**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      DC 20549**

**FORM      10-Q**

| DELAWARE(State                or Other Jurisdiction ofIncorporation                or Organization) | 71-0659511(IRS                Employer Identification No.) |
|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------|

----

----

**THERMOENERGY      CORPORATON**

**INDEX      **

| ** **** **** **        | ** **** **** **       | ** **** **** **                                                                                                                                                                                                                     | **Page****No.** |
|---------------------------------------|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| Part                I.      | Financial                Information |                                                                                                                                                                                                                                               |
|                        | Item                1.     | Financial                Statements                                                                                                                                                                                                      |            |
|                        |                       | Consolidated                Balance Sheets as of September 30, 2008 (Unaudited) and                December 31, 2007                                                                                                           | 3               |
|                        |                       | Consolidated                Statements of Operations for the nine months ended September 30, 2008                and 2007 (Unaudited)                                                                                               | 4               |
|                                  |                                 | Consolidated                Statements of Changes in Stockholders’ Equity (Deficit) for the period                ended January 1, 2007 through December 31, 2007 and the nine months                ended                September 30, 2008 | 5               |
|                        |                       | Consolidated                Statements of Cash Flows for the nine months ended September 30, 2008                and 2007 (Unaudited)                                                                                               | 6               |
|                        |                       | Consolidated                Notes to Financial Statements (Unaudited)                                                                                                                                                                    | 7               |
|                        | Item                2.     | Management's                Discussion and Analysis or Plan of Operation                                                                                                                                                                 | 18              |
|                                  | Item              3.                 | Quantitative              and Qualitative Disclosures About Market Risk                                                                                                                                                                       | 25              |
|                        | Item                4.     | Controls                and Procedures                                                                                                                                                                                                   | 25              |
| Part                II.     | Other                Information     |                                                                                                                                                                                                                                               |
|                        | Item                1.     | Legal                Proceedings                                                                                                                                                                                                         | 26              |
|                                  | Item                1A.              | Risk Factors                                                                                                                                                                                                                                       | 26              |
|                        | Item                2.     | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                                               | 27              |
|                                  | Item                3.               | Defaults                Upon Senior Securities                                                                                                                                                                                                     | 27              |
|                                  | Item                4.               | Submission                of Matters to a Vote of Security Holders                                                                                                                                                                                 | 27              |
|                                  | Item                5.               | Other                Information                                                                                                                                                                                                                   | 27              |
|                        | Item                6.     | Exhibits                                                                                                                                                                                                                                           | 28              |
| Signature                   | 28                                   |

