Sulphco 10K 2008 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2008

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

Commission file number. 001-32636

SULPHCO, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Common Stock, Par Value $0.001 Per Share		NYSE Alternext US LLC
(Title of each class)		(Name of each exchange on which registered)

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

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

Yes ¨ No x

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

Yes ¨ No x

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

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

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

Large accelerated filer ¨	Accelerated filer x

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company ¨

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

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

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

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

SULPHCO, INC.

2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page No.
	PART I

Item 1.	Business.	4
Item 1A.	Risk Factors.	17
Item 1B.	Unresolved Staff Comments.	23
Item 2.	Properties.	23
Item 3.	Legal Proceedings.	23
Item 4.	Submission of Matters to a Vote of Security Holders.	26

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	27
Item 6.	Selected Financial Data.	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	38
Item 8.	Financial Statements and Supplementary Data.	38
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	39
Item 9A.	Controls and Procedures.	40
Item 9B.	Other Information.	40

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance.	41
Item 11.	Executive Compensation.	41
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	41
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	41
Item 14.	Principal Accounting Fees and Services.	41

	PART IV

Item 15.	Exhibits, Financial Statement Schedules.	42

	Financial Statements for the Years Ended December 31, 2008, 2007 and 2006.	F-1

Forward-Looking Statements

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

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

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

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

PART I

Item 1. Business.

Introduction

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

The target applications for our Sonocracking™ technology and our Sonocracker™ units are within the refining, transportation, and crude oil production market segments. Environmental regulations mandate the reduction of sulfur content in many fuels, including gasoline, diesel fuel, and bunker fuel. For example, the sulfur specification for finished diesel fuel is less than 10 parts per million (“ppm”) in the European Union, while typical starting concentrations are in the thousands of ppm. Similar regulations are in effect for the U.S. market. Also, the sulfur content of crude oil is an increasing concern for all facets of the market, and the economic value of crude oil and crude oil products is driven largely by this value. Since our technology is designed to impact the overall quality of crude oil and crude oil products in a cost effective manner, the successful commercialization of our technology can be expected to produce economic benefits to future customers in these markets.

We maintain our principal executive offices and facilities at 4333 W. Sam Houston Pkwy N., Suite 190, Houston, Texas 77043. Our telephone number is (713) 896-9100. Our corporate website is www.sulphco.com. The information contained on our website is not part of this report.

Business Development Activities Update

The following is an update on the more significant activities the Company has been pursuing.

With respect to the Company’s ongoing commercial efforts, we continue to see a high level of interest in the Sonocracking™ process as potential customers see the value that can be driven by the technology. We are pursuing what we believe are opportunities presenting the highest likelihood of success for the technology (i.e., crude oil product streams such as diesel fuel, gasoline, and bunker fuels as well as low to moderate sulfur-containing crude oils) and are working with several potential customers to achieve that goal.

Houston, Texas

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

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

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

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

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

European Testing Activities

We met with our European testing partner in November 2008 and provided a detailed presentation of our Sonocracking™ technology to its technical team. We had conducted several trials with this partner over the course of the past 18 months, but we were previously unable to provide the partner with a clear and detailed demonstration of our technology. This time, however, by using much of the sulfur speciation data generated from our laboratory and field trials in the Southeastern United States, we were able to successfully demonstrate to our testing partner the positive effects of our process on the properties of the sulfur compounds in crude oil. The focus is now centered around the effect of the changes on the downstream processing in the testing partner’s refineries. We were able to successfully present clear benefits in terms of 1) immediate sulfur reduction in the crude oil, 2) reducing the sulfur content of the lower boiling and higher value fractions of the crude oil (e.g., naphtha, kerosene, diesel), 3) reducing the severity of the hydro-treating process and 4) potentially reducing the carbon footprint of the downstream process. At this technical meeting we immediately agreed to work on parallel paths in the laboratory and back in the field at the testing partner’s site. In late December 2008, the Company shipped a laboratory scale Sonocracking™ unit from Houston to the facilities of the European testing partner, where laboratory scale trials were conducted during the week of January 12, 2009 on a variety of crude oils and crude oil products under the supervision of Dr. Florian J. Schattenmann, SulphCo’s CTO, and a SulphCo senior chemist. The purpose of the laboratory trials was to define the relevant process parameters and appropriate operating conditions for the field trials that were conducted during the week of January 26, 2009. While the Company is encouraged by this recent progress, there can be no assurance that the Company will be successful in implementing any commercial agreements.

Middle East

On July 10, 2008, we announced an agreement with Amira Group Company LLC (“Amira”), a U.S.-based oil and gas services company, granting Amira an exclusive distributorship in certain regions of the Middle East and North Africa and certain customer specific opportunities (the "Amira Sales Territories"). The Company and Amira personnel have made formal presentations to several prospective customers within the Amira Sales Territories, providing technical and commercial information on the Sonocracking™ process. During the third and fourth quarters, SulphCo and Amira personnel narrowed these discussions to key, strategic potential customers, and those discussions have focused primarily on issues relating to proposed installation of Sonocracking™ units at customer sites. Currently, the Company has not entered into any customer agreements.

Southeast Asia

On February 11, 2008, we announced an agreement with Pt. Isis Megah (“Isis”), an Indonesian oil and gas services company, granting Isis an exclusive distributorship in the sales territories of India, Malaysia, Singapore and Indonesia (the “Isis Sales Territories”). We concurrently announced a customer order procured through Isis, conditioned upon the execution of an operating agreement, for Sonocracking™ units having at least 30,000 Bpd of processing capacity to be shipped at our expense from Fujairah to a designated port within the Isis Sales Territories. Subsequently, the Company shipped 90,000 Bpd of processing capacity from our facility in Fujairah, UAE, which arrived in Singapore during the week of April 14, 2008. The Sonocracking™ units have remained in storage there pending finalization of a refinery placement agreement. There can be no assurance that the Company will enter into any such agreements.

During the week of March 31, 2008, SulphCo personnel conducted joint site inspections with the customer at two of its Southeast Asian refineries to evaluate their suitability for the proposed Sonocracking™ unit installations. Following these inspections the parties reached a preliminary understanding as to the placement of the Company’s first 30,000 Bpd commercial scale Sonocracking™ unit within the customer’s refinery (the “Placement Agreement”). It was anticipated that upon execution of the Placement Agreement among Isis, the customer, and SulphCo, the 30,000 Bpd Sonocracking™ unit would be shipped by barge from Singapore to the customer’s refinery site. An operating agreement cannot be signed before finalization of the Placement Agreement, since the character of the crude oil or fractions to be processed are dependent upon both the selection of and location within the refinery where the Sonocracking™ unit is to be installed.

Subsequent to the initial discussions with the customer, an unanticipated event occurred which has led to delays in reaching a final Placement Agreement. The customer experienced a turnover in key management and operating personnel, leading to a decision that a further review be conducted prior to implementing SulphCo’s technology within its refineries. That review would require the customer’s personnel first witness testing of a relevant crude oil at either the Company’s Houston or Fujairah facilities and based on those results, the customer would determine how the implementation of the Sonocracking™ process at its refinery sites would proceed. In furtherance of this process, the Company conducted testing at its Houston facility on relevant crude oils during the third quarter of 2008 and has, through Isis, delivered the test results to the customer. In addition, because some of the relevant crude oils are of Middle Eastern origin, the Company has advised the customer that the Company is prepared to conduct additional testing in Fujairah, provided, the customer is able to supply the crude oil to the facility in Fujairah. Alternatively, the Company has invited the customer’s personnel to observe the testing of relevant crude oil at the Company’s Houston location. We understand, through Isis, that the customer has agreed to deliver samples to our Houston facility where they will witness testing. We are in the process of scheduling that visit, through Isis, and expect testing to occur later in the first quarter of 2009 or in the second quarter of 2009.

Fujairah

The Company had originally scheduled additional rounds of testing at the Fujairah facility during the second quarter of 2008 for the benefit of potential customers to allow them to observe the Sonocracking™ technology first hand. However, at the request of the potential customers the scheduled tests were put on hold. The Company is now prepared to conduct a new round of validation testing at the Fujairah facility during the first or second quarters of 2009 utilizing the latest generation probe technology and employing the newly developed catalyst and additive packages. The ultimate timing of those trials depends entirely on the requirements of the potential customers. In addition, the Company is currently in the process of securing sufficient crude oil and residual fuel oil for independent validation testing in Fujairah.

South America

Testing on crude oil and petroleum product streams provided by companies in South America is ongoing in SulphCo’s Houston, Texas facilities. Initial observations are consistent with results achieved in oils originating from other areas of the world. These results have created interest from refiners and producers. SulphCo’s distributor in Colombia, Ecuador, and Peru, J.W. Tecnologia Servicios Petroleros S.A.C., has arranged meetings with petroleum producers and refiners in that region to discuss the tests in greater detail. It is anticipated these discussions will lead to commercial scale demonstrations. Further, as a result of laboratory tests on samples provided by a large producer/refiner in Brazil, similar meetings are being held in that country. There can be no assurance that the Company will enter into any such agreements.

South Korea

The SulphCo KorAsia project has experienced delays due to unanticipated equipment problems that occurred during the testing conducted in the first quarter of 2008. During the course of the limited trials, issues arose with a certain switching component of an electrical driver for the ultrasound probes. Those issues were ultimately attributed to factors related to the original electrical equipment supplied with the earlier generation 2,000 Bpd Sonocracking™ unit in 2005. Given the limited resources of the Company and the higher priority attached to more immediate opportunities that have presented themselves elsewhere, the Company has been proceeding in South Korea at a more measured pace than originally anticipated. Once the technical updates are completed and several outstanding business issues are resolved we intend to resume testing utilizing Khafji crude oil (sulfur content ~2.9%). Once a full set of trials have been performed and the data analyzed, we will determine, in conjunction with SulphCo KorAsia, the appropriate technical and commercial paths forward. During the third and fourth quarters, several attempts were made to resolve the outstanding business issues between the parties, but those issues have not been resolved satisfactorily at this point. We expect to continue our efforts to resolve those issues in 2009. However, there can be no assurance that the technical updates or outstanding business issues will be resolved favorably.

General Description of Our Technology

SulphCo's technology is designed to use high power ultrasound to alter naturally occurring molecular structures in water and hydrocarbons. Under certain conditions, ultrasonic waves can induce cavitation in a liquid. Cavitation involves the creation of bubbles at the sites of refraction owing to the tearing of the liquid from the negative pressure of intense sound waves in the liquid. The bubbles then oscillate under the effect of positive pressure, growing to an unstable size as the wave fronts pass. The ultrasound waves stress these bubbles, leading to their growth, contraction, and eventual implosion, generating excess heat and pressure in and around every micrometer and submicrometer-sized bubble. The entire process takes a few nanoseconds and each bubble can behave as a microreactor, accelerating the physical reactions owing to the heat released and localized pressures obtained. The high temperature (estimated to be as high as 5,000 degrees Kelvin) and pressure (estimated to be as high as 500 atmospheres) reached locally can potentially cause disruption of molecular bonds.

The Sonocracking™ technology applies high-power ultrasonic energy to a mixture of crude oil in conjunction with proprietary catalysts and an oxidant. The ultrasound provides an intense shearing and mixing environment for the mixture and, along with the effects from cavitation, allows for efficient oxygen transfer from the oxidant to sulfur-containing and other compounds in the oil or fuel stream. Aside from the oxidation of sulfur compounds, the process may also bring about the disruption of complex asphaltenic structures and rupturing of bonds of complex hydrocarbon, which in turn may result in upgrading the overall hydrocarbon content by reducing the overall density and thereby increasing the API gravity.

SulphCo's proprietary Sonocracking™ units are designed to treat large volumes of petroleum products at relatively low temperatures and pressures. The base design and capacity for the Sonocracking™ technology consists of a nominal 5,000 Bpd processing line. Successive lines can be added to scale capacities in multiples of 5,000 Bpd. SulphCo has designed and implemented modular units with a 15,000 Bpd capacity that are skid mounted and can be transported in a typical shipping container. These units possess smaller “footprints” and are expected to have lower capital costs when compared to the conventional hydrotreating equipment and other upgrading technologies. This mobility and relative low capital cost make installation of Sonocracking™ equipment in the upstream (production), midstream (blending and transportation) and downstream (refining) sectors very flexible, with the ability to match customer capacity needs while requiring a relatively small “footprint.”

The Market for Our Technology

Potential Improvements and Benefits

SulphCo’s high power ultrasound Sonocracking™ process for treating crude oil and crude oil products is designed to produce a number of desirable effects, including the modification and reduction of sulfur compounds (oxidation of sulfur molecules), improvement in the API gravity (reduction in relative density), reduction in viscosity, and potentially modification and removal of nitrogen-containing compounds. Other improvements, such as heavy metal reduction/concentration, may also be possible. The degree to which any one or more of these improvements occur after treatment with the Sonocracking™ process depends heavily on the feed oil or fuel characteristics, including: molecular makeup of sulfur compounds, asphaltene level and microstructure, acidity, and several other factors. Not all crude oil or crude oil products will respond to the treatment to the same levels, therefore it is critical to optimize the process for a given feed stream to maximize the process benefits.

The economic benefit derived from the Sonocracking™ process depends on the overall improvement imparted to the crude oil or crude oil products in conjunction with customer and application-based drivers such as, but not limited to, crude oil and crude oil product pricing spreads, reduction in operating costs including reduced catalyst loading, lower hydrogen usage and lower carbon footprint, improved processing flexibility, and other benefits. Since different sectors of the oil market have unique individual needs and potential benefits, it is necessary to evaluate the overall benefit provided by the Sonocracking™ process in the context of the customer application, improvement in the oil or product stream, and market pricing.

The Refining Market (downstream)

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

These potential benefits include:

Lower raw material (i.e., crude oil) costs due to greater flexibility of feeds.

