BUSINESS

Introduction

       Overview

       We are engaged in the business of developing and commercializing our patented and proprietary technology for the reduction of the sulfur content of crude oils and petroleum products, and the “upgrading” of crude oil by reducing its density. Our patented and proprietary process is based upon the novel use of high power ultrasonics - the application of high energy, high frequency sound waves - to effect beneficial changes in the chemical composition in crude oil and other petroleum streams. Originally developed by us for low cost desulfurization of diesel fuel, our development efforts have expanded to include the desulfurization of crude oil and the “upgrading” of crude oil by reducing its density.

       Our process is expected to provide a cost-effective alternative or supplement to conventional refinery processes currently used to remove sulfur from crude oil. Conventional desulfurization equipment, known as “hydrotreaters,” require high temperatures and pressure, and must be designed and built to withstand these conditions in a refinery environment, which typically operate 24 hours per day, seven days per week, with infrequent breaks for maintenance. As such, conventional hydrotreaters are extremely expensive to purchase. In addition, conventional desulfurization processes require a continuous supply of hydrogen, which adds significant ongoing operational expense. Our units are designed to operate in a low temperature environment under atmospheric conditions, which is expected to permit these units to be constructed at a reduced cost compared to conventional hydrotreaters. Moreover, our units do not require expensive additives to effect the desulfurization process, thereby resulting in expected reduced ongoing operational costs for our units during the life of each unit. For additional information regarding expected capital and operating costs related to our desulfurization units, see “Business - Competitive Business Conditions” appearing elsewhere in this prospectus.

       We have developed and demonstrated a prototype in a laboratory setting using a revolutionary low pressure, low temperature process that uses high power ultrasound to reduce the sulfur content of crude oil and other petroleum streams. We have been developing and testing our desulfurization technologies since January 1999. Testing has been done through in-house facilities, independent laboratories, and more recently by ChevronTexaco Energy Technology Co., a unit of ChevronTexaco Corp. To date, our testing has been limited to samples produced by laboratory prototypes which process one to ten gallons of crude oil in a laboratory setting. Recent laboratory testing has also demonstrated the ability of our process to upgrade crude oils through the conversion of certain heavy components of petroleum to lighter components. We are also investigating the potential additional “upgrading” benefit our process may have through the reduction of nitrogen, acids, salts and certain metals in crude oil.

       We have completed the design and fabrication of a pre-production prototype of a desulfurization unit (deSN™ unit) which is intended to process up to 1,000 bbl per day. This unit is expected to be placed at Chevron U.S.A., Inc.’s refinery in El Segundo, California, for installation and testing, which is expected to occur in the first half of 2005. We have also begun the design of a production scale deSN™ unit which is intended to process 25,000 or more bbl per day.

       We are continuing to develop ultrasound technology to help provide the high power ultrasound necessary to our process. Our ultrasound technology is intended to increase the ultrasonic intensity generated within our desulfurization units and to improve on existing commercially available ultrasound technologies.

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       The market for our technology and our desulfurization units is expected to be crude oil producers and refiners. Crude oil price differentials are driven largely by both sulfur content and crude oil density. These price differentials reflect the relative economic value of crude oil to the ultimate consumer of most crude oil, the oil refiner. Because our technology is expected to both reduce sulfur content and reduce crude oil density at a reduced cost, the successful commercialization of our technology can be expected to produce economic benefits to our future customers.

Business Development

       SulphCo, Inc. is a Nevada corporation which was originally incorporated on December 23, 1986 as Hair-Life, Inc. On June 3, 1987, we completed a public offering pursuant to the provisions of Rule 504 of Regulation D of the Securities Act of 1933. Between 1987 and 1999, we pursued a number of business activities under different corporate names. All of these activities were unsuccessful and were ultimately discontinued by December 2000, when we were then known as Film World, Inc. (“Film World”).     

       In January 1999, Dr. Rudolf W. Gunnerman formed GRD, Inc. (GRD), a Nevada corporation owned by him and doing business as SulphCo, to engage in the development and commercialization of proprietary technology to be utilized for the removal of sulfur from crude oil and petroleum products. In January 1999 GRD entered into a Research Agreement with the University of Southern California and Dr. Teh Fu Yen for research into desulfurization technology. This research resulted in the first patent for the desulfurization technology which was later issued to Dr. Yen and assigned to us. In December 2000, GRD entered into an exchange agreement by which GRD obtained control of Film World by issuing 1,200,000 shares of GRD in exchange for all of the issued and outstanding shares of Film World. Following the exchange, GRD, which became our wholly owned subsidiary, was merged into us and our name was changed to SulphCo, Inc. Since the shareholders of GRD continued their control, the merger was accounted for as a reverse acquisition of FilmWorld by GRD.

       Since December 2000 our principal business activities have centered around the research, testing and development of our proprietary technology, which was originally developed for the removal of sulfur from diesel fuel and from crude oil.

     We maintain our principal executive offices and facilities at 850 Spice Islands Drive, Sparks, Nevada 89431. Our telephone number is 775-829-1310.

General Description of Our Technology

       SulphCo has built a pre-production prototype desulfurization unit which is intended to process up to 1,000 barrels per day on continuous basis. The equipment is mounted in a 40 foot mobile container for ease of transportation. Equal amounts of crude oil and water are supplied to the desulfurization unit, and then piped through a mixer. An additive is injected just prior to the crude oil and water mixture entering the ultrasonic reactor. Upon exiting the reactor, the crude oil and water mixture enters a large centrifuge where water is removed. Then the processed crude oil is “washed” with wash water and the wash water is then separated from the desulfurized crude oil. The water used in this process is intended to be filtered and reused. When incorporated into the traditional refinery process the desulfurized crude oil would return to the refinery for further processing into various petroleum products.

       The key to our technology is our use of high power ultrasound to alter naturally occurring molecular structures in hydrocarbons, which are the predominate molecular components of crude oil. In a process known as "sonochemistry," high power ultrasonic waves are applied to the crude oil and water mixture, creating bubbles which implode. With the implosion of the bubbles, immense heat and pressure are produced on a very small scale, accelerating reactions due to the extreme heat released upon implosion. Temperatures can reach 5,000°C with pressures of several hundred atmospheres. This speeds reactions, and breaks chemical bonds, thus making large heavy molecules smaller and lighter. At the same time, it removes sulfur by breaking carbon/sulfur bonds and it removes nitrogen by breaking carbon/ nitrogen bonds.

       We believe that the process is scalable to larger reactors and we are now in the process of designing a desulfurization unit intended to process 25,000 or more bbl per day.

