**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**






**FORM
      10-KSB**





[x ]
      ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





**For
      the fiscal year ended December 31, 2005**








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





Commission
      file no. **001-32636**





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


(Name
      of
      Small Business Issuer in Its Charter)




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





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





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





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





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


(Title
      of
      class)





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








Check
      whether issuer is not required to file reports pursuant to Section 13 or 15(d)
      of the Exchange Act. [  ]





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filings requirements for the past 90 days.  Yes [X]
      No [  ]





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to the Form 10-KSB. [  ]





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





State
      issuer's revenues for its most recent fiscal year: The Company had no revenue
      for the year ending December 31, 2005.








State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: On March 22, 2006, the aggregate market
      value of the voting and non-voting common equity held by non-affiliates, based
      on the closing price of which the common equity was sold on that date, equals
      $247,043,914.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date. The number of shares of Common Stock
      outstanding on March 31 ,
      2006,
      was 72,369,231.





Documents
      incorporated by reference: None.





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





2


**SULPHCO,
      INC.**


**2005
      FORM 10-KSB ANNUAL REPORT**





**TABLE
      OF CONTENTS**




Page
                  No.PART
                  IItem
                  1.
              Description
                  of Business
              5Item
                  2.
              Description
                  of Property
              13Item
                  3.
              Legal
                  Proceedings
              13Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              15PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder
                  Matters
              16Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of
                  Operation
              18Item
                  7.
              Financial
                  Statements
              22Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              22Item
                  8.A
              Controls
                  and Procedures
              22Item
                  8.B
              Other
                  Information
              23PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons;Compliance
                  with Section 16(a) of the Exchange Act
              24Item
                  10.
              Executive
                  Compensation
              27Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              28Item
                  12.
              Certain
                  Relationships and Related
                  Transactions
              29Item
                  13.
              Exhibits
              31Item
                  14.
              Principal
                  Accountant Fees and Services
              34


Financial
      Statements for the Years Ended December 31, 2005, and December 31, 2004, with
      Audit Report




3
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          of Contents


**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;


•
            commercialization
                and marketing of our products under development;


•
            our
                intellectual property;


•
            our
                estimates of future revenue and profitability;


•
            our
                estimates or expectations of continued losses;


•
            our
                expectations regarding future expenses, including research and
                development, sales and marketing, manufacturing and general and
                administrative expenses;


•
            difficulty
                or inability to raise additional financing, if needed, on terms acceptable
                to us;


•
            our
                estimates regarding our capital requirements and our needs for additional
                financing;


•
            attracting
                and retaining customers and employees;


•
            sources
                of revenue and anticipated revenue;
                and


•
            competition
                in our market.




These
      statements are only predictions. Although we believe that the expectations
      reflected in these forward-looking statements are reasonable, we cannot
      guarantee future results, levels of activity, performance or achievements.
      We
      are not required to and do not intend to update any of the forward-looking
      statements after the date of this report or to conform these statements to
      actual results. In light of these risks, uncertainties and assumptions, the
      forward-looking events discussed in this report might not occur. Actual results,
      levels of activity, performance, achievements and events may vary significantly
      from those implied by the forward-looking statements. In this report, we refer
      to information regarding our potential markets and other industry data. We
      believe that we have obtained this information from reliable sources that
      customarily are relied upon by companies in our industry, but we have not
      independently verified any of this information.




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







4
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          of Contents


**PARTI**




**ITEM
      1. DESCRIPTION OF BUSINESS**




**Introduction**




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





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





**Business
      Development**





In
      January 1999, Dr. Rudolf W. Gunnerman formed GRD, Inc. (“GRD”), a Nevada
      corporation owned by him and doing business as SulphCo, to engage in the
      development and commercialization of proprietary technology to be utilized
      for
      the removal of sulfur from crude oil and petroleum products. In January 1999
      GRD
      entered into a Research Agreement with the University of Southern California
      and
      Dr. Teh Fu Yen for research into desulfurization technology. This research
      resulted in the first patent for the desulfurization technology which was later
      issued to Dr. Yen and assigned to us.





In
      December 2000, in order to go public, GRD entered into an exchange agreement
      by
      which the owner of GRD, Dr. Gunnerman, purchased control of FilmWorld, Inc.,
      an
      inactive publicly held Nevada corporation in existence since 1986. Pursuant
      to
      the exchange agreement FilmWorld, Inc. issued a majority of its shares to Dr.
      Gunnerman in exchange for all of the issued and outstanding shares of GRD.
      Following the exchange, GRD was merged into FilmWorld, Inc, and its name was
      changed to SulphCo, Inc. Since the shareholders of GRD continued their control,
      the merger was accounted for as a reverse acquisition of FilmWorld, Inc. by
      GRD.





From
      December 2000 through 2004, our principal business activities centered around
      the research, testing and development of our proprietary technology, which
      was
      originally developed by the University of Southern California and sponsored
      by
      Dr. Gunnerman for the removal of sulfur from diesel fuel. In 2005 we began
      commercialization activities as detailed below.





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





**General
      Description of Our Technology**





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





5
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          of Contents


**Overview
      of Development and Commercialization Activities**





We
      have
      been developing our Sonocracking technologies on an ongoing basis since the
      formation of GRD, Inc. in January 1999. Testing has been done through in-house
      facilities and through third parties. Testing has been limited to samples
      produced by prototypes which have processed up to 55 gallons per hour of crude
      oil in a laboratory setting. Beginning in mid-2002 our development activities
      have centered around re-designing, upgrading and testing of laboratory scale
      prototypes utilizing more powerful ultrasonic generators, and redesigning these
      prototypes to accommodate the more powerful generators. Substantially all of
      the
      development work to date has been conducted by SulphCo personnel. We continue
      to
      conduct testing in-house and through relationships with third
      parties.




During
      2005 we completed construction of a 5,000 bbl/day Sonocracking unit and a 15,000
      bbl/day Sonocracking unit at our facilities in Sparks, Nevada, which culminated
      months of testing the internal components of the unit at our facility. These
      units are designed to be modular in order to facilitate both scalability and
      maintenance. The 15,000 bbl/day unit incorporates three reactor probe assemblies
      and associated equipment as used in the 5,000 bbl/day unit. Both the 5,000
      and
      15,000 bbl/day units are prototypes used for demonstration to customers who
      may
      request customized alterations to fit their processing needs. These systems
      are
      automated using programmable logic controllers and come equipped with touch
      screen interfaces.




Recent
      in-house testing of our 5,000 bbl/day unit (three of which make up the 15,000
      bbl/day unit) produced a Gravity API increase on heavy Nevada crude from 22
      degrees to 30 degrees. The 22 degree API heavy crude is comprised of 45%
      residuum.  After application of the Sonocracking process, the residuum
      was reduced to 15%.  The reduction of residuum and increase in lighter oil
      represents a significant increase of diesel and kerosene when that
      crude oil is refined according to distillation models.  Viscosity was also
      reduced by 25%.




We
      also
      recently completed the design of a Sonocracking unit intended to process 30,000
      bbl/day. This unit is based upon the design of the 5,000 and 15,000 bbl/day
      prototypes, whereby a 15,000 bbl/day unit consists of three 5,000 bbl/day units,
      and a 30,000 bbl/day unit consists of six 5,000 bbl/day units.





Manufacture
      of seven 30,000 bbl/day units is now underway in connection with the
      installation of a facility in Fujairah, United Arab Emirates with an initial
      capacity of 210,000 bbl/day. In December 2005 we entered into an agreement
      with
      NTG GmbH (“NTG”) of Gelnhausen, Germany to manufacture seven 30,000 bbl/day
      fully automated, stainless steel Sonocracking units pursuant to SulphCo’s design
      and specifications.  The ultrasonic equipment to be included in the units
      is being manufactured by Märkisches Werk GmbH.  The agreement calls for NTG
      to manufacture and assemble the units and have them ready for containerized
      shipment to SulphCo’s joint venture, Fujairah Oil Technology, LLC in Fujairah,
      United Arab Emirates in April 2006. See “Fujairah Oil Technology LLC” below for
      further information regarding this venture. The 30,000 bbl/day unit is expected
      to be used as a model when fulfilling future orders.





Following
      is a discussion of development and commercialization activities currently
      underway. For additional information regarding activities proposed to be
      conducted over the next 12 months, see “Management’s Discussion and Analysis or
      Plan of Operation” appearing elsewhere in this report.





**Fujairah
      Oil Technology LLC**





In
      November 2005 we formed a new company with the Government of Fujairah, in the
      United Arab Emirates, to implement our Sonocracking upgrading technology within
      and outside the United Arab Emirates. The new company, Fujairah Oil Technology
      LLC, is 50% owned by the Government of Fujairah through Trans Gulf Petroleum
      Co.
      and 50% owned by SulphCo.





Fujairah
      Oil Technology was formed to upgrade heavy and medium crude oil supplied by
      the
      Government of Fujairah with our Sonocracking units, and to thereby obtain the
      increase in value of the processed oil. SulphCo has agreed to furnish the use
      of
      its Sonocracking units and will retain ownership of the units. The Government
      of
      Fujairah is making available to the venture approximately 40,000 square meters
      of land adjacent to oil storage facilities and is assisting Fujairah Oil
      Technology in securing the use of up to 5 million barrels of adjacent storage
      capacity for lease by the joint venture. Fujairah Oil Technology will be
      responsible for the maintenance and day to day operations of the processing
      facilities.





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          of Contents


In
      December 2005, Fujairah Oil Technology formally requested that we design,
      manufacture and install Sonocracking processing equipment initially capable
      of
      upgrading 210,000 barrels per day. The ultrasound equipment has been ordered
      and
      is being manufactured by SulphCo third party suppliers, including NTG GmbH
      and
      M’rkisches Werk GmbH of Germany. Vera Group, a contractor, has been retained
      by
      SulphCo on behalf of the joint venture to finalize site engineering design
      and
      to construct building and related infrastructure necessary to house the
      Sonocracking units. We expect that seven Sonocracking units, each with a
      capacity of 30,000 bbl/day will be delivered in Fujairah in May 2006. We plan
      to
      complete installation and testing of one 30,000 bbl/day unit in June 2006 and
      then bring the remaining units online as soon as practicable thereafter. Upon
      completion of the installation and testing of the initial processing units
      an
      additional 300,000 bbl/day of additional capacity is expected to be added by
      the
      first quarter of 2007. The present timetable represents management’s best
      estimate based upon progress to date and presently known circumstances, and
      all
      parties are fully committed to a timely rollout of the Fujairah facility. Due
      to
      the inherent complexities involved in the installation of a facility of this
      magnitude, however, there may be unforeseen delays in our current
      timetable.





**Total
      France**





On
      October 10, 2005, we entered into a test agreement with Total France, a
      multinational integrated oil and gas company headquartered in France. The test
      agreement’s purpose is to enable us and Total France to jointly evaluate the
      technical viability of our Sonocracking technology on Total France’s upstream
      and downstream crude oil related assets. The agreement, which is currently
      set
      to expire on April 30, 2006, contemplates that we will process samples of Total
      France’s crude oils treated with the Sonocracking technology. To date Total
      France has shipped several samples to SulphCo for evaluation, and we have agreed
      upon dates in April 2006 to jointly evaluate the application of our Sonocracking
      technology to these samples. Due to the delay in receiving the samples, we
      expect that the current agreement will be extended to allow Total France
      sufficient time to complete its evaluation.


As
      part
      of the test agreement we have agreed to not engage in business discussions
      with
      other parties interested in the Sonocracking technology in the countries of
      France, Belgium, Italy and Spain during the term of the test
      agreement.





**Equipment
      Sale and Marketing Agreement in South Korea**





In
      February 2005, we entered into an agreement with OIL-SC, Ltd. (“OIL-SC”), based
      in Seoul, South Korea, which provides for the sale by us to OIL-SC of a
      Sonocracker pilot plant utilizing our Sonocracking technology for $1 million
      and
      the appointment of OIL-SC as our marketing representative for oil refiners
      in
      South Korea. OIL-SC is a newly formed Korean company operated by Mr. Sang Ok
      Lee. Mr. Lee has extensive experience as a businessman and entrepreneur in
      a
      variety of industries, including refining, construction and asphalt
      manufacturing.





The
      pilot
      plant, which has a processing capacity of up to 2,000 barrels per day, is
      located in South Korea, and is intended to both serve as a demonstration unit
      for our Sonocracking technology to South Korean refiners and to upgrade
      petroleum products which OIL-SC purchases on the open market. South Korea has
      the third largest refining capacity in Asia, behind China and Japan, and has
      the
      largest average refinery capacity per refinery in the world.





We
      completed construction, delivery, and assembly of the Sonocracker pilot plant
      in
      August 2005 and completed its installation in September 2005. The pilot plant
      was to be fully operational based upon agreed specifications by November 22,
      2005. These specifications called for the pilot plant to upgrade a specified
      grade of medium weight crude oil (Arab Medium Crude) by increasing its API
      gravity (reducing its weight) by 9.8%, reducing sulfur weight content by 29.4%,
      and reducing nitrogen content by 29.9%. At such date the pilot plant did not
      meet all agreed upon specifications due to a malfunctioning water separator
      manufactured by a third party. Currently we are working towards ensuring the
      pilot plant meets all agreed upon specifications and we expect that the pilot
      plant will meet all of the agreed specifications during the second quarter
      of
      2006. OIL-SC has advised us that it expects to complete their ongoing test
      program in April 2006 and issue a final test report in May 2006. SulphCo intends
      to upgrade the water separator unit in the 2,000 barrel/day pilot unit with
      the
      redesigned water separation system now incorporated into our 15,000 barrel/day
      unit. We have been advised by OIL-SC that their plan is to enter into a
      commercial agreement with a third party refinery in the fall of
      2006.





7
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The
      agreement with OIL-SC called for the $1 million purchase price for the pilot
      plant to be paid to us in installments. Installments totaling $550,000 were
      paid
      to us in 2005, and the remaining installment of $450,000 was originally payable
      on December 1, 2005. In November 2005, SulphCo and OIL-SC agreed to defer the
      remaining $450,000 installment payment until seven days after entering into
      the
      first commercial license agreement for the Sonocracking technology between
      the
      Company and a South Korean refining company, provided that OIL-SC, Ltd. uses
      the
      funds for continued marketing activities regarding the Sonocracking technology
      in South Korea.





The
      agreement provides that OIL-SC is entitled to a full refund of all payments
      if
      the pilot plant does not operate within agreed specifications by November 22,
      2005. To date, OIL-SC has not requested such refund and we continue to work
      with
      OIL-SC toward meeting all specifications. Because the payment of the purchase
      price is refundable if the pilot plant does not meet all of the agreed
      specifications, no portion of the purchase price will be recorded as revenue
      in
      our financial statements until the pilot plant meets all agreed specifications.





The
      original agreement also calls for OIL-SC to have exclusive marketing rights
      for
      South Korean refiners, other than LG-Caltex Oil Refinery, for a term of 24
      months, which exclusive rights are subject to extension for an additional five
      years if during the initial 24 months we enter into a transaction covered by
      the
      agreement with a third party. These marketing rights do not include contracting
      rights, which are retained by SulphCo. OIL-SC is entitled to a fee equal to
      10%
      of the quarterly gross profits received by us from introductions to South Korean
      refiners made during the term of the agreement. If OIL-SC fails to introduce
      us
      to a third party within 18 months of the date of the agreement, then OIL-SC’s
      marketing rights may be terminated by us. In addition, if we fail to enter
      into
      a business arrangement covered by the agreement within 24 months of the date
      of
      the agreement, OIL-SC’s marketing rights in South Korea become
      non-exclusive.





With
      our
      prior written consent, under certain conditions OIL-SC may also use the
      Sonocracker pilot plant for demonstration purposes for non-South Korean refiners
      and other third parties. In addition, we may use the plant for demonstration
      purposes for our own potential customers. If during the term of the agreement
      such use of the plant by us results in a business arrangement between us and
      a
      third party, OIL-SC is entitled to a fee equal to 2.5% of the quarterly gross
      profits received by us from such business arrangements.





OIL-SC
      has recently changed its name to SulphCo KorAsia, Inc. Presently neither SulphCo
      nor its affiliates have any equity interest in SulphCo KorAsia.





**Kuwait
      Joint Venture**





In
      February 2004 we formed a joint venture known as SulphCo Oil Technologies Kuwait
      with two Kuwaiti nationals, Fahad Alhajiri and Fuad A M A Alghareed, of which
      51% is owned by our joint venture partners. The ownership certificate states
      that Rudolf Gunnerman is the 49% owner. The Company intends to take action
      to
      correct the error prior to the beginning of any activity there. The purpose
      of
      this joint venture is to assist us in marketing our technology in Kuwait with
      third parties. Mr. Alhajiri has been a principal in a Kuwaiti international
      trading company, Fanan International Trading and Contracting Est., for at least
      the past six years. Mr. Alghareed is a Kuwaiti entrepreneur engaged in a number
      of Kuwaiti retail and marketing ventures. As of the date of this report none
      of
      the joint venture partners had contributed any assets to the joint venture
      and
      there have been no material financial activities. Future activities of the
      joint
      venture will be accounted for by us by consolidating it with our financial
      statements. We are unable to determine at this time what activities, if any,
      the
      Kuwait joint venture will undertake in the future.





**The
      Market for Our Technology**




***The
      Oil Producer Market***




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




8
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·
            The
                ability to obtain higher prices for crude oil processed by SulphCo’sSonocrackerunits; and




·
            Improved
                economics of utilizing heaver, higher sulfur content crude oil
                reserves.




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




The
      world
      consumes approximately 83 million barrels of oil per day, according to the
      Energy Information Administration as of the third quarter of 2005. Of this
      approximately 59 million barrels per day comes from medium and heavy crude
      oil.




***The
      Refinery Market***




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




These
      potential benefits include:




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




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




·
            Improved
                operation of conventional desulfurization
                equipment;




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




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




*Lower
      Raw Material Costs*




While
      all
      crude oils have differing characteristics, the relative cost of crude oil is
      influenced primarily by its 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.




As
      the
      cost of crude oil is generally considered the cost component with the greatest
      leverage on the profitability of an oil refinery, a refinery will normally
      seek
      to purchase the cheapest grade of crude oil which is suitable for its refinery
      operations. In this regard, typically no two refineries will have identical
      requirements. 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. Therefore,
      because of price differentials based upon the density and sulfur content of
      crude oil, a refinery will normally seek to purchase the cheapest heavy grade
      with the highest sulfur content which is suitable for its refining needs. In
      turn, as the market “spread” between light sweet crude oil and heavy sour crude
      oil increases, so too will a refinery’s profit margin if it has the capability
      of processing heavier sour crude oil.




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




*Improved
      Operation of Conventional Desulfurization Equipment*




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




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




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




For
      additional information regarding capital and operating costs related to our Sonocracker units,
      see “Description of Business - Competitive Business Conditions” appearing
      elsewhere in this report.