----

**THERMOENERGY        CORPORATION**

**CONSOLIDATED        BALANCE SHEETS**

**(in        thousands, except for share and par value amounts )**

|                                                                                                                                                                                                                                                                             |   | **September 30, 2008** |      | **December 31, 2007** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                             |   | **(Unaudited)**                  |      |                            |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |
| **ASSETS**                                                                                                                                                                                                                                                                       |   |                             |      |                            |   |
| Current                  Assets:                                                                                                                                                                                                                                                 |   |                             |      |                            |   |
| Cash                                                                                                                                                                                                                                                                             |   | $                                | 871       |                            | $      | 3,185 |   |
| Accounts                  Receivable, net                                                                                                                                                                                                                                        |   |                             | 199       |                            |   | 260 |   |
| Inventories                                                                                                                                                                                                                                                                      |   |                             | 224       |                            |   | 184 |   |
| Other                  Current Assets                                                                                                                                                                                                                                            |   |                             | 151       |                            |   | 239 |   |
| Total                  Current Assets                                                                                                                                                                                                                                            |   |                             | 1,445     |                            |   | 3,868 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Property                  and Equipment, net of Accumluated Depreciation (2008 - $115; 2007                  - $56)                                                                                                                                                              |   |                             | 300       |                            |   | 322 |   |
| Other                Assets                                                                                                                                                                                                                                                      |   |                             |  182 |                            |   |  5 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| **Total                  Assets**                                                                                                                                                                                                                                                |   | $                                | 1,927     |                            | $      | 4,195 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' EQUITY (DEFICIT)**                                                                                                                                                                                                              |   |                             |      |                            |   |   |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Current                  Liabilities:                                                                                                                                                                                                                                            |   |                             |      |                            |   |   |   |
| Accounts                  Payable                                                                                                                                                                                                                                                |   | $                                | 26        |                            | $      | 844 |   |
| Short                  Term Notes Payable                                                                                                                                                                                                                                        |   |                             | 198       |                            |   | 679 |   |
| Convertible                  Debt in Default                                                                                                                                                                                                                                     |   |                             | 3,107     |                            |   | 2,921 |   |
| Deferred                  Revenue                                                                                                                                                                                                                                                |   |                             | 139       |                            |   | 458 |   |
| Other                  Current Liabilities                                                                                                                                                                                                                                       |   |                             | 1,459     |                            |   | 1,552 |   |
| Total                  Current Liabilities                                                                                                                                                                                                                                       |   |                             | 4,929     |                            |   | 6,454 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Long                  Term Liabilities:                                                                                                                                                                                                                                          |   |                             |      |                            |   |   |   |
| Deferred                  Comp Retirement Plan for Officers Net of Current Portion                                                                                                                                                                                               |   |                             | 271       |                            |   | 304 |   |
| Convertible                  Debt                                                                                                                                                                                                                                                |   |                             | 1,155     |                            |   | 512 |   |
| Total                  Long Term Liabilities                                                                                                                                                                                                                                     |   |                             | 1,426     |                            |   | 816 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Minority                  Interest in Subsidiary                                                                                                                                                                                                                                 |   |                             | (1,571    | )                               |   | (1,414 | ) |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| **Total                  Liabilities**                                                                                                                                                                                                                                           |   |                             | 4,784     |                            |   | 5,856 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Stockholders'                  Equity (Deficit):                                                                                                                                                                                                                                 |   |                             |      |                            |   |   |   |
| Preferred                  Stock, $0.01 par value: authorized - 20,000,000 shares; issued                  and                  outstanding: 2008 - 208,334; 2007 - 5,301,670 shares                                                                                             |   |                             | 2         |                            |   | 53 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Common                  Stock, $.001 par value: authorized - 150,000,000 shares; issued:                  2008 -                  50,093,365 shares; 2007 - 40,817,516 shares; outstanding: 2008                  -                  50,009,568 shares; 2007 - 40,733,719 shares |   |                             | 50        |                            |   | 40 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Additional                  Paid-In Capital                                                                                                                                                                                                                                      |   |                             | 57,905    |                            |   | 50,794 |   |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| Accumulated                  Deficit                                                                                                                                                                                                                                             |   |                             | (60,814   | )                               |   | (52,548 | ) |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| **Total                  Equity (Deficit)**                                                                                                                                                                                                                                      |   |                             | (2,857    | )                               |   | (1,661 | ) |
|                                                                                                                                                                                                                                                                             |   |                             |      |                            |   |   |   |
| **TOTAL                  LIABILITIES AND EQUITY (DEFICIT)**                                                                                                                                                                                                                      |   | $                                | 1,927     |                            | $      | 4,195 |   |