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Recent Development and Testing Activities

       We have been developing our desulfurization technologies on an ongoing basis since January 1999. Testing has been done through in-house facilities, independent laboratories, and more recently by ChevronTexaco Energy Technology Co. (“ChevronTexaco”), a unit of ChevronTexaco Corp. To date, such testing has been limited to samples produced by prototypes which have processed from one to ten gallons of crude oil in a laboratory setting. Beginning in mid-2002 our development activities have centered around re-designing, upgrading and testing of laboratory scale prototypes utilizing more powerful ultrasonic generators, and redesigning these prototypes to accommodate the more powerful generators. Substantially all of the development work to date has been conducted by SulphCo personnel.

       In November 2002 we entered into a Laboratory Test Agreement with ChevronTexaco and we performed laboratory testing of our technology in 2002 and 2003 at our facilities which was observed by ChevronTexaco. Following completion of this laboratory testing, the parties entered into a Refinery Test Agreement in June 2003, which provided for the further testing of our desulfurization technology with a pre-production prototype to be provided by us and tested at Chevron U.S.A., Inc.’s refinery in El Segundo, California. More recently we conducted laboratory testing of our prototypes at our facilities from May 2004 through July 2004, which testing was observed from time to time by ChevronTexaco, and we generated sample materials for their analysis. The testing gave positive indication to both parties that there was sufficient sulfur removal and increase in the amount of lighter petroleum components in the crude oil to justify a joint collaboration to bring our technology to a stage of development suitable for the refinery test of our 1,000 bbl per day pre-production prototype under the Refinery Test Agreement and for eventual large scale commercial use. Accordingly, on August 6, 2004, we entered into a Collaboration Agreement with ChevronTexaco Energy Technology Co. to engage in joint activities to further evaluate, develop and commercialize our proprietary ultrasound technology.

       Our 1,000 bbl pre-production prototype unit was initially placed at Chevron U.S. A., Inc.’s refinery in El Segundo, California, in September 2003 pursuant to the Refinery Test Agreement, and was returned to our facility in Sparks, Nevada in November 2004 prior to refinery testing in order to upgrade the reactor and install a more powerful ultrasonics system. We are in the process of building a more powerful ultrasonic system for utilization in our prototypes, which we believe will be more powerful than ultrasonic systems currently available for purchase from third parties. We intend to retrofit our existing 1,000 bbl pre-production unit with this system when it is completed. We expect to complete the retrofit of this unit by February 15, 2005, and expect final installation and testing of the unit at this refinery to commence in the first half of 2005.

       We are currently in the process of designing a desulfurization unit intended to process 25,000 or more bbl per day. It is anticipated that we will complete the remaining design and engineering work during the first quarter of 2005. We estimate that following completion of the remaining design and engineering work, construction of the first two 25,000 bbl desulfurization units could be completed during the second quarter of 2005 at our facility in Sparks, Nevada. We expect that this activity will be coordinated with ChevronTexaco Energy Technology Co. under our Collaboration Agreement with them. We cannot assure you that we will be successful in completing the 25,000 bbl unit or when or if we will receive any customer orders for this unit.

       For additional information regarding development activities proposed to be conducted over the next 12 months, see “Business - Collaboration Agreement with ChevronTexaco Energy Technology Co.,” and “Plan of Operation” appearing elsewhere in this prospectus.

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Business Strategy

       Our business model provides for revenues to be generated from two principal sources:

• Revenues from the sale or lease of our deSN™ equipment to refiners and producers; and
• Revenues from the ongoing operation of our deSN™ equipment sold or leased to our customers, based upon a percentage of the value added to the end user.

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. To date we have generated no material revenues from our business operations. We are unable to predict when we will be able to generate revenues from commercial activities or the amounts expected from such activities.

       Our business strategy calls for us to form alliances with experienced third parties to develop, produce, market, distribute and support products utilizing our proprietary desulfurization and upgrading technology. Such alliances are intended to reduce our working capital requirements by reducing our costs, and provide an entree to more extensive and accelerated market penetration than would be permitted by an internal organization. The name recognition and technology/product validation provided by such alliances are also expected to provide a significant advantage, both domestically and internationally.

       In furtherance of this strategy, on August 6, 2004 we entered into a Collaboration Agreement with ChevronTexaco Energy Technology Co., a unit of ChevronTexaco Corp., to engage in joint activities to further evaluate, develop and commercialize our proprietary ultrasound technology. The precise nature and timing of the activities under the Collaboration Agreement (and any additional agreements) over the next 12 months and beyond cannot be predicted with certainty, as they are dependent upon the timing of completion of development and commercialization milestones and the requirements of ChevronTexaco. For a description of the activities proposed to be conducted under the collaboration agreement, see “Business - Collaboration Agreement with ChevronTexaco Energy Technology Co.” For information regarding SulphCo’s activities with ChevronTexaco prior to the Collaboration Agreement, see “Business - Recent Development and Testing Activities.”

       Because the Collaboration Agreement provides for an exclusive relationship regarding the licensing of our technology for at least one year and most decisions regarding the development and commercialization of our technology will require joint approval of the parties, the success of our business will be largely dependent upon our relationship with ChevronTexaco during the term of the Collaboration Agreement. However, we believe that the business risks to us under the Collaboration Agreement are substantially outweighed by the potential benefits to be achieved if our collaboration is successful.

       If for any reason ChevronTexaco elects to terminate activities under the Collaboration Agreement, further business activities by us will depend upon our assessment at that time of the commercial potential of our technology and available resources. If we determine that, notwithstanding any future termination of the Collaboration Agreement by ChevronTexaco, our technology may nonetheless be capable of commercialization, we intend to either seek another collaborative partner, continue further development activities on our own, and/or license our technology to a third party. We cannot predict what option will be most advantageous, as this will depend on factors which are presently unknown, such as the state of development of our technology, interest of third parties as potential licensees or collaborative partners, and our available resources. If none of these options is feasible, or if for any reason we determine in the future that our technology cannot be successfully commercialized, we intend to cease our day-to-day activities, liquidate our assets and discharge our liabilities to the extent of available assets, and to distribute remaining proceeds, if any, to our shareholders.

Collaboration Agreement with ChevronTexaco Energy Technology Co.

       On August 6, 2004, we entered into a Collaboration Agreement with ChevronTexaco Energy Technology Co. (“ChevronTexaco”), a unit of ChevronTexaco Corp., to engage in joint activities to further evaluate, develop and commercialize our proprietary ultrasound technology. The Collaboration Agreement was entered into following laboratory testing by us of our newer reactor at our facilities from May 2004 through July 2004, which testing was observed by ChevronTexaco from time to time and generated sample materials for analysis by ChevronTexaco. The testing gave positive indication that there was sufficient sulfur removal, oil density reduction and increase in the amount of lighter petroleum components in the crude oil to justify a joint collaboration to bring our technology to a stage of development suitable for a refinery test of our 1,000 bbl per day unit and for eventual large scale commercial use.