Lower desulfurization costs when compared to traditional hydrotreating processes

Possible reduction of carbon footprint

Lower Raw Material Costs

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

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

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

Lower Desulfurization Costs

The traditional process for removing sulfur compounds from crude oil products is hydrotreating. Hydrotreating is a high temperature, high pressure, high catalyst cost, and hydrogen consuming process employed in many refineries around the world. The intensity of the hydrotreating process is driven largely by the chemical makeup of the sulfur compounds present in the crude oil product streams. Certain types of sulfur molecules (e.g., dibenzothiophenes) require very intensive treatment and high catalyst and hydrogen loadings to remove the latent sulfur. SulphCo’s oxidative desulfurization approach modifies dibenzothiophenes by oxidizing the sulfur which in turn changes the chemical composition to either a sulfoxide or a sulfone. The sulfoxides and sulfones can be removed from the streams via secondary processes such as extraction or absorption, which in turn eliminates the need to hydrotreat those compounds. Alternatively, the sulfoxides and sulfones can be hydrotreated directly under milder reaction conditions and in some instances with significantly less hydrogen. Therefore, SulphCo’s Sonocracking™ technology has the potential to reduce the hydrotreating costs associated with crude oil product streams.

Reduced Carbon Footprint

The hydrotreating of crude oil products to reduce the sulfur levels to meet governmental standards and regulations requires a significant amount of hydrogen. This hydrogen is typically produced through a process that utilizes some form of light gas such as propane or methane and produces carbon dioxide as a by-product. Therefore, a process that reduces the amount of sulfur in a crude oil product stream has the potential to reduce the amount of hydrogen needed to treat that stream to meet the requirements. In turn, less hydrogen is required to be produced, thereby leading to lower carbon dioxide emissions. SulphCo’s Sonocracking™ process is designed to reduce the amount of sulfur in crude oil and crude oil products and therefore has the potential to reduce the carbon footprint at potential customer facilities.

The Transporting and Blending Market (mid-stream)

Sulphco’s Sonocracking™ technology can improve the blending economics for mid-stream crude oil blenders and transporters. Treating high sulfur crude oil with the Sonocracking™ units is expected to reduce the sulfur content and allow more of this treated crude oil to be blended into the crude oil streams, while still meeting the various pipeline specifications. In addition to the blending economics, in some cases blenders can save on the high cost of alternative transportation versus crude oil pipelines.

The Oil Producer Market (upstream)

SulphCo’s Sonocracking™ processing units are expected to provide economic benefits for oil producers utilizing these units. These benefits include, among other things, the ability to obtain higher prices for crude oil processed by SulphCo’s Sonocracker™ units.

The price of crude oil is based primarily on characteristics such as API gravity (relative density) and sulfur content. Because our technology is designed to increase the API gravity and sulfur content in crude oil in a commercial setting, this should allow a producer who treats crude oil with our Sonocracking™ technology to obtain a higher price for its crude oil from distributors and refiners as a result.

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

Geographic Scope of Our Market

We have a 50% ownership interest in Fujairah Oil Technology LLC in Fujairah, United Arab Emirates and are actively pursuing commercial opportunities in other parts of the world including Austria, South Korea, South America, Canada, India, Malaysia, Singapore and Indonesia. In February 2008, we entered into an agreement with Isis, which grants Isis an exclusive distributorship in the sales territories of India, Malaysia, Singapore and Indonesia. In July 2008, we entered into an agreement with Amira, which grants Amira an exclusive distributorship in certain regions of the Middle East and North Africa. As the potential markets for our technology include countries with significant oil producing or refining activities, we expect to conduct business in other countries as well. These activities may be conducted by us directly, or through partners, licensees or other third parties, in connection with the potential commercialization of our technologies.

Patents, Trademarks and Copyrights

We own eight United States patents and have four pending United States patent applications. Our granted U.S. Patents include:

Power Driving Circuit for Controlling a Variable Load Ultrasonic Transducer. U.S. patent no. 7,408,290 was issued on August 5, 2008 to SulphCo;

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

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

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

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

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

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

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

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

High-Throughput Continuous-Flow Ultrasound Reactor. Two pending U.S. patent application no. 10/857444, filed May 27, 2004, and no. 11/597043, filed on November 16, 2006.

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

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

In addition, SulphCo has been granted 46 international patents and has applied for an additional 134 international patents to protect other aspects and applications of the Company's technologies. These include, but are not limited to, new processes and procedures, developed by SulphCo personnel, required to manufacture higher power ultrasound equipment for use in SulphCo's desulfurization units.

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

Competitive Business Conditions

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

Our patented and proprietary Sonocracking™ process is based upon the novel use of high power ultrasound to effect beneficial changes in the chemical composition of crude oil. We believe this process gives us a competitive advantage because it is unique in that it “pre-treats” crude oil by both reducing relative density of oil and reducing sulfur content prior to being fed into the traditional refinery operation. Other than our proprietary Sonocracking™ process, we are not aware of any process in commercial use which is capable of both reducing the density of crude oil and reducing sulfur content other than the conventional refinery process itself.

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

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

Research and Development During the Last Three Years

During the past three years, our research and development expenditures have been directed toward the upgrading and desulfurization of crude oil and crude oil products and the improvement of our high power ultrasound technology. During the years ended December 31, 2008, 2007 and 2006, our research and development costs totaled approximately $4.1 million, $7.7 million, and $25.4 million, respectively. During the years ended December 31, 2008, 2007 and 2006, we expended approximately $0.4 million, $1.7 million and $21.5 million, respectively, for the construction of the building and for the purchase and installation of equipment at the test facility in Fujairah, UAE. Major capital expenditures related to the test facility in Fujairah, UAE are not anticipated to take place in the future until the process is commercialized, in which event such expenditures will be capitalized rather than expensed as research and development.

During the year ended December 31, 2007, we entered into a license agreement with Industrial Sonomechanics, LLC (“ISM”) granting us worldwide rights with respect to its proprietary patented ultrasonic probe and reactor technology. We expect to continue working with ISM to develop and test our technologies and prototypes and to explore the expansion of the range of petroleum products that can be upgraded with our technologies.

Effects of Government Regulation; Regulatory Approvals

Government Regulation of Sulfur Levels in Petroleum Products

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

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

Regulatory Approvals

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

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

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

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

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

Employees

As of February 28, 2009, we had 22 full-time employees.

Executive Officers

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

Name	Age (1)	Present Position
Dr. Larry D. Ryan	37	Chief Executive Officer and Director
M. Clay Chambers	62	Chief Operating Officer
Stanley W. Farmer	41	Vice President and Chief Financial Officer
Dr. Florian J. Schattenmann	43	Vice President and Chief Technology Officer
(1) Age is as of February 28, 2009

Business Experience of Executive Officers

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

M. Clay Chambers has served as our Chief Operating Officer since February 2008. Mr. Chambers has over 35 years experience in the refining and petrochemical industry, having begun his career with UOP, Inc. and held senior management positions with Coastal Corporation, El Paso Corporation and Texas City Refining. At Coastal (NYSE, Fortune 40 Company, now El Paso Corporation) he served as Vice President of Refining, Senior Vice President of International Project Development and Senior Vice President of Petroleum Coordination. Mr. Chambers had overall management responsibility for refineries located in Corpus Christi, Texas; Eagle Point, New Jersey; Mobile, Alabama; Wichita, Kansas and Aruba, with a total crude capacity of 538,000 barrels/day. He has extensive expertise regarding the full range of refinery and petrochemical processing units and has also held senior management positions in the product, crude supply and petroleum marketing areas. Mr. Chambers holds a professional degree in Chemical & Petroleum Refining Engineering from Colorado School of Mines and an MBA from the University of Houston.

Stanley W. Farmer has served as our Vice President and Chief Financial Officer since June 2007. From June 2005 to June 2007, Mr. Farmer was an audit partner at Malone & Bailey, PC, a full service certified public accounting firm specializing in providing audit services to small public companies. From November 2004 to April 2005, Mr. Farmer was the Chief Financial Officer at Texas Energy Ventures, L.L.C., a wholesale and retail energy holding company. From May 2003 to November 2004, Mr. Farmer was an Assistant Controller at Reliant Energy Wholesale Group, a subsidiary of Reliant Energy, Inc., a provider of electricity and energy-related products to retail and wholesale customers. From April 2000 to May 2003, Mr. Farmer was a Senior Director at Enron Corp. in its accounting transaction support group. Mr. Farmer earned a B.B.A in Accounting from Texas A&M University (College Station, Texas), is a certified public accountant (Texas) and is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants.

Dr. Florian J. Schattenmann currently serves as our Vice President and Chief Technology Officer and has been with the Company since August of 2008. Previously he was the Global Technology Manager for Elastomers division at Momentive Performance Materials (formerly General Electric Advanced Materials). Prior to that, Dr. Schattenmann was Technology Director for GE-Bayer Silicones based in Leverkusen, Germany. Dr. Schattenmann joined the GE Advanced Materials business from the GE Global Research Center, where he successively led several laboratories focused on the development of advanced technologies ranging from electronic materials to selective catalysis to nano-structured materials. Dr. Schattenmann is a certified Master Black Belt from GE in Six Sigma process methodology, holds seven patents and is the (co-)author of numerous peer-reviewed publications. He has a Ph.D. in Inorganic Chemistry from M.I.T.

Other

The Company's internet address is www.sulphco.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, as soon as reasonably practicable after they are filed with the U.S. Securities and Exchange Commission (SEC). Copies are also available without charge, from SulphCo, Inc., 4333 W. Sam Houston Pkwy N., Suite 190, Houston, TX 77043. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. References to our website addressed in this report are provided as a convenience and do not constitute, or should be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.

Item 1A. Risk Factors.

We are a development stage company with a limited operating history, which makes it more difficult to predict whether we will be able to successfully commercialize our technology and implement our business plan.

We are a development stage company with a limited operating history, and our principal technologies and products are not yet commercially proven. Accordingly, there is a limited operating history upon which to base an assumption that we will be able to successfully implement our business plan.

Our technologies are not fully developed, are commercially untested, and therefore, the successful development and commercialization of our technologies remain subject to significant uncertainty.

Our activities, to date, have involved the research and development of our crude oil desulfurization and upgrading technologies and the construction of a test facility. We have not yet generated any material revenues since commencing these activities in January 1999. Commercial application of our technologies will require further investment, development and testing. We may be unable to complete the commercialization of our technologies on a timely basis, or at all.

Development and commercialization of a new technology, such as our Sonocracking™ process, is inherently subject to significant risks. Accordingly, we cannot assure that our technology will perform in a commercial scale setting as indicated in initial laboratory or small scale testing or that we will be able to successfully commercialize our technology. Introducing and enhancing a new technology involves numerous technical challenges, substantial financial and personnel resources, and often takes many years to complete. We cannot be certain that we will be successful at commercializing our technology on a timely basis, or in accordance with milestones, if at all. In addition, we cannot be certain that, once our processing unit is made operational in a commercial setting, the unit will perform as expected. Our technology is complex and, despite further vigorous testing and quality control procedures, may contain undetected errors. Any inability to timely deliver a commercially viable unit could have a negative effect on our business, revenues, financial condition and results of operations.

We have a history of operating losses and have not generated material revenues to date, and we are unable to predict when or if we will generate material revenues on a sustained basis or achieve profitability.

We have not generated any material revenues, and we have experienced significant operating losses in each period since we commenced our current line of business in January 1999. As of December 31, 2008, we had an accumulated deficit of approximately $145.2 million. These losses are principally associated with the research and development of our Sonocracking™ units for desulfurization and upgrading of crude oil and other petroleum products, research and development of ultrasound technologies, development of pre-production prototypes and related marketing activity, and we expect to continue to incur expenses in the future for development, commercialization and sales and marketing activities related to the commercialization of our technology. We cannot predict when or to what extent our technology or resulting products will begin to produce revenues on a sustained basis, or whether we will ever reach profitability. If we are unable to achieve significant levels of revenue on a sustained basis, our losses will continue. If this occurs, we may be compelled to significantly curtail our business activities or suspend or cease our operations.

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

In the past we have financed our research and development activities primarily through debt and equity financings from our principal shareholder, Rudolf W. Gunnerman, and equity financings from third parties. We expect our existing capital resources will be sufficient to fund our cash requirements for the next 12 months based upon current levels of expenditures and anticipated needs. However, we expect that additional working capital will be required in the future.

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

continued progress toward commercialization of our technologies;

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

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

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

Sources of additional capital, other than from future revenues (for which we presently have no commitments) include proceeds from the exercise of warrants issued to the investors in the March 2007, November 2007, and May 2008 placements, sales of the Company’s common stock under the equity line of credit with Azimuth Opportunity Ltd. (“Azimuth”), funding through collaborative arrangements, licensing arrangements and debt and equity financings. We do not know whether additional financing will be available on commercially acceptable terms when needed. If we cannot raise funds on acceptable terms, we may not be able to successfully commercialize our technology, or respond to unanticipated requirements. If we are unable to secure such additional financing, we may have to curtail, suspend or cease all or a portion of our business activities. Further, if we issue equity securities, our shareholders may experience severe dilution of their ownership percentages, and the new equity securities may have rights, preferences or privileges senior to those of our common stock.

Commercial activities by us in foreign countries could subject us to political and economic risks which could impair future potential sources of revenue or impose significant costs.

We are currently engaged in activities outside the U.S., including the United Arab Emirates, Austria, Indonesia, Canada, South America and South Korea, and we expect to continue to do so in the future, either directly, or through partners, licensees or other third parties, in connection with the commercialization of our technologies. The transaction of business by us in a foreign country, either directly or through partners, licensees or other third parties, may subject us, either directly or indirectly, to a number of risks, depending upon the particular country. These risks may include, with respect to a particular foreign country:

government activities that may result in the curtailment of contract rights;

government activities that may restrict payments or limit the movement of funds outside the country;

confiscation or nationalization of assets;

confiscatory or other adverse foreign taxation regulations;

acts of terrorism or other armed conflicts and civil unrest;

currency fluctuations, devaluations and conversion restrictions; and

trade restrictions or embargoes imposed by the U.S. or a foreign country.

Many of these risks may be particularly significant in some oil producing regions, such as the Middle East and South America.

Our strategy for the development and commercialization of our technologies contemplates collaborations with third parties, making us dependent on them for our success.