***Geographic
      Scope of Our Market***




We
      have a
      50% ownership interest in Fujairah Oil Technology LLC in the United Arab
      Emirates, our marketing agreement with OIL-SC in South Korea, and a minority
      joint venture interest in SulphCo Oil Technologies Kuwait. As the potential
      markets for our technology include countries with significant oil producing
      or
      refining activities, we expect to conduct additional business in other countries
      in the future. These activities may be conducted by us directly, or through
      partners, licensees or other third parties, in connection with the
      commercialization of our technologies.




**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.





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





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





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





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




**Patents,
      Trademarks and Copyrights**





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





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





We
      have
      applied to register the trademarks Sonocracking,TM Sonocracker,TM Sonic Cracking,TM
Sonic Cracker,TM and Sonocracked CrudeTM with reference to our upgrading and
      desulfurization technology and the trademark SulphCo.TM We also rely on copyright
      protection for the software utilized in our Sonic CrackingTM units.




**Effects
      of Government Regulation; Regulatory Approvals**





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





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




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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 new regulations require the phase-in of gasoline sulfur
      standards beginning in 2004, with special extended phase-in provisions over
      the
      next few years for refineries meeting specified requirements. In addition,
      the
      EPA recently promulgated regulations that limit the sulfur content of highway
      diesel fuel beginning in 2006 to 15 parts per million. The former standard
      was
      500 parts-per-million. The EPA has also proposed regulations intended to limit
      the sulfur content of diesel fuel used in non-road activities such as mining,
      construction, agriculture, railroad and marine.




***Regulatory
      Approvals***




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




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




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




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.




Future
      activities may subject us to increased risk when we commercialize our units
      by
      reason of the installation and operation of these units at customer sites.
      We
      intend to address these risks by imposing contractual responsibility on third
      party users for maintaining necessary permits and complying with applicable
      environmental laws governing 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.




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





During
      the past two years our business efforts were directed towards research and
      development of upgrading and desulfurization of crude oil, including research
      and development of our high power ultrasound technology. We completed the design
      and production of our first 15,000 bbl/day Sonocracking unit. During this time
      our research and development costs totaled $1.8 million; $1.4 million in 2005
      and $400,000 in 2004. We expect to continue to develop and test our technologies
      and prototypes and to explore the expansion of the range of petroleum products
      that can be upgraded with our technologies.





**Employees**





As
      of
      March 1, 2006, we had 24 total employees, including 22 full-time employees
      and a
      consulting agreement with RWG, Inc., for the full-time services of our chairman
      and CEO, Rudolf W. Gunnerman. Two of our directors also provide consulting
      services currently. None of our employees or independent contractors is subject
      to a collective bargaining agreement, and we believe that our relations with
      employees and independent contractors are good.




**ITEM2.
      DESCRIPTION OF PROPERTY**




Our
      executive offices and facilities are located at 850 Spice Islands Drive, Sparks,
      Nevada 89431 in a leased facility consisting of approximately 92,125 square
      feet. The lease for this space will expire in March 2007. We believe that these
      facilities are adequate for our current needs and will look toward renewal
      or
      other options prior to the end of the lease.




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




**ITEM3.
      LEGAL PROCEEDINGS**




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





On
      January 5, 2004, we filed a lawsuit in the Second Judicial District Court for
      the State of Nevada, Case No. CV04-00013, against Alexander H. Walker, Jr.,
      our
      former general counsel and director, and Nevada Agency & Trust Company, our
      former transfer agent. The lawsuit alleges breaches of fiduciary duty, contract
      violations, conversion, and other related claims, in connection with the sale
      of
      shares of our common stock to Coldwater Capital, LLC and Mark Neuhaus in 2001.
      SulphCo claims it did not receive approximately $737,000 of the purchase price
      for the shares sold. The defendants have answered the complaint, generally
      denying the allegations and raising affirmative defenses, and cross-complaining
      against Coldwater Capital, LLC and Mark Neuhaus for the payment of the funds
      owed to SulphCo. We subsequently obtained an injunction requiring any proceeds
      of the sale of the SulphCo stock owned by Mr. Walker to be held by the court
      pending trial.





On
      June
      9, 2005, our company and our CEO, Rudolf Gunnerman, were named as defendants
      in
      two separate legal actions commenced in Reno, Nevada. Though the plaintiffs,
      factual allegations and theories of recovery asserted in the two cases are
      different, they both allege claims to intellectual property belonging to us,
      which claims we and the other named defendants regard as wholly without merit.
      The fact that the two cases were filed on the same day and were endorsed by
      the
      same counsel suggests a concerted effort between the two plaintiffs to induce
      an
      undeserved settlement from us and/or other named defendants. We intend to defend
      ourselves vigorously, asserting counterclaims to the extent appropriate.
      Following is a description of the plaintiffs’ allegations and the relief
      sought.




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*Talisman
      Capital Talon Fund, Ltd. v. Rudolf Gunnerman and Sulphco, Inc* .
      was
      commenced in the United States District Court for the District of Nevada (Case
      No. CV-N-05-0354-HDM-RAM) by an offshore company purportedly based in Tortola,
      British Virgin Islands, against SulphCo, Inc. and Rudolf W. Gunnerman. The
      Talisman Fund complaint alleges that the predecessor-in-interest of Talisman,
      Capital Strategies Fund, Ltd., entered into an agreement with Dr. Gunnerman
      in
      April 2003 in which Dr. Gunnerman purportedly assigned to Capital Strategies
      Fund, Ltd. all rights to specified intellectual property then owned by us or
      subsequently acquired or developed by us, including two patents issued to us
      prior to the April 2003 agreement (US Patent Nos. 6,402,939, 6,500,219), four
      patents issued to SulphCo subsequent to April 2003 (US Patent Nos. 6,827,844,
      6,652,992, and 6,897,628), and a patent application filed by us subsequent
      to
      April 2003. The Talisman Fund complaint further alleges claims against us for
      tortious interference with Talisman’s contractual rights under the April 2003
      agreement, conversion and unjust enrichment, and seeks as relief both
      unspecified damages and a declaration that Talisman is the exclusive owner
      of
      the claimed intellectual property. Talisman claims rights under and related
      to
      the April 2003 agreement purportedly as the result of an assignment by Capital
      Strategies Fund, Ltd. to Talisman Fund in May 2005 of its rights under the
      April
      2003 agreement. Both SulphCo and Dr. Gunnerman deny the validity of the claims
      of the Talisman Fund, including claims that rights to any of our company’s
      intellectual property are covered by the April 2003 agreement and further deny
      that the Talisman Fund has any rights to technology owned or used by us.
      O n
      October
      19, 2005, the United States District Court for the District of Nevada denied
      the
      defendants' Motion for Judgment on the Pleadings without prejudice, and the
      parties have commenced with discovery.





The
      second action commenced on June 9, 2005, *Clean
      Fuels Technology v. Rudolf W. Gunnerman, Peter Gunnerman, RWG, Inc. and SulphCo,
      Inc.* ,
      was
      filed in the Second Judicial District Court of the State of Nevada in and for
      the County of Washoe (Case No. CV05 01346). The complaint alleges that under
      an
      exclusive license agreement originally entered into between Dr. Gunnerman and
      the legal predecessor-in-interest of plaintiff Clean Fuels Technology (“CFT”) in
      1994, and which agreement was amended at various times after 1994, CFT owns
      the
      exclusive rights to “sulfur removal technology” originally developed by
      Professor Teh Fu Yen and Dr. Gunnerman with financial assistance provided by
      Dr.
      Gunnerman. The CFT complaint alleges that Rudolf Gunnerman, Peter Gunnerman,
      our
      President, and RWG, Inc., a company owned by Dr. Gunnerman, wrongfully
      transferred the “sulfur removal technology” to SulphCo, Inc. in violation of the
      terms of the exclusive license agreement and other legal duties allegedly owed
      by them to CFT. The CFT complaint further alleges, on the basis of unspecified
      “information and belief,” that we conspired with Rudolf and Peter Gunnerman and
      RWG, Inc. to conceal the sulfur removal technology from CFT in breach of alleged
      fiduciary duties owed by SulphCo, Inc. and the other defendants to CFT; that
      SulphCo, Inc. committed unspecified “intentional acts” to “pilfer” CFT’s rights
      in the sulfur removal technology, and that CFT is entitled to a constructive
      trust over the “sulfur removal technology” as well as damages against the named
      defendants. Both SulphCo, Inc. and the other defendants deny the validity of
      CFT’s claims, including claims to any rights to technology owned or used by us.
      Both Rudolf Gunnerman and Peter Gunnerman were co-founders of CFT as well as
      its
      predecessor-in-interest, and both Dr. Gunnerman and Peter Gunnerman are
      shareholders of CFT. O n
      September 15, 2005, the Second Judicial District Court of the State of Nevada
      in
      and for the County of Washoe denied the defendants' Motion for Judgment on
      the
      Pleadings without prejudice, and the parties have commenced with
      discovery.





On
      July
      12, 2005, Stan McLelland filed an arbitration demand against the Company before
      the American Arbitration Association. The demand alleges that Mr. McLelland
      was
      the Company’s president from August 13, 2001 until he resigned on September 12,
      2001. The demand seeks to exercise stock options that had not vested prior
      to
      Mr. McLelland’s resignation. Mr. McLelland also seeks salary for the six months
      following his resignation and $20,000 of alleged unpaid commuting expenses,
      as
      well as attorneys' fees and costs. The Company denies the validity of these
      claims.








**ITEM4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




Our
      2005
      Annual Meeting of Stockholders was held on December 9, 2005.  At the Annual
      Meeting each of our five nominees was elected to serve as a director until
      the
      next Annual Meeting of Stockholders and selection of Marc Lumer & Company as
      our independent auditors by the Audit Committee for the 2005 fiscal year was
      ratified.  The election results are as follows:




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          of Contents


**Election
      of Five Directors:**




Name
            
            For
            
            WithheldDr.
                Rudolf W. Gunnerman
            
            
            32,474,536
            
            
            185,178Richard
                L. Masica
            
            
            32,476,486
            
            
            183,228Robert
                van Maasdijk
            
            
            32,564,686
            
            
            4,150Dr.
                Raad Alkadiri
            
            
            32,558,386
            
            
            4,150Dr.
                Hannes Farnleitner
            
            
            32,564,686
            
            
            4,150







**Ratification
      of Marc Lumer & Company as Independent Auditors:**




For
            Against
            Abstain32,554,591
            4,000
            7,555









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**PARTII**




**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**




**Market
      Information**





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





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





High
            
            Low*Fiscal
                2005*First
                Quarter
            
            
            5.45
            
            
            2.80Second
                Quarter
            
            
            6.33
            
            
            2.96Third
                Quarter
            
            
            5.35
            
            
            2.68Fourth
                Quarter
            
            
            11.68
            
            
            3.25*Fiscal
                2004*First
                Quarter
            
            
            2.55
            
            
            .60Second
                Quarter
            
            
            3.25
            
            
            .58Third
                Quarter
            
            
            4.36
            
            
            1.45Fourth
                Quarter
            
            
            6.24
            
            
            1.65




On
      March
      30, 2006, the closing price of our common stock was $7.88, and 72,369,231 shares
      of our common stock were outstanding, after giving effect to the issuance of
      4
      million shares in the March 2006 private placement. There were 274 holders
      of
      record of our common stock on March 22, 2006. This number does not include
      stockholders whose shares were held in a "nominee" or "street"
      name.





**Dividends**




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







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**Securities
      Authorized Under Equity Compensation Plans**




The
      following table sets forth information as of December 31, 2005, regarding
      securities authorized for issuance under our equity compensation
      plans:




**Equity
      Compensation Plan Information**




**Plan
                Category**
            ****
            **Number
                of securities to**
              **be
                issued upon exercise**
              **of
                outstanding options,**
              **warrants
                and rights**
              **(a)**
            ****
            **Weighted-average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
              **(b)**
            ****
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation**
              **plans
                (excluding securities reflected in column (a))**
              **(c)**
            ****Equity
              compensation plans approved by security holders(1)Equity
                compensation plans not approved by security holders(2)
            
            100,000
            
            
            $2.89
            
            (3)







(1)
            As
                of December 31, 2005, we did not maintain equity compensation plans
                approved by our stockholders.


(2)
            Represents
                warrants issued to a consultant Rubenstein Public Relations, Inc.
                to
                purchase 50,000 shares of common stock at $1.93 per share and 50,000
                shares of common stock at $3.85 per share, both expiring November
                11,
                2009.


(3)
            Future
                grants are within the discretion of our board of directors and, therefore,
                cannot be determined at this time.





**Changes
      in Securities**





During
      the three months ended December 31, 2005, we sold and issued unregistered
      securities in the following transactions.





In
      November 2005, 50,000 restricted shares of common stock at $3.61 per share
      to a
      Director, Dr. Hannes Farnleitner, for services valued at $180,500.





In
      December 2005, 50,000 restricted shares of common stock were issued at $6.40
      per
      share to a Director, Christoph Henkel, for services valued at
      $320,000.





During
      the last quarter of 2005, investors in the 2004 private placements were issued
      securities in the following transactions: (1) Additional Investment Rights
      were
      exercised in exchange for 2,191,447 shares of common stock at $0.90 per share
      and Warrants for 767,009 shares of common stock exercisable at $1.125 per share,
      resulting in gross proceeds of $1,972,302; (2) Additional Investment Rights
      were
      exercised in exchange for 784,960 shares of common stock at $1.25 per share
      and
      Warrants for 549,472 shares of common stock exercisable at $1.5625 per share,
      resulting in gross proceeds of $981,200; (3) Warrants issued to investors in
      the
      2004 private placements were exercised in exchange for 379,347 shares of common
      stock at $1.125 per share, resulting in gross proceeds of $426,765; and (4)
      Warrants issued to investors in the 2004 private placements were exercised
      in
      exchange for 273,996 shares of common stock at $1.5625 per share, resulting
      in
      gross proceeds of $428,119.





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







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**ITEM6.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OR** **PLAN
      OF OPERATION**




**Business
      Plan**





Our
      business plan contemplates entering into business arrangements with third party
      oil producers, refiners and others whereby we would receive a percentage of
      the
      increase in value of the crude oil processed by our Sonocracking equipment.
      During the next 12 months we intend to continue development and
      commercialization activities currently underway and to explore new activities.
      Our principal focus has recently shifted to the commercial rollout of our
      Sonocracking units. In this regard:





·
            In
                November 2005 we formed a new company with the Government of Fujairah,
                in
                the United Arab Emirates, Fujairah Oil Technology LLC, to upgrade
                oil
                supplied by the Government of Fujairah with our Sonocracking units,
                and to
                thereby obtain the increase in value of the processed oil. SulphCo
                has
                agreed to furnish the use of its Sonocracking units and will retain
                ownership of the units.




·
            In
                December 2005 Fujairah Oil Technology formally requested that we
                design,
                manufacture and install Sonocracking processing equipment initially
                capable of upgrading 210,000 barrels per day. Accordingly, we have
                entered
                into an agreement with NTG GmbH (“NTG”) of Gelnhausen, Germany to
                manufacture seven 30,000 bbl/day fully automated, stainless steel
                Sonocracking units pursuant to SulphCo’s design and specifications. 
                The reactors to be included in the units are being manufactured by
                M’rkisches Werk GmbH of Germany.  The agreement calls for NTG to
                manufacture and assemble the units and have them ready for containerized
                shipment to SulphCo’s joint venture, Fujairah Oil Technology, LLC in
                Fujairah, United Arab Emirates in April 2006, with an anticipated
                delivery
                date of May 2006. A contractor has been retained to finalize site
                engineering design and to construct building and infrastructure to
                house
                the Sonocracking units. Our current schedule calls for the plant to
                be operational by July 2006. Upon completion of the installation
                and
                testing of the initial processing units an additional 300,000 bbl/day
                of
                additional capacity is expected to be added by the first quarter
                of
                2007.





·
            We
                completed construction, delivery, and installation of the Sonocracker
                pilot plant to OIL-SC, Ltd. in South Korea September 2005. The pilot
                plant, which has a processing capacity of up to 2,000 bbl/day, is
                intended
                to both serve as a demonstration unit for our Sonocracking technology
                to
                South Korean refiners and other Asian customers and to upgrade petroleum
                products which OIL-SC purchases on the open market. We are working
                with
                OIL-SC to ensure that the pilot plant meets all agreed specifications,
                and
                we expect that this will be completed during the second quarter of
                2006.





·
            OIL-SC
                has advised us that it expects to complete their ongoing test program
                in
                April 2006 and issue a final test report in May 2006. SulphCo intends
                to
                upgrade the water separator unit in the 2,000 barrel/day pilot unit
                with
                the redesigned water separation system now incorporated into our
                15,000
                barrel/day unit. We have been advised by OIL-SC that their plan is
                to
                enter into a commercial agreement with a third party refinery in
                the fall
                of 2006.





·
            We
                plan to continue to engage in ongoing development and testing activities
                during the next 12 months, intended to demonstrate the commercial
                potential of our technology to potential customers and optimize the
                technology for use in a variety of commercial
                settings.





·
            We
                expect to continue to work with Total France in connection with the
                testing and evaluation of their crude oil samples processed with
                our
                Sonocracking technology.







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We
      are
      also currently involved in discussions with prospective customers and we expect
      to continue to these discussions and explore other partnerships and
      relationships conducive to the further development and deployment of our
      Sonocracking technology. The precise nature and timing of our activities over
      the next 12 months and beyond cannot be predicted with certainty, as they are
      dependent upon a number of factors, including the timing of completion of
      development and commercialization milestones, and the requirements of customers
      and potential customers.





We
      have
      not yet generated any revenues from our Sonocracking technology and we do not
      expect to generate any revenues from the sale of Sonocracker units or the
      licensing of our technology until at least the second quarter of
      2006.





**Liquidity
      and Financial Condition**




As
      of
      March 30, 2006, we had approximately $35 million in available cash reserves
      which includes $27 million received from the March 2006 private placement
      described below under “Recent Financing Activities.”




As
      we are
      a development stage company, we have not generated any material revenues since
      we commenced our current line of business in 1999, and we do not anticipate
      generating any material revenues on a sustained basis until at least the second
      quarter of 2006. To date we have received $550,000 from OIL-SC pursuant to
      our
      Equipment Sale and Marketing Agreement, which is fully refundable if the pilot
      plant does not meet the agreed specifications. Accordingly, 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.





As
      of
      December 31, 2005, we had an accumulated deficit of approximately $31.7 million,
      which includes approximately $7.2 million of stock-based compensation expense,
      and we incurred a net loss of approximately $9.4 million for the 12 month period
      ending December 31, 2005. These losses are principally associated with the
      research and development of our Sonocracking technology, development of
      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
      technologies.