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       The Collaboration Agreement contemplates that specific activities will be carried out by the parties in two distinct phases, referred to as “Phase 1” and “Phase 2”, with each party having specific responsibilities in each of the two phases, and each party being required to bear the costs of the activities undertaken by such party:

        Phase 1

       The principal objectives of Phase 1 are (1) to demonstrate “proof of commercialization” (as defined in the Collaboration Agreement) on a laboratory scale prototype furnished by us, (2) to properly prepare for and support a refinery test of our pre-production prototype at Chevron U.S.A., Inc.’s El Segundo, California refinery pursuant to our Refinery Test Agreement, and (3) to negotiate a license agreement, which the parties contemplate will be entered into at such time as the parties mutually determine that our proprietary technology is suitable for licensing to third parties.

       During Phase 1 we will develop our desulfurization and upgrading technology for further laboratory testing of specific processes determined jointly by ChevronTexaco and us with the goal of demonstrating “proof of commercialization.” Laboratory testing is expected to occur at ChevronTexaco’s facilities using laboratory testing equipment supplied by us.

       “Proof of commercialization” under the Collaboration Agreement milestone requires the laboratory demonstration of the following general characteristics of our proprietary technology to determine whether our proprietary technology is useful as a desulfurization and upgrading process in the refining environment of a large scale commercial refinery: (1) its ability to accommodate different crude oil samples, test conditions and equipment; (2) its ability to distinguish between known good and bad operating conditions; (3) its ability to achieve suitable rates of sustained sulfur removal of at least 20% (by weight); and (4) the achievement of suitable integration between other refining operations, and refinery control and automation requirements.

       During Phase 1 ChevronTexaco will review the process and equipment design for our laboratory scale unit as well as the process and equipment design for our 1,000 bbl unit to be used in the refinery test at the El Segundo, California refinery. Upon the successful conclusion of this review, ChevronTexaco will explore additional research and testing to help support and prepare for a refinery test. ChevronTexaco will also focus on developing necessary technical information regarding the desulfurization and upgrading process, testing of a broader range of crude oil samples under different conditions, and providing an additional site for testing of crude oil samples provided by potential licensing customers. It is also contemplated by the parties that joint marketing efforts will commence during Phase 1 and continue into Phase 2. ChevronTexaco is not required to expend more than $250,000 during Phase 1, including equipment construction, manpower and analytical services. We estimate that we will incur approximately $50,000 per month in increased expenditures in connection with Phase 1 activities. For further information regarding these expenditures, see “Plan of Operation - Liquidity and Capital Resources” appearing elsewhere in this prospectus.

        License Agreement with ChevronTexaco - The Collaboration Agreement requires that we and ChevronTexaco endeavor to develop our technology to a stage where it is suitable for licensing to third parties in the field of collaboration. At such time as the parties mutually determine that our technology is suitable for licensing to third parties, the Collaboration Agreement requires that the parties enter into a license agreement to be negotiated during Phase 1 which will grant to ChevronTexaco a non-exclusive worldwide license to use our proprietary technology in the field of collaboration, and an exclusive right to sub-license such technology in the field of collaboration to third parties on terms and conditions mutually acceptable to the parties but which provide more favorable financial terms than those to be offered by us to any third parties who have not executed research collaborations with us. The precise terms of the license agreement with ChevronTexaco, including such items as royalty payments, are to be negotiated during Phase 1 and concluded prior to the commencement of Phase 2.

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       Phase 1 formally commenced on August 6, 2004, upon signing of the Collaboration Agreement, and it is presently scheduled to be completed by February 6, 2005. However, both parties to the Collaboration Agreement have initiated discussions regarding an extension of Phase 1 as provided for in the Agreement in order to accomplish the milestones identified therein. The extension of Phase 1 would be for a period of six months as provided for in the Collaboration Agreement. Under the terms of the Collaboration Agreement completion of Phase 1 requires achievement of the following stated objectives: (1) all negotiations of the licensing agreement between ChevronTexaco and us shall have been mutually concluded; and (2) the parties shall have mutually agreed that the laboratory scale tests of “proof of commercialization” (as defined above) have been demonstrated.

        Phase 2

       Phase 2 under the Collaboration Agreement will commence only upon the completion of the stated objectives of Phase 1, as mutually determined by the parties. During Phase 2 we will endeavor to continue to optimize our proprietary technology to bring it to a stage suitable for commercial use. During this Phase ChevronTexaco will continue to help develop and coordinate a marketing strategy for the licensing to third parties of the desulfurization and upgrading process. ChevronTexaco is not required to expend more than $250,000 during Phase 2. We are presently unable to estimate expenditures by us for Phase 2 activities, as this will depend to a large extent on the nature and extent of remaining technology optimization issues. However, we do not anticipate any material increase in expenditures as compared to our Phase 1 expenditures.

        Exclusivity - The Collaboration Agreement provides that during Phase 1 and for a six month period thereafter (but in no event less than one year or greater than three years) we are not allowed to enter into any arrangement with a third party (other than a government not-for-profit agency or academic institution) to license our technology or otherwise identify potential processes, in either case in the field of collaboration.

        Termination - The Collaboration Agreement provides for early termination of the Collaboration Agreement under the following circumstances:

• If by the end of Phase 1 (including any mutually agreed extension of Phase 1) it has been determined by both parties that “proof of commercialization” has not been demonstrated, the Collaboration Agreement will terminate as of the end of Phase 1.
• If by the end of Phase 1 it has not been determined by both parties whether proof of commercialization has been demonstrated, the parties may mutually agree to extend Phase 1 by one or more additional periods, each period not to exceed a total of 12 months.
• If by the end of Phase 1 (including any mutually agreed extension of Phase 1) it has not been determined to the satisfaction of both parties whether proof of commercialization has been demonstrated, and one of the parties elects not to extend Phase 1, then either party may elect to terminate the Collaboration Agreement on the following terms and conditions:

•     If ChevronTexaco unilaterally terminates the Collaboration Agreement, then we are free to enter into any relationship with a third party; and
•     If we unilaterally terminate the Collaboration Agreement, we must grant to ChevronTexaco a non-exclusive royalty-free worldwide license to use our proprietary technology.

