM
technology for desulfurization, it is possible that the application of existing
environmental legislation or regulations or the introduction of new legislation
or regulations could substantially impact our ability to launch and promote our
proprietary technologies, which could in turn negatively impact our
business.
  Rules and
regulations implementing federal, state and local laws relating to the
environment will continue to affect our business, including laws and regulations
which may apply to the use and operation of our SonocrackerTM units, and we
cannot predict what additional environmental legislation or regulations will be
enacted or become effective in the future or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not been applied previously.  Compliance with
more stringent laws or regulations, as well as more vigorous enforcement
policies of regulatory agencies, could have a materially adverse effect on our
business.
  To date,
environmental regulation has not had a material adverse effect on our business,
which is presently in the development stage.  However, future
activities may subject us to increased risk as we seek to commercialize our
units by reason of the installation and operation of these units at customer
sites.  We intend to address these risks by imposing contractual
responsibility, whenever practicable, on third party users for maintaining
necessary permits and complying with applicable environmental laws governing or
related to the operation of our units.  However, these measures may
not fully protect us against environmental risks.  Furthermore,
although we may be entitled to contractual indemnification from third parties
for environmental compliance liabilities, this would not preclude direct
liability by us to governmental agencies or third parties under applicable
federal and state environmental laws.  We are presently unable to
predict the nature or amount of additional costs or liabilities which may
arise in the future related to environmental
regulation.  However, such future liabilities and costs could be
material.
  We
may be sued for product liability, which could result in liabilities which
exceed our available assets.
 
 We may be
held liable if any product we develop, or any product which is made with the use
of any of our technologies, causes injury or is found otherwise unsuitable
during product testing, manufacturing, marketing, sale or use.  We
currently have no product liability insurance.  When we attempt to
obtain product liability insurance, this insurance may be prohibitively
expensive, or may not fully cover our potential
liabilities.  Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could inhibit the commercialization of products developed by
us.  If we are sued for any injury caused by our products, our
liability could exceed our available assets.
  21
  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.
  We
may have difficulty managing our growth.
 
 We expect to experience significant
growth if we are successful in our efforts to rollout our SonocrackingTM
technology.  This growth exposes us to increased competition, greater
operating, marketing and support costs and other risks associated with entry
into new markets and the development of new products, and could place a strain
on our operational, human and financial resources. To manage growth effectively,
we must:
 
 ·
                attract
      and retain qualified personnel;
 ·
                upgrade
      and expand our infrastructure so that it matches our level of
      activity;
 ·
                manage
      expansion into additional geographic areas;
and
 ·
                continue
      to enhance and refine our operating and financial systems and managerial
      controls and procedures.
 
 If we do not effectively manage our
growth, we will not be successful in executing our business plan, which could
materially adversely affect our business, results of operations and financial
condition.
  22
  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 also have a leased facility in
Sparks, Nevada consisting of approximately 5,000 square feet.  The
lease for this space will expire in the spring of 2010. We currently have
no investment policies in place regarding real estate interests.
  Item
3.     Legal Proceedings.
  There are
various claims and lawsuits pending against the Company arising in the normal
course of the Company’s business.  The following paragraphs set forth
the current status of the various actions pending against the
Company.
 
 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 the plaintiff.  In general, the plaintiff’s
alleged claims relate to ownership of the “sulfur removal technology” originally
developed by Professor Teh Fu Yen and 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 the plaintiff EcoEnergy Solutions,
Inc. on all of its claims.  As per the final judgment, all of the
plaintiff’s claims were resolved against the plaintiff and were dismissed with
prejudice.  In addition, the trial court entered judgment in favor of the
Company and against the plaintiff for reimbursement of legal fees and costs of
approximately $124,000, with post-judgment interest.  The plaintiff
appealed the judgment on October 5, 2007. On 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.  The appeal has
been fully briefed, but no date has been set for oral arguments. No asset or
liability has been accrued relative to this action.
 
 Talisman
Litigation
 
 In Talisman Capital Talon Fund, Ltd. v.
Rudolf W.Gunnerman and SulphCo, Inc., Case No. 05-CV-N-0354-BES-RAM, the
Company and Rudolf W. Gunnerman were named as defendants in a legal action
commenced in federal court in Reno, Nevada. The plaintiff’s claims relate to the
Company's ownership and rights to develop its "sulfur removal technology." The
Company regards these claims as without merit. Discovery in this case formally
concluded on May 24, 2006. On September 28, 2007, the court granted, in part,
the defendants' motion for summary judgment and dismissed the plaintiff's claims
for bad faith breach of contract and unjust enrichment that had been asserted
against Rudolf Gunnerman. The court denied the plaintiff's motion for partial
summary judgment. The trial for this matter commenced on December 1, 2008 and
continued through December 12, 2008.  The court recessed the trial on
December 12, 2008 prior to hearing closing arguments.  Post trial
briefs were filed with the court on February 20, 2009, closing arguments were
heard on March 3, 2009 and the matter has been submitted for decision. No
liability has been accrued relative to this action.
  23
  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 (the “Non-Qualified Stock Option
Agreement”).  Mark Neuhaus claimed 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.
 
 On July
9, 2008, the Company entered into a Confidential Settlement Agreement and
Release with Mark Neuhaus (the “Settlement Agreement”), by which Mr. Neuhaus and
the Company agreed to dismiss the respective legal proceedings each party had
initiated on the other, and by which both parties agreed to a mutual
release.  The total consideration paid by the Company to Mr. Neuhaus
under the Settlement Agreement was $750,000, of which $250,000 was paid in cash
and the remaining $500,000 was paid by issuance of 123,763 shares of the
Company’s common stock to Mr. Neuhaus and 123,762 shares of the Company’s common
stock to Mr. Neuhaus’ attorneys, Erickson, Thorpe & Swainston, Ltd, which
amount was determined by dividing $500,000 by $2.02, the closing price of the
Company’s stock on July 9, 2008.
 
 Hendrickson
Derivative Litigation
 
 On
January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
against certain current and former officers and directors of the Company in the
Second Judicial District Court of the State of Nevada, in and for the County of
Washoe. The case 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 had 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
committee comprised of three independent directors (the “Committee”) to evaluate
the Hendrickson Demand Letter and to determine what action, if any, should be
taken. The Committee retained independent counsel to advise
it.
  24
  On
September 2, 2008, the Company’s Board of Directors held a special meeting for
the purpose of hearing and considering the Committee’s report and
recommendation.  At that meeting, the Committee reported on its
investigation and presented the Committee’s unanimous recommendation that no
actions be brought by the Company based upon the matters identified in the
Hendrickson Demand Letter.  The Board of Directors unanimously adopted
the Committee’s recommendation.  SulphCo communicated this conclusion
to Mr. Hendrickson’s counsel in mid-September 2008.
 
 On
November 6, 2008, Mr. Hendrickson re-filed the shareholder derivative claim in
the 127th
Judicial District Court of Harris County, Texas. The case is known as Thomas Hendrickson, Derivatively on
Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman, Peter W. Gunnerman, Loren J.
Kalmen, Richard L. Masica, Robert Henri Charles Van Maasdijk, Hannes
Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence G. Schafran, Alan
L. Austin, Jr., Raad Alkadiri and Christoph Henkel, (No.
200866743).  The Company is currently in the process of responding to
this litigation.  No liability has been accrued relative to this
action.
 
 Nevada
Heat Treating Litigation
 
 On
November 29, 2007, Nevada Heat Treating, Inc. (“NHT”) filed a lawsuit against
the Company, Nevada Heat
Treating, Inc., d/b/a California Brazing, in the Second Judicial District
Court of the State of Nevada, in and for the County of Washoe, Case No.
CV07-02729.  In its complaint, NHT alleges trade secret
misappropriation and breach of contract relative to certain information alleged
to have been disclosed to the Company beginning in late 2006 and continuing
through early 2007 pursuant to a consulting engagement with
NHT.  Among other things, NHT 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 non-disclosure/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. Hearings on the preliminary
injunction motion took place on March 24 and 25, 2008, and May 8,
2008.  On May 8, 2008, the court ruled from the bench, at the
conclusion of the hearing on the motion for preliminary
injunction.  The court denied the plaintiff’s motion on grounds that
the plaintiff had failed to demonstrate a probability of success on the merits
of its claims.  On November 18, 2008, the Company and NHT reached a
settlement wherein it was agreed that NHT would dismiss its claims and each
party would bear its own costs and fees, but that NHT would preserve any claims
that it might have in the future relating to its patent
application.  The Company and NHT are currently memorializing the
settlement agreement.  Once the settlement agreement is memorialized,
the case will be dismissed.  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 to which the Company responded to the request for voluntary
production of documents and information, including financial, corporate, and
accounting information related to the following subject
matters:  Fujairah Oil Technology LLC, the Company’s restatements for
the first three quarterly periods of 2006 and the non-cash deemed dividend for
the quarter ended March 31, 2007, and information and documents related to
certain members of former management, none of whom have been employed by the
Company since March 2007.  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 fully cooperate with the SEC in connection with its requests for documents
and information.
  25


Item
4.  Submission of Matter to a Vote of Security Holders.





Not
applicable.


26


PART
II




Item
5.  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.




Market
Information





Our
common stock trades on the NYSE Alternext US LLC under the symbol
“SUF.”





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





High
                    
                    
                    LowFiscal
      2008First
      Quarter
                    
                    $
                    5.80
                    
                    
                    $
                    2.35Second
      Quarter
                    
                    $
                    4.55
                    
                    
                    $
                    2.15Third
      Quarter
                    
                    $
                    3.97
                    
                    
                    $
                    1.48Fourth
      Quarter
                    
                    $
                    2.50
                    
                    
                    $
                    0.74Fiscal
      2007First
      Quarter
                    
                    $
                    4.76
                    
                    
                    $
                    2.25Second
      Quarter
                    
                    $
                    5.95
                    
                    
                    $
                    3.35Third
      Quarter
                    
                    $
                    8.92
                    
                    
                    $
                    3.25Fourth
      Quarter
                    
                    $
                    9.39
                    
                    
                    $
                    3.80





There
were 271 holders of record of our common stock on February 28,
2009.  This number does not include stockholders whose shares were
held in a "nominee" or "street" name.





Dividends





We have
not declared or paid any cash dividends on our common stock and presently intend
to retain our future earnings to fund the development and growth of our business
and, therefore, do not anticipate paying any cash dividends in the foreseeable
future.


27




Table
of Securities Authorized for Issuance under Equity Compensation Plans at the End
of 2008




The
following table presents information regarding our securities which are
authorized for issuance under all of our compensation plans as of December 31,
2008.




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
                  
                  
                  3,694,844
                  
                  
                  $
                  3.80
                  
                  
                  
                  555,156Equity
      Compensation Plans Not Approved by Security Holders
                  
                  
                  100,000
                  
                  
                  $
                  4.25
                  
                  
                  
                  (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, 1,852,190 securities are
outstanding options granted pursuant to the SulphCo, Inc. 2006 Stock Option Plan
approved by the Company’s stockholders in 2006 and 1,842,654 securities are
outstanding options granted pursuant to the SulphCo, Inc. 2008 Omnibus Long-Term
Incentive Plan approved by the Company’s stockholders in 2008.




Under
compensation plans not approved by our security holders, 50,000 securities
relate to warrants granted in connection with the License Agreement between the
Company and ISM dated as of November 9, 2007, wherein the Company agreed to
issue warrants to purchase 45,000 shares of common stock to ISM and warrants to
purchase 5,000 shares of common stock to JM Resources LLC, at an exercise price
of $6.025 per share.  The warrants vest immediately and have a
three-year term.





Under
compensation plans not approved by our security holders, 50,000 securities
relate to warrants granted in connection with the Development and Manufacturing
Agreement between the Company and MWH dated as of June 28, 2008, wherein the
Company agreed to issue warrants to purchase 50,000 shares of common stock share
to MWH, at an exercise price of $2.49 per share.  One half of these
warrants vest six-months from the grant date and the remaining half of the
warrants vest one-year from the grant date.


28




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,
2008, 2007 and 2006 includes research and development expenses totaling
approximately $4.1 million, $7.7 million and $25.4 million, respectively,
including approximately $0.4 million, $1.7 million and $21.5 million for the
Fujairah Facility in 2008, 2007 and 2006, respectively.





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Operating
      revenue
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Loss
      from operations
                
                $
                (20,087,757
                )
                
                $
                (19,156,217
                )
                
                $
                (39,131,016
                )
                
                $
                (8,466,994
                )
                
                $
                (3,860,970
                )Loss
      per share: basic and diluted
                
                $
                (0.29
                )
                
                $
                (0.64
                )
                
                $
                (0.55
                )
                
                $
                (0.17
                )
                
                $
                (0.08
                )Total
      assets at year end
                
                $
                19,656,883
                
                
                $
                9,102,041
                
                
                $
                7,294,459
                
                
                $
                8,045,236
                
                
                $
                11,053,360Long-term
      obligations at year end
                
                
                -
                
                
                $
                3,147,860
                
                
                
                -
                
                
                $
                7,000,000
                
                
                $
                7,000,000Cash
      dividends declared per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -


29


Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.