Our
      monthly cash outflow, or cash burn rate, as of the date of this report, is
      approximately $722,000 for fixed and normal recurring expenses, as
      follows:





Salaries
                and related payroll costs
            
            $
            193,000Legal
                fees (excluding patents)
            
            
            180,000R&D
                Expenses (excluding salaries)
            
            
            95,000Consulting
                contracts
            
            
            60,000Property
                lease
            
            
            37,000Interest
            
            
            32,000Travel
            
            
            25,000Patent
                costs and maintenance
            
            
            20,000Accounting
                fees
            
            
            20,000Office,
                phone, utilities
            
            
            13,000Equipment
                acquisitions
            
            
            7,000Other
            
            
            40,000Total
            
            $
            722,000





“Salary
      and related payroll costs” represents salary and payroll costs for all of our
      full time employees.





“R&D
      Expenses (excluding salaries)” includes parts and supplies used for research and
      development.





“Consulting
      contracts” includes $30,000 to RWG, Inc., a company wholly owned by Dr. Rudolf
      Gunnerman, paid in lieu of salary to him, a contract for investor relations,
      and
      other consultants as needed.





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Monthly
      fixed and recurring expenses for “Property lease” of $37,000 represents the
      monthly lease payment to an unaffiliated third party for our facility located
      at
      850 Spice Islands Drive, Sparks, Nevada, which includes our executive offices
      (8,752 square feet), research facilities (5,988 square feet) and manufacturing
      space (77,385 square feet).




“Interest”
      represents interest payable to Dr. Gunnerman for two notes payable. One note
      payable in the amount of $500,000, with an interest rate of 8%, is paid
      quarterly. For the purposes of our schedule of monthly cash outflows, interest
      on this note of $3,333 per month represents quarterly payments of $10,000.
      Also
      included in “interest” are interest payments to Dr. Gunnerman for a note payable
      in the amount of $7,000,000. Interest on this note is paid annually, commencing
      December 30, 2005 and ending on December 30, 2007 and is accrued quarterly
      at a
      rate of 1-month “LIBOR” (4.385% at December 30, 2005) plus 0.5% which is
      equivalent to $28,496 per month.




Through
      June 2006 SulphCo expects to incur the following expenditures for the project
      in
      Fujairah, United Arab Emirates:





Equipment
                - first seven machines
            
            $
            10,080,000Building
                and infrastructure engineering and construction
            
            
            1,600,000Consulting
            
            
            100,000Technical
                assistance and travel
            
            
            150,000Total
            
            $
            11,930,000Paid
                through March 22, 2006
            
            
            4,982,000Balance
            
            $
            6,948,000





After
      June 2006 consulting, technical assistance and travel expenses will continue
      at
      an estimated $40,000 per month.





Operation
      and maintenance of the Fujairah facility is the responsibility of Fujairah
      Oil
      Technology, and SulphCo is responsible for contributing its Sonocracking units.
      Our present timetable calls for production to begin in July 2006. Until Fujairah
      Oil Technology generates revenues, additional operating expenses of the joint
      venture, estimated initially at $800,000 per month, including the estimated
      cost
      of leasing oil storage facilities of approximately $300,000 per month, is
      expected to be funded from capital contributions of the partners. 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, and
      for
      profits and losses to be distributed to the partners, subject to a 10% reserve
      for legal expenses which may be waived by the partners. SulphCo’s 50% share of
      distributions made by the joint venture to SulphCo will also be subject to
      other
      costs and expenses incurred directly by SulphCo from time to time, including
      commissions payable directly by SulphCo to third parties, presently estimated
      at
      up to 20% of SulphCo’s net joint venture profits. We expect that following the
      successful rollout of the 210,000 bbl/day facility, funding of direct
      expenditures by SulphCo for equipment will be available from joint venture
      cash
      distributions.





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





In
      addition to activities related to the Fujairah joint venture, we intend to
      continue to incur additional expenditures during the next 12 months for
      development and manufacture of Sonocracker units. Additional funding
      requirements during the next 12 months may arise upon the placement of an order
      by a future customer for Sonocracker units. Because we are unable to determine
      the precise timing of receipt of customer orders or achievement of commercial
      milestones, m onthly
      cash outflow may increase significantly as we prepare for assembly and
      manufacturing duties associated with the deployment of the Sonocracking
      technology.





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***Recent
      Financing Activities***





On
      March
      29, 2006, we completed a private placement to a small number of accredited
      investors for the sale of 4,000,000 units, each unit consisting of one share
      of
      the Company’s Common Stock and one Warrant to purchase a share of Common Stock.
      Each unit was sold at a price of $6.805 per share, resulting gross proceeds
      at
      closing of $27.2million. The Warrants are exercisable, in whole or in part,
      at a
      fixed price equal to $6.805 per share, and are exercisable for a period of
      18
      months following their issuance. The Company is required to file a Registration
      Statement with the SEC within 30 days following the closing covering the resale
      of the shares of Common Stock issued at closing and shares issuable upon
      exercise of Warrants.





In
      2004
      we conducted two private placements with institutional and other third party
      investors for the sale of units consisting of our common stock, warrants, and
      rights to acquire additional stock and warrants, generating net cash proceeds
      of
      approximately $4.6 million. An additional amount of approximately $3.8 million
      was generated in 2005, approximately $7.8 million was generated in the first
      quarter of 2006 from the exercise of outstanding rights and warrants, and up
      to
      approximately $2.6 million may be generated upon exercise of warrants and rights
      in the future if investors in the June 2004 private placements exercise all
      of
      the remaining outstanding warrants.  For
      additional information regarding the private placements, see Note 11 to our
      audited financial statements which appear elsewhere in this report.





As
      of
      December 31, 2005, we were obligated to pay approximately $820,000 in the
      aggregate to investors in the 2004 private placements as late registration
      fees
      and interest due to the fact that the registration statement covering the
      private placement shares was not declared effective by the SEC by the time
      required by the investor agreements. We have not included the payment of these
      fees in calculating our estimated monthly cash flow discussed in “Liquidity and
      Financial Condition” above as we do not expect that investors will demand
      payment of these late fees. However, as of the date of this report no formal
      agreements have been entered into with any investors to waive these
      fees.





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





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





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





Other
      sources of additional capital include the exercise of warrants issued to
      investors in the June 2004 and March 2006 private placements, and funding
      through future collaborative arrangements, licensing arrangements and debt
      and
      equity financings. We do not know whether additional financing will be available
      on commercially acceptable terms when needed. If we cannot raise funds on
      acceptable terms when needed, we may not be able to successfully commercialize
      our technologies, take advantage of future opportunities or respond to
      unanticipated requirements. If we are unable to secure such additional financing
      when needed, we will have to curtail or suspend all or a portion of our business
      activities. Further, if we issue equity securities, our shareholders may
      experience severe dilution of their ownership percentage.








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**Research
      and Development During the Next 12 Months**





We
      intend
      to continue our research and development program during the next 12 months
      in
      order to expand the development of the design and manufacture of commercial
      Sonocracking units which embody our proprietary technology. Management
      anticipates that our research and development costs, including a portion of
      salaries for full time employees, will be approximately $120,000 per month,
      or
      $1,440,000 during the next 12 months. The $120,000 anticipated monthly
      expenditure for research and development is included within our estimated
      monthly cash outflow, or burn rate, of approximately $722,000 for fixed and
      normal recurring expenses, as described above.





**Employees**





As
      of
      March 1, 2006, we had 24 total employees, including 22 full-time employees
      and a
      consulting agreement with RWG, Inc., for the full-time services of our chairman
      and CEO, Rudolf W. Gunnerman. We do not expect any material changes in the
      number of our employees during the next 12 months unless required to service
      future customer orders.





**Off-Balance
      Sheet Arrangements**





The
      Company has not entered into any off-balance sheet arrangements.








**ITEM7.
      FINANCIAL STATEMENTS**





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








**ITEM8.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE**





Not
      applicable.







**ITEM8A.
      CONTROLS AND PROCEDURES**




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





In
      order
      to correct these material weaknesses in the effectiveness of its disclosure
      controls and procedures, management of the Company, in consultation with the
      Audit Committee, is in the process of reviewing policies and procedures in
      place
      with a view towards supplementing existing procedures and adopting new
      procedures. The Company's management and Audit Committee have discussed the
      matters disclosed in this Item 8A with the Company's independent registered
      public accounting firm.





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








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**ITEM8B.
      OTHER INFORMATION**





On
      March
      29, 2006, we completed a private placement to a small number of accredited
      investors for the sale of 4,000,000 units, each unit consisting of one share
      of
      the Company’s Common Stock and one Warrant to purchase a share of Common Stock.
      Each unit was sold at a price of $6.805 per share, resulting gross proceeds
      at
      closing of $27.2million. The Warrants are exercisable, in whole or in part,
      at a
      fixed price equal to $6.805 per share, and are exercisable for a period of
      18
      months following their issuance. The Company is required to file a Registration
      Statement with the SEC within 30 days following the closing covering the resale
      of the shares of Common Stock issued at closing and shares issuable upon
      exercise of Warrants. The Company is required to pay a late registration penalty
      of 1.5% per month, computed on the amount of the investment, if the registration
      is not declared effective by the SEC within 90 days of the closing.





The
      units
      were issued and sold to the investors without registration under the Securities
      Act of 1933 in reliance upon the private placement exemption of Section 4(2)
      and
      Regulation D thereunder, as the offering was made solely to a small group of
      sophisticated, accredited investors without the use of public solicitation
      or
      advertising.







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**PART
      III**





**ITEM9.
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**




**Directors
      and Executive Officers**





As
      of
      February 28, 2006, our directors and executive officers, their ages, positions
      with SulphCo, and the dates of their initial election or appointment as director
      or executive officer are as follows:





**Name**
            
            **Age**
            
            **Position
                With SulphCo**
            
            **Served
                From**Dr.
                Rudolf W. Gunnerman
            
            77
            
            Chief
                Executive Officer, Chairman of the Board and Director
            
            December
                2000Peter
                W. Gunnerman
            
            39
            
            President
            
            June
                2005Loren
                J. Kalmen (1, 2)
            
            53
            
            Chief
                Financial Officer
            
            November
                2005Michael
                Applegate (3)
            
            53
            
            Chief
                Operating Officer
            
            January
                2006Richard
                L. Masica
            
            69
            
            Director
            
            November
                2004Dr.
                Hannes Farnleitner
            
            66
            
            Director
            
            November
                2005Robert
                Henri Charles van Maasdijk
            
            61
            
            Director
            
            April
                2005Dr.
                Raad Alkadiri
            
            39
            
            Director
            
            May
                2005Christoph
                Henkel (4)
            
            48
            
            Director
            
            December
                2005Michael
                T. Heffner (5)
            
            59
            
            Director
            
            February
                2006





1.
            On
                November 14, 2005, the Company announced the appointment of Loren
                J.
                Kalmen as Chief Financial Officer of the Company, effective November
                10,
                2005. Mr. Kalmen previously served as a member of the Company’s Board of
                Directors and Chairman of the Board’s Audit Committee. Mr. Kalmen resigned
                from the Board and ceased all Board Committee assignments effective
                November 10, 2005.


2.
            On
                November 14, 2005, the Company announced the resignation of Alan
                L.
                Austin, Jr. as Vice President of Finance and Chief Financial Officer,
                effective November 10, 2005. Mr. Austin also resigned as Secretary
                and
                Treasurer of the Company effective November 10,
                2005.


3.
            On
                January 9, 2006, the Company announced the appointment of Michael
                Applegate as Chief Operating Officer of the Company effective that
                day.


4.
            On
                December 8, 2005, Christoph Henkel accepted an appointment to serve
                as a
                member of the Board of Directors until the annual meeting of shareholders
                in 2006 and until his successor is elected and qualified. Such appointment
                became effective on December 8,
                2005.


5.
            On
                February 6, 2006, Michael T. Heffner accepted the offer from the
                Company’s
                Board of Directors to serve as a member of the Board of Directors
                until
                the next annual meeting of shareholders and until his successor is
                elected
                and qualified.





**Business
      Experience of Directors and Executive Officers**





*Dr.
      Rudolf W. Gunnerman* ,
      our
      Chief Executive Officer, Chairman of the Board and Director, is a 77-year-old
      entrepreneur who studied mathematics and physics at the University of Munich,
      Germany before he immigrated to the United States. Dr. Gunnerman has invented
      a
      series of successful technologies, including fireproof building materials and
      wood pellets. Thereafter, in his quest to reduce Nitrous Oxide, a major source
      of ozone depletion, Dr. Gunnerman invented a new range of clean fuel products
      known as A-55 Clean Fuels. Dr. Gunnerman founded Clean Fuels Technology, Inc.
      in
      1997 to develop and commercialize A-55 Clean Fuels, and served as its CEO from
      1997 to 2000, and as its Chairman from 1997 to 2003. Dr. Gunnerman holds three
      honorary doctorate degrees. Dr. Gunnerman has served as a director and Chairman
      of the Board of SulphCo since December 2000 and has served as our CEO since
      July
      2001.





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*Peter
      W. Gunnerman* has been
      our President since June 7, 2005, and also served as Chief Operating Officer
      from June 7, 2005 until January 2006. Prior to joining us he headed Global
      6,
      LLC, a consulting company he founded in 2004 that assists national and
      international technology companies with a variety of business functions,
      including marketing and financial support. We were a client of Global 6, LLC
      from January 2005 through May 2005. Mr. Gunnerman spent the majority of his
      career with Clean Fuels Technology, Inc. (“CFT”), a privately held company which
      develops and markets emulsified fuels. Mr. Gunnerman co-founded CFT with his
      father, Dr. Rudolf W. Gunnerman, in 1992. From 2002 to 2004 Mr. Gunnerman served
      as President of CFT’s Residual Oil Division, where he was responsible for
      product development and product verification testing at domestic and foreign
      trial sites. Prior thereto he served as CFT’s President - Business Development
      from 2000 to 2002, Executive Vice President - Business Development from 1998
      to
      2000, and as Vice President - Operations from 1992 to 1998.





*Loren
      J. Kalmen* was
      appointed as our Chief Financial Officer on November 10, 2005, and served as
      a
      Director from June 2003 until his appointment as Chief Financial Officer in
      2005. Mr. Kalmen received his bachelor’s degree in accounting from the
      University of Nevada, Reno, in 1974, and his license as a Certified Public
      Accountant in 1978. Mr. Kalmen has maintained his own public accounting practice
      in Reno, Nevada, since 1988.





*Michael
      Applegate* was
      appointed as our Chief Operating Officer on January 9, 2006. Mr. Applegate
      has
      spent the majority of his career at Applegate Drayage Company, a tractor-trailer
      fleet operator in California, Nevada and Utah. The company employed more than
      100 drivers, dock workers, mechanics and administrative staff. Applegate served
      as president, a position he held since 1988. Mr. Applegate has served as both
      president and chairman of the board of the California Trucking Association,
      the
      largest state trucking association in the United States. He also served on
      the
      board of the Nevada Motor Transportation Association.





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





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





*Robert
      Henri Charles van Maasdijk* ,
      a
      Director since April 2005, is the chairman and CEO of Attica Alternative
      Investment Fund, Ltd. (AAI), a private investment fund which he has headed
      since
      1999. For the previous 16 years, he served as managing director and CEO of
      Lombard Odier Investment Portfolio Management Ltd., one of the oldest and
      largest private banks in Switzerland. Over his 35-year career, he has held
      executive, portfolio management and research positions with Ivory & Sims,
      Edinburgh; Banque Lambert, Brussels; Pierson Heldring Pierson, Amsterdam; and
      with Burham and Company, New York.





*Dr.*  *Raad
      Alkadiri* ,
      a
      Director since May 2005, has been with the international energy advisory firm
      PFC Energy, Inc. since 1998.  Dr. Alkadiri is Director for Middle East and
      Africa in PFC’s Country Strategies Group and heads its Iraq advisory
      service.  Dr. Alkadiri focuses on the political, economic and sectoral
      factors that influence oil and gas producing states, particularly those in
      the
      Middle East. Dr. Alkadiri served as policy advisor and assistant private
      secretary to the United Kingdom’s special representatives to Iraq from 2003 -
      2004.  In this role, he assisted in shaping UK policy toward Iraq during
      the occupation, as well as planning Iraq’s transition to sovereignty.  He
      was invested as an Officer of the Order of the British Empire for his work
      in
      Baghdad.  Prior to joining PFC Energy in 1998, Alkadiri was Middle East
      analyst at the UK-based consultancy Oxford Analytica, where he focused on
      political and economic developments in the northern Persian Gulf states. 
From 2000 to 2001, he was associate professor at the School of Advanced
      International Studies, Johns Hopkins University.  He was a teaching fellow
      of politics at the University of St. Andrews from 1990 to 1991.





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*Christoph
      Henkel* ,
      a
      Director since December 2005, is vice chairman of the Shareholders Committee
      of
      Henkel KGaA, a $13 billion international consumer products company based in
      Dusseldorf, Germany. Prior to joining Henkel in 1989, Mr. Henkel held various
      management positions at Nestle and Henkel subsidiaries. He has served on the
      boards of Loctite Inc., the Clorox Company, as well as sporting goods company
      Head N.A. Mr. Henkel currently is principal and founding partner of Canyon
      Equity LLC, a private equity firm based in California.





*Michael
      T. Heffner,* a
      Director beginning February 2006, retired from an executive position in BP
      in 2001 after 20 years with the company. From 1996 to 2001, he was president
      of
      BP Algeria, responsible for overseeing a $5 billion division comprising a
      petroleum-producing property and two natural gas developments in Algeria.
      Previously, he served as joint venture manager in Colombia, managing partner
      relationships with the Colombian State Oil Company and private partners Total
      and Triton for a $2 billion Colombian oil and gas development. During his
      career he also served as British Petroleum's health, safety and environmental
      manager for the Western Hemisphere. Prior to working at BP, Mr. Heffner spent
      ten years with the Bechtel Corporation, where he served in a variety of cost,
      planning and construction roles in that company's petrochemical division in
      the
      U.S. and Canada. Mr. Heffner earned his BS degree in chemical engineering from
      the Georgia Institute of Technology and a master’s degree in business from Rice
      University.





**Family
      Relationships**





Peter
      W.
      Gunnerman is the son of Rudolf W. Gunnerman. There are no other family
      relationships between the directors or executive officers of
      SulphCo.





**Audit
      Committee Financial Expert**





Our
      audit
      committee consists of Robert Henri Charles van Maasdijk and Dr. Hannes
      Farnleitner. The Board has determined that both Robert van Maasdijk and Dr.
      Hannes Farnleitner are independent (as independence is currently defined in
      applicable SEC and American Stock Exchange rules). The Board has determined
      that
      Robert van Maasdijk qualifies as an “audit committee financial expert,” as
      defined in applicable SEC rules. The Board made a qualitative assessment of
      Mr.
      van Maasdijk’s level of knowledge and experience based on a number of factors,
      including his formal education and business experience.