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Kuwait Joint Venture

       In February 2004 we formed a joint venture known as SulphCo Oil Technologies Kuwait with two Kuwaiti nationals, Fahad Alhajiri and Fuad A M A Alghareed, of which 51% is owned by our joint venture partners, and 49% is owned by us. The purpose of this joint venture was to assist us in marketing our technology in Kuwait with third parties. Mr. Alhajiri has been a principal in a Kuwaiti international trading company, Fanan International Trading and Contracting Est., for at least the past five years. Mr. Alghareed is a Kuwaiti entrepreneur engaged in a number of Kuwaiti retail and marketing ventures. Since the joint venture’s formation in February 2004 until we entered into the Collaboration Agreement with ChevronTexaco in August 2004, activities of the joint venture were limited to exploring future sales of our processing units and the licensing of our technology. In August 2004, we entered into the Collaboration Agreement with ChevronTexaco, which agreement prohibits most licensing activities by us with third parties during Phase 1 of the Collaboration Agreement and further contemplates joint marketing activity by ChevronTexaco and SulphCo during Phase 2 of the Collaboration Agreement. Therefore, we anticipate that during Phase 1 of the Collaboration Agreement, marketing activities by the Kuwait joint venture will be limited to exploring sales of demonstration units in Kuwait, and no licensing of our technology will be conducted by the Kuwait joint venture during Phase 1 without the prior approval of ChevronTexaco, which approval is within the sole discretion of ChevronTexaco. If SulphCo and ChevronTexaco proceed to Phase 2 under the Collaboration Agreement, SulphCo expects that the future role of the Kuwait joint venture will be further defined as part of our negotiation of the terms of the proposed license agreement with ChevronTexaco. Other than the expected continuation of marketing efforts in Kuwait during Phase 1 of the Collaboration Agreement, we are unable to determine at this time what activities, if any, the Kuwait joint venture will undertake in the future.

       As of the date of this prospectus none of the joint venture partners had contributed any assets to the joint venture and there have been no material operations. Future activities of the joint venture will be accounted for by us by consolidating it with our financial statements. As of the date of this prospectus there have been no material financial activities relating to the joint venture.

The Market for Our Technology

       Industry Background

       The market for our technology and desulfurization units is expected to be crude oil producers and refiners. Differentials in crude oil prices are driven largely by both sulfur content and crude oil density. These price differentials reflect the relative economic value of crude oil to the ultimate consumer of most crude oil, the oil refiner. The discount at which heavy crude oil sells compared to the sales price of light crude oil is known in the oil industry as “the light/heavy spread.” Because our technology is expected to both reduce sulfur content and decrease crude oil density, the successful commercialization of our technology can be expected to produce significant economic benefits to our future customers.

       Traditionally, crude oils are named and grouped into broad categories based on the geographic location of origin, the level of sulfur contained in the crude oil and the density, or specific gravity, of the crude oil. Typically, crude oil is classified as (1) sweet (if sulfur content is low) or sour (if sulfur content is high), (2) light (if gravity is high) or heavy (if gravity is low) and (3) intermediate (if gravity or sulfur content is in between). For the most part, heavy crude oil tends to be sour and light crude oil tends to be sweet.

       When refined, lighter density crude oil produces a higher yield of higher margin refined products such as gasoline, diesel and jet fuel and as a result, is more expensive than heavier crude oil. In contrast, heavier crude oil produces more low margin by-products and heavy residual oils. Processing heavier grades of crude oil also typically requires more costly facilities found only in a “complex” refinery, with more extensive refining capabilities. Equipment used in the refinery process can process certain by-products and heavy residual oils to produce additional volumes of gasoline and diesel, thus increasing the aggregate yield of higher margin refined products from the same initial volume of crude oil. Because of the increased costs of processing heavier oil, heavier oil typically sells at a discount to lighter crude oil.

       Due to the high cost of removing sulfur from crude oil, both in terms of the capital cost of the equipment required and the incremental cost to the refinery of operating and maintaining this equipment, crude oil with higher concentrations of sulfur is generally less expensive than crude oil with lower concentrations of sulfur. Severely reduced sulfur concentrations in petroleum products have been mandated in recent years by extensive environmental regulation of sulfur content in petroleum products and the scope and the intensity of these restrictions on sulfur content is expected to increase as under existing and proposed regulations. The refinery process of removing sulfur from crude oil requires equipment generally known as “hydrotreaters”, which are extremely expensive to acquire, maintain and operate. Many refineries simply do not possess the equipment necessary to refine higher sulfur content oil, either due to the high acquisition costs of this equipment or the ability to operate the refinery at margins which justify the ownership and operation of this equipment. Moreover, higher sulfur crude oils are more corrosive to refinery equipment than lower sulfur crude oils.

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       The Refinery Market

       SulphCo’s processing units are expected to provide economic benefits for oil refiners as a result of their ability to reduce sulfur content of crude oil and to reduce its density. These potential benefits include:

• Lower costs of acquiring, operating and revamping desulfurization equipment;
• Lower raw material (i.e. crude oil) costs;
• Increased refining production; and
• The ability to produce a higher yield of higher value refinery end products.

       Lower Costs of Acquiring and Operating Desulfurization Equipment

       The reduction of sulfur levels is an integral part of most refinery processes. This is most commonly accomplished through refinery equipment generally referred to in the industry as “hydrotreaters.” This process, in addition to reducing sulfur levels in crude oil, also often reduces the levels of nitrogen as well as other metals such as nickel and vanadium.

       Hydrotreating is a refinery process in which hydrogen gas is mixed with the hydrocarbon stream and exposed to a catalyst with sufficiently high temperature and pressure to effect the hydrotreating process. The greater the temperature and pressure, the faster the hydrotreating process will go. Typically, lower grade (heavier) crude requires higher temperature and pressure to complete the hydrotreating process.

       Because conventional hydrotreaters require high temperatures and pressure, hydrotreaters must be designed and built to withstand these conditions in a refinery environment, which typically operate 24 hours per day, seven days per week, with infrequent breaks for maintenance. As such, hydrotreaters are extremely expensive to purchase. In addition, the hydrotreating processes require a continuous supply of hydrogen, which adds significant ongoing operational expense.

       Our deSN™ units are expected to have reduced acquisition and operating costs as compared to conventional hydrotreaters. Our units are designed to operate in a low temperature environment under atmospheric conditions, which is expected to permit these units to be acquired and operated at a reduced cost compared to conventional hydrotreaters. Moreover, our units do not require expensive catalysts to effect the desulfurization process, thereby resulting in expected reduced ongoing operational costs for our units during the life of each unit. In addition, because our units remove salt from crude oil, the use of our units is expected to remove the necessity to desalt crude oil, which is normally part of the oil refinery process. The current and proposed designs of our units are also expected to have a substantially small footprint than conventional hydrotreaters.