We do not possess all of the capabilities to fully commercialize our desulfurization and upgrading technologies on our own. Our success may depend upon partnerships and strategic alliances with third parties, such as our joint venture with Fujairah Oil Technology. Collaborative agreements involving the development or commercialization of technology such as ours generally pose such risks as:

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

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

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

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

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

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

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

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

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

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

Our business is subject to the risk of supplier concentration.

We depend on a limited number of third party suppliers and vendors for the manufacturing and development of our Sonocracker™ units. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of one of these suppliers, or a significant adverse change in our relationship with any of these suppliers, could have a material adverse effect on our business, results of operations and financial condition.

We are highly dependent on our key personnel to manage our business, and because of competition for qualified personnel, we may not be able to recruit or retain necessary personnel. The loss of key personnel or the inability to retain new personnel could delay the implementation of our business plan.

Our success depends to a significant degree on the continued services of our senior management and other key employees, and our ability to attract and retain highly skilled and experienced scientific, technical, managerial, sales and marketing personnel. We cannot assure you that we will be successful in recruiting new personnel or in retaining existing personnel. None of our senior management or key personnel have long term employment agreements with us. We do not maintain key person insurance on any members of our management team or other personnel. The loss of one or more key employees or our inability to attract additional qualified employees could delay the implementation of our business plan, which in turn could have a material adverse effect on our business, results of operations and financial condition. In addition, we may experience increased compensation costs in order to attract and retain skilled employees.

Because the market for products utilizing our technologies is still developing and is highly competitive, we may not be able to compete successfully in the highly competitive and evolving desulfurization and upgrading market.

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

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

Our commercial success will depend to a large degree on our ability to protect and maintain our proprietary technology and know-how and to obtain and enforce patents on our technology. We rely primarily on a combination of patent, copyright, trademark and trade secrets laws to protect our intellectual property. Although we have filed multiple patent applications for our technology, and we have eight issued patents in the U.S., our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent. Accordingly, we cannot assure you that any patents will be issued pursuant to our current or future patent applications or that patents issued pursuant to such applications will not be invalidated, circumvented or challenged. Also, we cannot ensure you that the rights granted under any such patents will provide the competitive advantages we anticipate or be adequate to safeguard and maintain our proprietary rights. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries. Moreover, we cannot ensure you that third parties will not infringe, design around, or improve upon our proprietary technology.

We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or patentable, in part by utilizing confidentiality agreements and, if applicable, inventor's rights agreements with our employees and third parties. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons will not assert rights to intellectual property arising out of these relationships.

We are a new entrant in our business and we face significant competition.

We are a new entrant in the market for development and sale of upgrading and sulfur reduction technology to the oil industry. We face well-established and well-funded competition from a number of sources. Our competitors in this area include manufacturers of conventional refinery desulfurization equipment and major integrated oil companies and oil refineries. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do.

Because of their experience and greater research and development capabilities, our competitors might succeed in developing and commercializing competing technologies or products which would render our technologies or products obsolete or non-competitive.

Regulatory developments could have adverse consequences for our business.

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

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

To date, environmental regulation has not had a material adverse effect on our business, which is presently in the development stage. However, future activities may subject us to increased risk as we seek to commercialize our units by reason of the installation and operation of these units at customer sites. We intend to address these risks by imposing contractual responsibility, whenever practicable, on third party users for maintaining necessary permits and complying with applicable environmental laws governing or related to the operation of our units. However, these measures may not fully protect us against environmental risks. Furthermore, although we may be entitled to contractual indemnification from third parties for environmental compliance liabilities, this would not preclude direct liability by us to governmental agencies or third parties under applicable federal and state environmental laws. We are presently unable to predict the nature or amount of additional costs or liabilities which may arise in the future related to environmental regulation. However, such future liabilities and costs could be material.

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

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

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

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

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

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

We may have difficulty managing our growth.

We expect to experience significant growth if we are successful in our efforts to rollout our Sonocracking™ technology. This growth exposes us to increased competition, greater operating, marketing and support costs and other risks associated with entry into new markets and the development of new products, and could place a strain on our operational, human and financial resources. To manage growth effectively, we must:

attract and retain qualified personnel;

upgrade and expand our infrastructure so that it matches our level of activity;

manage expansion into additional geographic areas; and

continue to enhance and refine our operating and financial systems and managerial controls and procedures.

If we do not effectively manage our growth, we will not be successful in executing our business plan, which could materially adversely affect our business, results of operations and financial condition.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Since July 2007, our executive offices and primary facilities have been located at 4333 W. Sam Houston Pkwy N., Suite 190, Houston, Texas 77043 in a leased facility consisting of approximately 12,000 square feet. The lease for this space will expire mid-year 2012. We also have a leased facility in Sparks, Nevada consisting of approximately 5,000 square feet. The lease for this space will expire in the spring of 2010. We currently have no investment policies in place regarding real estate interests.

Item 3. Legal Proceedings.

There are various claims and lawsuits pending against the Company arising in the normal course of the Company’s business. The following paragraphs set forth the current status of the various actions pending against the Company.

Clean Fuels Litigation

In Clean Fuels Technology v. Rudolf W. Gunnerman, Peter Gunnerman, RWG, Inc. and SulphCo, Inc., Case No. CV05-01346 (Second Judicial District, County of Washoe) the Company, Rudolf W. Gunnerman, Peter Gunnerman, and RWG, Inc., were named as defendants in a legal action commenced in Reno, Nevada. The plaintiff, Clean Fuels Technology later assigned its claims in the lawsuit to EcoEnergy Solutions, Inc., which entity was substituted as the plaintiff. In general, the plaintiff’s alleged claims relate to ownership of the “sulfur removal technology” originally developed by Professor Teh Fu Yen and Dr. Gunnerman with financial assistance provided by Dr. Gunnerman, and subsequently assigned to the Company. On September 14, 2007, after a jury trial and extensive post-trial proceedings, the trial court entered final judgment against the plaintiff EcoEnergy Solutions, Inc. on all of its claims. As per the final judgment, all of the plaintiff’s claims were resolved against the plaintiff and were dismissed with prejudice. In addition, the trial court entered judgment in favor of the Company and against the plaintiff for reimbursement of legal fees and costs of approximately $124,000, with post-judgment interest. The plaintiff appealed the judgment on October 5, 2007. On December 19, 2007, and as required by Nevada statute, the Company participated in a mandatory settlement conference at which time a settlement was not reached. The appeal has been fully briefed, but no date has been set for oral arguments. No asset or liability has been accrued relative to this action.

Talisman Litigation

In Talisman Capital Talon Fund, Ltd. v. Rudolf W.Gunnerman and SulphCo, Inc., Case No. 05-CV-N-0354-BES-RAM, the Company and Rudolf W. Gunnerman were named as defendants in a legal action commenced in federal court in Reno, Nevada. The plaintiff’s claims relate to the Company's ownership and rights to develop its "sulfur removal technology." The Company regards these claims as without merit. Discovery in this case formally concluded on May 24, 2006. On September 28, 2007, the court granted, in part, the defendants' motion for summary judgment and dismissed the plaintiff's claims for bad faith breach of contract and unjust enrichment that had been asserted against Rudolf Gunnerman. The court denied the plaintiff's motion for partial summary judgment. The trial for this matter commenced on December 1, 2008 and continued through December 12, 2008. The court recessed the trial on December 12, 2008 prior to hearing closing arguments. Post trial briefs were filed with the court on February 20, 2009, closing arguments were heard on March 3, 2009 and the matter has been submitted for decision. No liability has been accrued relative to this action.

Neuhaus Litigation

On October 20, 2006, Mark Neuhaus filed a lawsuit against the Company and Rudolf W. Gunnerman, Mark Neuhaus v. SulphCo, Inc., Rudolph W. Gunnerman, in the Second Judicial District Court, in and for the County of Washoe, Case No. CV06-02502, Dept. No. 1. The lawsuit is based on a purported Non-Qualified Stock Option Agreement and related Consulting Agreement between Mark Neuhaus and the Company dated March of 2002 (the “Non-Qualified Stock Option Agreement”). Mark Neuhaus claimed that according to the terms of the Non-Qualified Stock Option Agreement, he was granted an option to purchase three million (3,000,000) shares of the Company’s common stock at the exercise price per share of $0.01. On or about February of 2006, Mark Neuhaus attempted to exercise the option allegedly provided to him under the Non-Qualified Stock Option Agreement. At that time, the Company rejected Mr. Neuhaus’s attempt to exercise the option. Thereafter, Mr. Neuhaus filed this lawsuit seeking to enforce the Non-Qualified Stock Option Agreement.

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

Hendrickson Derivative Litigation

On January 26, 2007, Thomas Hendrickson filed a shareholder derivative claim against certain current and former officers and directors of the Company in the Second Judicial District Court of the State of Nevada, in and for the County of Washoe. The case is known as Thomas Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman, Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles Van Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph Henkel, Case No. CV07-00137, Dept. No. B6. The complaint alleges, among other things, that the defendants breached their fiduciary duty to the Company by failing to act in good faith and diligence in the administration of the affairs of the Company and in the use and preservation of its property and assets, including the Company’s credibility and reputation. The Company and the Board had intended to file a motion for dismissal with the court, based upon the plaintiff’s failure to make a demand upon the Board. On July 10, 2007, the Company received notice that a stipulation (the “Stipulation”) of voluntary dismissal without prejudice had been entered, with an effective date of July 3, 2007, regarding this action. The Stipulation provides that in connection with the dismissal of this action each of the parties will bear their own costs and attorney fees and thereby waive their rights, if any, to seek costs and attorney fees from the opposing party. Further, neither the plaintiff nor his counsel has received any consideration for the dismissal of this action, and no future consideration had been promised.

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

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

On November 6, 2008, Mr. Hendrickson re-filed the shareholder derivative claim in the 127th Judicial District Court of Harris County, Texas. The case is known as Thomas Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman, Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles Van Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph Henkel, (No. 200866743). The Company is currently in the process of responding to this litigation. No liability has been accrued relative to this action.

Nevada Heat Treating Litigation

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

Securities and Exchange Commission Subpoena

On February 25, 2008, the Company received a subpoena from the Denver office of the Securities and Exchange Commission (the “SEC”). The subpoena formalizes virtually identical requests the Company received in May, June and August 2007 to which the Company responded to the request for voluntary production of documents and information, including financial, corporate, and accounting information related to the following subject matters: Fujairah Oil Technology LLC, the Company’s restatements for the first three quarterly periods of 2006 and the non-cash deemed dividend for the quarter ended March 31, 2007, and information and documents related to certain members of former management, none of whom have been employed by the Company since March 2007. We have been advised by the SEC that, despite the subpoena and formal order of investigation authorizing its issuance, neither the SEC nor its staff has determined whether the Company or any person has committed any violation of law. The Company intends to continue to fully cooperate with the SEC in connection with its requests for documents and information.

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

Not applicable.

PART II

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

Market Information

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

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

	High		Low
Fiscal 2008
First Quarter	$	5.80	$	2.35
Second Quarter	$	4.55	$	2.15
Third Quarter	$	3.97	$	1.48
Fourth Quarter	$	2.50	$	0.74

Fiscal 2007
First Quarter	$	4.76	$	2.25
Second Quarter	$	5.95	$	3.35
Third Quarter	$	8.92	$	3.25
Fourth Quarter	$	9.39	$	3.80

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

Dividends

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

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

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

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and rights		Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected at Left)

Equity Compensation Plans Approved by Security Holders		3,694,844	$	3.80		555,156

Equity Compensation Plans Not Approved by Security Holders		100,000	$	4.25		(1	)

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

Under compensation plans approved by our security holders, 1,852,190 securities are outstanding options granted pursuant to the SulphCo, Inc. 2006 Stock Option Plan approved by the Company’s stockholders in 2006 and 1,842,654 securities are outstanding options granted pursuant to the SulphCo, Inc. 2008 Omnibus Long-Term Incentive Plan approved by the Company’s stockholders in 2008.

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

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

Item 6. Selected Financial Data.

Comparative Financial Data

The table below sets forth a comparison of the financial data specified for the latest five years. The loss from operations for the years ended December 31, 2008, 2007 and 2006 includes research and development expenses totaling approximately $4.1 million, $7.7 million and $25.4 million, respectively, including approximately $0.4 million, $1.7 million and $21.5 million for the Fujairah Facility in 2008, 2007 and 2006, respectively.

	2008			2007			2006			2005			2004

Operating revenue		-			-			-			-			-

Loss from operations	$	(20,087,757	)	$	(19,156,217	)	$	(39,131,016	)	$	(8,466,994	)	$	(3,860,970	)

Loss per share: basic and diluted	$	(0.29	)	$	(0.64	)	$	(0.55	)	$	(0.17	)	$	(0.08	)

Total assets at year end	$	19,656,883		$	9,102,041		$	7,294,459		$	8,045,236		$	11,053,360

Long-term obligations at year end		-		$	3,147,860			-		$	7,000,000		$	7,000,000

Cash dividends declared per share		-			-			-			-			-

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

Liquidity and Capital Resources

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

2008 Capital Activities

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

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

2007 Capital Activities

March 2007 Financing

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

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

issue the Warrant Holders the additional warrants (the “March 2007 Warrants”), with an exercise price of $2.68 per share, on a one to one basis for each existing warrant that was exercised including granting up to 1,952,068 warrants to 2004 Warrant Holders and up to 4,000,000 warrants to the 2006 Warrant Holders.

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

November 2007 Financing

On November 28, 2007, the Company executed Amendment No. 2 to Securities Purchase Agreements and Warrants (“Amendment No. 2”) with certain of the Warrant Holders holding approximately 3.95 million of the then outstanding March 2007 Warrants wherein the Warrant Holders agreed to exercise up to 50% of their March 2007 Warrants. In exchange, SulphCo agreed to issue the Warrant Holders additional warrants (the “November 2007 Warrants”) on a one-to-one basis with an exercise price of $7.00 per share and a term of three years. In addition, the Warrant Holders were granted an option to exercise the remaining 50% of their March 2007 Warrants on the later of April 15, 2008, or 30 days following the 2008 Annual Meeting of Stockholders in which SulphCo’s stockholders approve an increase of 10 million authorized common shares. The Company’s stockholders approved the increase of 10 million authorized common shares at the Special Meeting of Stockholders held on February 26, 2008. If this option is exercised, then SulphCo will issue the Warrant Holders additional November 2007 Warrants on a one-to-one basis with an exercise price of $7.00 a share and a term of three years.