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





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





Number
                of
              Late
                Reports
            
            Number
                of
              Transactions
                Not
              Reported
                TimelyAlan
                Austin
            1
            
            1Richard
                Masica
            1
            
            1Robert
                van Maasdijk
            1
            
            1Dr.
                Raad Alkadiri
            1
            
            1Dr.
                Hannes Farnleitner
            1
            
            1Christoph
                Henkel
            2
            
            1








**Code
      of Ethics**





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







26
 Table
          of Contents


**ITEM10.
      EXECUTIVE COMPENSATION**





The
      following table sets forth information about compensation paid or accrued by
      us
      during the years ended December 31, 2005, 2004 and 2003 to our chief executive
      officer and our other executive officers who served as executive officers in
      2005 and who received at least $100,000 in annual compensation in
      2005.




**Summary
      Compensation Table**


**Fiscal
      Years 2005, 2004 and 2003**




**Annual
                Compensation**
            
            
            
            
            **Long
                Term**
              **Compensation
                Awards****Name
              and Principal Position**
            
            
            **Year**
            
            
            **Salary**
            
            
            **Bonus**
            
            
            **Other
                Annual**
              **Compensation**
            
            
            **Securities**
              **Underlying**
              **Options
                (#)**
            
            
            **All
                Other**
              **Compensation**Rudolf
                W. Gunnerman
              Chairman
                and Chief Executive Officer
            
            
            2005
              2004
              2003
            
            $
              $
              $
            360,000
              370,000
              300,000
            (1)
              (1)
              (1)
            
            0
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0Peter
                W. Gunnerman (2)
              President
            
            
            2005
              2004
              2003
            
            $
              $
              $
            132,917
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0Alan
                L. Austin, Jr.(3)
              Vice
                President of Finance and
              Chief
                Financial Officer
            
            
            2005
              2004
              2003
            
            $
              $
              $
            188,000
              0
              0
            
            
            0
              0
              0
            
            
            $204,000(4)
              0
              0
            
            
            0
              0
              0
            
            
            0
              0
              0









(1)
            These
                payments are consulting payments paid to RWG, Inc., a Nevada corporation,
                owned by Rudolf W. Gunnerman.


(2)
            Peter
                Gunnerman was appointed President in June 2005. From January 2005
                through
                May 2005 we maintained a monthly consulting arrangement with Global
                6,
                LLC, a company owned by Peter Gunnerman, which provided for Global
                6 to
                provide management consulting services to us on a month-to-month
                basis,
                for a monthly consulting fee of $10,000. Amounts in the above table
                do not
                include these consulting payments.


(3)
            Mr.
                Austin resigned as Vice President of Finance and Chief Financial
                Officer
                on November 10, 2005.


(4)
            Mr.
                Austin received 50,000 shares of SulphCo stock upon employment valued
                at
                $204,000.








**Employment
      and Consulting Contracts**





We
      procure the full time services of our chairman of the board and chief executive
      officer, Dr. Rudolf W. Gunnerman, pursuant to a Consulting Agreement with RWG,
      Inc., a Nevada corporation owned by Dr. Gunnerman. As of July 1, 2004, we were
      obligated to pay a fee of $480,000 annually as a consulting payment through
      July
      2006. Effective as of November 1, 2004, this amount has been reduced by mutual
      agreement to $30,000 per month until we receive substantial additional
      funds.





Peter
      Gunnerman was appointed President and Chief Operating Officer on June 7, 2005.
      In connection with Mr. Gunnerman’s appointment we entered into a written
      Employment Agreement which provided for a base salary of $220,000 per annum,
      effective June 1, 2005. The Employment Agreement is terminable by either party
      at any time. If Mr. Gunnerman’s employment is terminated by reason of his
“disability,” or by us without “good cause” or by Mr. Gunnerman for “good
      reason,” Mr. Gunnerman is entitled to a severance payment equal to three months
      base salary plus medical and dental coverage for six months following the date
      of termination. From January 2005 through May 2005 we maintained a monthly
      consulting arrangement with Global 6, LLC, a company owned by Peter Gunnerman,
      which provided for Global 6 to provide management consulting services to us
      on a
      month-to-month basis, for a monthly consulting fee of $10,000.





27
 Table
          of Contents


On
      November 14, 2005, we announced the appointment of Loren J. Kalmen as Chief
      Financial Officer of the Company, effective November 10, 2005. In connection
      with the appointment of Mr. Kalmen to the position of Chief Financial Officer,
      the Company and Mr. Kalmen executed an employment agreement dated November
      10,
      2005. According to the terms of the employment agreement, Mr. Kalmen’s
      employment with us commenced November 10, 2005 and Mr. Kalmen assumed the
      position of Vice President of Finance and Chief Financial Officer effective
      November 10, 2005. Under the terms of the employment agreement, Mr. Kalmen
      is
      entitled to receive a base salary of $25,000 per month (or $300,000 on an
      annualized basis). Mr. Kalmen is also entitled to receive additional bonuses
      as
      determined by our board of directors and customary equity compensation and
      benefits as other of our similarly situated senior executives.




**Option
      Grants in the Last Fiscal Year**





No
      stock
      options were granted to the individuals named in the Summary Compensation Table
      above during the fiscal year ended December 31, 2005.







**ITEM11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**




The
      following table presents certain information as of March 29, 2006, regarding
      the
      beneficial ownership of our common stock by (i) each of our directors and
      executive officers named in the Compensation Table under the “Management -
      Executive Compensation” section (Named Executive Officers), (ii) all persons
      known by us to be beneficial owners of five percent or more of our common stock,
      and (iii) all of our directors and executive officers as a group. Unless
      otherwise noted, the persons listed below have sole voting and investment power
      and beneficial ownership with respect to such shares. The mailing address of
      the
      beneficial owners is 850 Spice Islands Drive, Sparks, NV 89431.




**Name
                (1)**
            
            **Number
                of**
              **Shares
                Beneficially**
              **Owned
                (1)**
            
            **Percent**
              **Beneficially**
              **Owned(1)****Directors
                and Named Executive Officers****:**Dr.
                Rudolf W. Gunnerman
            
            
            27,799,913
            (2)
            
            38.4%Richard
                L. Masica
            
            
            50,000
            
            
            *Robert
                Henri Charles van Maasdijk
            
            
            50,000
            
            
            *Dr.
                Raad Alkadiri
            
            
            50,000
            
            
            *Dr.
                Hannes Farnleitner
            
            
            57,000
            
            
            *Christoph
                Henkel
            
            
            150,000
            
            
            *Michael
                T. Heffner
            
            
            120,000
            
            
            *Peter
                W. Gunnerman
            
            
            1,915,000
            
            
            2.6%Loren
                J. Kalmen (3)
            
            
            97,000
            
            
            *Michael
                Applegate
            
            
            70,000
            (4)
            
            *All
                Executive Officers and Directorsas
                a Group (10 persons)
            
            
            30,358,913
            
            
            41.9%





*
            Denotes
                less than 1%




28
 Table
          of Contents


(1)
            Beneficial
                ownership is determined in accordance with rules of the SEC, and
                includes
                generally voting power and/or investment power with respect to securities.
                Shares of common stock which may be acquired by a beneficial owner
                upon
                exercise or conversion of warrants, options or rights which are currently
                exercisable or exercisable within 60 days of March 29, 2006, are
                included
                in the Table as shares beneficially owned and are deemed outstanding
                for
                purposes of computing the beneficial ownership percentage of the
                person
                holding such securities but are not deemed outstanding for computing
                the
                beneficial ownership percentage of any other person. Except as indicated
                by footnote, to our knowledge, the persons named in the table above
                have
                the sole voting and investment power with respect to all shares of
                common
                stock shown as beneficially owned by
                them.




(2)
            Includes
                27,797,913 shares owned by Dr. Gunnerman in joint tenancy with his
                wife,
                Doris Gunnerman, with whom he shares voting and investment
                power.




(3)
              Includes
                  5,000 shares owned by Mr. Kalmen's daughter, in which shares he
                  disclaims beneficial ownership.


(4)
            Includes
                50,000 shares granted to Mr. Applegate by the Company in connection
                with
                employment, which shares vest under the terms of his employment agreement
                on April 1, 2006.






**ITEM12.
      CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**





**Certain
      Transactions**





Following
      is a description of material transactions during the past two years between
      us
      and our directors, executive officers, or members of their immediate
      family.




On
      July
      1, 2004, and July 1, 2005, we entered into Engagement Agreements with RWG,
      Inc.,
      an affiliate of Dr. Gunnerman, providing for Dr. Gunnerman to render services
      to
      us as chairman of the Board and as chief executive officer. Each Engagement
      Agreement was for a term of one year, and provided for an annual fee to be
      paid
      to RWG, Inc. of $480,000. Effective as of November 1, 2004, this amount has
      been
      reduced by mutual agreement to $30,000 per month until we receive substantial
      additional funds.




On
      December 30, 2003, we issued a $500,000 promissory note to Dr. Gunnerman, of
      which $250,000 was advanced by Dr. Gunnerman on December 30, 2003 and the
      remaining $250,000 was advanced on March 22, 2004. The note was due on December
      30, 2004, and required the payment to Dr. Gunnerman, in lieu of interest, of
      500,000 shares of our common stock. On January 5, 2004, we issued 500,000 shares
      to Dr. Gunnerman valued at $0.37 per share and discounted 20% because of their
      restricted status, or $148,000, as prepaid interest through **** December
      30, 2004 in lieu of a cash interest payment for the loan of $500,000. In
      December 2004 Dr. Gunnerman agreed to extend the maturity of the note from
      December 30, 2004, to December 30, 2005 at an interest rate of 8% per annum.
      The
      extension agreement also provides for mandatory prepayments from revenues we
      receive from the sale of our products or the licensing of our technology or
      otherwise, and from the amount of unrestricted loan or equity financings we
      receive. In December 2005 Dr. Gunnerman again agreed to extend the maturity
      of
      the note from December 30, 2005, to December 30, 2006 at an interest rate of
      8%
      per annum. The extension agreement also provides for payment on demand of Dr.
      Gunnerman prior to December 30, 2006.





In
      April
      2004 Dr. Gunnerman furnished a commitment to fund up to an additional $2,000,000
      in loans to us, of which $200,000 was advanced to us as of May 2004. In June
      2004 the commitment was superseded by the funding under the June 3, 2004 and
      June 15, 2004 private placements. Accordingly, the $200,000 advanced by Dr.
      Gunnerman was repaid by us in June 2004.





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




On
      December 30, 2003, we issued a $500,000 promissory note to Erika Herrmann,
      the
      sister-in-law of Dr. Gunnerman, of which $250,000 was advanced by Ms. Herrmann
      on December 30, 2003, and the remaining $250,000 was advanced on April 28,
      2004.
      The note was due on December 30, 2004, and required the payment to Ms. Herrmann,
      in lieu of interest, of 500,000 shares of our common stock. On January 5, 2004,
      we issued 500,000 shares to Ms. Herrmann valued at $0.37 per share and
      discounted 20% because of their restricted status, or $148,000, as prepaid
      interest through **** December
      30, 2004, in lieu of a cash interest payment for the loan of $500,000. As of
      December 10, 2004, $500,000 remained outstanding under this note. In December
      2004 Ms. Herrmann agreed to extend the maturity of the note from December 30,
      2004, to December 30, 2005 at an interest rate of 8% per annum. The extension
      agreement also provides for mandatory prepayments from revenues we receive
      from
      the sale of our products or the licensing of our technology or otherwise, and
      from the amount of unrestricted loan or equity financings we receive. The note
      was paid off in December 2005.





29
 Table
          of Contents


Effective
      November 1, 2004, we entered into a consulting agreement with Peak One
      Consulting, Inc., a company owned by Richard L. Masica, a director, under which
      Peak One has agreed to provide management consulting services to SulphCo from
      time to time, as requested by SulphCo, until December 31, 2006, subject to
      earlier termination by either party. The consulting agreement provides for
      a
      consulting fee of $1,500 per day or $200 per hour, whichever is
      less.





In
      connection with Mr. Masica's appointment to the Board of Directors in November
      2004, SulphCo agreed to grant Mr. Masica 25,000 shares of our common stock
      on
      January 1, 2005 for services as a director if he is then serving as a director.
      Mr. Masica was also granted an option on November 30, 2004, to acquire 25,000
      shares of our common stock at an exercise price of $2.86 per share in
      consideration of services to be provided as a director, with the option expiring
      on November 30, 2007. These issuances of were based upon SulphCo’s determination
      of the value of the services rendered and to be rendered by Mr. Masica as a
      director. On December 27, 2004, our Board of Directors amended the terms of
      Mr.
      Masica’s compensation as a director to coincide with past compensation practices
      regarding outside directors and in view of Mr. Masica’s expected contributions
      to SulphCo. The amended terms provided for Mr. Masica to receive 50,000 shares
      of our common stock in lieu of the original proposal for 25,000 shares and
      25,000 options, effective January 1, 2005. In January 2005 the 50,000 restricted
      shares of common stock were issued to him at $5.47 per share, for services
      valued at $273,500.




From
      January 2005 through May 2005 we maintained a monthly consulting arrangement
      with Global 6, LLC, a company owned by Peter Gunnerman, which provided for
      Global 6 to provide management consulting services to SulphCo on a
      month-to-month basis, for a monthly consulting fee of $10,000. Peter Gunnerman
      is the son of Rudolf Gunnerman, our Chairman and Chief Executive Officer. The
      consulting arrangement was terminated immediately prior to Mr. Gunnerman joining
      the Company as President in June 2005. For information regarding Mr. Gunnerman’s
      employment agreement entered into in June 2005 see “Employment and Consulting
      Contracts” in Item 10 above.





Kristina
      Ligon, the daughter of Dr. Rudolf Gunnerman, has been employed by us as Dr.
      Gunnerman’s executive assistant. She received salaries of $162,500 in 2005 and
      $139,500 in 2004.




In
      April
      2005, 50,000 restricted shares of common stock were issued at $4.99 per share
      to
      a Director, Robert Van Maasdijk, for services valued at $249,500.





In
      May
      2005, 50,000 restricted shares of common stock were issued at $3.54 per share
      to
      a Director, Dr. Raad Alkadiri, for services valued at $177,000.





In
      November 2005, 50,000 restricted shares of common stock at $3.61 per share
      to a
      Director, Dr. Hannes Farnleitner, for services valued at $180,500.





In
      December 2005, 50,000 restricted shares of common stock were issued at $6.40
      per
      share to a Director, Christoph Henkel, for services valued at
      $320,000.




In
      February 2006 we agreed to issue 50,000 restricted
      shares of common stock to Michael T. Heffner, a director, for
      services.





All
      share
      issuances and option exercise prices described in this section were equal to
      the
      fair market value of our common stock on the date the share or option issuances,
      as the case may be, and were approved by our board of directors, except as
      otherwise specifically noted. All of the transactions described in this section,
      although involving related parties, are believed to be on terms no more
      favorable than could have been obtained from an independent third
      party.





For
      additional information regarding related party transactions, see Note 10 and
      Note 11 to our audited financial statements which appear elsewhere in this
      report.





30
 Table
          of Contents


**ITEM13.
      EXHIBITS**





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





3.2
                **
            Amended
                and Restated Bylaws.





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





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





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





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





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





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





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.





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





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





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





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





31
 Table
          of Contents


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





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





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





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





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





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





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





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





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




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





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





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





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





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





10.30
                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.





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





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





31.1
            Certifications
                pursuant to Rule 13a-14 under the Securities Exchange Act of
                1934.




31.2
            Certifications
                pursuant to Rule 13a-14 under the Securities Exchange Act of
                1934.




32.1
            Certification
                of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to 906 of
                the Sarbanes-Oxley Act of 2002.





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





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





32
 Table
          of Contents


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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





(13)
      Included in Exhibit 10.30.








33
 Table
          of Contents




**ITEM14.
      PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**




**Independent
      Auditors' Fees**




The
      following table represents aggregate fees billed for each of our fiscal years
      ended December 31, 2005, and December 31, 2004, by our independent
      auditors.


**Independent
                  Audit Firm******
              **Fiscal
                  Year****Ended****2005**
              **2004**Marc
                  Lumer & CompanyAudit
                  Fees
              $70,000
              -0-Audit-related
                  Fees
              -0-
              -0-Tax
                  Fees
              -0-
              -0-All
                  Other Fees
              -0-
              -0-Total
                  Fees
              $70,000
              -0-Mark
                  Bailey & Company, LtdAudit
                  Fees
              $50,975
              $60,000Audit-related
                  Fees
              -0-
              -0-Tax
                  Fees
              -0-
              -0-All
                  Other Fees
              -0-
              -0-Total
                  Fees
              $50,975
              $60,000




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









34
 Table
          of Contents


**SIGNATURES**





In
      accordance with Section 13 of the Securities Exchange Act of 1934, the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




SULPHCO,
              INC.March
              31, 2006
            By:
            /s/ Rudolf
              W.
              GunnermanRudolf
                W. Gunnerman,
              Chairman
                of the Board and
              Chief
                Executive Officer   In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





/s/
                  Rudolf W. Gunnerman
              
              Chairman
                  of the Board, Chief Executive
              
              March
                  31, 2006Rudolf
                  W. Gunnerman
              
              Officer,
                  Director(Principal
                  Executive Officer)/s/
                  Loren J. Kalmen
              
              Chief
                  Financial Officer
              
              March
                  31, 2006Loren
                  J. Kalmen
              
              (Principal
                  Financial Officer andPrincipal
                  Accounting Officer)/s/
                  Richard L. Masica
              
              Director
              
              March
                  31, 2006Richard
                  L. Masica/s/
                  Robert Henri Charles van Maasdijk
              
              Director
              
              March
                  31, 2006Robert
                  Henri Charles van Maasdijk/s/
                  Raad Alkadiri
              
              Director
              
              March
                  31, 2006Raad
                  Alkadiri/s/
                  Hannes Farnleitner
              
              Director
              
              March
                  31, 2006Hannes
                  Farnleitner/s/
                  Christoph Henkel
              
              Director
              
              March
                  31, 2006Christoph
                  Henkel/s/
                  Michael T. Heffner
              
              Director
              
              March
                  31, 2006Michael
                  T. Heffner










35
 Table
          of Contents


**EXHIBIT
      INDEX**




3.1*
              Restated
                  Articles of Incorporation, as filed on December 30, 2003, with
                  the Nevada
                  Secretary of State.
 
 3.2
                  **
              Amended
                  and Restated Bylaws.
 
 4.1+
              Form
                  of Additional Investment Rights initially issued on June 3,
                  2004.
 
 4.2++
              Form
                  of Additional Investment Rights initially issued on June 15,
                  2004.
 
 4.3+
              Form
                  of Warrant initially issued on June 3,
                  2004.
 
 4.4++
              Form
                  of Warrant initially issued on June 15,
                  2004.
 
 4.5#
              Form
                  of Warrant dated November 11, 2004, issued to Rubenstein Public
                  Relations,
                  Inc.
 