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

       For additional information regarding capital and operating costs related to our deSN™ units, see “Business - Competitive Business Conditions” appearing elsewhere in this prospectus.

       Lower Raw Material Costs

       While all crude oils have differing characteristics, the relative cost of crude oil is influenced primarily by its density and sulfur content. Typically, there is a direct correlation between oil density and sulfur content, with more dense crude generally containing higher sulfur concentrations. Therefore, crude oil with lower density and lower sulfur concentrations is generally sold at a higher price than higher density crude oil with higher sulfur concentrations. As the cost of crude oil is generally considered the cost component with the greatest leverage on the profitability of an oil refinery, a refinery will normally seek to purchase the cheapest grade of crude oil which is suitable for its refinery operations. In this regard, typically no two refineries will have identical requirements. Suitability of a particular grade of crude oil will normally depend upon the refining capabilities of a particular refinery (complex refineries, i.e. refineries which have more extensive refining capabilities) can more readily process heavier grades of crude oil containing higher sulfur concentrations) and the types of finished products it produces. Therefore, because of price differentials based upon the density and sulfur content of crude oil, a refinery will normally seek to purchase the cheapest heavy grade with the highest sulfur content which is suitable for its refining needs. In turn, as the market “spread” between light sweet crude oil and heavy sour crude oil increases, so too will a refinery’s profit margin if it has the capability of processing heavier sour crude oil.

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

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

       When refined, a lighter crude oil usually produces a higher yield of higher margin refined products such as gasoline, diesel and jet fuel and as a result, is more expensive than heavy crude oil. In contrast, heavy crude oil produces more low margin by-products and heavy residual oils. Certain equipment used in conventional refinery operations process certain by-products and heavy residual oils to produce additional volumes of gasoline and diesel, thus increasing the aggregate yield of higher margin refined products from the same initial volume of crude oil. Because our deSN™ units are expected to upgrade the quality of crude oil by reducing crude oil density, a refinery which “pre-treats” its crude oil with our deSN™ units are expected to be able to produce higher yield of higher value end products than would otherwise be the case without our deSN™ units.

        The Oil Producer Market

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

• The ability to obtain higher prices for crude oil processed by SulphCo’s deSN™ units; and
• Improved economics of utilizing heaver, higher sulfur content crude oil reserves.

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

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       Geographic Scope of Our Market

       Other than with regard to our minority joint venture interest in SulphCo Oil Technologies Kuwait we do not presently conduct any business activities outside the U.S. Presently, we have no facilities or assets outside of the U.S. However, as the potential markets for our technology include foreign countries with significant oil producing or refining activities, we expect to conduct business in foreign countries in the future. These activities may be conducted by us directly, or through partners, licensees or other third parties, in connection with the commercialization of our technologies.

       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;
• The lack of effective legal protections for our proprietary rights in some foreign countries; 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. The effect of these risks could impair future sources of revenue or impose significant costs. We intend to mitigate certain risks of transacting business in foreign countries whenever possible by seeking to associate with businesses or individuals having a local presence in the particular jurisdiction, as has been done with the formation of our joint venture in Kuwait. However, in view of the present stage of development of our business activities, we are presently unable to predict the effect of these risks on our future business and prospects.

Competitive Business Conditions

       We are a new entrant in the market for development and sale of sulfur reduction and 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 manufacturers of conventional hydrotreating 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. Principal competitors include MAKFining (an alliance among ExxonMobil Research and Engineering, Akzo Nobel Catalysts LLC, Kellogg Brown Root, Inc. and Total Fina Elf), Haldor Topsoe, Criterion, UOP and IFP.

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

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       Our crude oil processing technologies provide two separate and distinct benefits: reduction of sulfur content in crude oil; and upgrading of crude oil by reducing its density. Our principal competitor for desulfurization of crude oil is represented by existing hydrotreaters. These units are extremely expensive to purchase, with the cost depending upon the processing capacity of the unit and the type of the unit. In addition, operation of these units require the use of hydrogen as well as an expensive catalyst, and are expensive to maintain, due in part to the fact that they operate under extreme temperature and pressure conditions. In all cases, conventional hydrotreating processes involve the use of high temperatures, high pressures and hydrogen rich environments. As government mandates require lower and lower levels of sulfur content in transportation fuels, traditional hydrotreaters must be upgraded or replaced with units that can handle these higher temperatures and pressures. In most cases, refineries are “hydrogen limited,” which means that refineries also need to add hydrogen plants in order to increase production of lower sulfur fuels. SulphCo’s deSN™ units, on the other hand, are designed to work in a low temperature and low pressure environment, and do not require hydrogen or the use of expensive catalysts.

       Every refinery is different and faces a different set of possible solutions, as to how (and if) they will invest in new plant and equipment for desulfurization. Based on a June 8, 2001 study entitled “The Transition to Ultra-Low-Sulfur Diesel Fuel: Effects on Prices and Supply” prepared by the United States Energy Information Agency and on widely accepted industry rules of thumb for capital costs associated with new hydrotreater construction, the capital cost for conventional desulfurization equipment is about $1,200 to $1,500 per barrel per day of installed capacity. This does not include the cost of new hydrogen plants, nor does it take into account the costs associated with obtaining permits for new construction.

       By comparison, capital expense for our 25,000 bbl unit is expected to be between $80-$200 per barrel per day of installed capacity. Therefore, our units are expected to compete on the basis of price, with our units expected to result in substantial savings to the end user.

       Traditional hydrotreating plants operating costs depend on a wide variety of site-specific variables, but the higher the pressure and temperature, the higher the cost. Using various scenarios and assumptions, the United States Energy Information Agency’s report contains various estimates of both short-term and intermediate term operating cost for United States refineries in meeting ultra-low sulfur diesel requirements. With our the low pressure and temperature requirements of our system, we expect our operating costs to be between approximately $0.17 to $0.20 per barrel of oil processed based in large part on costs of $0.08 per kilowatt hour and $10.00 per gallon of promoter consumed in our process. Our operating costs are a fraction of the estimated operating costs of traditional hydrotreating plants as estimated by the United States Energy Information Agency.

       We believe that, separate and apart from the desulfurization capability of our technology, the expected capability of our desulfurization technology to reduce the density of crude oil is unique, in that our technology “pre-treats” crude oil prior to being fed into the traditional refinery operation. Other than our proprietary process, we are not aware of any process either in commercial use or under development which is capable of reducing the density of crude oil, other than through the conventional refinery process itself. SulphCo’s units, however, are intended to operate in conjunction with traditional refinery equipment, to provide additional upgrading benefits at a reduced cost.