Liquidity
and Capital Resources





As of
February 28, 2009, we had approximately $15.0 million in available cash
reserves, approximately $4.7 million of convertible notes payable, and
an average monthly cash burn rate during 2008 of approximately $1.3 million
a month.  The convertible notes payable have a stated maturity date of
December 31, 2011, unless the maturity date is accelerated to any date after
July 31, 2009.  In response to the deteriorating credit markets and in
an effort to extend the Company’s cash reserves as far into the future as
possible, the Company has enacted strict cost control measures in an effort to
reduce monthly cash expenditures.  Based on these recently enacted
cost control measures, we anticipate that our cash reserves will be sufficient
to fund our cash requirements through the middle part of 2010.  If the
maturity of the convertible notes payable is not accelerated by the investors,
we anticipate our cash reserves will be sufficient to fund our cash requirements
through late 2010 and perhaps into early 2011. We have historically been able to
raise capital to continue with our research and development and it is likely
that we will need to raise additional funds before we can generate enough
revenue to become profitable. There can be no assurance that the Company will be
able to raise additional funds.





2008 Capital
Activities





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





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





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 warrants, the Company agreed that it would:





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


30


·
            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 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”) 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 the maturity was set to
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.


31


·
            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.





Late Registration Statement
Penalty





As of
December 31, 2008 and 2007, we were obligated to pay approximately $0.6 million
and $1.1 million, respectively, in the aggregate for the penalty and accrued
interest, to investors in the 2004 private placements for late registration fees
and interest due to the fact that the registration statement covering the
private placement shares was not declared effective by the SEC by the time
required by the investor agreements.  During the fourth quarter of
2008, approximately 40% of the investors in the 2004 private placements tendered
payment demands to the Company.





Future Capital
Requirements





The
extent and timing of our future capital requirements will depend primarily upon
the rate of our progress in the development and commercialization of our
technologies, 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, 2008, we had an accumulated deficit of approximately $145.2 million
and we incurred net losses of approximately $21.1 million and $24.4 million for
the years ended December 31, 2008 and 2007, respectively.  These
losses are principally associated with non-cash stock compensation expense,
legal defense costs and ongoing research and development of our SonocrackingTM
technology, including the development of prototypes, and related marketing
activity.  Although we expect to continue to incur similar expenses in
the future, such expenditures will not include major construction projects until
commercialization of our SonocrackingTM technology.





Operation and maintenance of the
Fujairah Facility is the responsibility of Fujairah Oil Technology LLC (“FOT”)
and SulphCo is responsible for contributing its SonocrackingTM
units.  The Memorandum of Association of Fujairah Oil Technology,
which defines certain rights of the joint venture partners, calls for profits
and losses to be shared 50/50, with profits being distributed to the partners,
subject to a 10% reserve for legal expenses which may be waived by the partners.
SulphCo’s 50% share of distributions made by the joint venture to SulphCo will
also be subject to other costs and expenses incurred directly by SulphCo from
time to time.  We 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 Activities Update” above.





In addition to activities related to
the Fujairah Facility, we intend to continue to incur additional expenditures
during the next 12 months for the continuous development and testing of
SonocrackerTM units.





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


32


Other
possible sources of additional capital include the exercise of the remaining
warrants issued to investors in conjunction with financing transactions in March
2007, November 2007 and May 2008, and funding through sales of the Company’s
common stock under the equity line of credit with Azimuth, future collaborative
arrangements, licensing arrangements and debt and equity financings. We do
not know whether additional financing will be available on commercially
acceptable terms when needed.  If we cannot raise funds on acceptable
terms when needed, we may not be able to successfully commercialize our
technologies, take advantage of future opportunities or respond to unanticipated
requirements.  If we are unable to secure such additional financing
when needed, we may have to curtail or suspend all or a portion of our business
activities.  Further, if we issue additional equity securities, our
shareholders may experience severe dilution of their ownership
percentage.





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
2008, we incurred approximately $3.7 million in expenses related to research and
development of our SonocrackingTM technology.  This compares to
approximately $6.0 million and $4.0 million incurred in 2007 and 2006,
respectively. In 2008, 2007 and 2006, approximately $0.4 million and $1.7
million and $21.5 million, respectively, were spent on the test facility in
Fujairah, UAE.




During
2008, 2007 and 2006, we paid approximately $0.7 million, $0.2 million and
0.3 million, respectively, to our engineers and other research and development
employees as wages and related benefits and for design and testing of our
SonocrackerTM units, while approximately $2.0 million, $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.


33


Selling, General and
Administrative Expenses




During
2008, we incurred approximately $16.0 million in selling, general and
administrative expenses.  This compares to approximately $11.4 million
and $13.6 million during 2007 and 2006,
respectively.  Non-cash stock-based compensation included in selling,
general and administrative expenses in 2008 was approximately $5.2 million. This
compares to $4.3 million and $2.8 million in 2007 and 2006,
respectively.





During
2008, we incurred approximately $3.9 million in legal fees. This
compares to approximately $3.0 million and $6.1 million during 2007 and 2006,
respectively.  The increase in legal fees in 2008 relative to 2007 is
primarily due to increased activity associated with the on-going litigation
described above in “Item 3. Legal Proceedings.” The decrease in 2007
relative to 2006 is primarily attributable to the resolution of certain
significant legal matters in 2006.





Consulting
fees, payroll and related expenses were approximately $3.9 million in 2008
which compares to approximately $3.2 million and $3.7 million during
2007 and 2006, respectively.  Consulting fees in 2008 increased
by 21.8% compared to the same period in 2007 due to additional expenses
recognized in 2008 related to a settlement agreement with a former
consultant.  The decrease in 2007 relative to 2006 was 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
remainder of the amounts incurred relate to normal recurring operating expenses
such as depreciation, insurance, travel, lease expense, utilities, marketing,
and investor relations.





Interest
Expense




Interest
expense was approximately $1.2 million in 2008, of which approximately $0.9
million relates to non-cash discount accretion.  This compares to
approximately $5.5 million and $0.5 million during 2007 and 2006,
respectively. The decrease in 2008 relative to 2007 and 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.





Deemed
Dividend





During
the years ended December 31, 2008 and 2007, the Company recognized total
non-cash deemed dividends of approximately $4.1 million and $24.8 million,
respectively.





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





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





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


34


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





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





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





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





In May
2008, 1,953,088 of the March 2007 Warrants held by the Warrant Holders were
exercised during the quarter ended June 30, 2008, resulting in the grant of
1,953,088 additional warrants (the “May 2008 Warrants”).  Based on its
analysis, the Company concluded that a deemed dividend should be recorded to
account for the fair value of the inducement that was transferred to the Warrant
Holders computed as the fair value of the 1,953,088 May 2008 Warrants issued to
the Warrant Holders.  Based on the Black-Scholes valuation prepared
for this transaction, the Company recognized a non-cash deemed dividend was
approximately $4.1 million.





For the
years ended December 31, 2008, 2007 and 2006, the Company recognized non-cash
deemed dividends of approximately $4.1 million, $24.4 million, and zero,
respectively.


35


Net Lossand Net Loss Attributable
to Common Stockholders




The difference between net losses and
net losses attributable to common shareholders for the years ended December 31,
2008 and 2007, is solely attributable to the deemed dividends recorded in that
period.





Off-Balance
Sheet Arrangements





The
Company has not entered into any transactions with unconsolidated entities
whereby the Company has financial guarantees, subordinated retained interests,
derivative instruments, or other contingent arrangements that expose the Company
to material continuing risks, contingent liabilities, or any other obligation
under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company.





Contractual
Obligations





PaymentsduebyperiodTotal
                
                
                Less than 1
                  year
                
                
                1–3years
                
                
                3–5years
                
                
                More than
                  5yearsConvertible
      notes payable
                
                $
                4,680,044
                
                
                $
                4,680,044
                
                
                $
                -
                
                
                $
                -
                
                
                
                -Operating
      lease obligations
                
                
                571,862
                
                
                
                178,819
                
                
                
                317,443
                
                
                
                75,600
                
                
                
                -Total
                
                $
                5,251,906
                
                
                $
                4,858,863
                
                
                $
                317,443
                
                
                $
                75,600
                
                
                
                -




New
Accounting Pronouncements, Significant Accounting Policies and Critical
Accounting Estimates




New
Accounting Pronouncements and Significant Accounting Policies




See Note
1 to our financial statements.




Critical
Accounting Estimates




We make a
number of estimates and judgments in preparing our financial statements. These
estimates can differ from actual results and have a significant impact on our
recorded assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We consider an estimate to be a critical
accounting estimate if it requires a high level of subjectivity or judgment and
a significant change in the estimate would have a material impact on our
financial condition or results of operations. The Audit Committee of our Board
of Directors reviews each critical accounting estimate with our senior
management. Further discussion of these accounting policies and estimates is in
the notes to our financial statements.




Loss
Contingencies




We record
loss contingencies when it is probable that a liability has been incurred and
the amount can be reasonably estimated. We consider loss contingency estimates
to be critical accounting estimates because they entail significant judgment
regarding probabilities and ranges of exposure, and the ultimate outcome of the
proceedings is unknown and could have a material adverse effect on our results
of operations, financial condition and cash flows. See Note 11 to our financial
statements for additional information.


36




Stock-Based
Compensation




The
Company follows the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”).  Under
SFAS 123R, the Company is required to recognize, as expense, the estimated fair
value of all share based payments to employees.  The fair value of
each option award granted under the Company’s stock plans 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 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. See Note 13 to our financial
statements for additional information.




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 6 to
our financial statements for additional information.




We assess
our future ability to use federal, state and foreign net operating loss
carry-forwards, capital loss carry-forwards and other deferred tax assets using
the more-likely-than-not criteria. These assessments include an evaluation of
our recent history of earnings and losses, future reversals of temporary
differences and identification of other sources of future taxable income,
including the identification of tax planning strategies in certain
situations.


37




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
may have in foreign denominations are not in themselves material.





As of December 31, 2008, 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 2008 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, 2008, 2007 and 2006 and for the
years then ended are included at the end of this report following the signature
page.


38


Item 9.  Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosures.





On July 9, 2007, the Company dismissed
Marc Lumer & Company (“Lumer”) as its independent auditors, effective
immediately. On July 9, 2007, the Company 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:




·
            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 audit of the Company’s financial statements for each of the
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.


39




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
“Management’s Report on Internal Control Over Financial Reporting” on page
F-1.




Changes
in Internal Control Over Financial Reporting




In
connection with the evaluation described above, we identified no change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the 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.





Item 9B.   Other
Information.





Not
applicable.


40


PART
III





Item
10.   Directors, Executive Officers, and Corporate
Governance.





See
“Business—Executive Officers” in Item 1 of this Form 10-K. The remaining
information called for by this item is incorporated by reference to “Election of
Directors,” “Corporate Governance,” “Board of Directors and Committees” and
“Additional Information – Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive proxy statement for our 2009 Annual Meeting of
Stockholders, which will be filed within 120 days of the end of our fiscal year
ended December 31, 2008 (the “2009 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.In the event the Company
amends a provision of its Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions or elects to grant a waiver, including
an implicit waiver, from a provision of the Company's Code of Ethics to such
individuals, the Company will provide disclosures of such event on its website
at www.sulphco.com within four business days following the date of the amendment
or waiver.





Item
11.   Executive Compensation.





Incorporated by reference to
“Compensation Discussion and Analysis,” “Compensation Committee Report,”
“Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity
Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension
Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon
Termination” and “Non-management Directors’ Compensation” in the 2009 Proxy
Statement.





Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.





Incorporated
by reference to “Information on Stock Ownership” in the 2009 Proxy
Statement.





Item
13.   Certain Relationships and Related Transactions, and
Director Independence.





Incorporated
by reference to “Related Person Transactions” and “Corporate Governance” in the
2009 Proxy Statement.





Item
14.   Principal Accounting Fees and Services.





Incorporated by reference to
“Independent Auditor” in the 2009 Proxy Statement.


41


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.





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.


42


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 12th
      day of December, 2004, between Rudolf W. Gunnerman and SulphCo,
      Inc.





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





10.17(1)
              Separation
      Agreement and General Release dated as of December 28, 2004, by and
      between SulphCo, Inc. and Kirk S.
Schumacher.
 
 10.18(2)
              Letter
      Agreement dated as of January 6, 2005, by and between SulphCo, Inc. and
      Alan L. Austin, Jr.
 
 10.19(3)
              Promissory
      Note from SulphCo, Inc. to Rudolf W. Gunnerman dated December 31,
      2004.
 
 10.20#
              Letter
      Agreement dated February 4, 2005, by and between SulphCo, Inc. and
      ChevronTexaco Energy Technology
Company.
 
 10.21(4)
              Agreement
      dated February 22, 2005, by and between SulphCo, Inc. and OIL-SC,
      Ltd.





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





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





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





10.25(8)
            Employment
      agreement with Loren J. Kalmen dated November 10,
  2005.





10.26(9)
            Letter
      Agreement by and between SulphCo and OIL-SC and dated as of November 9,
      2005.





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





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





10.29(12)
            2nd
      Loan 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.


43


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.





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.


44


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.





10.60(28)
            Severance
      Agreement with Brian J. Savino effective March 8,
  2008.





10.61(29)
            Stock
      Purchase Agreement dated April 30, 2008, by and between SulphCo, Inc. and
      Azimuth Opportunity Ltd.