----

**THERMOENERGY        CORPORATION**

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

**(in        thousands, except per share amounts)**

|                                                             |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                             |   | **September 30, **     |   | **September 30, **    |   |
|                                                             |   | **2008**                         |   | **2007**                        |   | **2008** |   | **2007** |   |
|                                                             |   |                             |   |                            |   |   |   |   |   |
| Operating                  Income                                |   | $                                | 326    |                            | $      | 594 |   | $ | 1,511 |   | $ | 1,704 |   |
| Cost                  of Contract and Grant Income               |   |                             | 395    |                            |   | 383 |   |   | 1,529 |   |   | 1,609 |   |
| Gross                  Operating Income (Loss)                   |   |                             | (69    | )                               |   | 211 |   |   | (18 | ) |   | 95 |   |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses:                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| General                  and Administrative                      |   |                             | 626    |                            |   | 3,332 |   |   | 2,680 |   |   | 3,821 |   |
| Selling                  Expense                                 |   |                             | 102    |                            |   | 62 |   |   | 257 |   |   | 210 |   |
| Option                  Expense                                  |   |                             | 192    |                            |   | - |   |   | 1,469 |   |   | 128 |   |
| Warrant                  Expense                                 |   |                             | 839    |                            |   | 83 |   |   | 1,538 |   |   | 249 |   |
| Professional                  Fees                               |   |                             | 218    |                            |   | 257 |   |   | 992 |   |   | 903 |   |
| Travel                  and Entertainment                        |   |                             | 179    |                            |   | 93 |   |   | 539 |   |   | 350 |   |
| Total                  Operating Expenses                        |   |                             | 2,156  |                            |   | 3,827 |   |   | 7,475 |   |   | 5,661 |   |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Loss                  from Operations                            |   |                             | (2,225 | )                               |   | (3,616 | ) |   | (7,493 | ) |   | (5,566 | ) |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Other                  Income (Expense):                         |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Interest                  Income                                 |   |                             | -      |                            |   | 85 |   |   | 16 |   |   | 9 |   |
| Interest                  Expense                                |   |                             | 437    |                            |   | 127 |   |   | 946 |   |   | 206 |   |
| Total                  Other Income (Expense)                    |   |                             | (437   | )                               |   | (42 | ) |   | (930 | ) |   | (197 | ) |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Net                  loss before minority interest in subsidiary |   |                             | (2,662 | )                               |   | (3,658 | ) |   | (8,423 | ) |   | (5,763 | ) |
| Minority                  interest in subsidiary                 |   |                             | 71     |                            |   | 270 |   |   | 157 |   |   | 355 |   |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Net                  Loss                                        |   | $                                | (2,591 | )                               | $      | (3,388 | ) | $ | (8,266 | ) | $ | (5,408 | ) |
|                                                             |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Per                  Common Share:                               |   |                             |   |                            |   |   |   |   |   |   |   |   |   |
| Loss                  from Operations                            |   | $                                | (0.04  | )                               | $      | (0.11 | ) | $ | (0.17 | ) | $ | (0.20 | ) |
| Net                  Loss                                        |   | $                                | (0.05  | )                               | $      | (0.10 | ) | $ | (0.18 | ) | $ | (0.20 | ) |