       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 reducing sulfur or upgrading crude oil which are more cost-effective or more efficient than the methods which are currently commercially available.

Patents, Trademarks and Copyrights

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

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       In addition to these three issued or allowed U.S. patents which cover our basic desulfurization process, we have one additional U.S. patent and four pending U.S. patent applications which address specific aspects of our desulfurization process:

• First, Patent No. 6,652,992, covers a silver coating process on ultrasonic horns which makes the horns corrosion resistant. This patent was issued on November 25, 2003, and expires on December 20, 2022;
• Second, we have received a notice of allowance for a patent application relating to a high power generator powering ultrasonic probes for use in chemical reactions;
• Third, we have filed a patent application relating to the conversion of the heavy hydrocarbon components of petroleum residua to lighter components through ultrasonic treatment. The third patent application describes a shift in the entire distillation curve of the petroleum to lower boiling points and permits the refining of more petroleum product such as gasoline and diesel fuel from the crude oil;
• Fourth, we have filed a patent application relating to a loop-shaped ultrasonic probe for use in reactor systems; and
• Fifth, we have filed a patent application relating to a high-throughput continuous flow ultrasound reactor.

We also have multiple foreign patent applications pending relating to our U.S. patents.

       We have also applied to register the trademark “deSN™” with reference to our desulfurization units and have received a notice of allowance from the U.S. Patent and Trademark Office. We also rely on copyright protection for the software utilized in our desulfurization units.

       We attempt to minimize unauthorized duplication of our process by a variety of methods. However, we cannot assure you that unauthorized duplication will not occur. We attempt, and will continue to attempt, to protect our desulfurization and upgrading process by relying on patent laws as well as non-disclosure and confidentiality agreements with our employees and all other persons who have access to our proprietary technology.

Effects of Government Regulation; Governmental Approvals

        Government Regulation of Sulfur Levels in Petroleum Products

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

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

       Government 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 desulfurization 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 desulfurization units are subject to a variety of federal, state and local health and environmental laws and regulations governing product specifications, the discharge of pollutants into the air and water, and the generation, treatment, storage, transportation and disposal of solid and hazardous waste and materials. Permits with varying terms of duration may be required for the operation of our desulfurization 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. For example, we delivered a 1,000 bbl per day unit to Chevron U.S.A., Inc.’s refinery in El Segundo, California for testing in its refinery operation. Chevron U.S.A., Inc. was required to obtain, and was successful in obtaining, a permit from the South Coast Air Quality Management District before the unit could be installed and operated.

       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 in as part of our general overhead, and we do not presently anticipate any material increase in expenditures relating to environmental compliance in the near future based upon our current level of operations. We do not currently maintain insurance to protect us against risks relating to violation of federal or state laws governing the environment.

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

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

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Research and Development During the Last Two Years

       During the past two years substantially all of SulphCo’s business efforts were directed towards research and development of its desulfurization and upgrading technologies, including research and development of high power ultrasound technology. During this time SulphCo’s research and development costs totaled $513,151. We expect to continue to develop and test our technologies and prototypes and to explore the expansion of the range of petroleum products that can be desulfurized or upgraded with our technologies, both on our own and in conjunction with collaborative activities with ChevronTexaco.

       For information regarding development activities currently underway or proposed to be conducted over the next 12 months, see “Business - Collaboration Agreement with ChevronTexaco Energy Technology Co.,” “Business - Recent Development and Testing Activities” and “Plan of Operation” appearing elsewhere in this prospectus.

Employees

       As of January 13, 2005, the Company had 14 full-time employees and a consulting agreement with RWG, Inc., for the full-time services of our chairman and CEO, Rudolf W. Gunnerman. One of our directors also provides tax accounting services on a non-exclusive basis. None of our employees or independent contractors are subject to a collective bargaining agreement and we believe that our relations with employees and independent contractors are good.

Properties

       Our executive offices and facilities are located at 850 Spice Islands Drive, Sparks, Nevada 89431 in a leased facility consisting of approximately 92,125 square feet. The lease for this space will expire in March 2005. We do not have an option to renew this lease but we believe the landlord will renew the lease on commercially reasonable terms. We believe that these facilities are adequate for our current and anticipated needs.

Legal Proceedings

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

       On or about March 4, 2002, the Salt Lake City, Utah office of the Securities and Exchange Commission sent letters to SulphCo and our CEO, Rudolf W. Gunnerman, indicating that as a result of its investigation captioned In the Matter of SulphCo, Inc. (SL-02337), the staff of the Salt Lake District Office was recommending that a civil injunctive action be filed naming SulphCo and Mr. Gunnerman as defendants. The letter to SulphCo alleges violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934. The letter to Mr. Gunnerman alleges violations of Section 5(a), 5(c), and 17(a) of the Securities Act of 1934 and Section 10(b) of the Securities Act of 1934 and Rule 10b-5 and Rule 101 under Regulation M thereunder. The letters invited SulphCo and Mr. Gunnerman to submit written statements concerning the staff’s allegations. Such written statements are generally as known as "Wells Committee Submissions." SulphCo and Mr. Gunnerman have denied the allegations made by staff in the letters and retained counsel who submitted an initial response to the staff’s allegations in March 2002. In response to a second set of letters received in June 2003 detailing essentially the same allegations and including a proposed administrative proceeding against the Company and Mr. Gunnerman, SulphCo retained replacement counsel who submitted a second set of responses in August 2003. SulphCo met with the staff of the Salt Lake City, Utah office in February 2004 and was advised that the staff is actively seeking authorization from the Securities and Exchange Commission to commence the civil injunctive action and administrative proceedings against SulphCo and Mr. Gunnerman. We are unable to predict the outcome of any action, if commenced. Any such action could have a material adverse effect on SulphCo.

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

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PLAN OF OPERATION

Business Plan

       During the next 12 months we intend to continue development and commercialization activities currently underway and to explore new activities, pursuant to the Collaboration Agreement entered into on August 6, 2004, with ChevronTexaco Energy Technology Co. (ChevronTexaco). In this regard:

• We recently completed the development and fabrication of a pre-production desulfurization unit which is expected to process up to 1,000 bbl per day. This unit is now being upgraded with our newer reactor and with our more powerful ultrasonics system. We expect to complete this retrofitting by February 15, 2005. After retrofitting, this unit will be delivered to ChevronTexaco Products Company’s El Segundo, California refinery for final installation and refinery testing, which is expected to occur in the first half of 2005.
• We expect to complete remaining design and engineering work for a 25,000 bbl per day unit during the first quarter of 2005. Once the design and engineering work for the 25,000 bbl unit is fully developed and tested, we intend to manufacture two initial 25,000 bbl units in anticipation of receipt of a customer order. We estimate that we will require approximately 45 days to manufacture the two 25,000 bbl desulfurization units, and expect to have completed construction of the two units by the end of the second quarter of 2005. We intend to fabricate the units at our facility in Sparks, Nevada.
• We plan to engage in ongoing development and testing activities in collaboration with ChevronTexaco during the next 12 months, including laboratory testing at ChevronTexaco’s facilities, intended to demonstrate the commercial potential of our technology and optimize the technology for use in a commercial setting.