10.62(30)
            Purchase
      Agreement dated May 27, 2008, by and between SulphCo, Inc. and the
      Purchasers parties thereto.





10.63
            Employment
      Agreement with Florian J. Schattenmann dated January 9,
    2009.





14*
            Code
      of Ethics adopted by the Board of Directors on June 12,
    2008.





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.





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.









45




*  Incorporated
by reference from the registrant’s Form 8-K (SEC File No. 1-32636) filed with
the SEC on June 13, 2008.





**
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.





(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.


46


(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.





(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.





(28)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on March 13, 2008.


47


(29)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on May 1, 2008.





(30)
Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
as filed with the SEC on March 29, 2008.


48


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
      6, 2009
              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
      6, 2009Larry
      D. Ryan
              
              (Principal
      Executive Officer)/s/ Stanley W. Farmer
              
              Vice
      President and Chief Financial
              
              March
      6, 2009Stanley
      W. Farmer
              
              Officer
      (Principal Financial Officerand
      Principal Accounting Officer)/s/ Robert H. C. van
    Maasdijk
              
              Chairman
      of the Board, Director
              
              March
      6, 2009Robert
      H. C. van Maasdijk/s/ Dr. Hannes Farnleitner
              
              Director
              
              March
      6, 2009Dr.
      Hannes Farnleitner/s/ Michael T. Heffner
              
              Director
              
              March
      6, 2009Michael
      T. Heffner/s/ Edward G. Rosenblum
              
              Director
              
              March
      6, 2009Edward
      G. Rosenblum/s/ Lawrence G. Schafran
              
              Director
              
              March
      6, 2009Lawrence
      G. Schafran/s/ Edward E. Urquhart
              
              Director
              
              March
      6, 2009Edward
      E. Urquhart/s/ Fred S.
      Zeidman
              
              Director
              
              March
      6, 2009Fred
      S. Zeidman


49


MANAGEMENT’S
REPORT


ON


INTERNAL
CONTROL OVER FINANCIAL REPORTING




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting of the Company. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United Sates of America.




The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the polices or procedures may deteriorate.




Management
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in InternalControl—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2008.




The
effectiveness of the internal control over financial reporting as of December
31, 2008 has been audited by Hein & Associates LLP, an independent
registered public accounting firm, as stated in their report which appears on
Page F-2.




March 4,
2009




/s/ Larry D. Ryan
              
              /s/ Stanley W. FarmerLarry
      D. Ryan
                Chief
      Executive Officer
              
              Stanley
      W. Farmer
                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, 2008, based on criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
Company’s accompanying Report on Internal Control Over Financial Reporting
appearing on page F-1. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2008 and 2007, and the related statements of operations, cash
flows and changes in stockholders’ equity (deficit) for the years ended December
31, 2008 and 2007, and our report dated March 4 , 2009, expressed an unqualified
opinion thereon.




/s/
      Hein & Associates
      LLP




Houston,
Texas




March 4,
2009




F-2


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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




We have
audited the accompanying balance sheets of SulphCo, Inc. (a company in the
Development Stage) (the “Company”) as of December 31, 2008 and 2007, and the
related statements of operations, cash flows and changes in stockholders’ equity
(deficit) for the years ended December 31, 2008 and 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 audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company at December 31, 2008
and 2007, and the results of its operations and its cash flows for the years
ended December 31, 2008 and 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
years ending December 31, 2008 and 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, 2008.




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, 2008, 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 4, 2009, expressed an
unqualified opinion on the Company’s internal control over financial
reporting.




/s/
      Hein & Associates
      LLP




Houston,
Texas




March 4,
2009




F-3




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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




We have
audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows of SulphCo, Inc. (the “Company”) for the year
ended December 31, 2006. 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.




In our
opinion, the  accompanying statements of operations, stockholders' equity
(deficit), and cash flows the Company for the year ended December 31, 2006,
present fairly, in all material respects, the financial position of the
Company for the year ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.





/s/ Marc Lumer &
  CompanySan
      Francisco, CaliforniaApril
      2, 2007




F-4


SULPHCO,
INC.


(A
Company in the Development Stage)


BALANCE
SHEETS


December
31, 2008 and 2007




2008
                                                                    
                                                                    
                                                                    2007ASSETSCurrent AssetsCash
      and cash equivalents
                                                                    
                                                                    $
                                                                    17,567,848
                                                                    
                                                                    
                                                                    $
                                                                    7,430,138Prepaid
      expenses and other
                                                                    
                                                                    
                                                                    546,239
                                                                    
                                                                    
                                                                    
                                                                    442,934Total
      current assets
                                                                    
                                                                    
                                                                    18,114,087
                                                                    
                                                                    
                                                                    
                                                                    7,873,072Property
      and Equipment, net
                                                                    
                                                                    
                                                                    294,522
                                                                    
                                                                    
                                                                    
                                                                    309,323Other AssetsIntangible
      assets, net
                                                                    
                                                                    
                                                                    993,829
                                                                    
                                                                    
                                                                    
                                                                    881,848Other
                                                                    
                                                                    
                                                                    254,445
                                                                    
                                                                    
                                                                    
                                                                    37,798Total
      other assets
                                                                    
                                                                    
                                                                    1,248,274
                                                                    
                                                                    
                                                                    
                                                                    919,646Total
      assets
                                                                    
                                                                    $
                                                                    19,656,883
                                                                    
                                                                    
                                                                    $
                                                                    9,102,041LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent LiabilitiesAccounts
      payable and accrued expenses
                                                                    
                                                                    $
                                                                    1,823,033
                                                                    
                                                                    
                                                                    $
                                                                    1,515,278Refundable
      deposit
                                                                    
                                                                    
                                                                    550,000
                                                                    
                                                                    
                                                                    
                                                                    550,000Late
      registration penalty (including accrued interest)
                                                                    
                                                                    
                                                                    624,811
                                                                    
                                                                    
                                                                    
                                                                    1,094,671Convertible
      notes payable, net of discount
                                                                    
                                                                    
                                                                    3,824,282
                                                                    
                                                                    
                                                                    
                                                                    -Total
      current liabilities
                                                                    
                                                                    
                                                                    6,822,126
                                                                    
                                                                    
                                                                    
                                                                    3,159,949Long-Term LiabilitiesConvertible
      notes payable, net of discount
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    2,967,802Other
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    180,058Total
      long-term liabilities
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    3,147,860Total
      liabilities
                                                                    
                                                                    
                                                                    6,822,126
                                                                    
                                                                    
                                                                    
                                                                    6,307,809Commitments and Contingencies (Note
      11)Stockholders' EquityPreferred
      stock: 10,000,000 shares authorized ($0.001 par value) none
      issued
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Common
      stock: 110,000,000 shares authorized ($0.001 par value) 89,919,029 and
      80,848,416 shares issued and outstanding, respectively
                                                                    
                                                                    
                                                                    89,919
                                                                    
                                                                    
                                                                    
                                                                    80,848Additional
      paid-in capital
                                                                    
                                                                    
                                                                    157,992,101
                                                                    
                                                                    
                                                                    
                                                                    122,700,951Deficit
      accumulated during the development stage
                                                                    
                                                                    
                                                                    (145,247,263
                                                                    )
                                                                    
                                                                    
                                                                    (119,987,567
                                                                    )Total
      stockholders' equity
                                                                    
                                                                    
                                                                    12,834,757
                                                                    
                                                                    
                                                                    
                                                                    2,794,232Total
      liabilities and stockholders' equity
                                                                    
                                                                    $
                                                                    19,656,883
                                                                    
                                                                    
                                                                    $
                                                                    9,102,041




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, 2008, 2007 and 2006


and for
the Period from Inception through December 31, 2008




2008
                                                                                      
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      
                                                                                      Inception
                                                                                        to DateRevenueSales
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      42,967ExpensesSelling,
      general, and administrative expenses
                                                                                      
                                                                                      
                                                                                      (16,034,049
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (11,445,749
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (13,566,230
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (67,937,142
                                                                                      )Research
      and development expenses:Fujairah
      test facility
                                                                                      
                                                                                      
                                                                                      (364,904
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (1,694,509
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (21,473,129
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (23,532,542
                                                                                      )Other
                                                                                      
                                                                                      
                                                                                      (3,688,804
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (6,015,959
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (3,955,562
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (16,843,134
                                                                                      )Loss
      on joint venture
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (136,095
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (136,095
                                                                                      )Loss
      on disposal of asset
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (221,711
                                                                                      )Loss
      on impairment of asset
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (233,900
                                                                                      )Total
      operating expenses
                                                                                      
                                                                                      
                                                                                      (20,087,757
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (19,156,217
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (39,131,016
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (108,904,524
                                                                                      )Loss
      from operations
                                                                                      
                                                                                      
                                                                                      (20,087,757
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (19,156,217
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (39,131,016
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (108,861,557
                                                                                      )Other income
      (expense)Interest
      income
                                                                                      
                                                                                      
                                                                                      138,151
                                                                                      
                                                                                      
                                                                                      
                                                                                      290,094
                                                                                      
                                                                                      
                                                                                      
                                                                                      477,869
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,156,715Interest
      expense
                                                                                      
                                                                                      
                                                                                      (1,222,203
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (5,487,048
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (465,547
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (7,918,718
                                                                                      )Late
      registration penalty
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (760,240
                                                                                      )Other
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (9,160
                                                                                      )
                                                                                      
                                                                                      
                                                                                      2,532
                                                                                      
                                                                                      
                                                                                      
                                                                                      (6,628
                                                                                      )Net loss
                                                                                      
                                                                                      
                                                                                      (21,171,809
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (24,362,331
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (39,116,162
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (116,390,428
                                                                                      )Deemed
      dividend
                                                                                      
                                                                                      
                                                                                      (4,087,887
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (24,768,948
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (28,856,835
                                                                                      )Net loss attributable to
      common stockholders
                                                                                      
                                                                                      $
                                                                                      (25,259,696
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (49,131,279
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (39,116,162
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (145,247,263
                                                                                      )Other comprehensive income
      (loss)Foreign
      currency translation gain (loss)
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,455
                                                                                      
                                                                                      
                                                                                      
                                                                                      (3,455
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -Net
      comprehensive income (loss)
                                                                                      
                                                                                      $
                                                                                      (25,259,696
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (49,127,824
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (39,119,617
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (145,247,263
                                                                                      )Loss
      per share: basic and diluted
                                                                                      
                                                                                      $
                                                                                      (0.29
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.64
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.55
                                                                                      )Weighted
      average shares basic and diluted
                                                                                      
                                                                                      
                                                                                      85,870,148
                                                                                      
                                                                                      
                                                                                      
                                                                                      77,062,280
                                                                                      
                                                                                      
                                                                                      
                                                                                      70,737,679





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, 2008, 2007 and 2006


and for
the Period from Inception to December 31, 2008


Inception2008
                                                                            
                                                                            
                                                                            2007
                                                                            
                                                                            
                                                                            2006
                                                                            
                                                                            
                                                                            To DateCash Flows From Operating
      ActivitiesNet
      loss
                                                                            
                                                                            $
                                                                            (21,171,809
                                                                            )
                                                                            
                                                                            $
                                                                            (24,362,331
                                                                            )
                                                                            
                                                                            $
                                                                            (39,116,162
                                                                            )
                                                                            
                                                                            $
                                                                            (116,390,428
                                                                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                                            
                                                                            
                                                                            220,401
                                                                            
                                                                            
                                                                            
                                                                            189,880
                                                                            
                                                                            
                                                                            
                                                                            112,198
                                                                            
                                                                            
                                                                            
                                                                            1,407,845Accretion
      of convertible notes payable discount
                                                                            
                                                                            
                                                                            856,480
                                                                            
                                                                            
                                                                            
                                                                            5,024,308
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            5,880,788Allowance
      for loan receivable
                                                                            
                                                                            
                                                                            18,310
                                                                            
                                                                            
                                                                            
                                                                            313,451
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            331,761Stock-based
      compensation
                                                                            
                                                                            
                                                                            5,226,632
                                                                            
                                                                            
                                                                            
                                                                            4,335,261
                                                                            
                                                                            
                                                                            
                                                                            2,779,325
                                                                            
                                                                            
                                                                            
                                                                            19,710,735Other
                                                                            
                                                                            
                                                                            502,133
                                                                            
                                                                            
                                                                            
                                                                            (6,908
                                                                            )
                                                                            
                                                                            
                                                                            136,096
                                                                            
                                                                            
                                                                            
                                                                            1,937,932Changes
      in:Receivables
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (118,657
                                                                            )
                                                                            
                                                                            
                                                                            (118,657
                                                                            )Prepaid
      expenses and other
                                                                            
                                                                            
                                                                            (121,615
                                                                            )
                                                                            
                                                                            
                                                                            (215,458
                                                                            )
                                                                            
                                                                            
                                                                            (6,239
                                                                            )
                                                                            
                                                                            
                                                                            (480,889
                                                                            )Accounts
      payable and accrued expenses
                                                                            
                                                                            
                                                                            127,697
                                                                            
                                                                            
                                                                            
                                                                            (2,013,966
                                                                            )
                                                                            
                                                                            
                                                                            2,852,079
                                                                            
                                                                            
                                                                            