 4.6(13)
              Form
                  of Warrant dated March 29, 2006.
 
 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.
 
 10.12#
              Consulting
                  Agreement dated July 15, 2004, by and between SulphCo, Inc. and
                  InteSec
                  Group LLC.
 
 10.13#
              Collaboration
                  Agreement dated August 6, 2004, by and between SulphCo, Inc. and
                  ChevronTexaco Energy Technology
                  Company.
 
 10.14#
              Contract
                  for Establishment of a Limited Liability Company (SulphCo Oil Technologies
                  Kuwait).
 
 10.15#
              Loan
                  Extension Agreement, dated for reference the 12thday of December, 2004, between Rudolf W. Gunnerman and SulphCo,
                  Inc.
 
 Table
            of Contents
 10.16#
              Loan
                  Extension Agreement, dated for reference the 12thday of December, 2004, between Erika Herrmann and SulphCo,
                  Inc.
 
 10.17(1)
              Separation
                  Agreement and General Release dated as of December 28, 2004, by
                  and
                  between SulphCo, Inc. and Kirk S. Schumacher.
 
 10.18(2)
              Letter
                  Agreement dated as of January 6, 2005, by and between SulphCo,
                  Inc. and
                  Alan L. Austin, Jr.
 
 10.19(3)
              Promissory
                  Note from SulphCo, Inc. to Rudolf W. Gunnerman dated December 31,
                  2004.
 
 10.20#
              Letter
                  Agreement dated February 4, 2005, by and between SulphCo, Inc.
                  and
                  ChevronTexaco Energy Technology
                  Company.
 
 10.21(4)
              Agreement
                  dated February 22, 2005, by and between SulphCo, Inc. and OIL-SC,
                  Ltd.
 
 10.22(5)
              Letter
                  Agreement dated April 27, 2005, by and between SulphCo, Inc. and
                  ChevronTexaco Energy Technology
                  Company.
 
 10.23(6)
              Employment
                  Agreement dated as of June 1, 2005, by and between SulphCo, Inc.
                  and Peter
                  Gunnerman.
 
 10.24(7)
              Test
                  Agreement by and between SulphCo, Inc. and Total France entered
                  into on
                  October 10, 2005.
  10.25(8)
              Employment
                agreement with Loren J. Kalmen dated November 10,
                2005.
 
 10.26(9)
              Letter
                  Agreement by and between SulphCo and OIL-SC and dated as of November
                  9,
                  2005.
 
 10.27(10)
              Memorandum
                  of Association dated November 29, 2005, by and between SulphCo,
                  Inc. and
                  Trans Gulf Petroleum Co., a Government of Fujairah
                  company.
 
 10.28(11)
              Employment
                  Agreement, dated as of January 1, 2006, by and between SulphCo,
                  Inc. and
                  Michael Applegate.
 
 10.29(12)
              2ndLoan Extension and Modification Agreement by and between SulphCo,
                  Inc. and
                  Dr. Rudolf W. Gunnerman and Doris Gunnerman entered into on January
                  30,
                  2006.
 
 10.30
                  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.
 
 14*
              Code
                  of Ethics adopted by the Board of Directors on March 12,
                  2004.
 
 16.1+++
              Letter
                  from Forbush and Associates to the SEC dated May 14,
                  2004.
 
 31.1
              Certifications
                  pursuant to Rule 13a-14 under the Securities Exchange Act of
                  1934.
  31.2
              Certifications
                  pursuant to Rule 13a-14 under the Securities Exchange Act of
                  1934.
  32.1
              Certification
                  of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to 906 of
                  the Sarbanes-Oxley Act of 2002.
 
 *
        Incorporated by reference from the registrant’s Annual Report on Form 10-KSB
        (SEC File No. 333-27599) as filed with the SEC on March 29, 2004.
 
 **
        Incorporated by reference from the registrant’s Form 10-QSB for the quarter
        ended March 31, 2003 (SEC File No. 27599) as filed with the SEC on May 14,
        2003.
 
 Table
            of Contents
 +
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on June 4, 2004.
 
 ++
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on June 16, 2004.
 
 +++
        Incorporated by reference from the registrant’s Form 10-QSB for the quarter
        ended March 31, 2004, (SEC File No. 27599) as filed with the SEC on May 17,
        2004.
 
 #
        Incorporated by reference from the registrant’s Registration Statement on form
        SB-2 (SEC File Nos. 333-117061 and 27599).
 
 (1)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on January 3, 2005.
 
 (2)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on January 10, 2005.
 
 (3)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on January 4, 2005.
 
 (4)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on February 25, 2005.
 
 (5)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on May 2, 2005.
 
 (6)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 27599) as
        filed with the SEC on June 10, 2005.
 
 (7)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
        as filed with the SEC on October 14, 2005.
 
 (8)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
        as filed with the SEC on November 14, 2005.
 
 (9)
        Incorporated by reference from the registrant’s Form 10-QSB (SEC File No.
        1-32636) as filed with the SEC on November 14, 2005.
 
 (10)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
        as filed with the SEC on December 2, 2005.
 
 (11)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
        as filed with the SEC on January 13, 2006.
 
 (12)
        Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636)
        as filed with the SEC on January 31, 2006.
 
 (13)
        Included in Exhibit 10.30.
 
 Table
            of Contents


SULPHCO,
          INC.
   (A
          COMPANY IN THE DEVELOPMENT STAGE)
   FINANCIAL
          STATEMENTS
   FOR
          THE
          YEARS ENDED
   DECEMBER
          31, 2005
   AND
   DECEMBER
          31, 2004
   WITH
   AUDIT
          REPORT OF
   REGISTERED
          PUBLIC ACCOUNTING FIRM
      F-1
 
 Table
          of Contents
   
   TABLE
          OF
          CONTENTS
  Independent
                    Auditor’s Report
                F-3Report
                    of Mark Bailey & Co. LLP, Independent Auditors
                F-4Balance
                    Sheet
                F-5Statements
                    of Operations
                F-6Statement
                    of Changes in Stockholders’ Equity
                F-7Statements
                    of Cash Flows
                F-12Notes
                    to Financial Statements
                F-13
  F-2
 
 Table
            of
            Contents
  
 INDEPENDENT
        AUDITOR’S REPORT
  The
        Board
        of Directors and Stockholders
 SulphCo,
        Inc.
 Sparks,
        Nevada
  We
        have
        audited the accompanying balance sheet of SulphCo, Inc. as of December 31,
        2005
        and the related statements of operations, stockholders' equity, and cash
        flows
        for the year then ended. These financial statements and the schedule are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements and schedule based on our audit.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company has determined
        that it
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company's internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        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 financial statements referred to above present fairly, in all
        material respects, the financial position of SulphCo, Inc. at December 31,
        2005,
        and the results of its operations and its cash flows for the year then ended,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  
 /s/
        MARC
        LUMER & CO.
 San
        Francisco, California
 
 March
        30,
        2006
 
 F-3
 
 Table
            of
            Contents


REPORT
        OF
        MARK BAILEY & CO. LLP, INDEPENDENT AUDITORS
 
 
 March
        4,
        2005
 
 Board
        of
        Directors
 Sulphco,
        Inc.
 
 We
        have
        audited the accompanying balance sheet of Sulphco, Inc., (a company in the
        development stage) as of December 31, 2004, and the related statements of
        operations, shareholders’ deficit and cash flows for the years ended December
        31, 2004 and 2003. These financial statements are the responsibility of the
        Company's management **.** Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Sulphco, Inc., (a company in
        the
        development stage), as of December 31, 2004, and the results of its operations
        and its cash flows for the years ended December 31, 2004 and 2003, in conformity
        with accounting principles generally accepted in the United States.
 
 
 
 /s/
        Mark
        Bailey & Company, Ltd.
 Reno,
        Nevada
 
 F-4
 
 Table
            of
            Contents
    **SULPHCO,
        INC.**
 **(A
          Company in the Development Stage)**
 **BALANCE
          SHEET**
 **December
          31, 2005**


**December
                  31, 2005****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              6,874,653Prepaid
                  expenses and other
              
              
              137,577Total
                  current assets
              
              
              7,012,230**Property
                  and Equipment (net of accumulated depreciation of
                  $828,140)******(Notes
                  2&3)
              
              
              397,416**Other
                  Assets**Intangible
                  assets (net of accumulated amortization of $17,422) (Note
                  4)
              
              
              355,218Investment
                  in Joint Venture (Note 5)
              
              
              139,550Deposits
              
              
              140,822Deferred
                  tax asset (net of valuation allowance of $7,136,974) (Note
                  6)
              
              
              -Total
                  other assets
              
              
              635,590Total
                  assets
              
              $
              8,045,236**Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              
              $
              779,413Refundable
                  deposit (Note 7)
              
              
              550,000Accrued
                  fees and interest (Note 8)
              
              
              1,035,572Related
                  party note payable (Note 9)
              
              
              500,000Total
                  current liabilities
              
              
              2,864,985**Long
                  Term Related Party Note Payable**(Note 9)
              
              
              7,000,000**Commitments
                  and Contingencies**(Note 10)
              
              
              -Total
                  liabilities
              
              
              9,864,985**Stockholders'
                  Deficiency**Preferred
                  stock: 10,000,000 shares authorized ($0.001 par value) none
                  issued
              
              
              -Common
                  stock: 100,000,000 shares authorized ($0.001 par value)60,536,795
                  shares issued and outstanding at December 31, 2005
              
              
              60,537Paid
                  in capital
              
              
              30,604,342Stock
                  subscriptions receivable (Note 13)
              
              
              (744,500
              )Deficit
                  accumulated during the development stage
              
              
              (31,740,128
              )Total
                  stockholders' deficiency
              
              
              (1,819,749
              )Total
                  liabilities and stockholders' deficiency
              
              $
              8,045,236




The
      Accompanying Notes are an Integral Part of the Financial Statements


F-5
 Table
          of Contents


**SULPHCO,
        INC.**
 **(A
          Company in the Development Stage)**
 **STATEMENT
          OF OPERATIONS**
 **For
          the Years Ended December 31, 2005 and 2004 and from
          Inception**


**Inception****2005**
              
              **2004**
              
              **to
                  date****Revenue**Sales
              
              $
              -
              
              $
              -
              
              $
              42,967**Expenses**Selling,
                  general, and administrative expenses
              
              
              (6,790,998
              )
              
              (3,453,357
              )
              
              (26,891,114
              )Research
                  and development expenses
              
              
              (1,442,096
              )
              
              (407,613
              )
              
              (3,182,809
              )Loss
                  on disposal of asset
              
              
              -
              
              
              -
              
              
              (221,711
              )Loss
                  on impairment of asset
              
              
              (233,900
              )
              
              -
              
              
              (233,900
              )Total
                  operating expenses
              
              
              (8,466,994
              )
              
              (3,860,970
              )
              
              (30,529,534
              )Loss
                  from operations
              
              
              (8,466,994
              )
              
              (3,860,970
              )
              
              (30,486,567
              )**Other
                  income (expense)**Interest
                  income
              
              
              193,987
              
              
              17,303
              
              
              250,599Interest
                  expense
              
              
              (395,123
              )
              
              (302,786
              )
              
              (743,920
              )Late
                  registration fees
              
              
              (760,240
              )
              
              -
              
              
              (760,240
              )Loss
                  before taxes on income
              
              
              (9,428,370
              )
              
              (4,146,453
              )
              
              (31,740,128
              )Income
                  tax benefit (provision)
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (9,428,370
              )
              $
              (4,146,453
              )
              $
              (31,740,128
              )Loss
                  per share: basic and diluted
              
              $
              (0.17
              )
              $
              (0.08
              )
              $
              (0.83
              )Weighted
                  average sharesbasic
                  and diluted
              
              
              56,973,284
              
              
              53,713,346
              
              
              38,086,044


The
          Accompanying Notes are an Integral Part of the Financial
          Statements
 F-6
 Table
            of Contents
 **SULPHCO,
              INC.**
 **(A
                Company in the Development Stage)**
 **STATEMENT
                OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 **From
                Inception through December 31, 2005**


**Common
                    Stock**
                
                **Additional****Paid-in**
                
                **Accumulated**
                
                **Stock
                      issued****for prepaid**
                
                **Stock
                      issued****for prepaid**
                
                **Related
                    party**
                
                **Common****Stock**
                
                **Stock****Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Receivable**
                
                **Equity**Balance,
                    January 13, 1999Stock
                    issued for cash at $167 per share
                
                
                1,000
                
                $
                1
                
                $
                166,999
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                167,000Restatement
                    for recapitalization GRD, Inc.
                
                
                19,999,000
                
                
                19,999
                
                
                (19,999
                )
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (128,802
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (128,802
                )Balance
                    at December 31, 1999
                
                
                20,000,000
                
                $
                20,000
                
                $
                147,000
                
                $
                (128,802
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                38,198Contributions
                    from stockholdersin
                    December 2000Cash
                
                
                
                
                
                
                
                
                169,168
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                169,168Equipment
                
                
                
                
                
                
                
                
                362,331
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                362,331Acquisition
                    of GRD, Inc.
                
                
                1,200,000
                
                
                1,200
                
                
                (251,200
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (250,000
                )Stock
                    issued for cash and subscriptionreceivable
                    at $0.50 per share
                
                
                820,000
                
                
                820
                
                
                409,180
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (208,500
                )
                
                201,500Stock
                    options granted at $.50 per sharein
                    December 2000
                
                
                
                
                
                
                
                
                919,401
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                919,401Stock
                    options granted at $1.50 per sharein
                    December 2000
                
                
                
                
                
                
                
                
                94,799
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                94,799Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (1,364,393
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,364,393
                )Balance
                    at December 31, 2000
                
                
                22,020,000
                
                $
                22,020
                
                $
                1,850,679
                
                $
                (1,493,195
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (208,500
                )
                $
                171,004
 The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-7
 Table
              of Contents
 **SULPHCO,
              INC.**
 **(A
                Company in the Development Stage)**
 **STATEMENT
                OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 **From
                Inception through December 31, 2005**
 **Common
                    Stock**
                
                **Additional****Paid-in**
                
                **Accumulated**
                
                **Stock****issued****for
                    prepaid**
                
                **Stock
                      issued****for prep**aid
                
                **Related
                    party**
                
                **Common****Stock**
                
                **Stock****Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Receivable**
                
                **Equity**Stock
                    issued for intangible assets at $4.25per
                    share in January 2001
                
                
                292,800
                
                
                293
                
                
                1,244,107
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,244,400Stock
                    issued for intangible assets at $2.85per
                    share in February 2001
                
                
                400,000
                
                
                400
                
                
                1,139,600
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,140,000Stock
                    sold to a related party at $1.47per
                    share February 2001
                
                
                24,750
                
                
                25
                
                
                36,431
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                36,456Stock
                    issued for marketing servicesat
                    $2.86 per share April 2001
                
                
                200,000
                
                
                200
                
                
                571,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                572,000Issuance
                    of options to related parties forservices
                    in June 2001
                
                
                
                
                
                
                
                
                773,931
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                773,931Stock
                    issued in exchange for notes receivableat
                    $0.50 per share in May 2001
                
                
                9,556,000
                
                
                9,556
                
                
                4,768,444
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,778,000
                )
                
                -Stock
                    issued in exchange for notes receivableat
                    $1.50 per share in June 2001
                
                
                425,000
                
                
                425
                
                
                637,075
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (637,500
                )
                
                --Stock
                    sold for cash at $2.94 per sharein
                    June 2001
                
                
                100,000
                
                
                100
                
                
                293,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                294,000Stock
                    issued for a note receivable at $1.41per
                    share in June 2001
                
                
                200,000
                
                
                200
                
                
                281,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (282,000
                )
                
                -Stock
                    issued to a related party for cash at$0.50
                    per share in June 2001
                
                
                350,000
                
                
                350
                
                
                174,650
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                175,000Cash
                    received for subscription in July 2001
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                282,000
                
                
                282,000Cash
                    received for subscriptionsin
                    August 2001
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                340,000
                
                
                340,000Stock
                    issued for subscription receivableat
                    $0.725 per share in September 2001
                
                
                2,758,620
                
                
                2,759
                
                
                1,997,241
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,000,000
                )
                
                -Stock
                    issued to a related party forconsulting
                    fees at $0.85 per sharein
                    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 issued at a weightedaverage
                    issue price of $0.75 per sharein
                    October 2001
                
                
                
                
                
                
                
                
                89,020
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                89,020Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (6,927,525
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,927,524
                )Balance
                    at December 31, 2001
                
                
                39,927,170
                
                $
                39,928
                
                $
                15,646,632
                
                $
                (8,420,720
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (6,249,500
                )
                $
                1,016,340
  The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-8
 Table
              of Contents
 **SULPHCO,
                INC.**
 **(A
                  Company in the Development Stage)**
 **STATEMENT
                  OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 **From
                  Inception through December 31, 2005**
 **Common
                    Stock**
                
                **Additional****Paid-in**
                
                **Accumulated**
                
                **Stock
                      issued****for prepaid**
                
                **Stock
                      issued****for prepaid**
                
                **Related
                    party**
                
                **Common****Stock**
                
                **Stock****Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Receivable**
                
                **Equity**Stock
                    issued for related party servicesat
                    $0.50 per share in March 2002
                
                
                10,000,000
                
                
                10,000
                
                
                4,990,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000,000Stock
                    returned in May 2002
                
                
                (1,000,000
                )
                
                (1,000
                )
                
                (499,000
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                500,000
                
                
                -Stock
                    returned in June 2002
                
                
                (100,000
                )
                
                (100
                )
                
                (71,900
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                72,000
                
                
                -Stock
                    returned in July 2002
                
                
                (25,000
                )
                
                (25
                )
                
                (37,475
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                37,500
                
                
                -Payment
                    on stock subscription receivedin
                    July 2002
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                515,500
                
                
                515,500Stock
                    returned in July 2002
                
                
                (1,000,000
                )
                
                (1,000
                )
                
                (499,000
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                500,000
                
                
                -Stock
                    issued for services at $0.10 pershare
                    in September 2002
                
                
                50,000
                
                
                50
                
                
                4,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Stock
                    returned in September 2002
                
                
                (431,000
                )
                
                (431
                )
                
                (440,069
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (440,500
                )Stock
                    issued for services at $0.27 pershare
                    in October 2002
                
                
                50,000
                
                
                50
                
                
                13,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13,500Stock
                    Options issued in November 2002for
                    $0.10 per share (restated)
                
                
                
                
                
                
                
                
                31,500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                31,500Stock
                    issued to a related party for cash at$0.10
                    per share in November 2002
                
                
                100,000
                
                
                100
                
                
                9,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10,000Stock
                    issued to a related party for cash at$0.10
                    per share in December 2002
                
                
                50,000
                
                
                50
                
                
                4,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Net
                    loss (restated)
                
                
                
                
                
                
                
                
                
                
                
                (6,573,627
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,573,627
                )Balance
                    at December 31, 2002
                
                
                47,621,170
                
                $
                47,621
                
                $
                19,153,938
                
                $
                (14,994,346
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (4,624,500
                )
                $
                (417,287
                )Stock
                    subscribed for services at $0.42 pershare
                    in February 2003
                
                
                
                
                
                
                
                
                20,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                50
                
                
                
                
                
                21,000Payment
                    on stock subscriptionreceived
                    in February 2003
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,575,000
                
                
                3,575,000Stock
                    issued to a related party for cash at$0.33
                    per share in March 2003
                
                
                50,000
                
                
                50
                
                
                16,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,500Stock
                    issued for services at $0.32 pershare
                    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 arelated
                    party at $0.296 per sharein
                    December 2003 (Note 14)
                
                
                
                
                
                
                
                
                295,000
                
                
                
                
                
                (296,000
                )
                
                
                
                
                
                
                
                1,000
                
                
                
                
                
                -Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (3,170,959
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,170,959
                )Balance
                    at December 31, 2003
                
                
                49,670,083
                
                
                49,670
                
                
                19,762,839
                
                $
                (18,165,305
                )
                $
                (296,000
                )
                $
                -
                
                $
                -
                
                $
                1,050
                
                $
                (812,000
                )
                $
                540,254
 The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-9
 Table
              of Contents
 **SULPHCO,
                INC.**
 **(A
                  Company in the Development Stage)**
 **STATEMENT
                  OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 **From
                  Inception through December 31, 2005**
 **Common
                    Stock**
                
                **Additional****Paid-in**
                
                **Accumulated**
                
                **Stock
                      issued****for prepaid**
                
                **Stock
                      issued****for prepaid**
                
                **Related
                    party**
                
                **Common****Stock**
                
                **Stock****Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Receivable**
                
                **Equity**Restricted
                    stock issued forinterest
                    on notes at $0.296 per sharein
                    January 2004.
                