As a result of the inducement described above, 1,976,570 of the March 2007 Warrants held by the Warrant Holders were exercised resulting in the grant of 1,976,570 November 2007 Warrants. As a result of this inducement, the Company raised approximately $5.3 million.

Convertible Notes Payable

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

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

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

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

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

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

Late Registration Statement Penalty

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

Future Capital Requirements

The extent and timing of our future capital requirements will depend primarily upon the rate of our progress in the development and commercialization of our technologies, including the successful implementation of our venture with Fujairah Oil Technology and other third parties, and the timing of future customer orders.

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

Operation and maintenance of the Fujairah Facility is the responsibility of Fujairah Oil Technology LLC (“FOT”) and SulphCo is responsible for contributing its Sonocracking™ units. The Memorandum of Association of Fujairah Oil Technology, which defines certain rights of the joint venture partners, calls for profits and losses to be shared 50/50, with profits being distributed to the partners, subject to a 10% reserve for legal expenses which may be waived by the partners. SulphCo’s 50% share of distributions made by the joint venture to SulphCo will also be subject to other costs and expenses incurred directly by SulphCo from time to time. We expect that once the startup and operating plan for the Fujairah Facility is agreed, funding of direct expenditures, such as tank storage and pipelines, will be available from financing through FOT. For additional discussion regarding the Fujairah Facility see “Item 1. Business – Business Development Activities Update” above.

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

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

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

Results of Operations

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

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

Research and Development Expenses

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

During 2008, 2007 and 2006, we paid approximately $0.7 million, $0.2 million and 0.3 million, respectively, to our engineers and other research and development employees as wages and related benefits and for design and testing of our Sonocracker™ units, while approximately $2.0 million, $1.2 million and $2.1 million respectively, was incurred for the procurement of control panels, probes, centrifuges, and generators related to the ongoing research and development of our units. The remainder of our research and development costs are recurring monthly expenses related to the maintenance of our facilities.

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

Selling, General and Administrative Expenses

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

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

Consulting fees, payroll and related expenses were approximately $3.9 million in 2008 which compares to approximately $3.2 million and $3.7 million during 2007 and 2006, respectively. Consulting fees in 2008 increased by 21.8% compared to the same period in 2007 due to additional expenses recognized in 2008 related to a settlement agreement with a former consultant. The decrease in 2007 relative to 2006 was due to the dismissal of Dr. Gunnerman, the Company’s former Chairman and CEO, in January of 2007 as well as an overall reduction in the number of employees in 2007.

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

Interest Expense

Interest expense was approximately $1.2 million in 2008, of which approximately $0.9 million relates to non-cash discount accretion. This compares to approximately $5.5 million and $0.5 million during 2007 and 2006, respectively. The decrease in 2008 relative to 2007 and the increase in 2007 relative to 2006 is primarily due to approximately $5.0 million of non-cash discount accretion expense relating to the April 2007 and November 2007 Convertible Notes Payable refinancing transactions.

Deemed Dividend

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

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

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

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

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

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

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

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

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

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

Net Loss and Net Loss Attributable to Common Stockholders

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

			Payments due by period

	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years

Convertible notes payable	$	4,680,044	$	4,680,044	$	-	$	-		-
Operating lease obligations		571,862		178,819		317,443		75,600		-

Total	$	5,251,906	$	4,858,863	$	317,443	$	75,600		-

New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates

New Accounting Pronouncements and Significant Accounting Policies

See Note 1 to our financial statements.

Critical Accounting Estimates

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

Loss Contingencies

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

Stock-Based Compensation

The Company follows the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”). Under SFAS 123R, the Company is required to recognize, as expense, the estimated fair value of all share based payments to employees. The fair value of each option award granted under the Company’s stock plans is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the Company’s stock. The expected term of options granted to employees is derived utilizing the simplified method referred to in SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB No. 107”) which represents the period of time that options granted are expected to be outstanding. The Company utilizes the simplified method because it does not have historical exercise data which is sufficient to provide a reasonable basis to estimate the expected term. The Company expects to continue utilizing the simplified method to determine the expected term until such time as it accumulates historical exercise data that will provide a sufficient basis for the Company to begin estimating the expected term for option exercises. The expected term of options granted to non-employees is equal to the contractual term of the option as required by other accounting literature. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. See Note 13 to our financial statements for additional information.

Deferred Tax Assets, Valuation Allowances and Tax Liabilities

We estimate (a) income taxes in the jurisdictions in which we operate, (b) net deferred tax assets and liabilities based on expected future taxes in the jurisdictions in which we operate, (c) valuation allowances for deferred tax assets and (d) uncertain income tax positions. These estimates are considered critical accounting estimates because they require projecting future operating results (which is inherently imprecise) and judgments related to the ultimate determination of tax positions by taxing authorities. Also, these estimates depend on assumptions regarding our ability to generate future taxable income during the periods in which temporary differences are deductible. See Note 6 to our financial statements for additional information.

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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

As of December 31, 2008, the Company had variable rate convertible notes payable totaling $4,680,044. This variable rate debt exposes the Company to the risk of increased interest expense in the event of increases in near term interest rates. If the variable interest rate were to increase by 1% from December 2008 levels, interest expense would increase by approximately $47,000 annually. The carrying value of the variable rate convertible notes payable, excluding the discount relating to the beneficial conversion feature, approximates fair value as it bears interest at current market rates that reset on a quarterly basis.

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

Item 8. Financial Statements and Supplementary Data.

Our audited financial statements as of December 31, 2008, 2007 and 2006 and for the years then ended are included at the end of this report following the signature page.

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

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

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

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

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

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

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

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

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

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Management’s Annual Report on Internal Control Over Financial Reporting

The information required by this Item is incorporated by reference from “Management’s Report on Internal Control Over Financial Reporting” on page F-1.

Changes in Internal Control Over Financial Reporting

In connection with the evaluation described above, we identified no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during our fiscal quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

PART III

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

See “Business—Executive Officers” in Item 1 of this Form 10-K. The remaining information called for by this item is incorporated by reference to “Election of Directors,” “Corporate Governance,” “Board of Directors and Committees” and “Additional Information – Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days of the end of our fiscal year ended December 31, 2008 (the “2009 Proxy Statement”).

Family Relationships – None.

Audit Committee Financial Expert

Our audit committee consists of Lawrence G. Schafran (Chairman of the Audit Committee), Robert van Maasdijk and Michael T. Heffner. The Board has determined that Mr. Schafran and Mr. van Maasdijk qualify as “audit committee financial experts” as defined in applicable SEC rules. The Board made a qualitative assessment of Mr. Schafran’s and Mr. van Maasdijk’s level of knowledge and experience based on a number of factors, including formal education and business experience.

Code of Ethics

Our Board of Directors has adopted a Code of Ethics that is applicable to all Board members and all of the Company’s senior officers including its principal executive officer and its principal financial and accounting officer. A copy of the Code of Ethics is included as an exhibit to this report. In the event the Company amends a provision of its Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions or elects to grant a waiver, including an implicit waiver, from a provision of the Company's Code of Ethics to such individuals, the Company will provide disclosures of such event on its website at www.sulphco.com within four business days following the date of the amendment or waiver.

Item 11. Executive Compensation.

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

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

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

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

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

Item 14. Principal Accounting Fees and Services.

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

PART IV

Item 15. Exhibits, Financial Statement Schedules.

3.1	Restated Articles of Incorporation, as amended and filed with the Nevada Secretary of State.

3.2 **

Amended and Restated Bylaws.

3.3***

Amendment to Bylaws.

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

4.2++

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

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

4.4++

Form of Warrant initially issued on June 15, 2004.

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

4.6(13)

Form of Warrant dated March 29, 2006.

4.7(14)

Stock Option Agreement with Rudolf W. Gunnerman dated May 23, 2006.

4.8(14)

Director Stock Option Agreement with Robert van Maasdijk dated May 23, 2006.

4.9	Form of Warrant dated March 12, 2007.

10.1*

2003 Non-Officer Limited Stock Appreciation Rights Plan.

10.2+

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

10.3++

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

10.4#

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

10.5#

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

10.6#

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

10.7#

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

10.8#

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

10.9#

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

10.10#

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

10.11#

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

10.12#

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

10.13#

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

10.14#

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

10.15#

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

10.16#

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

10.17(1)

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

10.18(2)

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

10.19(3)

Promissory Note from SulphCo, Inc. to Rudolf W. Gunnerman dated December 31, 2004.

10.20#

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

10.21(4)

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

10.22(5)

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

10.23(6)

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

10.24(7)

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

10.25(8)

Employment agreement with Loren J. Kalmen dated November 10, 2005.

10.26(9)

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

10.27(10)

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

10.28(11)

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

10.29(12)

2nd Loan Extension and Modification Agreement by and between SulphCo, Inc. and Dr. Rudolf W. Gunnerman and Doris Gunnerman entered into on January 30, 2006.

10.30(13)

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

10.31(14)

SulphCo, Inc. 2006 Stock Option Plan approved by stockholders June 19, 2006.

10.32(15)

Engagement Agreement with RWG, Inc. dated July 1, 2006.

10.33(16)

Test Agreement between SK Corporation and SulphCo, Inc. dated July 20, 2006.

10.34(17)

Memorandum of Understanding with Pierson Capital International, Ltd. dated August 1, 2006.

10.35(18)

Memorandum of Understanding with Petrobras dated August 31, 2006.

10.36(19)

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

10.37(20)

Employment Agreement with Larry Ryan dated January 12, 2007.

10.38(21)

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

10.39(22)

Employment Agreement with Brian Savino dated March 9, 2007.

10.40(23)

Form of Assignment of Promissory Note, dated April, 24, 2007.

10.41(23)

Form of Allonge to Assignment of Promissory Note, dated April 27, 2007

10.42(24)

Employment Agreement with Stanley W. Farmer dated May 17, 2007

10.43(25)

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

10.44(25)

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

10.45(25)

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

10.46(25)

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

10.47(25)

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

10.48(25)

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

10.49(26)

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

10.50(26)

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

10.51(27)

Employment Agreement with M. Clay Chambers dated February 6, 2008.

10.52

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

10.53

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

10.54

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

10.55

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

10.56

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

10.57

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

10.58

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

10.59

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

10.60(28)

Severance Agreement with Brian J. Savino effective March 8, 2008.

10.61(29)

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

10.62(30)

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

10.63

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

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

16.1+++

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

16.2++++

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

23.1	Consent of Hein & Associates LLP

23.2	Consent of Marc Lumer & Company

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

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

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

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

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

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

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

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

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

++++ Incorporated by reference from the registrant’s Form 8-K (SEC File No. 1-32636) filed with the SEC on July 13, 2007.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SULPHCO, INC.

March 6, 2009	By:	/s/ Larry D. Ryan
		Larry D. Ryan
		Chief Executive Officer

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

/s/ Larry D. Ryan	Chief Executive Officer, Director	March 6, 2009
Larry D. Ryan	(Principal Executive Officer)

/s/ Stanley W. Farmer	Vice President and Chief Financial	March 6, 2009
Stanley W. Farmer	Officer (Principal Financial Officer
	and Principal Accounting Officer)

/s/ Robert H. C. van Maasdijk	Chairman of the Board, Director	March 6, 2009
Robert H. C. van Maasdijk

/s/ Dr. Hannes Farnleitner	Director	March 6, 2009
Dr. Hannes Farnleitner

/s/ Michael T. Heffner	Director	March 6, 2009
Michael T. Heffner

/s/ Edward G. Rosenblum	Director	March 6, 2009
Edward G. Rosenblum

/s/ Lawrence G. Schafran	Director	March 6, 2009
Lawrence G. Schafran

/s/ Edward E. Urquhart	Director	March 6, 2009
Edward E. Urquhart

/s/ Fred S. Zeidman	Director	March 6, 2009
Fred S. Zeidman

MANAGEMENT’S REPORT

INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

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

March 4, 2009

/s/ Larry D. Ryan		/s/ Stanley W. Farmer

Larry D. Ryan Chief Executive Officer		Stanley W. Farmer Vice President and Chief Financial Officer

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the internal control over financial reporting of SulphCo, Inc. (the “Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Company’s accompanying Report on Internal Control Over Financial Reporting appearing on page F-1. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

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

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

/s/ Hein & Associates LLP

Houston, Texas

March 4, 2009

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying balance sheets of SulphCo, Inc. (a company in the Development Stage) (the “Company”) as of December 31, 2008 and 2007, and the related statements of operations, cash flows and changes in stockholders’ equity (deficit) for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited the combination in the statements of operations, cash flows and changes in stockholders’ equity (deficit) of the amounts as presented for the years ending December 31, 2008 and 2007 with the amounts for the corresponding statements for the period from inception (January 13, 1999) through December 31, 2006. In our opinion, the amounts have been properly combined for the period from inception (January 13, 1999) through December 31, 2008.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 4, 2009, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Hein & Associates LLP

Houston, Texas

March 4, 2009

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

/s/ Marc Lumer & Company

San Francisco, California

April 2, 2007

F-4

SULPHCO, INC.

(A Company in the Development Stage)

BALANCE SHEETS

December 31, 2008 and 2007

	2008			2007
ASSETS
Current Assets
Cash and cash equivalents	$	17,567,848		$	7,430,138
Prepaid expenses and other		546,239			442,934
Total current assets		18,114,087			7,873,072

Property and Equipment, net		294,522			309,323

Other Assets
Intangible assets, net		993,829			881,848
Other		254,445			37,798

Total other assets		1,248,274			919,646
Total assets	$	19,656,883		$	9,102,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,823,033		$	1,515,278
Refundable deposit		550,000			550,000
Late registration penalty (including accrued interest)		624,811			1,094,671
Convertible notes payable, net of discount		3,824,282			-
Total current liabilities		6,822,126			3,159,949

Long-Term Liabilities
Convertible notes payable, net of discount		-			2,967,802
Other		-			180,058

Total long-term liabilities		-			3,147,860

Total liabilities		6,822,126			6,307,809

Commitments and Contingencies (Note 11)

Stockholders' Equity
Preferred stock: 10,000,000 shares authorized ($0.001 par value) none issued		-			-
Common stock: 110,000,000 shares authorized ($0.001 par value) 89,919,029 and 80,848,416 shares issued and outstanding, respectively		89,919			80,848
Additional paid-in capital		157,992,101			122,700,951
Deficit accumulated during the development stage		(145,247,263	)		(119,987,567	)
Total stockholders' equity		12,834,757			2,794,232
Total liabilities and stockholders' equity	$	19,656,883		$	9,102,041

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

F-5

SULPHCO, INC.