                                                                            1,745,223Other
      assets
                                                                            
                                                                            
                                                                            (216,647
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            333,353Accrued
      fees and interest
                                                                            
                                                                            
                                                                            (469,860
                                                                            )
                                                                            
                                                                            
                                                                            135,867
                                                                            
                                                                            
                                                                            
                                                                            (275,000
                                                                            )
                                                                            
                                                                            
                                                                            211,992Net
      cash used in operating activities
                                                                            
                                                                            
                                                                            (15,028,278
                                                                            )
                                                                            
                                                                            
                                                                            (16,599,896
                                                                            )
                                                                            
                                                                            
                                                                            (33,636,360
                                                                            )
                                                                            
                                                                            
                                                                            (85,430,345
                                                                            )Cash Flows From Investing
      ActivitiesPurchase
      of property and equipment, net of sales
                                                                            
                                                                            
                                                                            (137,259
                                                                            )
                                                                            
                                                                            
                                                                            (240,534
                                                                            )
                                                                            
                                                                            
                                                                            105,550
                                                                            
                                                                            
                                                                            
                                                                            (1,393,333
                                                                            )Investments
      in joint ventures and subsidiaries
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (361,261
                                                                            )Return/
      (payment) of deposits
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            104,000
                                                                            
                                                                            
                                                                            
                                                                            (36,822
                                                                            )Investments
      in intangible assets
                                                                            
                                                                            
                                                                            (182,455
                                                                            )
                                                                            
                                                                            
                                                                            (418,436
                                                                            )
                                                                            
                                                                            
                                                                            (180,268
                                                                            )
                                                                            
                                                                            
                                                                            (1,169,641
                                                                            )Net
      cash (used in) provided by investing activities
                                                                            
                                                                            
                                                                            (319,714
                                                                            )
                                                                            
                                                                            
                                                                            (658,970
                                                                            )
                                                                            
                                                                            
                                                                            29,282
                                                                            
                                                                            
                                                                            
                                                                            (2,961,057
                                                                            )Cash
      Flows from Financing
    ActivitiesProceeds
      from sales of stock, net of offering costs
                                                                            
                                                                            
                                                                            25,485,702
                                                                            
                                                                            
                                                                            
                                                                            18,684,012
                                                                            
                                                                            
                                                                            
                                                                            35,237,417
                                                                            
                                                                            
                                                                            
                                                                            95,168,890Proceeds
      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
                                                                            )
                                                                            
                                                                            
                                                                            (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
                                                                            
                                                                            
                                                                            25,485,702
                                                                            
                                                                            
                                                                            
                                                                            18,684,012
                                                                            
                                                                            
                                                                            
                                                                            32,737,417
                                                                            
                                                                            
                                                                            
                                                                            105,959,250Net
      change in cash and cash
equivalents
                                                                            
                                                                            
                                                                            10,137,710
                                                                            
                                                                            
                                                                            
                                                                            1,425,146
                                                                            
                                                                            
                                                                            
                                                                            (869,661
                                                                            )
                                                                            
                                                                            
                                                                            17,567,848Cash
      and cash equivalents: beginning of period
                                                                            
                                                                            
                                                                            7,430,138
                                                                            
                                                                            
                                                                            
                                                                            6,004,992
                                                                            
                                                                            
                                                                            
                                                                            6,874,653
                                                                            
                                                                            
                                                                            
                                                                            -Cash
      and cash equivalents: end of period
                                                                            
                                                                            $
                                                                            17,567,848
                                                                            
                                                                            
                                                                            $
                                                                            7,430,138
                                                                            
                                                                            
                                                                            $
                                                                            6,004,992
                                                                            
                                                                            
                                                                            $
                                                                            17,567,848Supplemental informationCash
      paid for interest
                                                                            
                                                                            $
                                                                            417,673
                                                                            
                                                                            
                                                                            $
                                                                            341,545
                                                                            
                                                                            
                                                                            $
                                                                            334,251
                                                                            
                                                                            
                                                                            $
                                                                            1,385,433Cash
      paid for income taxes
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Non-cash investing and financing
      activitiesExtinguishment
      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
                                                                            
                                                                            
                                                                            4,087,887
                                                                            
                                                                            
                                                                            
                                                                            24,768,948
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            28,856,835





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, 2008





StockAdditional
                                          
                                          
                                          
                                          
                                          
                                          SubscriptionsCommon Stock
                                          
                                          
                                          Paid-in
                                          
                                          
                                          Accumulated
                                          
                                          
                                          Receivable
                                          
                                          
                                          TotalShares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Deficit
                                          
                                          
                                          and
      Other
                                          
                                          
                                          EquityBalance
      at January 13, 1999
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Stock
      issued for cash at $167 per share
                                          
                                          
                                          1,000
                                          
                                          
                                          
                                          1
                                          
                                          
                                          
                                          166,999
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          167,000Restatement
      for recapitalization of GRD, Inc.
                                          
                                          
                                          19,999,000
                                          
                                          
                                          
                                          19,999
                                          
                                          
                                          
                                          (19,999
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (128,802
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (128,802
                                          )Balance
      at December 31, 1999
                                          
                                          
                                          20,000,000
                                          
                                          
                                          
                                          20,000
                                          
                                          
                                          
                                          147,000
                                          
                                          
                                          
                                          (128,802
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          38,198Contributions
      from stockholders:Cash
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          169,169
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          169,169Equipment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          362,331
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          362,331Acquisition
      of GRD, Inc.
                                          
                                          
                                          1,200,000
                                          
                                          
                                          
                                          1,200
                                          
                                          
                                          
                                          (251,200
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (250,000
                                          )Stock
      issued for cash and subscriptionreceivable 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, 2008





StockAdditional
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  SubscriptionsCommon Stock
                                                                                  
                                                                                  
                                                                                  Paid-in
                                                                                  
                                                                                  
                                                                                  Accumulated
                                                                                  
                                                                                  
                                                                                  Receivable
                                                                                  
                                                                                  
                                                                                  TotalShares
                                                                                  
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  
                                                                                  Capital
                                                                                  
                                                                                  
                                                                                  Deficit
                                                                                  
                                                                                  
                                                                                  and Other
                                                                                  
                                                                                  
                                                                                  EquityBalance
      at December 31, 2000
                                                                                  
                                                                                  
                                                                                  22,020,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  22,020
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,850,680
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (1,493,192
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (208,500
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  171,008Stock
      issued for intangible assets at $4.25 per share in January
      2001
                                                                                  
                                                                                  
                                                                                  292,800
                                                                                  
                                                                                  
                                                                                  
                                                                                  293
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,244,107
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,244,400Stock
      issued for intangible assets at $2.85 per share in February
      2001
                                                                                  
                                                                                  
                                                                                  400,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  400
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,139,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,140,000Stock
      sold to related party at $1.47 per share in February
      2001
                                                                                  
                                                                                  
                                                                                  24,750
                                                                                  
                                                                                  
                                                                                  
                                                                                  25
                                                                                  
                                                                                  
                                                                                  
                                                                                  36,431
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  36,456Stock
      issued for marketing services at $2.86 per share  in
      April 2001
                                                                                  
                                                                                  
                                                                                  200,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  200
                                                                                  
                                                                                  
                                                                                  
                                                                                  571,800
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  572,000Stock
      options granted to related parties for services in June
      2001
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  773,931
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  773,931Stock
      issued in exchange for notes receivable at $0.50 per share in May
      2001
                                                                                  
                                                                                  
                                                                                  9,556,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  9,556
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,768,444
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,778,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Stock
      issued in exchange for notes receivable at $1.50 per share in June
      2001
                                                                                  
                                                                                  
                                                                                  425,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  425
                                                                                  
                                                                                  
                                                                                  
                                                                                  637,075
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (637,500
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Stock
      sold for cash at $2.94 per share in June 2001
                                                                                  
                                                                                  
                                                                                  100,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  100
                                                                                  
                                                                                  
                                                                                  
                                                                                  293,900
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  294,000Stock
      issued in exchange for note receivable at $1.41 per share in June
      2001
                                                                                  
                                                                                  
                                                                                  200,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  200
                                                                                  
                                                                                  
                                                                                  
                                                                                  281,800
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (282,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Stock
      issued to related party for cash at $0.50 per share  in
      June 2001
                                                                                  
                                                                                  
                                                                                  350,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  350
                                                                                  
                                                                                  
                                                                                  
                                                                                  174,650
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  175,000Cash
      received for subscription receivable in July
    2001
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  282,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  282,000Cash
      received for subscription receivable in August
      2001
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  340,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  340,000Stock
      issued for subscription  receivable at $0.725 per share
      in September 2001
                                                                                  
                                                                                  
                                                                                  2,758,620
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,759
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,997,241
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (2,000,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Stock
      issued to related party for consulting fees at $0.85 per
      share  in November 2001
                                                                                  
                                                                                  
                                                                                  4,000,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,396,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,400,000Stock
      returned in November 2001
                                                                                  
                                                                                  
                                                                                  (300,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (300
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,558,147
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  784,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  (773,947
                                                                                  )Cash
      received for subscriptions
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  200,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  200,000Stock
      returned in December 2001
                                                                                  
                                                                                  
                                                                                  (100,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (100
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (49,900
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  50,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Stock
      options at a weighted average price of $0.75 per share in October
      2001
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  89,020
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  89,020Net
      loss
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (6,927,525
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (6,927,525
                                                                                  )Balance
      at December 31, 2001
                                                                                  
                                                                                  
                                                                                  39,927,170
                                                                                  
                                                                                  
                                                                                  $
                                                                                  39,928
                                                                                  
                                                                                  
                                                                                  $
                                                                                  15,646,632
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (8,420,717
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (6,249,500
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  1,016,343





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




F-9


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008





StockAdditional
                                                
                                                
                                                
                                                
                                                
                                                SubscriptionsCommon Stock
                                                
                                                
                                                Paid-in
                                                
                                                
                                                Accumulated
                                                
                                                
                                                Receivable
                                                
                                                
                                                TotalShares
                                                
                                                
                                                Amount
                                                
                                                
                                                Capital
                                                
                                                
                                                Deficit
                                                
                                                
                                                and Other
                                                
                                                
                                                EquityBalance
      at December 31, 2001
                                                
                                                
                                                39,927,170
                                                
                                                
                                                $
                                                39,928
                                                
                                                
                                                $
                                                15,646,632
                                                
                                                
                                                $
                                                (8,420,717
                                                )
                                                
                                                $
                                                (6,249,500
                                                )
                                                
                                                $
                                                1,016,343Stock
      issued for  related party services at$0.50 per share in
      March 2002
                                                
                                                
                                                10,000,000
                                                
                                                
                                                
                                                10,000
                                                
                                                
                                                
                                                4,990,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                5,000,000Stock
      returned in May 2002
                                                
                                                
                                                (1,000,000
                                                )
                                                
                                                
                                                (1,000
                                                )
                                                
                                                
                                                (499,000
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                500,000
                                                
                                                
                                                
                                                -Stock
      returned in June 2002
                                                
                                                
                                                (100,000
                                                )
                                                
                                                
                                                (100
                                                )
                                                
                                                
                                                (71,900
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                72,000
                                                
                                                
                                                
                                                -Stock
      returned in July 2002
                                                
                                                
                                                (25,000
                                                )
                                                
                                                
                                                (25
                                                )
                                                
                                                
                                                (37,475
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                37,500
                                                
                                                
                                                
                                                -Payment
      on stock subscription receivedin July 2002
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                515,500
                                                
                                                
                                                
                                                515,500Stock
      returned in July 2002
                                                
                                                
                                                (1,000,000
                                                )
                                                
                                                
                                                (1,000
                                                )
                                                
                                                
                                                (499,000
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                500,000
                                                
                                                
                                                
                                                -Stock
      issued for services at $0.10per
      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 $0.10per share in November
      2002
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                9,900
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                10,000Stock
      issued to a related party for cash at $0.10per 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, 2008




StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and Other
                  
                  
                  EquityBalance
      at December 31, 2002
                  
                  
                  47,621,170
                  
                  
                  $
                  47,622
                  
                  
                  $
                  19,153,938
                  
                  
                  $
                  (14,994,344
                  )
                  
                  $
                  (4,624,500
                  )
                  
                  $
                  (417,284
                  )Stock
      subscribed for  services at $0.42 per share in February
      2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,950
                  
                  
                  
                  -
                  
                  
                  
                  50
                  
                  
                  
                  21,000Payment
      on stock subscription received in February 2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,575,000
                  
                  
                  
                  3,575,000Stock
      issued to a related party for cash at $0.33 per share in March
      2003
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  16,450
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,500Stock
      issued for services at $0.32 per share in June 2003
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  15,950
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,000Stock
      returned in August 2003
                  
                  
                  (196,870
                  )
                  
                  
                  (197
                  )
                  
                  
                  (196,678
                  )
                  
                  
                  -
                  
                  
                  
                  196,875
                  
                  
                  
                  -Stock
      returned in September 2003
                  
                  
                  (3,130
                  )
                  
                  
                  (3
                  )
                  
                  
                  (3,322
                  )
                  
                  
                  -
                  
                  
                  
                  3,325
                  
                  
                  