                
                1,000,000
                
                
                1,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,000
                )
                
                
                
                
                -Stock
                    issued for services at $0.85 pershare
                    in January 2004
                
                
                100,000
                
                
                100
                
                
                84,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                85,000Issued
                    subscribed stock at $0.42 pershare
                    in March 2004
                
                
                50,000
                
                
                50
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (50
                )
                
                
                
                
                -Private
                    placement stock issuance at $0.90per
                    share in June 2004 (See Note 11 forattached
                    rights and warrants)
                
                
                2,978,342
                
                
                2,978
                
                
                2,677,530
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,680,508Private
                    placement stock issuance at $1.25per
                    share in June 2004 (See Note 11 forattached
                    rights and warrants)
                
                
                2,030,960
                
                
                2,031
                
                
                1,896,912
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,898,943Stock
                    options exercised at $0.55 pershare
                    in July 2004
                
                
                200,000
                
                
                200
                
                
                109,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                110,000Stock
                    options exercised at $0.35 pershare
                    in July 2004
                
                
                100,000
                
                
                100
                
                
                34,900
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                35,000Stock
                    issued for services at $2.86 pershare
                    in August 2004
                
                
                45,000
                
                
                45
                
                
                128,655
                
                
                
                
                
                
                
                
                (128,700
                )
                
                
                
                
                
                
                
                
                
                
                -Cancellation
                    of subscribed stock at $1.50per
                    share in September 2004
                
                
                (45,000
                )
                
                (45
                )
                
                (67,455
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                67,500
                
                
                -Stock
                    options exercised at $0.55 pershare
                    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 stockholderof
                    option given former employee to buy100,000
                    shares at $0.55 per share(Note
                    12)
                
                
                
                
                
                
                
                
                555,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                555,000Related
                    party receivable for tax withholdingon
                    exercise of stock options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (257,750
                )
                
                
                
                
                
                
                
                (257,750
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (4,146,453
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,146,453
                )Balance
                    December 31, 2004
                
                
                56,429,385
                
                $
                56,429
                
                $
                25,347,781
                
                $
                (22,311,758
                )
                $
                -
                
                $
                (75,075
                )
                $
                (257,750
                )
                $
                -
                
                $
                (744,500
                )
                $
                2,015,127
  The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-10
 Table
              of Contents
 **SULPHCO,
                INC.**
 **(A
                  Company in the Development Stage)**
 **STATEMENT
                  OF CHANGES IN STOCKHOLDERS' DEFICIENCY**
 **From
                  Inception through December 31, 2005**
 **Common
                    Stock**
                
                **Additional****Paid-in**
                
                **Accumulated**
                
                **Stock
                      issued****for prepaid**
                
                **Stock
                      issued****for prepaid**
                
                **Related
                    party**
                
                **Common****Stock**
                
                **Stock****Subscriptions**
                
                **Total****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **interest**
                
                **expenses**
                
                **receivable**
                
                **Subscribed**
                
                **Receivable**
                
                **Equity**Stock
                    issued to a Director for servicesat
                    $5.47 per share in January 2005
                
                
                50,000
                
                $
                50
                
                
                273,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                273,500Stock
                    issued to an Officer for servicesat
                    $4.08 per share in January 2005
                
                
                50,000
                
                $
                50
                
                
                203,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                204,000Receipt
                    of related Party ReceivablesJanuary
                    2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                257,750
                
                
                
                
                
                
                
                
                257,750Stock
                    issued to a consultant for servicesat
                    $5.91 per share in April 2005
                
                
                15,000
                
                $
                15
                
                
                88,635
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                88,650Stock
                    issued to a Director for servicesat
                    $4.99 per share in April 2005
                
                
                50,000
                
                $
                50
                
                
                249,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                249,500Stock
                    issued to a Director for servicesat
                    $3.54 per share in May 2005
                
                
                50,000
                
                $
                50
                
                
                176,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                177,000Warrants
                    and Additional InvestmentRights
                    ("AIR's") exercised - August 2005
                
                
                79,430
                
                $
                79
                
                
                81,151
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                81,230Warrants/AIR's
                    exercised - September 2005
                
                
                83,230
                
                $
                83
                
                
                84,565
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                84,648Warrants/AIR's
                    exercised - October 2005
                
                
                16,126
                
                $
                16
                
                
                21,812
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                21,828Warrants/AIR's
                    exercised - November 2005
                
                
                585,244
                
                $
                585
                
                
                535,094
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                535,679Stock
                    issued to a Director for servicesat
                    $3.61 per share in November 2005
                
                
                50,000
                
                $
                50
                
                
                180,450
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                180,500Stock
                    issued to a Director for servicesat
                    $6.40 per share in December 2005
                
                
                50,000
                
                $
                50
                
                
                319,950
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                320,000Warrants/AIR's
                    exercised - December 2005
                
                
                3,028,380
                
                $
                3,028
                
                
                3,041,104
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,044,132Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                75,075
                
                
                
                
                
                
                
                
                
                
                
                75,075Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (9,428,370
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (9,428,370
                )Balance
                    December 31, 2005
                
                
                60,536,795
                
                $
                60,537
                
                $
                30,604,342
                
                $
                (31,740,128
                )
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (744,500
                )
                $
                (1,819,749
                )
  The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-11
 Table
              of Contents
 **SULPHCO,
              INC.**
 **(A
                Company in the Development Stage)**
 **STATEMENT
                OF CASH FLOWS**
 **For
                the Years Ended December 31, 2005 and 2004 and from
                Inception**
 **Years
                      Ended****December
                      31**
                  
                  **Inception****2005**
                  
                  **2004**
                  
                  **to
                      date****Cash
                      Flows From Operating Activities**Net
                      loss
                  
                  $
                  (9,428,370
                  )
                  $
                  (4,146,453
                  )
                  $
                  (31,740,128
                  )Adjustments
                      to reconcile net loss to cash usedin
                      operating activities:Depreciation
                      & amortization
                  
                  
                  215,478
                  
                  
                  104,242
                  
                  
                  885,366Stock
                      issued for services
                  
                  
                  1,568,225
                  
                  
                  138,625
                  
                  
                  7,369,517Stock
                      issued for interest expense
                  
                  
                  -
                  
                  
                  296,000
                  
                  
                  296,000Contribution
                      from stockholder
                  
                  
                  -
                  
                  
                  555,000
                  
                  
                  555,000Loss
                      on disposal of subsidiary
                  
                  
                  -
                  
                  
                  -
                  
                  
                  221,711Loss
                      on impairment of asset
                  
                  
                  233,900
                  
                  
                  
                  
                  
                  233,900Decrease
                      in legal settlement
                  
                  
                  
                  
                  
                  (13,636
                  )
                  
                  -(Increase)
                      decrease in accounts receivable
                  
                  
                  317,800
                  
                  
                  (317,569
                  )
                  
                  -(Increase)
                      decrease in prepaid expenses and other
                  
                  
                  (98,718
                  )
                  
                  (27,887
                  )
                  
                  (137,577
                  )Increase
                      (decrease) in accounts payableand
                      accrued liabilities
                  
                  
                  (1,070
                  )
                  
                  650,468
                  
                  
                  779,413Increase
                      in refundable deposit
                  
                  
                  550,000
                  
                  
                  
                  
                  
                  550,000Increase
                      in accrued fees and interest
                  
                  
                  820,985
                  
                  
                  
                  
                  
                  820,985Net
                      cash used in operating activities
                  
                  
                  (5,821,770
                  )
                  
                  (2,761,210
                  )
                  
                  (20,165,813
                  )**Cash
                      Flows From Investing Activities**Purchase
                      of property and equipment
                  
                  
                  (224,962
                  )
                  
                  (58,508
                  )
                  
                  (1,121,088
                  )Investments
                      in joint ventures and subsidiaries
                  
                  
                  (139,550
                  )
                  
                  
                  
                  
                  (361,261
                  )Return
                      / (payment) of deposits
                  
                  
                  (94,000
                  )
                  
                  (10,000
                  )
                  
                  (140,822
                  )Investments
                      in intangible assets
                  
                  
                  (200,011
                  )
                  
                  (172,628
                  )
                  
                  (388,482
                  )Net
                      cash used in investing activities
                  
                  
                  (658,523
                  )
                  
                  (241,136
                  )
                  
                  (2,011,653
                  )**Cash
                      Flows from Financing Activities**Proceeds
                      from issuance of stock
                  
                  
                  3,982,107
                  
                  
                  4,889,452
                  
                  
                  15,761,759Proceeds
                      from stock subscriptions
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,240,887Proceeds
                      from issuance of related party notes payable
                  
                  
                  -
                  
                  
                  7,500,000
                  
                  
                  11,000,000Proceeds
                      from issuance of line of credit
                  
                  
                  -
                  
                  
                  -
                  
                  
                  750,000Return
                      on capital
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (118,427
                  )Principal
                      payments on related party notes payable
                  
                  
                  (500,000
                  )
                  
                  (250,000
                  )
                  
                  (750,000
                  )Decrease
                      in related party receivable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,359,185Payments
                      on contract payable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (250,000
                  )Principal
                      payments on line of credit
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (750,000
                  )Principal
                      payments on advance from related party
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,191,285
                  )Net
                      cash provided by financing activities
                  
                  
                  3,482,107
                  
                  
                  12,139,452
                  
                  
                  29,052,119Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  (2,998,186
                  )
                  
                  9,137,106
                  
                  
                  6,874,653Cash
                      and cash equivalents at beginning of period
                  
                  
                  9,872,839
                  
                  
                  735,733
                  
                  
                  -Cash
                      and cash equivalents at end of period
                  
                  $
                  6,874,653
                  
                  $
                  9,872,839
                  
                  $
                  6,874,653**Supplemental
                      Information and non cash transactions**Total
                      interest payments included in operations
                  
                  $
                  334,251
                  
                  $
                  6,000The
                      Company paid no income taxes during 2005 and 2004.Noncash
                      investing and financing activity: The Company incurred a payable
                      of
                      $214,587 in issuing securities (see Note 11).
 The
            Accompanying Notes are an Integral Part of the Financial
            Statements
 F-12
 Table
              of Contents
 **SULPHCO,
            INC.**
 **(A
              Company in the Development Stage)**
 **NOTES
              TO FINANCIAL STATEMENTS**
 **December
              31, 2005, and 2004**
 **1.**  **Organization
              and Significant Accounting Policies**
 
 **Business**
 The
          Company is still considered a developmental stage company in 2005, as defined
          by
          Statement of Financial Accounting Standards (“FAS”) No. 7, due to the Company’s
          primary focus of continuing to develop and market processes for the upgrading
          of
          crude oil by reducing its weight, viscosity, and sulfur
          content.
 
 SulphCo,
        Inc. (the Company), formerly FilmWorld, Inc., was originally organized under
        the
        laws of the State of Nevada on December 23, 1986 under the name Hair Life
        Inc.
        The Company became inactive during 1987 and remained inactive until September
        1994. In September 1994, through a reverse acquisition agreement, the Patterson
        Group became a wholly owned subsidiary of Hair Life, Inc. Operations were
        conducted via two subsidiaries until 1998, at which time all operations were
        discontinued, and the Company remained dormant until January 1999.
 
 In
        July
        1999 the Company acquired film rights and changed the corporate name to
        FilmWorld, Inc. In December 2000 the Company discontinued its film operations
        and distributed all assets and liabilities related to that business to certain
        shareholders in exchange for their stock.
 
 In
        December 2000 the Company entered into an exchange agreement with GRD, Inc.
        (DBA
        Sulphco) and issued 1,200,000 shares in exchange for all of the outstanding
        shares of GRD, Inc. Because the shareholders of GRD, Inc. controlled the
        Company
        after the exchange, the merger was accounted for as a reverse acquisition
        of
        FilmWorld, Inc. The Company’s name was changed to SulphCo, Inc.
 
 The
        Company’s common stock had been quoted on the NASD, Inc. OTC Bulletin Board
        under the symbol “SLPH.” On October 3, 2005, the Company’s application to be
        listed on the American Stock Exchange was accepted and on October 7, 2005,
        the
        Company’s stock began trading on the American Stock Exchange under the symbol
“SUF.”
 
 **Use
        of Estimates in the Preparation of Financial
        Statements**
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosures of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates. The markets for the Company’s
        potential products and services will be impacted by the price of oil,
        competition, rapid technological development, regulatory changes, and new
        product introductions, all of which may impact the future value of the Company’s
        assets.
 
 **Cash
        and Cash Equivalents**
 
 All
        highly liquid investments with maturities of three months or less are considered
        to be cash equivalents. The Company maintains amounts in two U.S. accounts,
        a
        checking account and a money market account, on deposit with one financial
        institution which exceed federally insured limits by approximately $6.6 million
        at December 31, 2005, and an account in Saudi Arabia.
  **Foreign
        Currency Translation and Transactions**
  The
        financial position and results of operations of the Company's foreign marketing
        programs and equity ownerships are determined using local currency as the
        functional currency. Assets and liabilities of the equity ownerships are
        translated at the prevailing exchange rate in effect at each year end.
        Contributed capital accounts are translated using the historical rate of
        exchange when capital is injected. Income statement accounts are translated
        at
        the average rate of exchange during the year. Translation adjustments arising
        from the use of different exchange rates from period to period are included
        in
        the cumulative translation adjustment account in shareholders' equity. Gains
        and
        losses resulting from foreign currency transactions are included in operations.
  F-13
 Table
            of Contents
 **Accounts
        Receivable and Allowance for Doubtful Accounts**
 
 The
        Company evaluates the collectibility of accounts receivable on a case-by-case
        basis. Based on such evaluation, the Company records allowances for accounts
        at
        such time as they are considered doubtful of collection.
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amount 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. Cash held in Saudi Arabia
        is valued at the December 31, 2005 exchange rate of 3.75 Riyals per Dollar.
        The
        carrying value of the payable to related party reasonably approximates its
        fair
        value as the stated interest rate approximates current market interest
        rates .
 
 **Property
        and Equipment**
 
 Property
        and equipment are recorded at cost, less accumulated depreciation. In accordance
        with FAS 144, the Company reviews its long-lived assets for impairment. Whenever
        events or changes in circumstances indicate that the carrying amount of the
        assets might not be recovered through undiscounted future cash flows, such
        impairment losses are recognized in the statement of operations.
 
 The
        cost
        of property, plant, and equipment is depreciated over the remaining estimated
        useful lives of the assets ranging from 3 to 7 years. Leasehold improvements
        are
        depreciated over the lesser of the terms of the lease or the estimated useful
        lives of the assets. Depreciation is computed using the straight line method.
        Expenditures for maintenance and repairs are expensed when incurred, while
        betterments are capitalized. Gains and losses on the sale of property and
        equipment are reflected in the statement of operations.
 
 **Equity
        method**
 
 The
        Investment in Fujairah Oil Technology LLC, on December 14, 2005 in which
        the
        Company acquired a 50% interest, is carried at cost, and will be adjusted
        for the Company's 50% share of their undistributed earnings or losses once
        it
        begins operations. There
        was no activity in the entity for the year ended December 31, 2005.
 
 Previously,
        the Company stated that “The Company also owns 49% of a joint venture to market
        and deploy the Company’s technology in Kuwait which is unfunded.” The ownership
        certificate states that Rudolf Gunnerman is the 49% owner. The Company intends
        to take action to correct the error prior to the beginning of any activity
        there. There was no activity in the entity for the years ended December 31,
        2005
        and 2004. When activity begins the investment will be carried at cost and
        adjusted for the Company’s 49% share of undistributed earnings or
        losses.
 
 **Research
        and Development**
  The
        Company expenses research and development as incurred.
  **Income
        Taxes**
  The
        Company provides for income taxes under the provisions of FAS No. 109
“Accounting for Income Taxes,” which requires an asset and liability based
        approach in accounting for income taxes.
 
 Deferred
        income tax assets and liabilities are recorded to reflect the tax consequences
        in future years of temporary differences between revenue and expense items
        for
        financial statement and income tax purposes. Valuation allowances are provided
        against assets that are not likely to be realized. Deferred tax assets and
        liabilities are measured using the enacted tax rates expected to apply to
        taxable income in the years in which those temporary differences are expected
        to
        be recovered or settled. The effect on deferred tax assets and liabilities
        of a
        change in tax rates is recognized in income in the period that includes the
        enactment date.
 
 **Loss
        Per Share**
 
 The
        computation of basic and diluted earnings per common share is based on the
        weighted average number of shares outstanding during the year, plus the common
        stock equivalents. Common stock equivalents are not included in the diluted
        loss
        per share calculation when their effect is antidilutive.
 