       The precise timing of the activities under the Collaboration Agreement (and any additional agreements) over the next 12 months and beyond cannot be predicted with certainty, as they are dependent upon the timing of completion of development and commercialization milestones and the requirements of our collaborative partner. For a description of the activities proposed to be conducted under the Collaboration Agreement, see “Business - Collaboration Agreement with ChevronTexaco Energy Technology Co.”

       As discussed in the section entitled “Business - Kuwait Joint Venture,” in February 2004 we formed a joint venture with two Kuwaiti nationals to engage in the marketing of our technology in Kuwait. We anticipate that during Phase 1 of the Collaboration Agreement with ChevronTexaco, which commenced in August 2004, marketing activities by the Kuwait joint venture will be limited to exploring sales of demonstration units in Kuwait, and no licensing of our technology will be conducted by the Kuwait joint venture during Phase 1 without the prior approval of ChevronTexaco, which approval is within the sole discretion of ChevronTexaco. If SulphCo and ChevronTexaco proceed to Phase 2 under the Collaboration Agreement, SulphCo expects that the future role of the Kuwait joint venture will be further defined as part of our negotiation of the terms of the proposed license agreement with ChevronTexaco. Other than the expected continuation of marketing efforts in Kuwait during Phase 1 of the Collaboration Agreement, we are unable to determine at this time what activities, if any, the Kuwait joint venture will undertake in the future. Activities in Kuwait, as well as other areas in the Middle East, present significant risks, including potential difficulties of enforcing proprietary rights in a foreign legal system, foreign government regulations limiting the movement of funds outside the country, currency fluctuations, acts of terrorism, and confiscation of assets by a foreign government. The occurrence of any of these events could have a material adverse effect on our business or prospects in the Middle East.

       As of the date of this prospectus, we have not taken any steps to line up customer orders other than informal discussions with the Kuwait Oil Company through the Kuwait joint venture regarding the possible acquisition of a demonstration unit. We do not expect to generate any revenues from the sale of desulfurization units until at least the first half of 2005. We do not expect to generate any revenues from licensing arrangements which may be entered into in the future under the Collaboration Agreement until at least mid-2005.

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Liquidity and Financial Results

       As of January 13, 2005, we had $9,535,732 in available cash reserves. As we are a development stage company, we have not generated any material revenues since we commenced our current line of business in 1999, and we do not anticipate generating any material revenues unless and until a licensing agreement, sale of an initial production scale unit or other commercial arrangement is entered into with respect to our technology.

       As of September 30, 2004, we had an accumulated deficit of approximately $20.3 million, which includes approximately $5.7 million of stock-based compensation expense, all of which represents compensation to officers and directors and their affiliates and members of their immediate family, and we incurred losses of $2,556,861in the nine month period ending September 30, 2004 (which includes approximately $145,000 of stock based compensation). These losses are principally associated with the research and development of our desulfurization and upgrading 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 technologies. For further information regarding stock-based compensation and other amounts paid to officers, directors, affiliates and their immediate family members, see the “Management” section of this prospectus, including the subsections entitled “Certain Transactions,” Executive Compensation,” “Employment and Consulting Contracts” and “Option Grants in the Last Fiscal Year.”

       Accounts payable of $90,634 at September 30, 2004, represent various monthly bills for operating expenses paid to unrelated third parties, including utility bills, machining services, laboratory expenses, plant and office expenses and public relations expenses. Accrued expenses of $49,934 at September 30, 2004, represent accrued payroll and related taxes. Of this amount, $29,708 represents accrued payroll expenses for officers, directors, affiliates and their immediate family members. Related party notes payable of $1,000,000 at September 30, 2004, represent loans funded by Dr. Gunnerman and Erika Herrmann, Dr. Gunnerman’s sister-in-law, which are described below.

       Our current monthly cash outflow, or cash burn rate, is approximately $265,000 per month for fixed and normal recurring expenses, as follows:

       “Salary and related payroll costs” represents salary and payroll costs for all of our full time employees other than our CEO, Rudolf W. Gunnerman. Included in this amount are monthly salaries and related payroll costs to officers and directors and members of their immediate family as follows: Alan Austin - $15,000; Kristina Gunnerman-Ligon - $13,000; and an aggregate of approximately $1,000 per month of other monthly payroll costs for these individuals. As of July 1, 2004, payments of $40,000 per month for Dr. Gunnerman’s full time services as our CEO have been made pursuant to a consulting agreement with RWG, Inc., a company wholly-owned by Dr. Gunnerman. Effective as of November 1, 2004, this amount has been reduced by mutual agreement to $30,000 per month until we receive substantial additional funds. As these payments are made pursuant to a consulting agreement, they are included in the category entitled “Consulting contract.” For further information regarding this consulting agreement, see “Management - Employment and Consulting Contracts.”

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

       Included in professional fees are estimated recurring legal fees paid to outside corporate and patent counsel and ongoing litigation expenses, audit and review fees paid to our independent accountants, and fees paid for investor relations.

       “Interest expense” represents interest paid to Erika Herrmann and Dr. Gunnerman for notes payable. Two notes payable in the amount of $500,000 each, carry an interest rate of 8% and are paid quarterly, commencing April 1, 2005. For the purposes of our schedule of monthly cash outflows, interest on these notes of $6,666 per month represents quarterly payments of $20,000 for these notes. Also included in “interest expense” are interest payments to Dr. Gunnerman for a note payable in the amount of $7,000,000. Interest on this note is paid annually, commencing December 30, 2005 and ending on December 30, 2007 and is accrued quarterly at a rate of 1-month “LIBOR” (2.5% at 12/30/04) plus .5%, which is equivalent to $16,917 per month.

       Under the Collaboration Agreement entered into with ChevronTexaco effective August 6, 2004, each party is required to bear its own expenses in connection with the activities conducted and proposed to be conducted under such agreement. Estimated increased monthly expenses expected to be incurred by us during the term of the Collaboration Agreement relate primarily to development activities and include an additional $11,000 of salary expense per month for the addition of two engineers, $25,000 per month of additional research and development costs, $4,000 of additional patent expenses, and $10,000 per month of additional miscellaneous expenses such as outside non-professional services, shipping costs and equipment rental. Research and development costs include the cost of laboratory equipment and modifications to our demonstration unit. All of these incremental amounts relating to the Collaboration Agreement are included in our total estimate of $265,000 per month for fixed and normal recurring expenses.