                  -Stock
      issued to a related party for cash at $0.23 per share in November
      2003
                  
                  
                  2,173,913
                  
                  
                  
                  2,174
                  
                  
                  
                  497,826
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500,000Stock
      returned in December 2003
                  
                  
                  (25,000
                  )
                  
                  
                  (25
                  )
                  
                  
                  (37,275
                  )
                  
                  
                  -
                  
                  
                  
                  37,300
                  
                  
                  
                  -Stock
      subscribed for  prepaid interest to a related party at
      $0.42 per share in December 2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  295,000
                  
                  
                  
                  -
                  
                  
                  
                  (295,000
                  )
                  
                  
                  -Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,170,959
                  )
                  
                  
                  -
                  
                  
                  
                  (3,170,959
                  )Balance
      at December 31, 2003
                  
                  
                  49,670,083
                  
                  
                  $
                  49,671
                  
                  
                  $
                  19,762,839
                  
                  
                  $
                  (18,165,303
                  )
                  
                  $
                  (1,106,950
                  )
                  
                  $
                  540,257





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




F-11


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008




StockAdditional
                  
                  
                  
                  
                  
                  SubscriptionsCommon Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Receivable
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  and Other
                  
                  
                  EquityBalance
      at December 31, 2003
                  
                  
                  49,670,083
                  
                  
                  $
                  49,671
                  
                  
                  $
                  19,762,839
                  
                  
                  $
                  (18,165,303
                  )
                  
                  $
                  (1,106,950
                  )
                  
                  $
                  540,257Restricted
      stock issued for interest on notes $0.296 per share in January
      2004
                  
                  
                  1,000,000
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,000
                  )
                  
                  
                  -Stock
      issued for services at $0.85 per share in January
2004
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  84,900
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85,000Issued
      subscribed stock at $0.42 per share in March 2004
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (50
                  )
                  
                  
                  -Private
      placement stock issuance at $0.90 per share in June
    2004
                  
                  
                  2,978,342
                  
                  
                  
                  2,978
                  
                  
                  
                  2,677,530
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,680,508Private
      placement stock issuance at $1.25 per share in June
    2004
                  
                  
                  2,030,960
                  
                  
                  
                  2,031
                  
                  
                  
                  1,896,912
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,898,943Stock
      options exercised at $0.55 per share in July 2004
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  109,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  110,000Stock
      options exercised at $0.35 per share in July 2004
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  34,900
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  35,000Stock
      issued for services at $2.86 per share in August 2004
                  
                  
                  45,000
                  
                  
                  
                  45
                  
                  
                  
                  128,655
                  
                  
                  
                  -
                  
                  
                  
                  (128,700
                  )
                  
                  
                  -Cancellation
      of subscribed stock at $1.50 per share in September
    2004
                  
                  
                  (45,000
                  )
                  
                  
                  (45
                  )
                  
                  
                  (67,455
                  )
                  
                  
                  -
                  
                  
                  
                  67,500
                  
                  
                  
                  -Stock
      options exercised at $0.55 per share in December 2004
                  
                  
                  300,000
                  
                  
                  
                  300
                  
                  
                  
                  164,700
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  165,000Amortization
      of prepaid interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  296,000
                  
                  
                  
                  296,000Amortization
      of prepaid expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53,625
                  
                  
                  
                  53,625Contribution
      from related party stockholder of option given to former employee to
      by 100,000 shares at $0.55 per share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,000Related
      party receivable for tax withholding on exercise of stock
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (257,750
                  )
                  
                  
                  (257,750
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,146,453
                  )
                  
                  
                  -
                  
                  
                  
                  (4,146,453
                  )Balance
      at December 31, 2004
                  
                  
                  56,429,385
                  
                  
                  $
                  56,430
                  
                  
                  $
                  25,347,781
                  
                  
                  $
                  (22,311,756
                  )
                  
                  $
                  (1,077,325
                  )
                  
                  $
                  2,015,130





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




F-12


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008




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





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




F-13


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008


StockAdditional
              
              
              
              
              
              SubscriptionsCommon Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Receivable
              
              
              TotalShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              and Other
              
              
              EquityBalance
      at December 31, 2005
              
              
              60,536,795
              
              
              $
              60,536
              
              
              $
              30,604,342
              
              
              $
              (31,740,126
              )
              
              $
              (744,500
              )
              
              $
              (1,819,748
              )Warrants
      and Additional Investment Rights exercised in January 2006
              
              
              4,423,628
              
              
              
              4,424
              
              
              
              4,790,044
              
              
              
              -
              
              
              
              -
              
              
              
              4,794,468Warrants
      and Additional Investment Rights exercised in February
2006
              
              
              1,291,660
              
              
              
              1,292
              
              
              
              1,303,532
              
              
              
              -
              
              
              
              -
              
              
              
              1,304,824Warrants
      and Additional Investment Rights exercised in March 2006
              
              
              2,151,327
              
              
              
              2,151
              
              
              
              2,068,603
              
              
              
              -
              
              
              
              -
              
              
              
              2,070,754Private
      placement – March 2006
              
              
              4,000,000
              
              
              
              4,000
              
              
              
              27,063,373
              
              
              
              -
              
              
              
              -
              
              
              
              27,067,373Stock
      issued to a consultant for services at $7.44 per share in March
      2006
              
              
              17,500
              
              
              
              18
              
              
              
              130,182
              
              
              
              -
              
              
              
              -
              
              
              
              130,200Stock
      option accrued for a consultant for services at $7.44 per share in March
      2006
              
              
              -
              
              
              
              -
              
              
              
              357,525
              
              
              
              -
              
              
              
              -
              
              
              
              357,525Stock
      issued to a Director for services at $8.80 per share in March
      2006
              
              
              50,000
              
              
              
              50
              
              
              
              439,950
              
              
              
              -
              
              
              
              -
              
              
              
              440,000Stock
      issued to a Director for services at $12.72 per share in March
      2006
              
              
              50,000
              
              
              
              50
              
              
              
              635,950
              
              
              
              -
              
              
              
              -
              
              
              
              636,000Stock
      option accrued for a consultant for services at $7.44 per share in March
      2006
              
              
              -
              
              
              
              -
              
              
              
              8,050
              
              
              
              -
              
              
              
              -
              
              
              
              8,050Accrual
      of stock option for Director – June 2006
              
              
              -
              
              
              
              -
              
              
              
              687,500
              
              
              
              -
              
              
              
              -
              
              
              
              687,500Stock
      issued to a Director for services at $5.53 per share in August
      2006
              
              
              50,000
              
              
              
              50
              
              
              
              276,450
              
              
              
              -
              
              
              
              -
              
              
              
              276,500Stock
      issued to a Director for services at $4.87 per share in December
      2006
              
              
              50,000
              
              
              
              50
              
              
              
              243,450
              
              
              
              -
              
              
              
              -
              
              
              
              243,500Accrual
      of stock option for Director
              
              
              -
              
              
              
              -
              
              
              
              1,045,000
              
              
              
              -
              
              
              
              -
              
              
              
              1,045,000Options
      for Director forfeited December 2006
              
              
              -
              
              
              
              -
              
              
              
              (1,045,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,045,000
              )Reversal
      of stock subscriptions receivable
              
              
              -
              
              
              
              -
              
              
              
              (744,500
              )
              
              
              -
              
              
              
              744,500
              
              
              
              -Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,455
              )
              
              
              (3,455
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (39,116,162
              )
              
              
              -
              
              
              
              (39,116,162
              )Balance
      at December 31, 2006
              
              
              72,620,910
              
              
              $
              72,621
              
              
              $
              67,864,451
              
              
              $
              (70,856,288
              )
              
              $
              (3,455
              )
              
              $
              (2,922,671
              )




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




F-14


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008




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




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




F-15


SULPHCO,
INC.


(A
Company in the Development Stage)


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


From
Inception to December 31, 2008





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





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




F-16


SULPHCO,
INC.


(A
Company in the Development Stage)


NOTES TO FINANCIAL
STATEMENTS


December
31, 2008





1.
            Organizationand 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 sulfur 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.”





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 original maturities of three months or less are
considered to be cash equivalents.





FairValue 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.





F-17




Property and
Equipment




Property
and equipment are recorded at cost, less accumulated
depreciation.  The Company periodically reviews its long-lived assets
for impairment and whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recovered through undiscounted future
cash flows, such impairment losses are recognized in the statement of
operations.




The cost
of property and equipment is depreciated over the remaining estimated useful
lives of the assets ranging from three to seven years.  Leasehold
improvements are depreciated over the lesser of the terms of the lease or the
estimated useful lives of the assets.  Depreciation is computed using
the straight line method.  Expenditures for maintenance and repairs
are expensed when incurred, while betterments are capitalized.  Gains
and losses on the sale of property and equipment are reflected in the statement
of operations.




Intangible
Assets




Intangible assets include patents,
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 10 to 20 years.
Intangible assets with a definite life are tested for impairment whenever events
or circumstances indicate that the carrying amount of an asset (asset group) may
not be recoverable.An impairment loss is
recognized when the carrying amount of an asset exceeds the estimated
undiscounted cash flows used in determining the fair value of the asset. The
amount of the impairment loss to be recorded is calculated by the excess of the
asset’s carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis.





EquityMethod





Investments
in joint ventures and other entities over which the Company does not have
control, but does have the ability to exercise significant influence over the
operating and financial policies, are carried under the equity method. The
Investment in Fujairah Oil Technology LLC, 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.




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.




F-18




Income
Taxes




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





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




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, 2008, 2007 and 2006, there were
approximately 11.0 million, 9.0 million and 7.3 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,
2008, 2007 and 2006, 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, 2008, 2007 and 2006, the Company recognized
non-cash general and administrative expenses for stock options and restricted
stock awards of approximately $5.2 million, $4.3 million and $2.8 million,
respectively.




Concentrations





The Company has generally been able to
obtain component parts from multiple sources without
difficulty.  Nevertheless, because of price and quality
considerations, in 2005, the Company began utilizing three manufacturers to
supply virtually all of its needs, as the Company's results could be adversely
affected if manufacturing were delayed or curtailed.





Reclassifications





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




F-19


New Accounting
Pronouncements
  Recently
Adopted Accounting Standards
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS 157 was effective for
fiscal years beginning after November 15, 2007, however the FASB has
delayed the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities,
except those items recognized or disclosed at fair value on an annual or more
frequent basis. The adoption of SFAS 157 for financial assets and liabilities in
the first quarter of 2008 did not have a material impact on the Company’s
financial statements. The Company does not believe that the adoption of SFAS 157
for nonfinancial assets and nonfinancial liabilities will have a material impact
on its financial statements.
  Recently
Issued Accounting Standards
  In June
2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force
(“EITF”) Issue No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that unvested stock-based
compensation awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) should be classified as participating
securities and should be included in the computation of earnings per share
pursuant to the two-class method as described by SFAS No. 128, Earnings per Share. The
provisions of FSP EITF 03-6-1 are required for fiscal years beginning after
December 15, 2008. The Company does not believe the adoption of FSP EITF
03-6-1 will have a material impact on its computation of earnings per
share.
  In June
2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF
07-5”). EITF 07-5 addresses the determination of whether provisions that
introduce adjustment features (including contingent adjustment features) would
prevent treating a derivative contract or an embedded derivative on a company’s
own stock as indexed solely to the company’s stock. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008. The Company does not
believe the adoption of EITF 07-5 will have a material impact on its
consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (revised 2007)(“SFAS 141R”). SFAS 141R replaces SFAS 141 and requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value. SFAS 141R also requires transaction costs related to the business
combination to be expensed as incurred. SFAS 141R is effective for business
combinations for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. The Company does not believe the
adoption of SFAS 141R will have a material impact on its consolidated financial
statements.
 
 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
$57,000.  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 established an allowance for doubtful collection equal
to the total principal balance and accrued interest thereon.
 
 F-20
  The
Company also holds a refundable deposit of SulphCo KorAsia, which may be
available to offset the loan receivable, should there be a final determination
that SulphCo KorAsia could not repay the loan and accrued interest (see Note
7).
 