 F-14
 Table
            of Contents
 **Concentrations**
 
 The
        Company has generally been able to obtain component parts from multiple sources
        without difficulty. Nevertheless, because of price and quality considerations,
        in 2005 the Company lined up three manufacturers to supply virtually all
        its
        needs, as the Company's results could be adversely affected if manufacturing
        were delayed or curtailed.
  **2.**  **Property
        and Equipment**
 
 The
        following is a summary of property, plant, and equipment - at cost, less
        accumulated depreciation:
 
 **2005**
              
              **2004**Equipment
              
              $
              911,438
              
              $
              629,056Computers
              
              
              176,226
              
              
              73,895Office
                  furniture
              
              
              54,517
              
              
              44,669Leasehold
                  improvements
              
              
              83,375
              
              
              55,457Desulfurization
                  unit (see Note 3)
              
              
              -
              
              
              431,4171,225,556
              
              
              1,234,494Less:
                  Accumulated depreciation
              
              
              (828,140
              )
              
              (630,084
              )Total
              
              $
              397,416
              
              $
              604,410
 
 Depreciation
        expense was $198,056 in 2005 and $104,242 in 2004.
 
 **3.**  **Loss
        On Impairment of Asset**
 
 The
        Company had a desulfurization unit (“unit”) consisting of a trailer containing
        equipment to be used to remove sulfur from crude oil. The Company spent $3,787
        in the year ended December 31, 2004, upgrading the unit. At December 31,
        2004
        the cost of the unit was $431,417 (See Note 2). No depreciation expense related
        to the unit was recognized in 2004 as it was considered work in
        process.
 
 In
        March
        2005 the unit was determined to be obsolete based on the Company’s current
        technological improvements. The estimated value of the reusable components
        as of
        March 31, 2005 was $197,517, resulting in an impairment loss of $233,900.
        The
        Company included the $197,517 in equipment and began depreciating it in
        2005.
  **4.**  **Investment
        in Joint Venture**
 
 In
        November 2005 the Company and Trans Gulf Petroleum Co., a Government of Fujairah
        company, formed Fujairah Oil Technology LLC (“LLC”), a United Arab Emirates
        limited liability company, to implement SulphCo’s SonocrackingTM desulfurization
        technology. The LLC is 50% owned by Trans Gulf Petroleum and 50% owned by
        SulphCo. Fujairah is one of the seven Emirates of the United Arab
        Emirates.
 
 The
        formation agreement called for each shareholder to contribute 500,000 Dirhams
        for 500 shares for the 50% ownership in the LLC. On December 14, 2005, the
        Company wired to the LLC its 500,000 Dirhams, which equaled $139,550. The
        50%
        contribution by Trans Gulf Petroleum was received by the LLC in January,
        2006.
 
 The
        LLC’s
        operations began in 2006 but it had no operations in 2005, and thus no share
        of
        earnings or loss has been reflected for 2005. The
        Company’s 50% share of distributions made by the joint venture will also be
        subject to other costs and expenses incurred directly by the Company from
        time
        to time, including commissions payable directly by the Company to third parties,
        presently estimated at up to 20% of the Company’s net joint venture
        profits.
  F-15
 Table
            of Contents
 **5.**  **Intangibles
        Assets**
 
 The
        Company has five U.S. patents, six U.S. patents pending, five foreign patents,
        several foreign patents pending, and six U.S. trademarks pending. At December
        31, 2005 the Company had capitalized $372,640 in costs that were incurred
        in
        connection with filing patents and trademarks related to its internally
        developed technology in accordance with APB Opinion No. 17 - *Intangible
        Assets* .
        Of this
        amount $200,011 was capitalized in 2005.
 
 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
        16.2
        years. Due to the majority of the 2004 capitalized costs being incurred near
        the
        end of the year, no amortization expense was recognized in 2004. Amortization
        expense related to patents and trademarks for the years ended December 31,
        2005
        and 2004 and from inception was $-0-, $17,422, and $17,422, respectively.
        Throughout 2005 maintenance costs totaling $28,972 were expensed.
 
 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
                Expense2006
              $23,0002007
              23,0002008
              23,0002009
              23,0002010
              23,000
  **6.**  **Income
        Taxes**
 
 The
        deferred tax assets computed prior to the valuation allowances and the valuation
        allowances were overstated in earlier periods. The valuation allowance was
        always set equal to the deferred tax asset prior to such allowance, and the
        Company never reflected an income tax benefit. The corrections of the
        overstatements do not, therefore, require any adjustments to assets,
        liabilities, equity, or income. Also, tax credit carryforwards were omitted
        from
        earlier period disclosures. The corrections to the deferred tax assets prior
        to
        the valuation allowance, the valuation allowance, and the tax credit
        carryforwards at December 31, 2004 are as follows:
 
 As
                  OriginallyPresented
              
              Correction
              
              CorrectedDeferred
                  tax assets relative to the following:Net
                  operating loss carryforwards
              
              $
              7,584,187
              
              
              (3,491,100
              )
              $
              4,093,087Depreciable
                  assets
              
              
              
              
              
              20,380
              
              
              20,380Accrued
                  payroll tax
              
              
              
              
              
              7,548
              
              
              7,548Total
                  deferred tax assets prior to offsets
              
              
              7,584,187
              
              
              (3,463,172
              )
              
              4,121,015Offsets:Deferred
                  tax liabilities:Patent
                  costs
              
              
              -
              
              
              (58,694
              )
              
              (58,694
              )Depreciable
                  assets
              
              
              
              
              
              (52,551
              )
              
              (52,551
              )Total
                  deferred tax liabilities
              
              
              -
              
              
              (111,245
              )
              
              (111,245
              )Valuation
                  allowance
              
              
              (7,584,187
              )
              
              3,574,417
              
              
              (4,009,770
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
              
              $
              -Research
                  tax credit carryforward
              
              $
              -
              
              $
              149,720
              
              $
              149,720
 
  F-16
 Table
            of Contents
 The
        significant components of the Company’s deferred tax assets and liabilities at
        December 31, 2005 are as follows:
  Deferred
                  tax assets relative to the following:Net
                  operating loss carryforwards
              
              $
              6,764,528Depreciable
                  assets
              
              
              325,442Directors
                  fees deferred
              
              
              183,430Accrued
                  payroll tax
              
              
              7,548Total
                  deferred tax assets prior to offsets
              
              
              7,280,948Offsets:Deferred
                  tax liabilities:Patent
                  costs
              
              
              (128,976
              )Depreciable
                  assets
              
              
              (14,998
              )Total
                  deferred tax liabilities
              
              
              (143,974
              )Valuation
                  allowance
              
              
              (7,136,974
              )Net
                  deferred tax assets
              
              $
              -
 
 For
        the
        year ended December 31, 2005, the valuation allowance was increased by
        $3,127,204 due to the uncertainties surrounding the realization of the deferred
        tax assets resulting from the Company’s net loss of $9,370,370 in 2005 and an
        accumulated deficit of $31,682,127 at December 31, 2005.
 
 The
        provision (benefit) for income taxes differs from the provision (benefit)
        amount
        computed by applying the statutory federal tax rate (34%) to the loss before
        taxes due to the following:
 
 Computed
                  expected benefit
              
              $
              (3,187,131
              )Nondeductible
                  expenses:Equipment
                  expensed as research and development
              
              
              276,687Deferred
                  director fees
              
              
              183,430Loss
                  on impairment of asset
              
              
              79,526Research
                  credit amount
              
              
              28,671Other
              
              
              36,051Tax
                  related deductions not expensed on financial statements:Patent
                  costs
              
              
              (75,078
              )Depreciation
              
              
              (13,597
              )Employee
                  stock based paymentsOtherIncrease
                  in benefit from net operating loss
              
              
              (2,671,441
              )(Increase)
                  decrease in other deferred tax assets
              
              
              (488,492
              )Increase
                  (decrease) in deferred tax liabilities
              
              
              32,729Increase
                  in valuation allowance
              
              
              3,127,204Provision
                  (benefit) for income taxes
              
              **$**
              **-**
 
 As
        of
        December 31, 2005, the Company had a net operating loss carryforward for
        federal
        income tax purposes of $19,895,672. The Company also had a tax credit
        carryforward of $234,047 for incremental research expenses. Both the
        carryforwards for net operating loss and tax credit will begin to expire
        in
        2019.
 
 The
        valuation allowance has been estimated in an amount equal to the projected
        future benefit of the deferred tax asset net of the deferred tax liability.
        Due
        to the lack of earnings in the Company’s history, it is not certain for the
        purpose of this calculation that it will generate sufficient income to utilize
        the future tax benefits.
 
 F-17
 Table
            of Contents
 **7.**  **Refundable
        Deposit**
 
 During
        2005, the Company received $550,000 which represents the first three
        installments on the sale of a Sonocracking pilot plant to OIL-SC, LTD for
        $1
        million. In accordance with the terms of the agreement by and between the
        Company and OIL-SC, Ltd., dated as of February 22, 2005, the
        Sonocracking  unit
        was
        to be installed and operational within six months from the date of the contract.
        This was followed by a thirty day commissioning period and a sixty day period
        to
        modify the unit, as necessary. The pilot plant was to operate based upon
        agreed
        specifications by November 22, 2005. At such date the pilot plant did not
        meet
        all agreed upon specifications due to a malfunctioning water separator supplied
        by a third party. Currently the Company is working towards ensuring that
        the
        pilot plant meets all agreed upon specifications. Until OIL-SC, LTD accepts
        in
        writing the results of the pilot plant, the $550,000 is refundable at their
        option. The Company has agreed to receive the remaining payment of $450,000
        within seven days after the first commercial license agreement for the
        Sonocracking technology between the Company and a Korean refining company,
        provided that OIL-SC, Ltd. uses the funds for continued marketing activities
        regarding the Sonocracking technology in Korea.
 
 
 **8.**  **Accrued
        Fees and Interest**
 
 The
        Company has accrued late registration fees of $760,240, interest thereon
        of
        $60,745, and additional offering fees of $214,587 in conjunction with a private placement,
        as more fully described in Note 11.
 
 
 **9.**  **Notes
        Payable - Related Party**
 
 The
        Company’s notes payable consist of the following as of December 31,
        2005:
  On
        December 30, 2003, the Company issued a $500,000 note to the Chairman and
        CEO
        and a $500,000 note to Erika Herrmann, sister-in-law of the Dr. Rudolf
        Gunnerman, the Chairman and CEO. From each of these notes, $250,000 was obtained
        before year end, 2003. The balance of $250,000 for each note was obtained
        during
        2004. The notes were originally issued on December 30, 2003 at an interest
        rate
        of 29.6%, which was paid via the issuance of 1,000,000 shares of restricted
        stock on January 1, 2004 for total consideration of $296,000 or $0.296 per
        share. On December 30, 2004 the notes were renewed at 8% per annum with the
        interest and principal due December 30, 2005. Effective December 30, 2005,
        the
        note to the Chairman and CEO was again renewed for another year at 8% per
        annum
        with interest payable quarterly and principal due on demand or on December
        30,
        2006. The other note was paid off.
 
 On
        December 31, 2004, under the approval of its Board of Directors, the Company
        borrowed $7,000,000 in the form of a long-term note from the Chairman and
        CEO.
        Interest on the note is adjusted quarterly based on a 3-month London Inter-Bank
        Offering Rate (“LIBOR”) plus 0.5% per annum, with interest only payments due on
        December 31, 2005, and 2006 and the remaining accrued interest and principal
        due
        on December 31, 2007 when the note matures. The interest rate on the note
        from
        October 1 through December 31, 2005 was 4.36%. Beginning January 1, 2006
        the
        rate was adjusted to 4.885%.
 
 F-18
 Table
            of Contents
 The
        annual payment obligations related to these notes based on the current 2006
        interest rates, assuming no early retirements of principal, are as
        follows:
 
 Principal
              
              Interest
              
              Total2006:Principal
                  due
              
              $
              500,000
              
              
              
              
              $
              500,000Interest
                  due:On
                  $500,000 note
              
              
              
              
              $
              40,000
              
              $
              40,000On
                  $7 million note
              
              
              
              
              $
              341,950
              
              $
              341,950Totals
              
              $
              500,000
              
              $
              381,950
              
              $
              881,9502007:Principal
                  due
              
              $
              7,000,000
              
              
              
              
              $
              7,000,000Interest
                  due
              
              
              
              
              $
              341,950
              
              $
              341,950Totals
              
              $
              7,000,000
              
              $
              341,950
              
              $
              7,341,950Thereafter
              
              
              None
              
              
              None
              
              
              NoneTotals
              
              $
              7,500,000
              
              $
              723,900
              
              $
              8,223,900
 
 Interest
        expense of $333,917 and $302,786 were paid on the above notes during 2005
        and
        2004 respectively.
 
 **10.**  **Commitments
        and Contingencies**
 
 In
        December 2005 the Company entered into an agreement with NTG of Germany to
        manufacture and deliver seven 30,000 bbl/day Sonocracking units to Fujairah
        for
        use by Fujairah Oil Technology LLC (see Note 4).  The initial costs
        pursuant to the agreement with NTG are 5,561,000 Euros, approximately US
        $6.6
        million, for all seven units. On February 15, 2006 additional costs of 2,450,000
        Euros were agreed upon, bringing the total to 7,826,000 Euros, approximately
        US
        $9.5 million. Payments of $4 million have been made since December 31, 2005
        and
        a deposit of $100,000 was made in December, 2005.
 *Talisman
          Capital Talon Fund, Ltd. v. Rudolf Gunnerman and Sulphco, Inc* .
          was
          commenced on June 9, 2005, in the United States District Court for the
          District
          of Nevada (Case No. CV-N-05-0354-HDM-RAM) by an offshore company purportedly
          based in Tortola, British Virgin Islands, against SulphCo, Inc. and Rudolf
          W.
          Gunnerman. The Talisman Fund complaint alleges that the predecessor-in-interest
          of Talisman, Capital Strategies Fund, Ltd., entered into an agreement with
          Dr.
          Gunnerman in April 2003 in which Dr. Gunnerman purportedly assigned to
          Capital
          Strategies Fund, Ltd. all rights to specified intellectual property then
          owned
          by the Company or subsequently acquired or developed by the Company, including
          two patents issued to the Company prior to the April 2003 agreement (US
          Patent
          Nos. 6,402,939, 6,500,219), four patents issued to the Company subsequent
          to
          April 2003 (US Patent Nos. 6,827,844, 6,652,992, and 6,897,628), and a
          patent
          application filed by the Company subsequent to April 2003. The Talisman
          Fund
          complaint further alleges claims against the Company for tortious interference
          with Talisman’s contractual rights under the April 2003 agreement, conversion
          and unjust enrichment, and seeks as relief both unspecified damages and
          a
          declaration that Talisman is the exclusive owner of the claimed intellectual
          property. Talisman claims rights under and related to the April 2003 agreement
          purportedly as the result of an assignment by Capital Strategies Fund,
          Ltd. to
          Talisman Fund in May 2005 of its rights under the April 2003 agreement.
          Both the
          Company and Dr. Gunnerman deny the validity of the claims of the Talisman
          Fund,
          including claims that rights to any of our company’s intellectual property are
          covered by the April 2003 agreement and further deny that the Talisman
          Fund has
          any rights to technology owned or used by the Company. O n
          October
          19, 2005, the United States District Court for the District of Nevada denied
          the
          defendants' Motion for Judgment on the Pleadings without prejudice, and
          the
          parties have commenced with discovery.
 
 *Clean
          Fuels Technology v. Rudolf W. Gunnerman, Peter Gunnerman, RWG, Inc. and
          SulphCo,
          Inc.* ,
          was
          filed in the Second Judicial District Court of the State of Nevada in and
          for
          the County of Washoe (Case No. CV05 01346) on June 9, 2005. The complaint
          alleges that under an exclusive license agreement originally entered into
          between Dr. Gunnerman and the legal predecessor-in-interest of plaintiff
          Clean
          Fuels Technology (“CFT”) in 1994, and which agreement was amended at various
          times after 1994, CFT owns the exclusive rights to “sulfur removal technology”
originally developed by Professor Teh Fu Yen and Dr. Gunnerman with financial
          assistance provided by Dr. Gunnerman. The CFT complaint alleges that Rudolf
          Gunnerman, Peter Gunnerman, the Company’s President, and RWG, Inc., a company
          owned by Dr. Gunnerman, wrongfully transferred the “sulfur removal technology”
to the Company in violation of the terms of the exclusive license agreement
          and
          other legal duties allegedly owed by them to CFT. The CFT complaint further
          alleges, on the basis of unspecified “information and belief,” that the Company
          conspired with Rudolf and Peter Gunnerman and RWG, Inc. to conceal the
          sulfur
          removal technology from CFT in breach of alleged fiduciary duties owed
          by
          SulphCo, Inc. and the other defendants to CFT; that the Company committed
          unspecified “intentional acts” to “pilfer” CFT’s rights in the sulfur removal
          technology, and that CFT is entitled to a constructive trust over the “sulfur
          removal technology” as well as damages against the named defendants. Both the
          Company and the other defendants deny the validity of CFT’s claims, including
          claims to any rights to technology owned or used by the Company. Both Rudolf
          Gunnerman and Peter Gunnerman were co-founders of CFT as well as its
          predecessor-in-interest, and both Dr. Gunnerman and Peter Gunnerman are
          shareholders of CFT. O n
          September 15, 2005, the Second Judicial District Court of the State of
          Nevada in
          and for the County of Washoe denied the defendants' Motion for Judgment
          on the
          Pleadings without prejudice, and the parties have commenced with
          discovery.
  
 F-19
 Table
            of Contents
 On
        July
        12, 2005, Stan McLelland filed an arbitration demand against the Company
        before
        the American Arbitration Association. The demand alleges that Mr. McLelland
        was
        the Company’s president from August 13, 2001 until he resigned on September 12,
        2001. The demand seeks to exercise stock options that had not vested prior
        to
        Mr. McLelland’s resignation. Mr. McLelland also seeks salary for the six months
        following his resignation and $20,000 of alleged unpaid commuting expenses,
        as
        well as attorneys' fees and costs. The Company denies the validity of these
        claims.
 
 
 **11.**  **Common
        Stock**
 
 Other
        than the related party transactions disclosed in Note 14, the Company had
        the
        following transactions related to its common stock during the years ended
        December 31, 2005 and 2004:
 
 In
        January 2004 the Company issued 100,000 shares of common stock at $0.85 per
        share, the closing value on the date issued, for the services of a consultant
        valued at $85,000.
 
 In
        June
        2004 the Company entered into two private placements. The first private
        placement was to sell 2,978,342 shares of common stock at $0.90 per share,
        warrants exercisable at $1.125 per share for 1,073,690 shares of common stock,
        additional investment rights (“AIR’s”) entitling the purchaser to purchase up to
        6,135,357 shares of common stock at a purchase price of $0.90, and additional
        warrants to purchase up to 2,147,379 shares of common stock at $1.125 per
        share.
        The additional warrants are issued for shares equal to 35% of shares issued
        when
        the AIR’s are exercised. The AIR’s are exercisable by investors for 180 trading
        days following the date the registration statement was first declared effective
        by the Securities and Exchange Commission. That occurred June 27, 2005, which
        caused the expiration date to be March 15, 2006. The warrants are exercisable
        for up to 30 months after the later of the June 27, 2005 effective date or
        the
        date of their issuance. All 2,978,342 shares were issued for net cash proceeds
        totaling $2,342,985 during 2004. During 2005 AIR’s for 2,280,229 shares and
        warrants for 410,403 shares were exercised for proceeds of $2,513,909. At
        December 31, 2005 AIR’s for 3,855,137 shares and warrants for 1,461,368 were
        outstanding from this placement.
 