----

**THERMOENERGY        CORPORATION**

**CONSOLIDATED        STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**

**Period        Ended December 31, 2007 and the Nine Months Ended September 30, 2008        (Unaudited)**

**(in        thousands)**

|                                                                                                                                                                                                                                                                                                                                      |   | **Common****Stock** |   | **Series                  A****Convertible****Preferred****Stock** |   | **Additional****Paid-In****Capital** |   | **Accumulated****Deficit** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------|--------|----------------------------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |
| Balance                  (Deficit) January 1, 2007                                                                                                                                                                                                                                                                                        |   |                | 23     |                                                               |   | 6,198                                |   |                       | 29,863 |      |   | (34,871 | ) |   | 1,213 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Options                  issued to directors                                                                                                                                                                                                                                                                                              |   |                |   |                                                               |   |                                 |   |                       | 904    |      |   |   |   |   | 904 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Stock                  issued for services                                                                                                                                                                                                                                                                                                |   |                | -      |                                                               |   | -                                    |   |                       | 52     |      |   | - |   |   | 52 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Warrants                  issued for services                                                                                                                                                                                                                                                                                             |   |                |   |                                                               |   |                                 |   |                       | 331    |      |   |   |   |   | 331 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Converted                  Preferred Stock to Common Stock (897,001 shares at an                                                                                                                                                                                                                                                          |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| average                  price of $0.764 per share)                                                                                                                                                                                                                                                                                       |   |                | 1      |                                                               |   | (686                                 | )      |                       | 685    |      |   |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of Common Stock (1,238,095 at $0.42 per share)                                                                                                                                                                                                                                                                  |   |                | 1      |                                                               |   | -                                    |   |                       | 519    |      |   | - |   |   | 520 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of Common Stock from Cashless Exercise of Warrants, Various 2007,                  Issued                  113,886 Shares                                                                                                                                                                                       |   |                | -      |                                                               |   | -                                    |   |                       | -      |      |   | - |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of Common Stock, June 2007, net of Issuance Costs of $99,721.17                  (4,000,000                  shares at $0.75 per share) and 2,000,000 warrants at a price equal                  to a 12                  month average with a floor of $0.75 and a ceiling of $1.50 per                  share |   |                | 4      |                                                               |   |                                 |   |                       | 2,896  |      |   |   |   |   | 2,900 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Warrants                  and beneficial conversion option issued with Convertible                  Notes                                                                                                                                                                                                                                 |   |                |   |                                                               |   |                                 |   |                       | 944    |      |   |   |   |   | 944 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Reincorporated                  in Delaware and reduced par value of preferred shares                                                                                                                                                                                                                                                     |   |                |   |                                                               |   | (5,459                               | )      |                       | 5,459  |      |   |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of common stock (4,588,088 shares at $.50 per share) and common                  stock                  warrants for CASTion acquisition                                                                                                                                                                        |   |                | 5      |                                                               |   |                                 |   |                       | 4,163  |      |   |   |   |   | 4,168 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of common stock, July 2007 (30,000 shares at $.99 per                  share)                                                                                                                                                                                                                                   |   |                | -      |                                                               |   |                                 |   |                       | 30     |      |   |   |   |   | 30 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issuance                  of Common Stock, December 2007, net of Issuance Costs of $667,283.76                  (6,666,667 shares at $0.75 per share) and 10,000,000 warrants at                  a price                  of $1.50 per share                                                                                             |   |                | 6      |                                                               |   |                                 |   |                       | 4,326  |      |   |   |   |   | 4,332 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Warrants                  Issued as Broker Compensation for Private Placement of Common                  Stock                                                                                                                                                                                                                            |   |                |   |                                                               |   |                                 |   |                       | 622    |      |   |   |   |   | 622 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Net                  Loss                                                                                                                                                                                                                                                                                                                 |   |                |   |                                                               |   |                                 |   |                       |   |      |   | (17,677 | ) |   | (17,677 | ) |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Balance                  (Deficit) December 31, 2007                                                                                                                                                                                                                                                                                      |   | $                   | 40     |                                                               | $      | 53                                   |   | $                          | 50,794 |      | $      | (52,548 | ) | $ | (1,661 | ) |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Warrants                  issued for services                                                                                                                                                                                                                                                                                             |   |                |   |                                                               |   |                                 |   |                       | 1,225  |      |   |   |   |   | 1,225 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Issued                  190,000 shares of Common Stock for Services                                                                                                                                                                                                                                                                       |   |                |   |                                                               |   |                                 |   |                       | 247    |      |   |   |   |   | 247 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Cashless                  exercise of 4,662,639 warrants for 1,854,984 shares of Common                  Stock                                                                                                                                                                                                                            |   |                | 2      |                                                               |   |                                 |   |                       | (2     | )         |   |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Exercised                  741,493 warrants for 741,493 shares of Common Stock (average price                  of                  $0.638 per share)                                                                                                                                                                                      |   |                | 1      |                                                               |   |                                 |   |                       | 473    |      |   |   |   |   | 474 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Stock                  grants issued to officers                                                                                                                                                                                                                                                                                          |   |                | 1      |                                                               |   |                                 |   |                       | 278    |      |   |   |   |   | 279 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Stock                  options issued to officers, directors and employees                                                                                                                                                                                                                                                                |   |                | -      |                                                               |   | -                                    |   |                       | 1,469  |      |   |   |   |   | 1,469 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Converted                  Preferred Stock to Common Stock (5,051,668 shares)                                                                                                                                                                                                                                                             |   |                | 5      |                                                               |   | (51                                  | )      |                       | 46     |      |   |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Convertible                  Note converted to Common Stock (1,146,036 shares at $0.50 per                  share)                                                                                                                                                                                                                        |   |                | 1      |                                                               |   |                                 |   |                       | 572    |      |   |   |   |   | 573 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Warrants                  and beneficial conversion feature issued with convertible                  notes                                                                                                                                                                                                                                |   |                |   |                                                               |   |                                 |   |                       | 2,803  |      |   |   |   |   | 2,803 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Net                  Loss                                                                                                                                                                                                                                                                                                                 |   |                |   |                                                               |   |                                 |   |                       |   |      |   | (8,266 | ) |   | (8,266 | ) |
|                                                                                                                                                                                                                                                                                                                                      |   |                |   |                                                               |   |                                 |   |                       |   |      |   |   |   |   |   |   |
| Balance                  (Deficit) September 30, 2008                                                                                                                                                                                                                                                                                     |   | $                   | 50     |                                                               | $      | 2                                    |   | $                          | 57,905 |      | $      | (60,814 | ) | $ | (2,857 | ) |