 3.  Property and
Equipment
  The
following is a summary of property and equipment at cost, less accumulated
depreciation:
  2008
                                
                                
                                2007Equipment
                                
                                $
                                933,894
                                
                                
                                $
                                868,172Computers
                                
                                
                                260,688
                                
                                
                                
                                230,177Office
      furniture
                                
                                
                                61,071
                                
                                
                                
                                57,116Vehicles
                                
                                
                                12,000
                                
                                
                                
                                -Leasehold
      improvements
                                
                                
                                92,965
                                
                                
                                
                                70,9651,360,618
                                
                                
                                
                                1,226,430Less:
      Accumulated depreciation
                                
                                
                                (1,066,096
                                )
                                
                                
                                (917,107
                                )Total
                                
                                $
                                294,522
                                
                                
                                $
                                309,323
  Depreciation expense was approximately
$0.1 million, $0.1 million and $0.2 million for 2008, 2007 and 2006,
respectively.
  4.  Intangible
Assets
 
 As of December 31, 2008, the Company
had eight U.S. patents, four U.S. patents pending, 46 foreign patents, and 134
foreign patents pending.  At December 31, 2008 and 2007, the Company
had capitalized approximately $1.2 million and $1.0 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, 2008 and 2007 was approximately $0.2 million and $0.1
million, respectively.  During the years ended December 31, 2008, 2007
and 2006 the Company capitalized intangible assets of approximately $0.2
million, $0.4 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, 2008, 2007, and 2006 was approximately $70,000, $45,000
and $28,000, respectively.  Maintenance costs of approximately $62,000
and $59,000 were expensed throughout 2008 and 2007, 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 Expense2009
                    
                    $
                    75,0002010
                    
                    $
                    75,0002011
                    
                    $
                    75,0002012
                    
                    $
                    75,0002013
                    
                    $
                    75,000
 
 F-21
  5. 
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 “FOT”),
a United Arab Emirates limited liability company, to implement the Company’s
SonocrackingTM desulfurization technology.  FOT  is 50% owned
by Trans Gulf and 50% owned by the Company.  Fujairah is one of the
seven Emirates of the United Arab Emirates.  Under the terms of the
joint venture, the Company is responsible for contributing its SonocrackingTM
units and the facility that houses them including bearing all costs relating
thereto.  Operation and maintenance of the Fujairah test facility is
the responsibility of FOT.  Until FOT generates revenues, operating
expenses of the facility are expected to be funded from capital contributions of
the Company.
 
 Once FOT
begins generating revenues, the joint venture agreement contemplates that
profits and losses will be shared on a 50/50 basis between Trans Gulf and the
Company.  The Company’s 50% share of distributions made by the joint
venture will also be subject to other costs and expenses incurred directly by
the Company from time to time.  The Company is uncertain that it will
be able to recover its investment in FOT.  Accordingly, the carrying
value of the investment has been reduced to zero at December 31, 2008 and 2007,
respectively.  Going forward, and to the extent that the Company
continues to incur costs in excess of its investment in FOT, these costs will be
recognized by the Company as research and development costs.
  F-22
 
 6.  Income
Taxes
 
 The
Company 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, 2008 and 2007 were as
follows:
 
 December 31, 2008
                    
                    
                    December 31, 2007Deferred
      tax assets relative to the following:Net
      operating loss carry-forwards
                    
                    $
                    21,142,236
                    
                    
                    $
                    16,268,427Research
      and development credit carryforwards
                    
                    
                    890,139
                    
                    
                    
                    688,961Capitalized
      research and development costs
                    
                    
                    8,382,222
                    
                    
                    
                    7,579,497Deferred
      share-based compensation
                    
                    
                    3,122,956
                    
                    
                    
                    1,334,844Expensed
      receivables
                    
                    
                    163,799
                    
                    
                    
                    157,573Depreciable
      assets
                    
                    
                    39,489
                    
                    
                    
                    31,014Late
      registration payment and accrued interest
                    
                    
                    212,436
                    
                    
                    
                    130,964Other
                    
                    
                    58,706
                    
                    
                    
                    51,328Total
      deferred tax assets prior to offsets
                    
                    $
                    34,011,983
                    
                    
                    $
                    26,242,608Current
      portion
                    
                    $
                    434,941
                    
                    
                    $
                    339,865Non-current
      portion
                    
                    
                    33,577,042
                    
                    
                    
                    25,902,743$
                    34,011,983
                    
                    
                    $
                    26,242,608LiabilitiesDeferred
      tax liabilities relative to the following:Patent
      costs
                    
                    $
                    (337,902
                    )
                    
                    $
                    (315,062
                    )Total
      deferred tax liabilities (all non-current)
                    
                    $
                    (337,902
                    )
                    
                    $
                    (315,062
                    )Current
      portion
                    
                    $
                    434,941
                    
                    
                    $
                    339,865Non-current
      portion
                    
                    
                    33,239,140
                    
                    
                    
                    25,587,681Total
      deferred tax assets prior to offsets
                    
                    $
                    33,674,081
                    
                    
                    $
                    25,927,546Valuation
      allowance
                    
                    $
                    (33,674,081
                    )
                    
                    $
                    (25,927,546
                    )Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    -
 
 For the years ended December 31, 2008
and 2007, the valuation allowance was increased by approximately $7.7 million
and $5.7 million, respectively due to the uncertainties surrounding the
realization of the deferred tax assets resulting from the Company’s net losses
of approximately $21.2 million and $24.4 million in 2008 and 2007, respectively,
and accumulated deficits of approximately $145.2 million and $120.0 million
at December 31, 2008 and 2007, respectively.
  F-23
  A
reconciliation of the expected income tax provision (benefit) using the federal
statutory income tax rate to the Company’s effective income tax rate is as
follows for the years ended December 31, 2008, 2007, and 2006:
 
 December 31,
                    2008
                  
                  
                  December 31,
                    2007
                  
                  
                  December 31,
                    2006Income
      tax computed at federal statutory rate
                  
                  
                  34.0
                  %
                  
                  
                  34
                  %
                  
                  
                  34
                  %Permanent
      differences
                  
                  
                  (1.7
                  )%
                  
                  
                  (7.2
                  )%
                  
                  
                  -Change
      in valuation allowance
                  
                  
                  (32.3
                  )%
                  
                  
                  (26.8
                  )%
                  
                  
                  (34
                  )%Provision
      (benefit) for income taxes
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
 
 As of December 31, 2008 and 2007, the
Company had net operating loss carry-forwards for federal income tax purposes of
approximately $62.2 million and $47.8 million, respectively.  The net
operating loss carry-forwards will begin expiring in 2019 and will fully expire
in 2028.
 
 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.
 
 7.  Refundable
Deposit
 
 In 2005,
the Company received $550,000 from SulphCo KorAsia (formerly known as OIL-SC,
Ltd.), pursuant to an equipment sale and marketing agreement.  As this
amount is fully refundable if the pilot plant does not ultimately meet the
agreed specifications, no portion of the purchase price has been or will be
recorded as revenue in the Company’s financial statements until the pilot plant
meets all agreed specifications.  The Company does not have an equity
interest in SulphCo KorAsia.
 
 8. 
Accrued Fees and
Interest
 
 As of December 31, 2008 and 2007, the
Company had accrued late registration fees of approximately $0.4 million and
$0.8 million, respectively, and interest thereon of approximately $0.3 million
and $0.2 million, respectively, in conjunction with the private placements in
2004.  For the years ended December 31, 2008, 2007 and 2006, interest
expense associated with accrued late fees was approximately $0.1 million, $0.1
million and $0.1million, respectively.
 
 9.  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 the 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.
  F-24
  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.
 
 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 were
accounted for as if the Company had directly issued the warrants to the
Investors.  Since the warrants were acquired contemporaneously 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 the Convertible Notes Payable into
shares of 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.
 
 F-25
  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.
 
 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.
 
 F-26
 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.
 
 As of
December 31, 2008 and 2007, the net balances of the Convertible Notes Payable
were:
 
 2008
                      
                      
                      2007Assumed
      proceeds from modified Convertible Notes Payable
                      
                      $
                      4,680,044
                      
                      
                      $
                      4,680,044Less:Discount
      related to beneficial conversion feature
                      
                      
                      (1,736,550
                      )
                      
                      
                      (1,736,550
                      )Net
      Convertible Notes Payable Balance
                      
                      
                      2,943,494
                      
                      
                      
                      2,943,494Add:Discount
      accretion through December 31,
                      
                      
                      880,788
                      
                      
                      
                      24,308Net
      Convertible Notes Payable balance at December 31,
                      
                      $
                      3,824,282
                      
                      
                      $
                      2,967,802
 
 The
Convertible Notes Payable represent an unsecured obligation of the
Company.
  F-27
  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 31st 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, 2008, 2007 and 2006, the
Company recognized total interest expense of approximately $1.1 million, $5.5
million and $0.5 million, respectively.  For the years ended December
31, 2008 and 2007, total interest expense recognized by the Company included
approximately $0.8 million and $5.0 million, respectively, of incremental
interest expense associated with discount accretion.
 
 10.  Deemed
Dividends
 
 On March
12, 2007, the Company executed Amendment No. 1 to Securities Purchase Agreements
and Warrants (“Amendment No. 1”) with certain warrant holders (the “Warrant
Holders”) who had been issued warrants by the Company in 2004 (“2004
Warrants,” and holders of 2004 Warrants, “2004 Warrant Holders”) and in 2006
(“2006 Warrants,” and holders of 2006 Warrants, “2006 Warrant Holders”) that
provided inducements to encourage the Warrant Holders to exercise their
respective warrants.  As consideration for Warrant Holders exercising
their respective warrants, the Company agreed that it would:
 
 ·
              reduce
      the exercise price on warrants to acquire 4,000,000 shares of the
      Company’s common stock held by the 2006 Warrant Holders from $6.805 per
      share to $2.68 per share; and
 
 ·
              issue
      the Warrant Holders additional warrants, with an exercise price of $2.68
      per share, on a one to one basis for each existing warrant that was
      exercised including granting up to 1,952,068 warrants to the 2004 Warrant
      Holders and up to 4,000,000 warrants to the 2006 Warrant
      Holders.
 
 As a
result of the inducements included in Amendment No. 1 described above, during
the quarter ended March 31, 2007, 1,952,068 warrants held by the 2004 Warrant
Holders and 2,000,000 warrants held by the 2006 Warrant Holders were exercised
resulting in the grant of 3,952,068 additional warrants (the “March 2007
Warrants”).  As a result of the inducements, the Company recorded a
non-cash deemed dividend of approximately $11.5 million.  The amount
of the deemed dividend was estimated to be equal to the sum of the fair value of
the inducements as the sum of (1) the incremental fair value conveyed to the
2006 Warrant Holders by the reduction of the exercise price of the 2006 Warrants
determined as provided in paragraph 51 of SFAS 123R utilizing the Black-Scholes
Valuation Model and (2) the fair value of the 3,952,068 March 2007 Warrants
estimated using the Black-Scholes Valuation Model.
 
 During
the quarter ended June 30, 2007, 600,000 2006 Warrants held by the 2006 Warrant
Holders were exercised resulting in the grant of 600,000 additional
warrants.  As a result, the Company recorded additional non-cash
deemed dividends of approximately $1.7 million that was estimated using the
Black-Scholes Valuation Model.
 
 During
the quarter ended September 30, 2007, the remaining 1,400,000 warrants held by
the 2006 Warrant Holders were exercised resulting in the grant of 1,400,000
additional warrants.  As a result, the Company recorded additional
non-cash deemed dividend of approximately $3.9 million that was estimated using
the Black-Scholes Valuation Model
 
 F-28
 
 On
November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase
Agreements and Warrants (“Amendment No. 2”) with certain of the Warrant Holders
holding approximately 3.95 million of the then outstanding March 2007 Warrants
wherein the Warrant Holders agreed to exercise up to 50% of their March 2007
Warrants.  In exchange, SulphCo agreed to issue the Warrant Holders
additional warrants (the “November 2007 Warrants”) on a one-to-one basis with an
exercise price of $7.00 per share and a term of three years.  In
addition, the Warrant Holders were granted an option to exercise the remaining
50% of their March 2007 Warrants on the later of April 15, 2008, or 30 days
following the 2008 Annual Meeting of Stockholders in which SulphCo’s
stockholders approve an increase of 10 million authorized common
shares.  If this option were exercised, then SulphCo would issue the
Warrant Holders additional warrants on a one-to-one basis with an exercise price
of $7.00 a share and a term of three years.  As a result of the
inducement described above 1,976,570 of the March 2007 Warrants held by the
Warrant Holders were exercised in November 2007 resulting in a grant of
1,976,750 additional warrants (the “November 2007 Warrants”). Based on its
analysis, the Company concluded that a deemed dividend should be recorded to
account for the fair value of the inducement that was transferred to the Warrant
Holders computed as the fair value of the 1,976,750 November 2007 Warrants
issued to the Warrant Holders.  Based on the Black-Scholes valuation
prepared for this transaction, the Company recognized a non-cash deemed dividend
of approximately $7.3 million.
 
 In May
2008, 1,953,088 of the March 2007 Warrants held by the Warrant Holders were
exercised resulting in the grant of 1,953,088 additional warrants (the “May 2008
Warrants”).  Based on its analysis, the Company concluded that a
deemed dividend should be recorded to account for the fair value of the
inducement that was transferred to the Warrant Holders computed as the fair
value of the 1,953,088 May 2008 Warrants issued to the Warrant
Holders.  Based on the Black-Scholes valuation prepared for this
transaction, the Company recognized a non-cash deemed dividend was approximately
$4.1 million.
 
 For the
years ended December 31, 2008, 2007 and 2006, the Company recognized non-cash
deemed dividends of approximately $4.1 million, $24.8 million, and zero,
respectively.
 