 The
        second private placement was to sell 2,030,960 shares of common stock at
        $1.25
        per share, warrants exercisable at $1.5625 per share for 732,161 shares of
        common stock, AIR’s entitling the purchaser to purchase up to 2,091,889 shares
        of common stock at $1.25 per share, and additional warrants to purchase up
        to
        1,464,322 shares of common stock at $1.5625 per share. The additional warrants
        are issued for shares equal to 70% of shares issued when the AIR’s are
        exercised. The AIR’s are exercisable by investors for 180 trading days following
        the date the registration statement was first declared effective by the
        Securities and Exchange Commission. As registration for both placements were
        combined, the expiration date was March 15, 2006. The warrants are exercisable
        for up to 30 months after the later of the June 27, 2005 effective date or
        the
        date of their issuance. All 2,030,960 shares were issued during 2004 for
        net
        cash proceeds totaling $2,236,466. During 2005 AIR’s for 810,656 shares and
        warrants for 291,122 shares were exercised for proceeds of $1,468,198. At
        December 31, 2005 AIR’s for 1,281,232 shares and warrants for 1,008,500 were
        outstanding from this placement.
 
 For
        both
        placements additional fees equal to 7% of proceeds from the exercise of AIR’s is
        payable to Olympus Securities, LLC pursuant to the agreement. At December
        31,
        2005 this amount was $214,587 and is included in accrued fees and
        interest.
 
 All
        AIR’s
        and warrants are valued at exercise price when exercised net of any offering
        fees payable.
 
 In
        August
        2004 the Company issued 45,000 shares at $2.86 per share, the closing value
        on
        the date issued, for the services of a consultant valued at
        $128,700.
 
 In
        September 2004 the Company received 45,000 subscribed shares which were returned
        to cancel part of a subscription receivable at $1.50 per share or
        $67,500.
 
 In
        April
        2005 fifteen thousand shares of common stock were issued at $5.91 per share,
        the
        closing value on the date issued, in exchange for consulting services valued
        at
        $88,650.
 
 During
        August through December of 2005, additional investment rights and warrants,
        issued in the two private placements of 2004, were exercised for 3,792,410
        shares for net proceeds of $3,767,518. Additional warrants for 1,365,543
        shares
        of Common stock were issued pursuant to the agreements as a result of exercises
        of additional investment rights.
 
 F-20
 Table
            of Contents
 The
        Company is obligated to pay $760,240 in late registration fees due to the
        registration statement related to the private placement not having gone
        effective on time, as per the agreement with the investors. The agreement
        requires SulphCo to pay late registration fees to the selling security holders
        at the rate of 2% per month of the invested amount if the registration covering
        the placement shares is not declared effective by the SEC within 90 days
        of the
        date of the investment. As of December 31, 2005, the full amount of fees
        has
        been accrued plus $60,745  of
        accrued interest at 18% per annum on the balance of unpaid fees since the
        registration date. The registration statement was declared effective by the
        SEC
        on June 27, 2005.
 
 **12.**  **Stock
        Options**
 
 The
        Company has adopted the disclosure provision for stock-based compensation
        of FAS
        No. 123, “Accounting for Stock-Based Compensation,” and FAS No. 148, “Accounting
        for Stock-Based Compensation-Transition and Disclosure,” but continues to
        account for such items using the intrinsic value method as outlined under
        APB
        Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, if the
        exercise price of the Company’s employee stock options equals or exceeds the
        fair market value of the underlying stock on the date of grant no compensation
        expense is recognized.
 
 For
        purposes of pro forma disclosures, the estimated fair value of the employee
        options is amortized to expense over the vesting period of the options, but
        because the only employee who held options at the end of both years 2004
        and
        2005 was Kirk Schumacher whose employment had terminated before the end of
        2004,
        there was no amortization in 2004 and 2005. The options exercised for employee
        compensation during the year ended December 31, 2004 were included in the
        net
        loss for 2004.
 
 Other
        than the additional investment rights and warrants related to the private
        placements of 2004, the following table summarizes information about stock
        options related to employees and non-employees which were outstanding during
        2005 and 2004:
 
 **2005**
              
              **2004**Weighted
                  Average
              
              
              
              Weighted
                  AverageShares
              
              Exercise
                  Price
              
              Shares
              
              Exercise
                  PriceOutstanding,
                  beginning
              
              
              150,000
              
              $
              1.01
              
              
              1,100,000
              
              $
              0.53Options
                  exercised
              
              
              -
              
              
              -
              
              
              (600,000
              )
              
              0.52Options
                  forfeited
              
              
              -
              
              
              -
              
              
              (500,000
              )
              
              0.55Option
                  granted
              
              
              50,000
              
              
              3.85
              
              
              150,000
              
              
              1.01Outstanding,
                  ending
              
              
              200,000
              
              $
              1.72
              
              
              150,000
              
              $
              1.01
 
 For
        2005
        and 2004 options for 50,000 and 150,000  shares,
        respectively, were granted with strike prices as detailed below.
 
 Dr.
        Rudolf Gunnerman personally granted to Mr. Kirk Schumacher, upon his termination
        December 28, 2004, an option to acquire 100,000 shares of the Company’s Common
        Stock owned by Dr. Gunnerman at an exercise price of $0.55. Those 100,000
        options remained unexercised at December 31, 2005, but were exercised in
        February 2006 prior to expiration. As Dr. Gunnerman is the Chairman, CEO,
        and
        controlling shareholder of the Company, the Company recognized an expense
        in
        2004 of $555,000, the difference between the exercise price of the option
        and
        the market price on the date of grant, on December 28, 2004.
 
 F-21
 Table
            of Contents
 In
        November 2004 the Company entered into a stockholders relations consulting
        agreement with Rubenstein Public Relations, Inc. providing for cash compensation
        of $10,000 per month. Pursuant to this agreement the Company also agreed
        to
        issue: (i) one warrant evidencing the right to purchase 50,000 shares of
        unregistered common stock at an exercise price of $1.93, the closing price
        of
        trading common stock at the date of the execution of the agreement; and (ii)
        provided the agreement had not been terminated as of May 2005 (which it had
        not), one warrant evidencing the right to purchase 50,000 shares of
        unregistered common stock at an exercise price equal to the closing price
        of
        trading common stock on May 11, 2005, which was $3.85. Each of the warrants
        will
        expire in November 2009. No value was given to these warrants as the intrinsic
        value was zero on the dates of grant and the Company was paying a fair value
        charge in cash for the services it received.
 
 The
        Company has a Non-Officer Limited Stock Appreciation Rights Plan. In August
        2003
        ten employees were granted awards for 2,500 limited stock appreciation rights,
        each with a multiplier of eighteen, at a base price of $0.24, with a maximum
        value of $450,000 per employee. The limited stock appreciation rights are
        exercisable only upon the following two conditions being met: First, the
        closing
        price of the Company’s common stock must have exceeded $10 for at least three
        consecutive trading days, or the stock price in a proposed acquisition must
        exceed $10. Second, the Company must have engaged in an acquisition after
        the
        first condition is met. Under the plan, “acquisition” means that the Company is
        merged or consolidated with another company wherein over 20% of voting control
        is lost by Company shareholders; or that over 50% of the Company is acquired
        by
        an entity owning 20% or less of the Company prior to acquisition; or any
        other
        acquisition determined by the Board of Directors. Rights to awards end upon
        termination of employment. As of December 31, 2005, six of the ten employees
        originally granted rights are still employed and covered under the plan.
        No
        values can be ascribed to these awards unless and until the Company engages
        in
        an acquisition.
 
 
 **13.**  **Stock
        Subscriptions**
 
 As
        of
        December 31, 2005 and 2004 the Company had stock subscriptions receivable
        of
        $744,500. In January 2004 the Company filed suit to collect $737,000 for
        a stock
        subscription receivable that, as of the report date, is being disputed (see
        Note
        10).
 
 
 **14.**  **Related
        Party Transactions**
 
 The
        Company paid to RWG, Inc., a corporation wholly owned by Dr. Rudolf Gunnerman
        the Chairman and CEO, consulting fees of $360,000 and $370,000 in 2005 and
        2004
        respectively. The consulting agreement, was set to terminate on July 1, 2005,
        and was renewed until July 1, 2006. Although the current agreement calls
        for
        $480,000 per year, RWG, Inc. has agreed to take $30,000 per month. The Company
        does not pay a salary to Dr. Gunnerman.
 
 In
        February 2003 the Company agreed to issue 50,000 shares of common stock to
        Kirk
        Schumacher, a Director, at $0.42 per share for director services of $21,000.
        These shares were issued in March 2004.
 
 In
        July
        2004, the Company issued to Kirk Schumacher, President, Secretary, and Director,
        200,000 shares of common stock at $0.55 per share in connection with the
        exercise of stock options granted in 2003 for cash in the amount of
        $110,000.
 
 In
        July
        2004, the company issued to Patrick Lacy, Controller and Director, 100,000
        shares of common stock at $0.35 per share in connection with the exercise
        of
        stock options granted in 2003 for cash in the amount of $35,000.
 
 As
        of
        December 31, 2004 the Company had a receivable of $60,050 due from Dr. Rudolf
        Gunnerman for personal expenses paid by the Company. The amount was classified
        as an account receivable for balance sheet purposes. The Company received
        payment for the receivable in early January 2005.
 
 As
        of
        December 31, 2004 the Company had a $25,000 payable due to Dr. Rudolf Gunnerman
        for advancing funds to the Company to avoid incurring a penalty for closing
        out
        a certificate of deposit. The amount was classified as an account payable
        for
        balance sheet purposes and was relieved in January 2005.
 
 In
        February 2003 the Company entered into an Executive Employment Agreement
        with
        its then President Kirk S. Schumacher who served as President and Secretary
        from
        February 2004 through December 2004. The agreement provided for his employment
        through February 17, 2008, and provided for an initial signing bonus of
        $100,000, which was paid February 2003, an annual base salary of $300,000,
        and
        incentive compensation commencing in 2004. The 2003 agreement included a
        grant
        of stock options for 1,000,000 shares of the Company’s common stock, fully
        vested, at an exercise price of $.55 per share, the value of the stock at
        grant
        date, expiring February 14, 2006.
 
 F-22
 Table
            of Contents
 Effective
        December 28, 2004 Mr. Schumacher resigned as President and Secretary. In
        connection with Mr. Schumacher's resignation, the Company and Mr. Schumacher
        entered into a Separation Agreement and General Release, dated and effective
        December 28, 2004, which provided for Mr. Schumacher to retain 500,000 of
        the
        1,000,000 million options previously granted to him under his Executive
        Employment Agreement and to receive a separation payment of $165,000 upon
        resignation in lieu of the $600,000 severance payment provided for under
        the
        Executive Employment Agreement. The remaining 500,000 options previously
        granted
        under the Executive Employment Agreement were cancelled pursuant to the
        Separation Agreement.
  In
        addition, on December 28, 2004, Dr. Rudolf Gunnerman personally granted to
        Mr.
        Schumacher an option to acquire 100,000 shares of the Company’s Common Stock
        owned by Dr. Gunnerman at an exercise price of $0.55. This option was exercised
        in February 2006 prior to expiration (See Note 12).
 
 As
        of
        December 31, 2004 the Company had a $257,750 receivable due from its former
        President Kirk Schumacher for payroll tax liabilities related to the exercise
        of
        Company stock options. The Company received payment for the receivable in
        January 2005.
 
 In
        January 2005 fifty thousand restricted shares of common stock were issued
        at
        $4.08 per share, the closing value on his effective date of appointment,
        to the
        CFO Alan Austin, Jr. for compensation expense valued at $204,000.
 
 In
        April
        2005 fifty thousand restricted shares of common stock were issued at $4.99
        per
        share, the closing value on April 13, 2005, the effective date of his
        appointment to the Board of Directors, to Robert Van Maasdijk, a Director,
        for
        services valued at $249,500.
 
 In
        May
        2005 fifty thousand restricted shares of common stock were issued at $3.54
        per
        share, the closing value on May 17, 2005, the effective date of his appointment
        to the Board of Directors, to Dr. Raad Alkadiri, a Director, for services
        valued
        at $177,000.
 
 In
        December 2005 fifty thousand restricted shares of common stock were issued
        at
        $3.61 per share, the closing value on November 10, 2005, the effective date
        of
        his appointment to the Board of Directors, to Dr. Hannes Farnleitner, a
        Director, for services valued at $180,500.
 
 In
        December 2005 fifty thousand restricted shares of common stock were issued
        at
        $6.40 per share, the closing value on December 8, 2005, the effective date
        of
        his appointment to the Board of Directors, to Christoph Henkel, a Director,
        for
        services valued at $320,000.
 
 In
        2005
        the Company had a consulting agreement with Peter Gunnerman’s wholly owned
        company Global 6 LLC prior to him becoming the Company’s COO and President.
        Global 6 LLC was paid $50,000 in consulting fees and reimbursed $50,015 in
        travel related expenses.
 
 The
        Company has a consulting agreement with Peak One Consulting, Inc., a company
        owned 100% by a Director, Richard Masica, which was paid $57,313 in fees
        for
        management and technical consulting and reimbursed $18,683 in travel related
        expenses in 2005.
 
 Total
        related party expenses were $1,539,018 and $1,771,887 in 2005 and 2004
        respectively. Total related party cash payments were $1,277,018 and $755,101
        in
        2005 and 2004 respectively. See Note 9 for related party notes payable and
        interest payments for 2005 and 2004.
 
 
 **15.**  **Operating
        Lease**
 
 The
        Company leases office and warehouse space in Sparks, Nevada. In February
        2004
        the Company extended its lease term for one additional year through March
        3,
        2005 and in February of 2005, the lease was again extended for two years
        to
        February 28, 2007. The Chairman and CEO guaranteed the lease.
 
 F-23
 Table
            of Contents
 Following
        is a schedule of payments required under the rental lease
        agreement:
 
 2006
              
              $
              461,0602007
              
              
              76,843After
                  2007
              
              
              -0-Total
                  minimum lease payments
              
              $
              537,903
 
 The
        Company incurred $434,635 and $443,007 for rent expense in 2005 and 2004
        respectively.
 
 
 **16.**  **Quarterly
        Financial Information (Unaudited)**
 
 Summarized
        unaudited quarterly financial information for the years ended December 31,
        2005
        and 2004 are noted below (in thousands, except for per share
        amounts):
  **2005**Dec.
                  31, 2005
              
              Sep.
                  30, 2005
              
              Jun.
                  30, 2005
              
              Mar.
                  31, 2005Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  (loss)
              
              $
              (2,906
              )
              $
              (1,840
              )
              $
              (2,357
              )
              $
              (2,325
              )Net
                  (loss) per share - basic and diluted
              
              $
              (0.05
              )
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.04
              )**2004**Dec.
                  31, 2004
              
              
              Sep.
                  30, 2004
              
              
              Jun.
                  30, 2004
              
              
              Mar.
                  31, 2004Net
                  revenues
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Gross
                  profit
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  loss
              
              $
              (1,692
              )
              $
              (915
              )
              $
              (736
              )
              $
              (803
              )Net
                  loss per share - basic and diluted
              
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.02
              )
 
 
 **17.**  **New
        Accounting Pronouncements**
 
 In
        December 2004 the FASB issued FAS No. 123 (revised 2004, or “R”),
“Share-Based Payment — a revision of FAS No. 123 Accounting for
        Stock-Based Compensation.” FAS No. 123 supersedes Accounting
        Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
        Employees,” and amends FAS No. 95, “Statement of Cash Flows.”
FAS No. 123(R) requires all share-based payments to employees,
        including grants of employee stock options, to be recognized in the income
        statement based on their fair values. Pro forma disclosure is no longer an
        alternative. The new standard will be effective for the Company beginning
        January 1, 2006. There are currently no share-based payments to employees
        to
        account for, but as they arise the Company will report them at fair values
        based
        on share or option values available or a calculation using the Black-Scholes
        option valuation model.
  F-24
 Table
            of Contents
 In
        December 2004 the FASB issued FAS No. 153, an amendment to Accounting
        Principles Board (“APB”) Opinion
        No. 29, *Accounting
        for Nonmonetary Transactions* .
        This
        Statement amends Opinion
        29 to eliminate the exception from measuring exchanges at fair value for
        nonmonetary exchanges of similar productive assets and replaces it with a
        general exception for exchanges of nonmonetary assets that do not have
        commercial substance. A nonmonetary exchange has commercial substance if
        the
        future cash flows of the entity are expected to change significantly as a
        result
        of the exchange. Any such exchange will be measured at the fair values of
        the
        assets exchanged. The new standard will be effective for the Company beginning
        January 1, 2006. As such transactions arise, the Company will report them
        at
        fair values based upon the best evidence available.
  In
        May
        2005 the FASB issued FAS 154, which replaces APB Opinion No. 20, *Accounting
        Changes,* and FASB
        Statement No. 3, *Reporting
        Accounting Changes in Interim Financial Statements,* and
        changes the requirements for the accounting for and reporting of a change
        in
        accounting principle. This Statement applies to all voluntary changes in
        accounting principle. It also applies to changes required by an accounting
        pronouncement in the unusual instance that the pronouncement does not include
        specific transition provisions. When a pronouncement includes specific
        transition provisions, those provisions should be followed. This Statement
        shall
        be effective for accounting changes and corrections of errors made in fiscal
        years beginning after December 15, 2005.
  
 **18.**  **Subsequent
        Events**
 
 Additional
        Investment Rights and Warrants for 7,837,433 shares were exercised in 2006
        through March 15, generating $8,129,667.
 
 On
        March
        29, 2006, we completed a private placement to a small number of accredited
        investors for the sale of 4,000,000 units, each unit consisting of one share
        of
        the Company’s Common Stock and one Warrant to purchase a share of Common Stock.
        Each unit was sold at a price of $6.805 per share, resulting gross proceeds
        at
        closing of $27.2million. The Warrants are exercisable, in whole or in part,
        at a
        fixed price equal to $6.805 per share, and are exercisable for a period of
        18
        months following their issuance. The Company is required to file a Registration
        Statement with the SEC within 30 days following the closing covering the
        resale
        of the shares of Common Stock issued at closing and shares issuable upon
        exercise of Warrants. The Company is required to pay a late registration
        penalty
        of 1.5% per month, computed on the amount of the investment, if the registration
        is not declared effective by the SEC within 90 days of the closing.
  In
        December 2005 one million shares were erroneously transferred to the Chairman
        and CEO. Subsequently, the transaction was reversed and the shares were
        cancelled. The transaction was accounted for as if it were completed prior
        to
        December 31, 2005.
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