(A Company in the Development Stage)

STATEMENTS OF OPERATIONS

For the Years ended December 31, 2008, 2007 and 2006

and for the Period from Inception through December 31, 2008

	2008			2007			2006			Inception to Date

Revenue
Sales	$	-		$	-		$	-		$	42,967
Expenses
Selling, general, and administrative expenses		(16,034,049	)		(11,445,749	)		(13,566,230	)		(67,937,142	)
Research and development expenses:
Fujairah test facility		(364,904	)		(1,694,509	)		(21,473,129	)		(23,532,542	)
Other		(3,688,804	)		(6,015,959	)		(3,955,562	)		(16,843,134	)
Loss on joint venture		-			-			(136,095	)		(136,095	)
Loss on disposal of asset		-			-			-			(221,711	)
Loss on impairment of asset		-			-			-			(233,900	)
Total operating expenses		(20,087,757	)		(19,156,217	)		(39,131,016	)		(108,904,524	)
Loss from operations		(20,087,757	)		(19,156,217	)		(39,131,016	)		(108,861,557	)

Other income (expense)
Interest income		138,151			290,094			477,869			1,156,715
Interest expense		(1,222,203	)		(5,487,048	)		(465,547	)		(7,918,718	)
Late registration penalty		-			-			-			(760,240	)
Other		-			(9,160	)		2,532			(6,628	)

Net loss		(21,171,809	)		(24,362,331	)		(39,116,162	)		(116,390,428	)

Deemed dividend		(4,087,887	)		(24,768,948	)		-			(28,856,835	)

Net loss attributable to common stockholders	$	(25,259,696	)	$	(49,131,279	)	$	(39,116,162	)	$	(145,247,263	)

Other comprehensive income (loss)
Foreign currency translation gain (loss)		-			3,455			(3,455	)		-

Net comprehensive income (loss)	$	(25,259,696	)	$	(49,127,824	)	$	(39,119,617	)	$	(145,247,263	)

Loss per share: basic and diluted	$	(0.29	)	$	(0.64	)	$	(0.55	)

Weighted average shares basic and diluted		85,870,148			77,062,280			70,737,679

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

F-6

SULPHCO, INC.

(A Company in the Development Stage)

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2008, 2007 and 2006

and for the Period from Inception to December 31, 2008

										Inception
	2008			2007			2006			To Date
Cash Flows From Operating Activities
Net loss	$	(21,171,809	)	$	(24,362,331	)	$	(39,116,162	)	$	(116,390,428	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		220,401			189,880			112,198			1,407,845
Accretion of convertible notes payable discount		856,480			5,024,308			-			5,880,788
Allowance for loan receivable		18,310			313,451			-			331,761
Stock-based compensation		5,226,632			4,335,261			2,779,325			19,710,735
Other		502,133			(6,908	)		136,096			1,937,932
Changes in:
Receivables		-			-			(118,657	)		(118,657	)
Prepaid expenses and other		(121,615	)		(215,458	)		(6,239	)		(480,889	)
Accounts payable and accrued expenses		127,697			(2,013,966	)		2,852,079			1,745,223
Other assets		(216,647	)		-			-			333,353
Accrued fees and interest		(469,860	)		135,867			(275,000	)		211,992
Net cash used in operating activities		(15,028,278	)		(16,599,896	)		(33,636,360	)		(85,430,345	)
Cash Flows From Investing Activities
Purchase of property and equipment, net of sales		(137,259	)		(240,534	)		105,550			(1,393,333	)
Investments in joint ventures and subsidiaries		-			-			-			(361,261	)
Return/ (payment) of deposits		-			-			104,000			(36,822	)
Investments in intangible assets		(182,455	)		(418,436	)		(180,268	)		(1,169,641	)
Net cash (used in) provided by investing activities		(319,714	)		(658,970	)		29,282			(2,961,057	)
Cash Flows from Financing Activities
Proceeds from sales of stock, net of offering costs		25,485,702			18,684,012			35,237,417			95,168,890
Proceeds from related party notes payable		-			-			-			11,000,000
Proceeds from stock subscriptions		-			-			-			4,240,887
Proceeds from issuance of line of credit		-			-			-			750,000
Return on capital		-			-			-			(118,427	)
Principal payments on related party notes payable		-			-			(2,500,000	)		(3,250,000	)
Decrease in related party receivable		-			-			-			1,359,185
Payments on contract payable		-			-			-			(250,000	)
Principal payments on line of credit		-			-			-			(750,000	)
Principal payments on advance from related party		-			-			-			(2,191,285	)
Net cash provided by financing activities		25,485,702			18,684,012			32,737,417			105,959,250
Net change in cash and cash equivalents		10,137,710			1,425,146			(869,661	)		17,567,848
Cash and cash equivalents: beginning of period		7,430,138			6,004,992			6,874,653			-
Cash and cash equivalents: end of period	$	17,567,848		$	7,430,138		$	6,004,992		$	17,567,848
Supplemental information
Cash paid for interest	$	417,673		$	341,545		$	334,251		$	1,385,433
Cash paid for income taxes		-			-			-			-
Non-cash investing and financing activities
Extinguishment of related party note payable		-			5,000,000			-			5,000,000
Extinguishment of convertible notes payable		-			4,680,044			-			4,680,044
Issuance of stock for convertible notes payable		-			319,956			-			319,956
Non-cash deemed dividends		4,087,887			24,768,948			-			28,856,835

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

F-7

SULPHCO, INC.

(A Company in the Development Stage)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

From Inception to December 31, 2008

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

Balance at January 13, 1999		-	$	-	$	-		$	-		$	-		$	-

Stock issued for cash at $167 per share		1,000		1		166,999			-			-			167,000

Restatement for recapitalization of GRD, Inc.		19,999,000		19,999		(19,999	)		-			-			-

Net loss		-		-		-			(128,802	)		-			(128,802	)

Balance at December 31, 1999		20,000,000		20,000		147,000			(128,802	)		-			38,198

Contributions from stockholders:
Cash		-		-		169,169			-			-			169,169
Equipment		-		-		362,331			-			-			362,331

Acquisition of GRD, Inc.		1,200,000		1,200		(251,200	)		-			-			(250,000	)

Stock issued for cash and subscription receivable at $0.50 per share		820,000		820		409,180			-			(208,500	)		201,500

Stock options granted at $0.50 per share in December 2000		-		-		919,401			-			-			919,401

Stock options granted at $1.50 per share in December 2000		-		-		94,799			-			-			94,799

Net loss		-		-		-			(1,364,390	)		-			(1,364,390	)

Balance at December 31, 2000		22,020,000	$	22,020	$	1,850,680		$	(1,493,192	)	$	(208,500	)	$	171,008

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

F-8

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2000		22,020,000		$	22,020		$	1,850,680		$	(1,493,192	)	$	(208,500	)	$	171,008

Stock issued for intangible assets at $4.25 per share in January 2001		292,800			293			1,244,107			-			-			1,244,400

Stock issued for intangible assets at $2.85 per share in February 2001		400,000			400			1,139,600			-			-			1,140,000

Stock sold to related party at $1.47 per share in February 2001		24,750			25			36,431			-			-			36,456

Stock issued for marketing services at $2.86 per share in April 2001		200,000			200			571,800			-			-			572,000

Stock options granted to related parties for services in June 2001		-			-			773,931			-			-			773,931

Stock issued in exchange for notes receivable at $0.50 per share in May 2001		9,556,000			9,556			4,768,444			-			(4,778,000	)		-

Stock issued in exchange for notes receivable at $1.50 per share in June 2001		425,000			425			637,075			-			(637,500	)		-

Stock sold for cash at $2.94 per share in June 2001		100,000			100			293,900			-			-			294,000

Stock issued in exchange for note receivable at $1.41 per share in June 2001		200,000			200			281,800			-			(282,000	)		-

Stock issued to related party for cash at $0.50 per share in June 2001		350,000			350			174,650			-			-			175,000

Cash received for subscription receivable in July 2001		-			-			-			-			282,000			282,000

Cash received for subscription receivable in August 2001		-			-			-			-			340,000			340,000

Stock issued for subscription receivable at $0.725 per share in September 2001		2,758,620			2,759			1,997,241			-			(2,000,000	)		-

Stock issued to related party for consulting fees at $0.85 per share in November 2001		4,000,000			4,000			3,396,000			-			-			3,400,000

Stock returned in November 2001		(300,000	)		(300	)		(1,558,147	)		-			784,500			(773,947	)

Cash received for subscriptions		-			-			-			-			200,000			200,000

Stock returned in December 2001		(100,000	)		(100	)		(49,900	)		-			50,000			-

Stock options at a weighted average price of $0.75 per share in October 2001		-			-			89,020			-			-			89,020

Net loss		-			-			-			(6,927,525	)		-			(6,927,525	)

Balance at December 31, 2001		39,927,170		$	39,928		$	15,646,632		$	(8,420,717	)	$	(6,249,500	)	$	1,016,343

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

F-9

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2001		39,927,170		$	39,928		$	15,646,632		$	(8,420,717	)	$	(6,249,500	)	$	1,016,343

Stock issued for related party services at $0.50 per share in March 2002		10,000,000			10,000			4,990,000			-			-			5,000,000

Stock returned in May 2002		(1,000,000	)		(1,000	)		(499,000	)		-			500,000			-

Stock returned in June 2002		(100,000	)		(100	)		(71,900	)		-			72,000			-

Stock returned in July 2002		(25,000	)		(25	)		(37,475	)		-			37,500			-

Payment on stock subscription received in July 2002		-			-			-			-			515,500			515,500

Stock returned in July 2002		(1,000,000	)		(1,000	)		(499,000	)		-			500,000			-

Stock issued for services at $0.10
per share in September 2002		50,000			50			4,950			-			-			5,000

Stock returned in September 2002		(431,000	)		(431	)		(440,069	)		-			-			(440,500	)

Stock issued for services at $0.27
per share in October 2002		50,000			50			13,450			-			-			13,500

Stock options issued in November 2002 for $0.10 per share		-			-			31,500			-			-			31,500

Stock issued to a related party for cash at $0.10 per share in November 2002		100,000			100			9,900			-			-			10,000

Stock issued to a related party for cash at $0.10 per share in December 2002		50,000			50			4,950			-			-			5,000

Net loss		-			-			-			(6,573,627	)		-			(6,573,627	)

Balance at December 31, 2002		47,621,170		$	47,622		$	19,153,938		$	(14,994,344	)	$	(4,624,500	)	$	(417,284	)

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

F-10

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2002		47,621,170		$	47,622		$	19,153,938		$	(14,994,344	)	$	(4,624,500	)	$	(417,284	)

Stock subscribed for services at $0.42 per share in February 2003		-			-			20,950			-			50			21,000

Payment on stock subscription received in February 2003		-			-			-			-			3,575,000			3,575,000

Stock issued to a related party for cash at $0.33 per share in March 2003		50,000			50			16,450			-			-			16,500

Stock issued for services at $0.32 per share in June 2003		50,000			50			15,950			-			-			16,000

Stock 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			-			-			500,000

Stock returned in December 2003		(25,000	)		(25	)		(37,275	)		-			37,300			-

Stock subscribed for prepaid interest to a related party at $0.42 per share in December 2003		-			-			295,000			-			(295,000	)		-

Net loss		-			-			-			(3,170,959	)		-			(3,170,959	)

Balance at December 31, 2003		49,670,083		$	49,671		$	19,762,839		$	(18,165,303	)	$	(1,106,950	)	$	540,257

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

F-11

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2003		49,670,083		$	49,671		$	19,762,839		$	(18,165,303	)	$	(1,106,950	)	$	540,257

Restricted stock issued for interest on notes $0.296 per share in January 2004		1,000,000			1,000			-			-			(1,000	)		-

Stock issued for services at $0.85 per share in January 2004		100,000			100			84,900			-			-			85,000

Issued subscribed stock at $0.42 per share in March 2004		50,000			50			-			-			(50	)		-

Private placement stock issuance at $0.90 per share in June 2004		2,978,342			2,978			2,677,530			-			-			2,680,508

Private placement stock issuance at $1.25 per share in June 2004		2,030,960			2,031			1,896,912			-			-			1,898,943

Stock options exercised at $0.55 per share in July 2004		200,000			200			109,800			-			-			110,000

Stock options exercised at $0.35 per share in July 2004		100,000			100			34,900			-			-			35,000

Stock issued for services at $2.86 per share in August 2004		45,000			45			128,655			-			(128,700	)		-

Cancellation of subscribed stock at $1.50 per share in September 2004		(45,000	)		(45	)		(67,455	)		-			67,500			-

Stock options exercised at $0.55 per share in December 2004		300,000			300			164,700			-			-			165,000

Amortization of prepaid interest		-			-			-			-			296,000			296,000

Amortization of prepaid expenses		-			-			-			-			53,625			53,625

Contribution from related party stockholder of option given to former employee to by 100,000 shares at $0.55 per share		-			-			555,000			-			-			555,000

Related party receivable for tax withholding on exercise of stock options		-			-			-			-			(257,750	)		(257,750	)

Net loss		-			-			-			(4,146,453	)		-			(4,146,453	)

Balance at December 31, 2004		56,429,385		$	56,430		$	25,347,781		$	(22,311,756	)	$	(1,077,325	)	$	2,015,130

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

F-12

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2004		56,429,385	$	56,430	$	25,347,781	$	(22,311,756	)	$	(1,077,325	)	$	2,015,130

Stock issued to a Director for services at $5.47 per share in January 2005		50,000		50		273,450		-			-			273,500

Stock issued to an Officer for services at $4.08 per share in January 2005		50,000		50		203,950		-			-			204,000