 11.  Commitments and
Contingencies
 
 Commitments
under Operating Leases
 
 In May
2007, the Company entered into an operating lease agreement for office space in
Houston, Texas having a term of 60 months.  Also in May 2007, the
Company entered into operating lease agreements for facilities in Reno, Nevada
and Sparks, Nevada, with each having a 36 month term.  In July 2007,
the Company relocated its corporate headquarters from Reno, Nevada to Houston,
Texas.  As of December 31, 2007, the Company made the decision to
discontinue utilizing the Reno office space and attempted to sub-lease this
space for the remaining term of the lease which extends through May
2010.  In connection with its decision to discontinue utilizing the
Reno office space, the Company recognized a charge of approximately $0.3 million
in 2007 which represents the total amount of the future minimum lease payments
remaining under the terms of the Reno operating lease agreement. In August 2008,
the Company agreed to terminate the Reno operating lease agreement for
approximately $75,000, which resulted in the reversal of the remaining accrued
liability for future minimum lease payments of $0.2 million during
2008.
  F-29
  Following
is a schedule of future minimum lease payments required under non-cancelable
operating lease agreements:
 
 2009
                        
                        $
                        178,8192010
                        
                        
                        166,2432011
                        
                        
                        151,2002012
                        
                        
                        75,6002013
                        
                        
                        -Total
      future minimum lease payments
                        
                        $
                        571,862
 
 The
Company recognized approximately $0.1 million, $0.7 million, and $0.4 million
for net rent expense in 2008, 2007, and 2006, respectively.
 
 Concentrations
of Credit Risk
 
 Substantially
all of the Company’s cash and cash equivalents are maintained with two major
U.S. financial institutions.  The majority of the Company’s cash
equivalents are invested in a money market fund that invests primarily in U.S.
Treasury securities and repurchase agreements relating to those instruments.
Investments in this fund are not insured by or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.  Generally,
these deposits may be redeemed upon demand and therefore, management believes
that they bear minimal risks.  The Company has not experienced any
losses in such accounts, nor does management believe it is exposed to any
significant credit risk.
 
 Litigation
Contingencies
 
 There are
various claims and lawsuits pending against the Company arising in the normal
course of the Company’s business.  The following paragraphs set forth
the current status of the various actions pending against the Company at
December 31, 2008.
 
 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 the plaintiff.  In general, the plaintiff’s
alleged claims relate to ownership of the “sulfur removal technology” originally
developed by Professor Teh Fu Yen and 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 the plaintiff EcoEnergy Solutions,
Inc. on all of its claims.  As per the final judgment, all of the
plaintiff’s claims were resolved against the plaintiff and were dismissed with
prejudice.  In addition, the trial court entered judgment in favor of the
Company and against the plaintiff for reimbursement of legal fees and costs of
approximately $124,000, with post-judgment interest.  The plaintiff
appealed the judgment on October 5, 2007.  On 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.  The appeal has
been fully briefed, but no date has been set for oral arguments. No asset or
liability has been accrued relative to this action.
 
 F-30
  Talisman
Litigation
 
 In Talisman Capital Talon Fund, Ltd. v.
Rudolf W.Gunnerman and SulphCo, Inc., Case No. 05-CV-N-0354-BES-RAM, the
Company and Rudolf W. Gunnerman were named as defendants in a legal action
commenced in federal court in Reno, Nevada. The plaintiff’s claims relate to the
Company's ownership and rights to develop its "sulfur removal technology." The
Company regards these claims as without merit. Discovery in this case formally
concluded on May 24, 2006. On September 28, 2007, the court granted, in part,
the defendants' motion for summary judgment and dismissed the plaintiff's claims
for bad faith breach of contract and unjust enrichment that had been asserted
against Rudolf Gunnerman. The court denied the plaintiff's motion for partial
summary judgment. The trial for this matter commenced on December 1, 2008 and
continued through December 12, 2008.  The court recessed the trial on
December 12, 2008 prior to hearing closing arguments.  Post trial
briefs were filed with the court on February 20, 2009, closing arguments were
heard on March 3, 2009 and the matter has been submitted for
decision.  No liability has been accrued relative to this
action.
 
 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 (the “Non-Qualified Stock Option
Agreement”).  Mark Neuhaus claimed 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.
 
 On July
9, 2008, the Company entered into a Confidential Settlement Agreement and
Release with Mark Neuhaus (the “Settlement Agreement”), by which Mr. Neuhaus and
the Company agreed to dismiss the respective legal proceedings each party had
initiated on the other, and by which both parties agreed to a mutual
release.  The total consideration paid by the Company to Mr. Neuhaus
under the Settlement Agreement was $750,000, of which $250,000 was paid in cash
and the remaining $500,000 was paid by issuance of 123,763 shares of the
Company’s common stock to Mr. Neuhaus and 123,762 shares of the Company’s common
stock to Mr. Neuhaus’ attorneys, Erickson, Thorpe & Swainston, Ltd, which
amount was determined by dividing $500,000 by $2.02, the closing price of the
Company’s stock on July 9, 2008.
 
 Hendrickson
Derivative Litigation
 
 On
January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim
against certain current and former officers and directors of the Company in the
Second Judicial District Court of the State of Nevada, in and for the County of
Washoe. The case 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.
 
 F-31
 In September of 2007, the Company’s
Board of Directors received a demand letter (the “Hendrickson Demand Letter”)
from Mr. Hendrickson’s attorney reasserting the allegations contained in the
original derivative claim and requesting that the Board of Directors conduct an
investigation of these matters in response thereto.  In response to
the Hendrickson Demand Letter, the Company’s Board of Directors formed a
committee comprised of three independent directors (the “Committee”) to evaluate
the Hendrickson Demand Letter and to determine what, if any, action should be
taken. The Committee retained independent counsel to advise it.
 
 On
September 2, 2008, the Company’s Board of Directors held a special meeting for
the purpose of hearing and considering the Committee’s report and
recommendation.  At that meeting, the Committee reported on its
investigation and presented the Committee’s unanimous recommendation that no
actions be brought by the Company based upon the matters identified in the
Hendrickson Demand Letter.  The Board of Directors unanimously adopted
the Committee’s recommendation.  SulphCo communicated this conclusion
to Mr. Hendrickson’s counsel in mid-September 2008.
 
 On
November 6, 2008, Mr. Hendrickson re-filed the shareholder derivative claim in
the 127th
Judicial District Court of Harris County, Texas. The case is known as Thomas Hendrickson, Derivatively on
Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman, Peter W. Gunnerman, Loren J.
Kalmen, Richard L. Masica, Robert Henri Charles Van Maasdijk, Hannes
Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence G. Schafran, Alan
L. Austin, Jr., Raad Alkadiri and Christoph Henkel, (Cause No.
200866743).  The Company is currently in the process of responding to
this litigation.  No liability has been accrued relative to this
action.
 
 Nevada
Heat Treating Litigation
 
 On
November 29, 2007, Nevada Heat Treating, Inc. (“NHT”) filed a lawsuit against
the Company, Nevada Heat
Treating, Inc., d/b/a California Brazing, in the Second Judicial District
Court of the State of Nevada, in and for the County of Washoe, Case No.
CV07-02729.  In its complaint, NHT alleges trade secret
misappropriation and breach of contract relative to certain information alleged
to have been disclosed to the Company beginning in late 2006 and continuing
through early 2007 pursuant to a consulting engagement with
NHT.  Among other things, NHT 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 non-disclosure/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. Hearings on the preliminary
injunction motion took place on March 24 and 25, 2008, and May 8,
2008.  On May 8, 2008, the court ruled from the bench, at the
conclusion of the hearing on the motion for preliminary
injunction.  The court denied the plaintiff’s motion on grounds that
the plaintiff had failed to demonstrate a probability of success on the merits
of its claims.  On November 18, 2008, the Company and NHT reached a
settlement wherein it was agreed that NHT would dismiss its claims and each
party would bear its own costs and fees, but that NHT would preserve any claims
that it might have in the future relating to its patent
application.  The Company and NHT are currently memorializing the
settlement agreement.  Once the settlement agreement is memorialized,
the case will be dismissed.  No liability has been accrued relative to
this action.
 
 F-32
 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 to which the Company responded to the request for voluntary
production of documents and information, including financial, corporate, and
accounting information related to the following subject
matters:  Fujairah Oil Technology LLC, the Company’s restatements for
the first three quarterly periods of 2006 and the non-cash deemed dividend for
the quarter ended March 31, 2007, and information and documents related to
certain members of former management, none of whom have been employed by the
Company since March 2007.  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.
 
 12.  Common
Stock
 
 Other
than stock based compensation disclosed in Note 13 and related party
transactions disclosed in Note 15, the Company had the following transactions
related to its common stock during the years ended December 31, 2008, 2007, and
2006:
 
 Year
Ended December 31, 2008
 
 During
the quarter ended June 30, 2008, the Company completed two equity
transactions.  The first involved the sale of 6,818,750 shares of its
common stock at a price of $3.20 per share pursuant to the terms of a Securities
Purchase Agreement dated May 27, 2008, resulting in net proceeds to the Company
of approximately $20.3 million before transaction costs.  The shares
were sold pursuant to a shelf registration statement declared effective by the
Securities and Exchanges Commission on September 4, 2007.  The second
involved the exercise by investors of warrants to acquire approximately 1.9
million shares of the Company’s common stock at an exercise price of $2.68 per
share resulting in net proceeds to the Company of approximately $5.2
million.  Between these two transactions, the Company raised net
proceeds totaling approximately $25.5 million.
 
 During
the quarter ended June 30, 2008, the Company entered into an equity line of
credit with Azimuth Opportunity Ltd. (“Azimuth”) pursuant to a Common Stock
Purchase Agreement dated April 30, 2008. Subject to the conditions set forth in
that agreement, Azimuth is committed to purchase up to $60,000,000 of the
Company’s common stock pursuant to draw down notices that the Company may give
to Azimuth from time to time at the Company’s discretion until November 1, 2009.
The price of shares sold is determined by reference to the volume weighted
average price of the Company’s common stock during a 10 trading day pricing
period at the time of each draw down notice, less a small discount.
 
 On July
9, 2008, the Company entered into a Confidential Settlement Agreement and
Release with Mark Neuhaus (the “Settlement Agreement”), by which Mr. Neuhaus and
the Company agreed to dismiss the respective legal proceedings each party had
initiated on the other, and by which both parties agreed to a mutual
release.  The total consideration paid by the Company to Mr. Neuhaus
under the Settlement Agreement was $750,000, of which $250,000 was paid in cash
and the remaining $500,000 was settled by issuance of 123,763 shares of the
Company’s common stock to Mr. Neuhaus and 123,762 shares of the Company’s common
stock to Mr. Neuhaus’ attorneys, Erickson, Thorpe & Swainston, Ltd, which
amount was determined by dividing $500,000 by $2.02, the closing price of the
Company’s stock on July 9, 2008.
 
 F-33
  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 10.
 
 During
the second quarter of 2007, the Company raised approximately $1.6 million
through an exercise of 600,000 of the remaining 2,000,000 2006 Warrants at an
exercise price of $2.68 per share, which was a reduction from the original
exercise price of $6.805 per share. As previously agreed, the 2006 Warrant
Holders received 600,000 March 2007 Warrants to replace all of the 2006 Warrants
that were exercised on a one to one basis. Each March 2007 Warrant expires three
years from the date of issuance and entitles the holder to purchase one share of
common stock at $2.68 per share.
 
 During
the third quarter of 2007, the Company raised approximately $3.8 million through
the exercise of approximately 1.4 million 2006 Warrants at an exercise price of
$2.68 per share, which was a reduction from the original exercise price of
$6.805 per share. As previously agreed, the 2006 Warrant Holders received
approximately  1.4 million March 2007 Warrants to replace all of the
2006 Warrants that were exercised on a one to one basis. Each March 2007 Warrant
expires three years from the date of issuance and entitles the holder to
purchase one share of common stock at $2.68 per share.
 
 During
the fourth quarter of 2007, the Company raised approximately $5.3 million
through the exercise of 1,976,570 March 2007 Warrants at an exercise price of
$2.68 per share.  In connection with this exercise, the Warrant
Holders received 1,976,570 November 2007 Warrants with an exercise price of
$7.00 per share and a term of three years from the date of
issuance.
 
 During
the year ended December 31, 2007, the Company raised approximately $18.5
million, net of offering costs, through the exercise of warrants held by the
Warrant Holders, as described above.
 
 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.
 
 F-34
  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.
 
 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.
 
 13. 
Stock Plans and
Share-Based Compensation
 
 The Company follows the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based
Payment” (“SFAS 123R”).  Under SFAS 123R, the Company is required to
recognize, as expense, the estimated fair value of all share based payments to
employees.  The fair value of each option award granted under the
Stock Plans 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 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,
2008, 2007 and 2006, the Company used the following information to value option
grants:
 
 2008
                            
                            
                            2007
                            
                            
                            2006Expected
      Volatility
                            
                            
                            93%
      - 151%
                            
                            
                            
                            133%
      - 150%
                            
                            
                            
                            117%
      - 147%Expected
      Dividend Yield
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Expected
      Term (in years)
                            
                            
                            1.5
      - 9.5
                            
                            
                            
                            5.0
      – 10.0
                            
                            
                            
                            3.0Risk
      Free Rate
                            
                            
                            1.6%
      - 3.6%
                            
                            
                            
                            3.6%
      - 5.1%
                            
                            
                            
                            5.2%
  F-35
  Stock
Option Plans
 
 We maintain the 2006 Stock Option Plan
(the “2006 Plan”) and the 2008 Omnibus Long-Term Incentive Plan (the “2008
Plan”), which are collectively referred to as the “Stock
Plans.”  Under our Stock Plans, incentive and nonqualified stock
options are granted to eligible participants. The exercise price of options
granted pursuant to the Stock Plans shall be at least 100 percent of the fair
value of the Company’s common stock on the date of grant. Options are generally
granted for a term of 10 years and become exercisable at such times as
determined by the Compensation Committee. Certain stock options provide for
accelerated vesting if there is a change in control. As of December 31 2008,
approximately 0.6 million shares are available for future grants of awards under
the Stock Plans.
 