       We intend to continue to incur additional expenditures during the next 12 months for development and manufacture of the deSN™ units. These expenditures will relate to the design of the deSN ^TM units, and are included in the monthly cash outflow described above. Additional funding requirements during the next 12 months may arise upon the placement of an order by a future customer for one or more deSN ^TM units. We expect that funding for the cost of manufacturing of any particular unit would be available either from current cash reserves or from potential customers before we commence manufacturing the unit. Our preliminary estimates of the cost of a deSN ^TM unit range from $2 million to $4 million. However, we cannot assure you that our cost estimates will be accurate or that we will receive funds received prior to the commencement of manufacture sufficient to manufacture this unit.

       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 other parties.

       As indicated elsewhere in this prospectus under “Business - Legal Proceedings,” and “Risk Factors - We are subject to an SEC investigation, which could materially affect us,” both our CEO, Dr. Gunnerman, and SulphCo, have been subjects of a formal SEC investigation commenced in 2002, and in February 2004 we were advised by the SEC staff that it is actively seeking authorization from the SEC to commence civil and administrative proceedings against Dr. Gunnerman and us. The outcome of this investigation and any resulting proceedings could have a material adverse effect on our financial condition in view of a number of factors, including indeterminate legal costs associated with defending these proceedings and exposure to payments by us of fines or penalties, either as part of a settlement or as a result of an adverse judgment. However, as we are unable to predict the outcome of these matters, no amounts have been reserved for these contingencies in our financial statements.

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Recent Financing Activities

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

       On December 30, 2003, we issued a $500,000 promissory note to Dr. Gunnerman, of which $250,000 was advanced by Dr. Gunnerman on December 30, 2003 and the remaining $250,000 was advanced on March 22, 2004. The note is due on December 30, 2004, and required the payment to Dr. Gunnerman, in lieu of interest, of 500,000 shares of our common stock. On January 5, 2004, we issued 500,000 shares to Dr. Gunnerman valued at $0.37 per share and discounted 20% because of their restricted status, or $148,000, as prepaid interest through December 30, 2004 in lieu of a cash interest payment for the loan of $500,000. As of December 10, 2004, $500,000 remained outstanding under this note. In December 2004 Dr. Gunnerman agreed to extend the maturity of the note from December 30, 2004, to December 30, 2005 at an interest rate of 8% per annum. The extension agreement also provides for mandatory prepayments from revenues we receive from the sale of our products or the licensing of our technology or otherwise, and from the amount of unrestricted loan or equity financings we receive.

       In June 2004 we conducted two private placements with institutional and other third party investors for the sale of units consisting of our common stock, warrants, and rights to acquire additional stock and warrants, generating net cash proceeds of approximately $2.4 million. The commitment made by Rudolf W. Gunnerman, our chairman and CEO, in April 2004 to fund up to an additional $2,000,000 in loans to us, of which $250,000 had been advanced in June 2004, has now been repaid, and the $2,000,000 commitment by Dr. Gunnerman has been superseded by funding received by us in June 2004 from these two private placements. Additional cash proceeds of $2.4 million were generated as of November 2, 2004, when investors in the June 2004 acquired the remaining unpurchased units pursuant to the terms of the June 2004 placements, and up to $15.2 million may be generated upon exercise of warrants and rights if investors in the June 2004 private placements exercise all available warrants and rights. For additional information regarding the June 2004 private placements, see “Selling Security Holders - June 2004 Private Placements,” and “Use of Proceeds” appearing elsewhere in this prospectus. We cannot assure you that that these investors will exercise any of their rights and warrants.

       In December 2004 Dr. Gunnerman advanced $7 million to us as a loan. The loan is evidenced by a promissory note which bears interest at the rate of 0.5% above the 30 day “LIBOR” rate, adjusted quarterly and payable annually, and the entire principal amount is due and payable in December 2007. The “LIBOR” rate, which stands for London Interbank Offered Rate, is a reference rate for short-term loans between banks in the London interbank market. The initial loan rate under the promissory note on December 31, 2004, was 2.9% (0.5% above the “LIBOR” rate), and the interest rate under the note is adjusted quarterly. We anticipate using these funds both to meet our working capital needs and for funding the initial manufacturing costs associated with producing two 25,000 bbl per day desulfurization units at our facility in Sparks, Nevada. We expect to complete construction of these units during the second quarter of 2005. The units will be constructed at our facility in Sparks, Nevada.

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       Accordingly, we anticipate that our existing capital resources will be sufficient to fund our cash requirements through at least January 2007 from cash presently on hand, based upon our current levels of expenditures and anticipated needs during this period, assuming we receive no additional proceeds from the exercise of warrants and rights issued in the June 2004 placements. However, additional working capital will be required in order to meet our working capital requirements by February 2007. 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, our ability to maintain our collaborative arrangement with ChevronTexaco, and the timing of future customer orders.

       To date we have generated no material revenues from our business operations. We are unable to predict when or if we will be able to generate 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. However, we presently have no commitments for any such payments.

       Sources of additional capital include the exercise of additional investment rights and warrants issued to investors in the June 2004 private placements, and funding through future collaborative arrangements, licensing arrangements and debt and equity financings. We do not know whether additional financing will be available on commercially acceptable terms when needed. If we cannot raise funds on acceptable terms or extend or refinance the $1 million of related party receivables due December 30, 2005, we may not be able to successfully commercialize our technologies, take advantage of future opportunities or respond to unanticipated requirements. If we are unable to secure such additional financing when needed, we will have to curtail or suspend all or a portion of our business activities and we could be required to cease operations entirely. Further, if we issue equity securities, our shareholders may experience severe dilution of their ownership percentage.

Research and Development During the Next 12 Months

       We intend to continue our research and development program during the next 12 months in order to expand the development of the design and manufacture of commercial desulfurization units which embody our proprietary technology. Management anticipates that our research and development costs, including a portion of salaries for full time employees, will be approximately $50,000 per month, or $600,000 during the next 12 months. The $50,000 anticipated monthly expenditure for research and development is included within our current monthly cash outflow, or burn rate, of approximately $265,000 per month for fixed and normal recurring expenses, as described above.

Employees

       As of the date of this prospectus we had 15 full time employees, inclusive of our contract with RWG, Inc. for the full-time services of our Chairman and CEO Dr. Rudy Gunnerman. We do not expect any material changes in the number of our employees during the next 12 months.

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