Receipt of related party receivable for tax withholding on stock options in January 2005		-		-		-		-			257,750			257,750

Stock issued to a consultant for services at $5.91 per share in April 2005		15,000		15		88,635		-			-			88,650

Stock issued to a Director for services at $4.99 per share in April 2005		50,000		50		249,450		-			-			249,500

Stock issued to a Director for services at $3.54 per share in May 2005		50,000		50		176,950		-			-			177,000

Warrants and Additional Investment Rights exercised in August 2005		79,430		79		81,151		-			-			81,230

Warrants and Additional Investment Rights exercised in September 2005		83,230		83		84,565		-			-			84,648

Warrants and Additional Investment Rights exercised in October 2005		16,126		16		21,812		-			-			21,828

Warrants and Additional Investment Rights exercised in November 2005		585,244		585		535,094		-			-			535,679

Stock issued to a Director for services at $3.61 per share in November 2005		50,000		50		180,450		-			-			180,500

Stock issued to a Director for services at $6.40 per share in December 2005		50,000		50		319,950		-			-			320,000

Warrants and Additional Investment Rights exercised in December 2005		3,028,380		3,028		3,041,104		-			-			3,044,132

Amortization of prepaid expenses		-		-		-		-			75,075			75,075

Net loss		-		-		-		(9,428,370	)		-			(9,428,370	)

Balance at December 31, 2005		60,536,795	$	60,536	$	30,604,342	$	(31,740,126	)	$	(744,500	)	$	(1,819,748	)

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

F-13

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

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

Balance at December 31, 2005		60,536,795	$	60,536	$	30,604,342		$	(31,740,126	)	$	(744,500	)	$	(1,819,748	)

Warrants and Additional Investment Rights exercised in January 2006		4,423,628		4,424		4,790,044			-			-			4,794,468

Warrants and Additional Investment Rights exercised in February 2006		1,291,660		1,292		1,303,532			-			-			1,304,824

Warrants and Additional Investment Rights exercised in March 2006		2,151,327		2,151		2,068,603			-			-			2,070,754

Private placement – March 2006		4,000,000		4,000		27,063,373			-			-			27,067,373

Stock issued to a consultant for services at $7.44 per share in March 2006		17,500		18		130,182			-			-			130,200

Stock option accrued for a consultant for services at $7.44 per share in March 2006		-		-		357,525			-			-			357,525

Stock issued to a Director for services at $8.80 per share in March 2006		50,000		50		439,950			-			-			440,000

Stock issued to a Director for services at $12.72 per share in March 2006		50,000		50		635,950			-			-			636,000

Stock option accrued for a consultant for services at $7.44 per share in March 2006		-		-		8,050			-			-			8,050

Accrual of stock option for Director – June 2006		-		-		687,500			-			-			687,500

Stock issued to a Director for services at $5.53 per share in August 2006		50,000		50		276,450			-			-			276,500

Stock issued to a Director for services at $4.87 per share in December 2006		50,000		50		243,450			-			-			243,500

Accrual of stock option for Director		-		-		1,045,000			-			-			1,045,000

Options for Director forfeited December 2006		-		-		(1,045,000	)		-			-			(1,045,000	)

Reversal of stock subscriptions receivable		-		-		(744,500	)		-			744,500			-

Other		-		-		-			-			(3,455	)		(3,455	)

Net loss		-		-		-			(39,116,162	)		-			(39,116,162	)

Balance at December 31, 2006		72,620,910	$	72,621	$	67,864,451		$	(70,856,288	)	$	(3,455	)	$	(2,922,671	)

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

F-14

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

											Stock
					Additional						Subscriptions
	Common Stock				Paid-in			Accumulated			Receivable			Total
	Shares		Amount		Capital			Deficit			and Other			Equity
Balance at December 31, 2006		72,620,910	$	72,621	$	67,864,451		$	(70,856,288	)	$	(3,455	)	$	(2,922,671	)

Stock-Based Compensation		70,206		70		4,335,191			-			-			4,335,261

Proceeds from Stock Sales (Net of Offering Costs)
Warrants exercised in Q1 2007 at $1.12 to $2.68 per share		3,952,068		3,952		7,783,721			-			-			7,787,673
Warrants exercised in Q2 2007 at $2.68 per share		600,000		600		1,599,925			-			-			1,600,525
Warrants exercised in Q3 2007 at $2.68 per share		1,425,412		1,425		3,767,425			-			-			3,768,850
Warrants exercised in Q4 2007 at $2.68 per share		2,029,070		2,029		5,524,935			-			-			5,526,964

Deemed Dividends		-		-		24,768,948			(24,768,948	)		-			-

Convertible Notes Payable - Beneficial Conversion Feature		-		-		6,736,550			-			-			6,736,550

Cashless option exercise		66,551		67		(67	)		-			-			-

Debt Conversion at $3.80 per share		84,199		84		319,872			-			-			319,956

Other		-		-		-			-			3,455			3,455

Net loss		-		-		-			(24,362,331	)		-			(24,362,331	)

Balance at December 31, 2007		80,848,416	$	80,848	$	122,700,951		$	(119,987,567	)	$	-		$	2,794,232

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

F-15

SULPHCO, INC.

(A Company in the Development Stage)

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

From Inception to December 31, 2008

										Stock
					Additional					Subscriptions
	Common Stock				Paid-in		Accumulated			Receivable		��	Total
	Shares		Amount		Capital		Deficit			and Other			Equity
Balance at December 31, 2007		80,848,416	$	80,848	$	122,700,951	$	(119,987,567	)	$	-		$	2,794,232

Stock-Based Compensation		-		-		5,139,632		-			-			5,139,632

Proceeds from Stock Sales (Net of Offering Costs)
Warrants exercised in Q2 2008 at $2.68 per share		1,953,088		1,953		5,158,714		-			-			5,160,667
Shelf Registration in Q2 2008 at $3.20 per share		6,818,750		6,819		20,318,216		-			-			20,325,035

Deemed Dividends		-		-		4,087,887		(4,087,887	)		-			-

Stock Issued to Settle Litigation at $2.02 per share		247,525		248		499,752		-			-			500,000
Stock Issued for Services and other at $1.70 per share		51,250		51		86,949		-			-			87,000
Net loss		-		-		-		(21,171,809	)		-			(21,171,809	)

Balance at December 31, 2008		89,919,029	$	89,919	$	157,992,101	$	(145,247,263	)	$	-		$	12,834,757

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

F-16

SULPHCO, INC.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

December 31, 2008

1.	Organization and Significant Accounting Policies

Business

SulphCo, Inc. (“SulphCo” or the “Company”) is considered a developmental stage company as defined by Statement of Financial Accounting Standards (“FAS”) No. 7, as the Company has not recognized significant revenue and is continuing to develop and market processes for the upgrading of crude oil by reducing its relative density, viscosity, and sulfur content.

SulphCo, formerly Film World, Inc., was originally organized under the laws of the State of Nevada on December 23, 1986 under the name Hair Life, Inc. The Company became inactive during 1987 and remained inactive until September 1994. In September 1994, through a reverse acquisition agreement, the Patterson Group became a wholly owned subsidiary of Hair Life, Inc. Operations were conducted via two subsidiaries until 1998, at which time all operations were discontinued, and the Company remained dormant until January 1999.

In July 1999 the Company acquired film rights and changed the corporate name to Film World, Inc. In December 2000 the Company discontinued its film operations and distributed all assets and liabilities related to that business to certain shareholders in exchange for their stock.

In December 2000 the Company entered into an exchange agreement with GRD, Inc. (DBA SulphCo) and issued 1,200,000 shares in exchange for all of the outstanding shares of GRD, Inc. Because the shareholders of GRD, Inc. controlled the Company after the exchange, the merger was accounted for as a reverse acquisition of Film World, Inc. The Company’s name was changed to SulphCo, Inc.

On October 7, 2005, the Company’s stock began trading on the American Stock Exchange under the symbol “SUF.” Previously the Company’s common stock had been quoted on the OTC Bulletin Board under the symbol “SLPH.”

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The markets for the Company’s potential products and services will be impacted by the price of oil, competition, rapid technological development, regulatory changes, and new product introductions, all of which may impact the future value of the Company’s assets.

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

F-17

Property and Equipment

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

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

Intangible Assets

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

Equity Method

Investments in joint ventures and other entities over which the Company does not have control, but does have the ability to exercise significant influence over the operating and financial policies, are carried under the equity method. The Investment in Fujairah Oil Technology LLC, in which the Company owns a 50% interest, is carried at cost and adjusted for the Company's 50% share of undistributed earnings or losses. There was no activity in the entity prior to 2006.

Research and Development

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

F-18

Income Taxes

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

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

Loss Per Share

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include options and warrants to acquire the Company’s common stock and convertible debt. As of December 31, 2008, 2007 and 2006, there were approximately 11.0 million, 9.0 million and 7.3 million shares issuable, respectively, in connection with these potentially dilutive securities. These potentially dilutive securities were disregarded in the computations of diluted net loss per share for the years ended December 31, 2008, 2007 and 2006, respectively, because inclusion of such potentially dilutive securities would have been anti-dilutive.

Stock-Based Compensation

We adopted SFAS No. 123R (SFAS 123R), “Share-based Payment,” effective January 1, 2006. This pronouncement requires companies to measure the cost of employee services received in exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is estimated using option-pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period. Prior to the adoption of SFAS 123R, this accounting treatment was optional with pro forma disclosures required. During the years ended December 31, 2008, 2007 and 2006, the Company recognized non-cash general and administrative expenses for stock options and restricted stock awards of approximately $5.2 million, $4.3 million and $2.8 million, respectively.

Concentrations

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

Reclassifications

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

F-19

New Accounting Pronouncements

Recently Adopted Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for fiscal years beginning after November 15, 2007, however the FASB has delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent basis. The adoption of SFAS 157 for financial assets and liabilities in the first quarter of 2008 did not have a material impact on the Company’s financial statements. The Company does not believe that the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities will have a material impact on its financial statements.

Recently Issued Accounting Standards

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) should be classified as participating securities and should be included in the computation of earnings per share pursuant to the two-class method as described by SFAS No. 128, Earnings per Share. The provisions of FSP EITF 03-6-1 are required for fiscal years beginning after December 15, 2008. The Company does not believe the adoption of FSP EITF 03-6-1 will have a material impact on its computation of earnings per share.

In June 2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 addresses the determination of whether provisions that introduce adjustment features (including contingent adjustment features) would prevent treating a derivative contract or an embedded derivative on a company’s own stock as indexed solely to the company’s stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company does not believe the adoption of EITF 07-5 will have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (revised 2007) (“SFAS 141R”). SFAS 141R replaces SFAS 141 and requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transaction costs related to the business combination to be expensed as incurred. SFAS 141R is effective for business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The Company does not believe the adoption of SFAS 141R will have a material impact on its consolidated financial statements.

2. Loans Receivable and Accrued Interest

On February 16, 2006 the Company committed to a loan agreement with SulphCo KorAsia (formerly known as OIL-SC, Ltd.) of South Korea. The agreement called for advances of $50,000 per month through May 15, 2006. A total of $150,000 was advanced through May 2006. An additional $50,000 was advanced on June 6, 2006 under the same terms as the original note and in November 2006, an additional $75,000 was advanced, with a revision to the loan agreement that the full $275,000 in advances and related interest would be immediately repaid from revenues or from proceeds of any equity financings. Interest accrues at prime rate plus 1% per annum. Interest accrued since February 16, 2006 totals approximately $57,000. Based on the fact that SulphCo KorAsia has never had material revenue streams and considering that there continues to be a high level of uncertainty regarding when, if ever, it will generate material revenue streams, the Company has established an allowance for doubtful collection equal to the total principal balance and accrued interest thereon.

F-20

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

3. Property and Equipment

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

	2008			2007
Equipment	$	933,894		$	868,172
Computers		260,688			230,177
Office furniture		61,071			57,116
Vehicles		12,000			-
Leasehold improvements		92,965			70,965
		1,360,618			1,226,430
Less: Accumulated depreciation		(1,066,096	)		(917,107	)
Total	$	294,522		$	309,323

Depreciation expense was approximately $0.1 million, $0.1 million and $0.2 million for 2008, 2007 and 2006, respectively.

4. Intangible Assets

As of December 31, 2008, the Company had eight U.S. patents, four U.S. patents pending, 46 foreign patents, and 134 foreign patents pending. At December 31, 2008 and 2007, the Company had capitalized approximately $1.2 million and $1.0 million, respectively, in costs that were incurred in connection with filing patents and trademarks related to internally developed technology. Accumulated amortization as of December 31, 2008 and 2007 was approximately $0.2 million and $0.1 million, respectively. During the years ended December 31, 2008, 2007 and 2006 the Company capitalized intangible assets of approximately $0.2 million, $0.4 million, and $0.2 million, respectively.

Patents and trademarks are amortized using the straight-line method over their estimated period of benefit, ranging from 10 to 20 years with a weighted average of 16.5 years. Amortization expense related to patents and trademarks for the years ended December 31, 2008, 2007, and 2006 was approximately $70,000, $45,000 and $28,000, respectively. Maintenance costs of approximately $62,000 and $59,000 were expensed throughout 2008 and 2007, respectively.

The following table reflects management’s estimate for amortization expense, using the straight-line method, for the next five years based on current capitalized amounts and estimated lives:

Year	Estimated Amortization Expense
2009	$	75,000
2010	$	75,000
2011	$	75,000
2012	$	75,000
2013	$	75,000

F-21

5. Investment in Joint Venture

In November 2005, the Company and Trans Gulf Petroleum Co. (“Trans Gulf”), a Government of Fujairah company, formed Fujairah Oil Technology LLC (the “FOT”), a United Arab Emirates limited liability company, to implement the Company’s Sonocracking™ desulfurization technology. FOT is 50% owned by Trans Gulf and 50% owned by the Company. Fujairah is one of the seven Emirates of the United Arab Emirates. Under the terms of the joint venture, the Company is responsible for contributing its Sonocracking™ units and the facility that houses them including bearing all costs relating thereto. Operation and maintenance of the Fujairah test facility is the responsibility of FOT. Until FOT generates revenues, operating expenses of the facility are expected to be funded from capital contributions of the Company.