 The
following table summarizes the activity for our options for the 12 months ended
December 31, 2008:
 
 Number of
                          Shares
                        
                        
                        Weighted Average
                          Exercise PriceOptions
      outstanding, December 31, 2007
                        
                        
                        1,790,524
                        
                        
                        $
                        4.20Options
      granted
                        
                        
                        2,131,820
                        
                        
                        $
                        3.36Options
      exercised
                        
                        
                        -
                        
                        
                        
                        -Options
      forfeited
                        
                        
                        (227,500
                        )
                        
                        $
                        2.87Options
      outstanding, December 31, 2008
                        
                        
                        3,694,844
                        
                        
                        $
                        3.80Options
      exercisable and vested
                        
                        
                        2,348,010
                        
                        
                        $
                        4.09
  Options
outstanding at December 31, 2008, had a weighted average remaining contractual
life of 8.6 years and are out-of-the money with no intrinsic value. Options
exercisable at December 31, 2008, had a weighted average remaining contractual
life of 8.2 years and are out-of-the money with no intrinsic value. The
weighted average grant date fair value of stock options granted in 2008, 2007
and 2006 was $2.97, $3.49, and $5.50.
 
 Included in the table above are 500,000
performance-based stock options granted to the Company’s CEO on June 18, 2008.
The performance based stock options have an exercise price of $3.28, a term of
ten years from the grant date and vest in full within 18 months subject to
achievement of certain commercial milestones.  If the commercial
milestones are not achieved by December 18, 2009, the entire award will be
forfeited. The weighted average fair value of each performance-based stock
option was $2.97 and was estimated using the Black-Scholes option pricing model
consistent with the weighted average assumptions included in the table above. As
of December 31, 2008, the Company has recorded approximately $0.5 million for
the performance-based stock options as the Company considers it probable that
the commercial milestones will be achieved.  The Company will assess
the probability of the achievement of the commercial milestones at the end of
each reporting period.  If the Company determines that achievement of
the commercial milestones by December 18, 2009 is not probable,
a cumulative adjustment will be recorded  to reverse stock-based
compensation recognized since the grant date.
  F-36
  Other
Options
 
 In
addition to options available for issuance under the Stock Plans, the Company
has previously granted other options and warrants (the “Other Options”) to
non-employees and consultants.  The following table provides
additional information related to the Other Options:
 
 Number of
                      Shares
                    
                    
                    Weighted Average
                      Exercise PriceOptions
      outstanding, December 31, 2007
                    
                    
                    50,000
                    
                    
                    $
                    6.03Options
      granted
                    
                    
                    50,000
                    
                    
                    $
                    2.47Options
      exercised
                    
                    
                    -
                    
                    
                    
                    -Options
      forfeited/cancelled
                    
                    
                    -
                    
                    
                    
                    -Options
      outstanding, December 31, 2008
                    
                    
                    100,000
                    
                    
                    $
                    4.25Options
      exercisable and vested
                    
                    
                    75,000
                    
                    
                    $
                    4.84
  The
weighted average grant date fair value of Other Options granted in 2008 and 2007
was $2.22 per share and $3.97 per share, respectively.  Other Options
outstanding at December 31, 2008, had a weighted average remaining contractual
life of 3.4 years and no intrinsic value.  Other Options exercisable
at December 31, 2008, had a weighted average remaining contractual life of 2.1
years and no intrinsic value.
 
 Summary
Option Information
 
 The
following table summarizes information about all stock options outstanding as of
December 31, 2008:
 
 Options Outstanding
                      
                      
                      Options ExercisableRange of
                        Exercise
                        Prices
                      
                      
                      Number
                        Outstanding
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life (in Years)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life (in Years)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price$1.00 - $1.99
                      
                      
                      
                      60,000
                      
                      
                      
                      9.9
                      
                      
                      $
                      1.28
                      
                      
                      
                      25,000
                      
                      
                      
                      9.9
                      
                      
                      $
                      1.23$2.00
      - $2.99
                      
                      
                      
                      447,452
                      
                      
                      
                      7.7
                      
                      
                      $
                      2.64
                      
                      
                      
                      237,452
                      
                      
                      
                      6.8
                      
                      
                      $
                      2.61$3.00
      - $3.99
                      
                      
                      
                      2,791,868
                      
                      
                      
                      8.9
                      
                      
                      $
                      3.62
                      
                      
                      
                      1,665,034
                      
                      
                      
                      8.7
                      
                      
                      $
                      3.74$4.00
      - $4.99
                      
                      
                      
                      200,000
                      
                      
                      
                      9.0
                      
                      
                      $
                      4.96
                      
                      
                      
                      200,000
                      
                      
                      
                      9.0
                      
                      
                      $
                      4.96$5.00
      - $5.99
                      
                      
                      
                      120,524
                      
                      
                      
                      8.9
                      
                      
                      $
                      5.49
                      
                      
                      
                      120,524
                      
                      
                      
                      8.9
                      
                      
                      $
                      5.49$6.00
      - $6.99
                      
                      
                      
                      50,000
                      
                      
                      
                      1.9
                      
                      
                      $
                      6.03
                      
                      
                      
                      50,000
                      
                      
                      
                      1.9
                      
                      
                      $
                      6.03$7.00
      - $9.99
                      
                      
                      
                      125,000
                      
                      
                      
                      0.4
                      
                      
                      $
                      9.03
                      
                      
                      
                      125,000
                      
                      
                      
                      0.4
                      
                      
                      $
                      9.033,794,844
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,423,010
 
 The weighted average grant date fair
value of stock options granted in 2008 and 2007 was $2.97 per share and $3.49
per share, respectively. The total intrinsic value of options and warrants
exercised during the years ended December 31, 2008, 2007 and 2006 was
approximately zero, $0.8 million, and zero, respectively.  Cash
received from all option and warrant exercises under all share-based payment
arrangements for the years ended December 31, 2008, 2007 and 2006 was
approximately zero, $0.2 million, and zero, 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.
 
 F-37
  As of
December 31, 2008, there was approximately $2.1 million of total
unrecognized compensation cost related to non-vested options.  That
cost is expected to be recognized on a straight line basis over the weighted
average vesting period of approximately 0.8 years.
 
 Restricted
Stock Grants – Directors, Officers and Employees
 
 Year
Ended December 31, 2008
 
 During
the year ended December 31, 2008, the Company did not grant any shares of
restricted stock to directors, officers or 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 retainer.  Additionally, the Company also made grants of
93,353 restricted shares of common stock 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.  The Company
rescinded a total of 193,353 current and prior year restricted stock
grants.  As of December 31, 2007, all grants of restricted shares were
fully vested and there were no unrecognized compensation costs relating to
restricted share grants.
 
 Year
Ended December 31, 2006
 
 During the years ended December 31,
2006, the Company granted 200,000 shares of its restricted stock to officers and
directors for which it recognized charges of approximately $1.6
million  respectively.  As of December 31, 2006, all grants
of restricted shares were fully vested and there were no unrecognized
compensation costs relating to restricted share grants.
 
 Restricted
Stock Grants – Non-Employees
 
 Year
ended December 31, 2008
 
 During
the year ended December 31, 2008, the Company granted 50,000 shares of
restricted stock to non-employees for which it recognized a charge of
approximately $0.1 million.  As of December 31, 2008, all grants of
restricted shares were fully vested and there were no unrecognized compensation
costs relating to restricted share grants.
 
 Year
ended December 31, 2007
 
 During
the year ended December 31, 2007, the Company did not grant any shares of
restricted stock to non-employees.
 
 Year
ended December 31, 2006
 
 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, 2008, all grants of
restricted shares were fully vested and there were no unrecognized compensation
cost relating to restricted share grants.
  F-38
  Total
Share Based Compensation
 
 During the years ended December 31,
2008, 2007 and 2006, the Company recognized total share-based compensation (for
grants of stock options, warrants and restricted stock) of approximately $5.2
million, $4.3 million and $2.8 million, respectively.
 
 14.  Employee Benefit
Plans
 
 During
the year ended December 31, 2007, the Company adopted a qualified defined
contribution retirement plan (the “401(k) Plan”) for full-time
employees.  The 401(k) Plan provides participants the opportunity to
make contributions ranging from 1 percent to 15 percent of their covered
salaries or wages.  The Company makes an annual minimum contribution
to the 401(k) Plan equal to 3 percent of the covered participant’s salaries and
wages. During the years ended December 31, 2008 and 2007, the Company made
or accrued minimum contributions to the 401(k) plan of  approximately $0.1
million and $0.1 million, respectively. In addition to the annual minimum
contribution the Company can make discretionary contributions. During the years
ended December 31, 2008 and 2007, no such discretionary contributions were
made.
 
 15.  Related Party
Transactions
 
 Other
than share-based compensation as detailed in Note 13, the following discussion
sets forth related party transactions occurring in the years 2008, 2007, and
2006.
 
 During
the years ended December 31, 2008, 2007 and 2006, the Company made payments
totaling approximately $1.1 million, $1.3 million and $7,500, respectively to
Maerkisches 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, 2008, 2007 and 2006, the total expense recognized by the
Company under this arrangement was zero, $0.2 million, and $0.6 million,
respectively.  Of the amount paid during the year ended December 31,
2007, $200,000 was paid in connection with a settlement in the second quarter of
2007 between the Company and Dr. Gunnerman.
 
 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 years
ended December 31, 2008 and 2007.  During the year ended December 31,
2006, the Company paid Mr. Masica approximately $30,000 in fees for management
and technical consulting and approximately $3,000 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 leased a furnished
apartment for the use of Company officers in Reno, Nevada for $1,500 per month.
The Company terminated this agreement effective September 30,
2007.  During the year ended December 31, 2007, the Company
recognized approximately $8,000 in lease expense relative to this
agreement.
 
 F-39
  In April
2007, the Company entered into a consulting contract with Vincent van Maasdijk,
the son of Robert van Maasdijk who is the Chairman of the Company’s Board of
Directors, to serve as a project manager. As a project manager, Mr. van
Maasdijk’s responsibilities include overseeing the installation and testing of
commercial Sonocracking units at various locations assigned by the
Company.  Under the current terms of the contract, Mr. van Maasdijk
receives a monthly payment of approximately $7,000 plus reimbursement of all
reasonable out-of-pocket expenses, in accordance with the Company’s applicable
policies and procedures.  The agreement ends in April 2009 at which
time the Company and Mr. van Maasdijk have agreed to review the status of any
ongoing services to determine whether the parties wish to enter into an
extension of the agreement. For the years ended December 31, 2008 and 2007, the
total expense recognized by the Company under this arrangement was approximately
$103,000 and $78,000, respectively.
 
 During
the years ended December 31, 2008 and 2007, the Company paid approximately
$6,000 and $10,000, respectively, 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 $1.3 million, $1.6 million, and $4.2
million in 2008, 2007, and 2006 respectively.  Total related party
cash payments were approximately $1.3 million, $1.6 million and $1.9 million in
2008, 2007, and 2006, respectively.
  F-40
 
 16. Quarterly Financial
Information (Unaudited)
 
 Summarized unaudited quarterly
financial information for the years ended December 31, 2008, 2007 and 2006 is
noted below (in thousands, except for per share amounts):
 
 2008
                                          
                                          Mar. 31
                                          
                                          
                                          Jun. 30
                                          
                                          
                                          Sep. 30
                                          
                                          
                                          Dec. 31Net
      revenues
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Gross
      profit
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Net
      (loss)
                                          
                                          $
                                          (6,874
                                          )
                                          
                                          $
                                          (8,973
                                          )
                                          
                                          $
                                          (4,866
                                          )
                                          
                                          $
                                          (4,547
                                          )Net
      (loss) per share – basic and diluted (a)
                                          
                                          $
                                          (0.09
                                          )
                                          
                                          $
                                          (0.11
                                          )
                                          
                                          $
                                          (0.05
                                          )
                                          
                                          $
                                          (0.05
                                          )2007
                                          
                                          Mar. 31
                                          
                                          
                                          Jun. 30
                                          
                                          
                                          Sep. 30
                                          
                                          
                                          Dec. 31Net
      revenues
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Gross
      profit
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Net
      (loss)
                                          
                                          $
                                          (14,513
                                          )
                                          
                                          $
                                          (8,883
                                          )
                                          
                                          $
                                          (8,367
                                          )
                                          
                                          $
                                          (9,719
                                          )Net
      (loss) per share – basic and diluted (a)
                                          
                                          $
                                          (0.20
                                          )
                                          
                                          $
                                          (0.12
                                          )
                                          
                                          $
                                          (0.11
                                          )
                                          
                                          $
                                          (0.22
                                          )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
                                          )
  (a) The sum of the individual
quarterly earnings (loss) per share may not agree with year-to-date earnings
(loss) per share as each quarterly computation is based on the income or loss
for that quarter and the weighted average number of common shares outstanding
during that period.
  F-41