Once FOT begins generating revenues, the joint venture agreement contemplates that profits and losses will be shared on a 50/50 basis between Trans Gulf and the Company. The Company’s 50% share of distributions made by the joint venture will also be subject to other costs and expenses incurred directly by the Company from time to time. The Company is uncertain that it will be able to recover its investment in FOT. Accordingly, the carrying value of the investment has been reduced to zero at December 31, 2008 and 2007, respectively. Going forward, and to the extent that the Company continues to incur costs in excess of its investment in FOT, these costs will be recognized by the Company as research and development costs.

F-22

6. Income Taxes

The Company is currently subject to income taxation only in the jurisdiction of the United States. Foreign jurisdictions will impose income taxes if and when income is generated subject to their laws, but there is currently no such related income. The significant components of the Company’s deferred tax assets and liabilities at December 31, 2008 and 2007 were as follows:

	December 31, 2008			December 31, 2007
Deferred tax assets relative to the following:
Net operating loss carry-forwards	$	21,142,236		$	16,268,427
Research and development credit carryforwards		890,139			688,961
Capitalized research and development costs		8,382,222			7,579,497
Deferred share-based compensation		3,122,956			1,334,844
Expensed receivables		163,799			157,573
Depreciable assets		39,489			31,014
Late registration payment and accrued interest		212,436			130,964
Other		58,706			51,328
Total deferred tax assets prior to offsets	$	34,011,983		$	26,242,608

Current portion	$	434,941		$	339,865
Non-current portion		33,577,042			25,902,743
	$	34,011,983		$	26,242,608
Liabilities
Deferred tax liabilities relative to the following:
Patent costs	$	(337,902	)	$	(315,062	)
Total deferred tax liabilities (all non-current)	$	(337,902	)	$	(315,062	)

Current portion	$	434,941		$	339,865
Non-current portion		33,239,140			25,587,681
Total deferred tax assets prior to offsets	$	33,674,081		$	25,927,546

Valuation allowance	$	(33,674,081	)	$	(25,927,546	)

Net deferred tax assets	$	-		$	-

For the years ended December 31, 2008 and 2007, the valuation allowance was increased by approximately $7.7 million and $5.7 million, respectively due to the uncertainties surrounding the realization of the deferred tax assets resulting from the Company’s net losses of approximately $21.2 million and $24.4 million in 2008 and 2007, respectively, and accumulated deficits of approximately $145.2 million and $120.0 million at December 31, 2008 and 2007, respectively.

F-23

A reconciliation of the expected income tax provision (benefit) using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2008, 2007, and 2006:

	December 31, 2008			December 31, 2007			December 31, 2006
Income tax computed at federal statutory rate		34.0	%		34	%		34	%
Permanent differences		(1.7	)%		(7.2	)%		-
Change in valuation allowance		(32.3	)%		(26.8	)%		(34	)%

Provision (benefit) for income taxes		0.00	%		0.00	%		0.00	%

As of December 31, 2008 and 2007, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $62.2 million and $47.8 million, respectively. The net operating loss carry-forwards will begin expiring in 2019 and will fully expire in 2028.

The valuation allowance for each year has been estimated in an amount equal to the projected future benefit of the deferred tax asset net of the deferred tax liability as it is not certain that the Company will generate sufficient income to utilize the future tax benefits, due to the lack of earnings in the Company’s history.

7. Refundable Deposit

In 2005, the Company received $550,000 from SulphCo KorAsia (formerly known as OIL-SC, Ltd.), pursuant to an equipment sale and marketing agreement. As this amount is fully refundable if the pilot plant does not ultimately meet the agreed specifications, no portion of the purchase price has been or will be recorded as revenue in the Company’s financial statements until the pilot plant meets all agreed specifications. The Company does not have an equity interest in SulphCo KorAsia.

8. Accrued Fees and Interest

As of December 31, 2008 and 2007, the Company had accrued late registration fees of approximately $0.4 million and $0.8 million, respectively, and interest thereon of approximately $0.3 million and $0.2 million, respectively, in conjunction with the private placements in 2004. For the years ended December 31, 2008, 2007 and 2006, interest expense associated with accrued late fees was approximately $0.1 million, $0.1 million and $0.1million, respectively.

9. Convertible Notes Payable

April 2007 Modification

In late April 2007 two events occurred related to the Company’s then outstanding $5 million note payable (the “Note Payable”) to Rudolf W. Gunnerman (“Gunnerman”), the Company’s former Chairman and CEO. First, the Note Payable was acquired from Gunnerman by a group of investors (the “Investors”). Second, the Company negotiated modifications (the “April 2007 Modifications”) to the terms of the Note Payable with the Investors to (1) extend the maturity date from December 31, 2007 to December 31, 2008 and (2) to add a conversion option to the Note Payable making the Note Payable convertible into the Company’s common stock at a conversion price of $3.80 per share (hereinafter the Note Payable is referred to as the “Convertible Notes Payable”).

In connection with the first event, the Gunnerman Note Payable was acquired directly from Gunnerman by the Investors. The Company’s participation in this event was limited to providing its consent to the assignment of the Note Payable from Gunnerman to the Investors. As such, this element of the transaction had no impact on the Company and required no accounting in relation thereto.

F-24

Regarding the second event, the provisions of Emerging Issues Task Force (“EITF”) Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”), provide that a modification of a debt instrument that adds a substantive conversion option is always considered a substantial change. Therefore, debt extinguishment accounting pursuant to EITF 96-19 was required for this event. In connection with the conclusion that EITF 96-19 is applicable to this transaction, SulphCo also made the determination that (1) the conversion option was substantive on the date it was added pursuant to the guidance in paragraphs 7-9 of EITF Issue No. 05-1, “Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer’s Exercise of a Call Option” (“EITF 05-1”), (2) the conversion option would not be separately accounted for as a derivative under SFAS Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” since the Convertible Notes Payable are considered to be “conventional” or “traditional” debt as contemplated in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in , a Company’s Own Stock” (“EITF 00-19”) and (3) the modification is not within the scope of SFAS Statement No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings” as contemplated in paragraph 11 of EITF Issue No. 02-04, “Determining Whether a Debtor’s Modification of Exchange of Debt Instruments Is within the Scope of FASB Statement No. 15” (“EITF 02-04”) since the Investors are not deemed to have granted a concession (i.e., because the Company’s effective borrowing rate on the Convertible Notes Payable is not less than the effective borrowing rate of the original Note Payable). Since the Convertible Notes Payable had a variable interest rate structure, the fair value of the Note Payable approximated the carrying value of the Convertible Notes Payable. As a result, there was no gain or loss resulting from these modifications.

Contemporaneous with the acquisition of the Convertible Notes Payable and just prior to the modifications, the Investors acquired warrants from Gunnerman to acquire 1,625,000 shares of the Company’s common stock currently held by Gunnerman. Since Gunnerman is considered to be a related party and a control person (i.e., since he owns greater than 10% of the Company’s outstanding common stock), these actions are presumed to have been taken on behalf and for the benefit of the Company. Therefore, the warrants were accounted for as if the Company had directly issued the warrants to the Investors. Since the warrants were acquired contemporaneously with the issuance of convertible debt, the guidance in EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios” (“EITF 98-5”) and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”) must be applied. Using the Black-Scholes option valuation model, the Company has estimated that the fair value of the warrants on the date of grant was approximately $3.0 million. The fair value of the Convertible Notes Payable on that date was $5 million (since it has a variable interest rate equal to LIBOR + 0.5% that resets quarterly). Using these amounts, the Company determined that on a relative fair value basis, approximately $1.9 million of the assumed proceeds of $5 million resulting from the extinguishment should be allocated to the warrants. After taking into account the effect of the allocation of proceeds to the warrants, the Company determined that the conversion feature that was added to the Convertible Notes Payable was a beneficial conversion feature (“BCF”) that had to be accounted for pursuant to EITF 98-5 and EITF 00-27. SulphCo determined that the value of the BCF was in excess of the remaining unallocated debt proceeds. Therefore, and as is provided in the guidance of EITF 98-5 and EITF 00-27, the extent of the BCF discount is limited to the amount of the remaining unallocated proceeds of $3.1 million. As a result of the accounting required for the modification of the terms of the Convertible Notes Payable, a 100% (i.e., $5 million) discount results. Prior to the November 2007 modifications (discussed below), the resulting discount was being accreted into the statement of operations, using the effective interest method, over the remaining term of the Convertible Notes Payable (i.e., through December 31, 2008) as incremental interest expense.

October 2007 Conversion

On October 22, 2007, one of the Investors holding approximately $320,000 of the Convertible Notes Payable elected to convert the Convertible Notes Payable into shares of SulphCo common stock. Pursuant to the terms of the Convertible Notes Payable, it was converted into 84,199 shares of SulphCo common stock at a conversion price of $3.80 per share. Since the Convertible Notes Payable are instruments with a beneficial conversion feature, the pro rata amount of the unamortized discount remaining at the date of conversion was recognized as interest expense. The pro rata amount of unamortized discount recognized as interest expense upon conversion was approximately $318,000.

F-25

November 2007 Modification

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

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

To determine the appropriate accounting for the November 2007 Modifications noted above, the Company again applied the provisions of EITF 96-19. Under EITF 96-19, a substantial modification of loan terms results in accounting for the modification as a debt extinguishment. EITF 96-19 specifies that a modification should be considered substantial if the present value of the cash flows under the new terms is at least 10% different from the present value of the remaining cash flows under the original loan terms. EITF 96-19 requires the use of the original effective interest rate for calculating the present value of the cash flows under the modified loan.

In order to apply EITF 96-19, the Company determined the annual payments (principal and interest) under the new loan terms. In instances where either debt instrument has a floating interest rate, which in this case both debt instruments did, the variable rate in effect at the date of the modification is used to calculate the cash flows of the variable rate instrument. The variable rate in effect on the date of the November 2007 Modifications was 5.6275%. The Company used this rate to calculate the cash flows for both debt instruments. If either debt instrument is callable or putable, EITF 96-19 requires that the present value calculation should be made assuming the instrument is called (put) and assuming the instrument is not called (put). The cash flow assumptions that generate the smaller change are to be used in the 10% test. In this case, the original instrument had a face value call option exercisable at any time. The new instrument had a put option added as part of the modifications that is exercisable at any time after July 31, 2009 and retained the face value call option.

Using the original effective interest rate as the discount factor for each set of cash flows, the Company computed the present values under the various scenarios. Based on this analysis, the Company determined that the difference between the cash flows under the original terms and the modified terms was not in excess of 10% which suggested that the November 2007 Modifications were not substantial.

F-26

However, because the November 2007 Modifications involved convertible debt, the Company referred to the guidance in EITF No. 06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”). EITF 06-6 requires that a separate analysis must be performed if the cash flow test under EITF 96-19 does not result in a conclusion that a substantial modification or exchange has occurred. Under that separate analysis, a substantial modification or exchange has occurred and the issuer should apply extinguishment accounting if the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying amount of the original debt instrument immediately prior to the modification or exchange.

Pursuant to the guidance in EITF 06-6, the Company calculated the fair value of the embedded conversion option immediately before and after the modifications using the Black-Scholes Option Valuation. Based on this analysis, the Company determined that the fair value of the conversion option had increased by more than 10%. Therefore, extinguishment accounting, pursuant to the provisions of EITF 96-19, applies.

EITF 96-19 requires that any unamortized discount relating to the extinguished debt should be written off and included in determining the debt extinguishment gain or loss to be recognized. In connection with this requirement, the Company recorded a journal entry of approximately $4.7 million (recognized as incremental interest expense) to accrete the remaining discount associated with the April 2007 Modification. The Company then determined that an extinguishment loss of approximately $22,000 was present. The Company then determined that the conversion feature that was relating to the Convertible Notes Payable was a BCF that had to be accounted for pursuant to EITF 98-5 and EITF 00-27. SulphCo determined that the value of the BCF was approximately $1.7 million. The resulting discount is being accreted into the statement of operations as incremental interest expense using the effective interest method through July 31, 2009, after which time the Investors have the ability to accelerate the maturity of the Convertible Notes Payable.

As of December 31, 2008 and 2007, the net balances of the Convertible Notes Payable were:

	2008			2007
Assumed proceeds from modified Convertible Notes Payable	$	4,680,044		$	4,680,044
Less:
Discount related to beneficial conversion feature		(1,736,550	)		(1,736,550	)
Net Convertible Notes Payable Balance		2,943,494			2,943,494
Add:
Discount accretion through December 31,		880,788			24,308
Net Convertible Notes Payable balance at December 31,	$	3,824,282		$	2,967,802

The Convertible Notes Payable represent an unsecured obligation of the Company.

F-27

Interest on the Convertible Notes Payable is adjusted quarterly based on a London Inter-Bank Offering Rate (“LIBOR”) plus 0.5% per annum, with interest only payments due on December 31st of each year during the remaining term of the Convertible Notes Payable that extends through December 31, 2011 when the note matures (unless maturity is otherwise accelerated by the Investors to any date after July 31, 2009). As a result of the November 2007 Modifications, the effective interest rate of the Convertible Notes Payable was determined to be approximately 33%. During the years ended December 31, 2008, 2007 and 2006, the Company recognized total interest expense of approximately $1.1 million, $5.5 million and $0.5 million, respectively. For the years ended December 31, 2008 and 2007, total interest expense recognized by the Company included approximately $0.8 million and $5.0 million, respectively, of incremental interest expense associated with discount accretion.

10. Deemed Dividends

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

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

F-28

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

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

For the years ended December 31, 2008, 2007 and 2006, the Company recognized non-cash deemed dividends of approximately $4.1 million, $24.8 million, and zero, respectively.

11. Commitments and Contingencies

Commitments under Operating Leases

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

F-29

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

2009	$	178,819
2010		166,243
2011		151,200
2012		75,600
2013		-
Total future minimum lease payments	$	571,862

The Company recognized approximately $0.1 million, $0.7 million, and $0.4 million for net rent expense in 2008, 2007, and 2006, respectively.

Concentrations of Credit Risk

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

Litigation Contingencies

Clean Fuels Litigation

F-30

Talisman Litigation

Neuhaus Litigation

Hendrickson Derivative Litigation

F-31

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

On November 6, 2008, Mr. Hendrickson re-filed the shareholder derivative claim in the 127th Judicial District Court of Harris County, Texas. The case is known as Thomas Hendrickson, Derivatively on Behalf of SulphCo, Inc. v. Rudolf W. Gunnerman, Peter W. Gunnerman, Loren J. Kalmen, Richard L. Masica, Robert Henri Charles Van Maasdijk, Hannes Farnleitner, Michael T. Heffner, Edward E. Urquhart, Lawrence G. Schafran, Alan L. Austin, Jr., Raad Alkadiri and Christoph Henkel, (Cause No. 200866743). The Company is currently in the process of responding to this litigation. No liability has been accrued relative to this action.

Nevada Heat Treating Litigation

F-32

Securities and Exchange Commission Subpoena

On February 25, 2008, the Company received a subpoena from the Denver office of the Securities and Exchange Commission (the “SEC”). The subpoena formalizes virtually identical requests the Company received in May, June and August 2007 to which the Company responded to the request for voluntary production of documents and information, including financial, corporate, and accounting information related to the following subject matters: Fujairah Oil Technology LLC, the Company’s restatements for the first three quarterly periods of 2006 and the non-cash deemed dividend for the quarter ended March 31, 2007, and information and documents related to certain members of former management, none of whom have been employed by the Company since March 2007. We have been advised by the SEC that, despite the subpoena and formal order of investigation authorizing its issuance, neither the SEC nor its staff has determined whether the Company or any person has committed any violation of law. The Company intends to continue to cooperate with the SEC in connection with its requests for documents and information.

12. Common Stock

Other than stock based compensation disclosed in Note 13 and related party transactions disclosed in Note 15, the Company had the following transactions related to its common stock during the years ended December 31, 2008, 2007, and 2006:

Year Ended December 31, 2008

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

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

F-33

Year Ended December 31, 2007

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

The accounting for the reduction in the exercise price of the 2006 Warrants and the Additional Warrants is described in Note 10.

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

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

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

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

Year Ended December 31, 2006

On March 29, 2006, the Company completed a private placement to a small number of accredited investors for the sale of 4,000,000 units, each unit consisting of one share of the Company’s common stock and one warrant to purchase a share of common stock. Each unit was sold at a price of $6.805 per share, resulting in gross proceeds at closing of approximately $27.2million. The warrants are exercisable, in whole or in part, at a fixed price equal to $6.805 per share, and are exercisable for a period of 18 months following their issuance. The Company filed a registration statement with the SEC covering the resale of the shares of common stock issued at closing and shares issuable upon exercise of warrants. The registration statement was declared effective by the SEC on June 23, 2006.

The Company granted 217,500 shares of its common stock during 2006, all of which were vested during the year. The weighted-average grant-date fair value of those shares was $7.94 per share.

F-34

A fee of $100,000 was paid to an unrelated third party in consideration of introducing an investor to the Company relative to the March 29, 2006 placement. This amount was reflected as a reduction of the proceeds.

Increase in Authorized Capital Stock

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

13. Stock Plans and Share-Based Compensation

The Company follows the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”). Under SFAS 123R, the Company is required to recognize, as expense, the estimated fair value of all share based payments to employees. The fair value of each option award granted under the Stock Plans is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the Company’s stock. The expected term of options granted to employees is derived utilizing the simplified method referred to in SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB No. 107”) which represents the period of time that options granted are expected to be outstanding. The Company utilizes the simplified method because it does not have historical exercise data which is sufficient to provide a reasonable basis to estimate the expected term. The Company expects to continue utilizing the simplified method to determine the expected term until such time as it accumulates historical exercise data that will provide a sufficient basis for the Company to begin estimating the expected term for option exercises. The expected term of options granted to non-employees is equal to the contractual term of the option as required by other accounting literature. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. For the years ended December 31, 2008, 2007 and 2006, the Company used the following information to value option grants:

	2008		2007		2006
Expected Volatility		93% - 151%		133% - 150%		117% - 147%
Expected Dividend Yield		-		-		-
Expected Term (in years)		1.5 - 9.5		5.0 – 10.0		3.0
Risk Free Rate		1.6% - 3.6%		3.6% - 5.1%		5.2%

F-35

Stock Option Plans

We maintain the 2006 Stock Option Plan (the “2006 Plan”) and the 2008 Omnibus Long-Term Incentive Plan (the “2008 Plan”), which are collectively referred to as the “Stock Plans.” Under our Stock Plans, incentive and nonqualified stock options are granted to eligible participants. The exercise price of options granted pursuant to the Stock Plans shall be at least 100 percent of the fair value of the Company’s common stock on the date of grant. Options are generally granted for a term of 10 years and become exercisable at such times as determined by the Compensation Committee. Certain stock options provide for accelerated vesting if there is a change in control. As of December 31 2008, approximately 0.6 million shares are available for future grants of awards under the Stock Plans.

The following table summarizes the activity for our options for the 12 months ended December 31, 2008:

	Number of Shares			Weighted Average Exercise Price
Options outstanding, December 31, 2007		1,790,524		$	4.20
Options granted		2,131,820		$	3.36
Options exercised		-			-
Options forfeited		(227,500	)	$	2.87
Options outstanding, December 31, 2008		3,694,844		$	3.80

Options exercisable and vested		2,348,010		$	4.09

Options outstanding at December 31, 2008, had a weighted average remaining contractual life of 8.6 years and are out-of-the money with no intrinsic value. Options exercisable at December 31, 2008, had a weighted average remaining contractual life of 8.2 years and are out-of-the money with no intrinsic value. The weighted average grant date fair value of stock options granted in 2008, 2007 and 2006 was $2.97, $3.49, and $5.50.

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

F-36

Other Options

In addition to options available for issuance under the Stock Plans, the Company has previously granted other options and warrants (the “Other Options”) to non-employees and consultants. The following table provides additional information related to the Other Options:

	Number of Shares		Weighted Average Exercise Price
Options outstanding, December 31, 2007		50,000	$	6.03
Options granted		50,000	$	2.47
Options exercised		-		-
Options forfeited/cancelled		-		-
Options outstanding, December 31, 2008		100,000	$	4.25

Options exercisable and vested		75,000	$	4.84

The weighted average grant date fair value of Other Options granted in 2008 and 2007 was $2.22 per share and $3.97 per share, respectively. Other Options outstanding at December 31, 2008, had a weighted average remaining contractual life of 3.4 years and no intrinsic value. Other Options exercisable at December 31, 2008, had a weighted average remaining contractual life of 2.1 years and no intrinsic value.

Summary Option Information

The following table summarizes information about all stock options outstanding as of December 31, 2008:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price
	$1.00 - $1.99		60,000		9.9	$	1.28		25,000		9.9	$	1.23
	$2.00 - $2.99		447,452		7.7	$	2.64		237,452		6.8	$	2.61
	$3.00 - $3.99		2,791,868		8.9	$	3.62		1,665,034		8.7	$	3.74
	$4.00 - $4.99		200,000		9.0	$	4.96		200,000		9.0	$	4.96
	$5.00 - $5.99		120,524		8.9	$	5.49		120,524		8.9	$	5.49
	$6.00 - $6.99		50,000		1.9	$	6.03		50,000		1.9	$	6.03
	$7.00 - $9.99		125,000		0.4	$	9.03		125,000		0.4	$	9.03
			3,794,844						2,423,010

The weighted average grant date fair value of stock options granted in 2008 and 2007 was $2.97 per share and $3.49 per share, respectively. The total intrinsic value of options and warrants exercised during the years ended December 31, 2008, 2007 and 2006 was approximately zero, $0.8 million, and zero, respectively. Cash received from all option and warrant exercises under all share-based payment arrangements for the years ended December 31, 2008, 2007 and 2006 was approximately zero, $0.2 million, and zero, respectively. There were no tax benefits realized for tax deductions resulting from option and warrant exercises of share-based payment arrangements for the year ended December 31, 2007.

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As of December 31, 2008, there was approximately $2.1 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized on a straight line basis over the weighted average vesting period of approximately 0.8 years.

Restricted Stock Grants – Directors, Officers and Employees

Year Ended December 31, 2008

During the year ended December 31, 2008, the Company did not grant any shares of restricted stock to directors, officers or employees.

Year Ended December 31, 2007

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

Year Ended December 31, 2006

During the years ended December 31, 2006, the Company granted 200,000 shares of its restricted stock to officers and directors for which it recognized charges of approximately $1.6 million respectively. As of December 31, 2006, all grants of restricted shares were fully vested and there were no unrecognized compensation costs relating to restricted share grants.

Restricted Stock Grants – Non-Employees

Year ended December 31, 2008

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

Year ended December 31, 2007

During the year ended December 31, 2007, the Company did not grant any shares of restricted stock to non-employees.

Year ended December 31, 2006

During the year ended December 31, 2006, the Company granted 17,500 shares of restricted stock to non-employees for which it recognized a charge of approximately $0.1 million. As of December 31, 2008, all grants of restricted shares were fully vested and there were no unrecognized compensation cost relating to restricted share grants.

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Total Share Based Compensation

During the years ended December 31, 2008, 2007 and 2006, the Company recognized total share-based compensation (for grants of stock options, warrants and restricted stock) of approximately $5.2 million, $4.3 million and $2.8 million, respectively.

14. Employee Benefit Plans

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

15. Related Party Transactions

Other than share-based compensation as detailed in Note 13, the following discussion sets forth related party transactions occurring in the years 2008, 2007, and 2006.

During the years ended December 31, 2008, 2007 and 2006, the Company made payments totaling approximately $1.1 million, $1.3 million and $7,500, respectively to Maerkisches Werk Halver, GmbH (“MWH”) in connection with ongoing probe development activities. Edward E. Urquhart, a member of the Company’s Board of Directors since August 2006, has been the Chief Executive Officer of MWH since July 2003.

Historically, the Company had maintained a consulting contract with RWG, Inc., a company wholly-owned by Dr. Rudolf W. Gunnerman, the Company’s former Chairman and CEO. This contract was terminated in January 2007 contemporaneous with Dr. Gunnerman’s dismissal from the Company. During the years ended December 31, 2008, 2007 and 2006, the total expense recognized by the Company under this arrangement was zero, $0.2 million, and $0.6 million, respectively. Of the amount paid during the year ended December 31, 2007, $200,000 was paid in connection with a settlement in the second quarter of 2007 between the Company and Dr. Gunnerman.

Beginning in 2005, the Company had a consulting agreement with Peak One Consulting, Inc., a company wholly-owned by Richard L. Masica, a Director of the Company until his retirement from the Company’s Board of Directors in June 2007. No amounts were paid to Mr. Masica under this consulting agreement during the years ended December 31, 2008 and 2007. During the year ended December 31, 2006, the Company paid Mr. Masica approximately $30,000 in fees for management and technical consulting and approximately $3,000 in travel related expenses, respectively, pursuant to this agreement.

The Company had a consulting arrangement with a Director, Michael T. Heffner, who was paid approximately $49,000 in technical consulting fees and approximately $5,000 in travel related expense reimbursements in 2006. This agreement was terminated in the second quarter of 2006. On April 15, 2007, the Company entered into a month-to-month operating lease agreement with Mr. Heffner. Under the lease agreement, the Company leased a furnished apartment for the use of Company officers in Reno, Nevada for $1,500 per month. The Company terminated this agreement effective September 30, 2007. During the year ended December 31, 2007, the Company recognized approximately $8,000 in lease expense relative to this agreement.

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In April 2007, the Company entered into a consulting contract with Vincent van Maasdijk, the son of Robert van Maasdijk who is the Chairman of the Company’s Board of Directors, to serve as a project manager. As a project manager, Mr. van Maasdijk’s responsibilities include overseeing the installation and testing of commercial Sonocracking units at various locations assigned by the Company. Under the current terms of the contract, Mr. van Maasdijk receives a monthly payment of approximately $7,000 plus reimbursement of all reasonable out-of-pocket expenses, in accordance with the Company’s applicable policies and procedures. The agreement ends in April 2009 at which time the Company and Mr. van Maasdijk have agreed to review the status of any ongoing services to determine whether the parties wish to enter into an extension of the agreement. For the years ended December 31, 2008 and 2007, the total expense recognized by the Company under this arrangement was approximately $103,000 and $78,000, respectively.

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

Total related party expenses were approximately $1.3 million, $1.6 million, and $4.2 million in 2008, 2007, and 2006 respectively. Total related party cash payments were approximately $1.3 million, $1.6 million and $1.9 million in 2008, 2007, and 2006, respectively.

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16. Quarterly Financial Information (Unaudited)

Summarized unaudited quarterly financial information for the years ended December 31, 2008, 2007 and 2006 is noted below (in thousands, except for per share amounts):

2008	Mar. 31			Jun. 30			Sep. 30			Dec. 31

Net revenues	$	-		$	-		$	-		$	-

Gross profit	$	-		$	-		$	-		$	-

Net (loss)	$	(6,874	)	$	(8,973	)	$	(4,866	)	$	(4,547	)

Net (loss) per share – basic and diluted (a)	$	(0.09	)	$	(0.11	)	$	(0.05	)	$	(0.05	)

2007	Mar. 31			Jun. 30			Sep. 30			Dec. 31

Net revenues	$	-		$	-		$	-		$	-

Gross profit	$	-		$	-		$	-		$	-

Net (loss)	$	(14,513	)	$	(8,883	)	$	(8,367	)	$	(9,719	)

Net (loss) per share – basic and diluted (a)	$	(0.20	)	$	(0.12	)	$	(0.11	)	$	(0.22	)


2006	Mar. 31			Jun. 30			Sep. 30			Dec. 31

Net revenues	$	-		$	-		$	-		$	-

Gross profit	$	-		$	-		$	-		$	-

Net loss	$	(9,180	)	$	(18,452	)	$	(5,724	)	$	(5,766	)

Net loss per share – basic and diluted (a)	$	(0.14	)	$	(0.25	)	$	(0.08	)	$	(0.08	)

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

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Sulphco (SUF) Inactive 10-K2008 FY Annual report

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