----

**THERMOENERGY        CORPORATION**

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

**(in        thousands)**

|                                                                 |   | **Nine Months Ended** |   |
|----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                 |   | **September 30,**          |   |
|                                                                 |   | **2008**                        |   | **2007** |   |
|                                                                 |   |                            |   |   |   |
| Operating                  Activities:                               |   |                            |   |   |   |
| Net                  Loss                                            |   | $                               | (8,266 | ) | $ | (2,020 | ) |
|                                                                 |   |                            |   |   |   |   |   |
| Items                  not requiring (providing) cash:               |   |                            |   |   |   |   |   |
| Options                  issued to officers, directors and employees |   |                            | 1,469  |   |   | 128 |   |
| Warrants                  issued for services                        |   |                            | 1,225  |   |   | 166 |   |
| Depreciation                  Expense                                |   |                            | 31     |   |   | 13 |   |
| Loss                  on Disposal of Property and Equipment          |   |                            | 105    |   |   | - |   |
| Minority                  Interest In Subsidiary                     |   |                            | (157   | ) |   | - |   |
| Restricted                  Stock issued for services                |   |                            | 247    |   |   | 11 |   |
| Amortization                  of Discount on Convertible Debt        |   |                            | 595    |   |   | 8 |   |
|                                                                 |   |                            |   |   |   |   |   |
| Changes                  in:                                         |   |                            |   |   |   |   |   |
| Accounts                  and Notes Receivable                       |   |                            | 61     |   |   | (508 | ) |
| Inventories                                                          |   |                            | (40    | ) |   | - |   |
| All                  Other Assets                                    |   |                            | 71     |   |   | 40 |   |
| Accounts                  Payable                                    |   |                            | (818   | ) |   | 62 |   |
| Short                  Term Notes Payable                            |   |                            | (220   | ) |   | - |   |
| Deferred                  Revenue                                    |   |                            | (319   | ) |   | - |   |
| Other                  Current Liabilities                           |   |                            | 285    |   |   | (144 | ) |
| Deferred                  Compensation Retirement Plan               |   |                            | (33    | ) |   | (23 | ) |
|                                                                 |   |                            |   |   |   |   |   |
| Net                  Cash used in operating activities               |   |                            | (5,764 | ) |   | (2,267 | ) |
|                                                                 |   |                            |   |   |   |   |   |
| Investing                  Activities:                               |   |                            |   |   |   |   |   |
| Purchases                  of Property and Equipment                 |   |                            | (114   | ) |   | - |   |
|                                                                 |   |                            |   |   |   |   |   |
| Net                  cash used in investing activities               |   |                            | (114   | ) |   | - |   |
|                                                                 |   |                            |   |   |   |   |   |
| Financing                  Activities:                               |   |                            |   |   |   |   |   |
| Proceeds                  from issuance of Common Stock and Warrants |   |                            | 474    |   |   | 3,420 |   |
| Proceeds                  from Convertible Debentures                |   |                            | 3,250  |   |   | 750 |   |
| Debt                  Issue Costs                                    |   |                            | (160   | ) |   | 750 |   |
|                                                                 |   |                            |   |   |   |   |   |
| Net                  cash provided by financing activities           |   |                            | 3,564  |   |   | 4,920 |   |
|                                                                 |   |                            |   |   |   |   |   |
| Increase                  (Decrease) in cash                         |   |                            | (2,314 | ) |   | 2,653 |   |
| Cash,                  beginning of year                             |   |                            | 3,185  |   |   | 637 |   |
| Cash,                  end of period                                 |   | $                               | 871    |   | $ | 3,290 |   |

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      1: BASIS OF PRESENTATION**

**NOTE      2: LOSS PER COMMON SHARE**

**NOTE      3: MANAGEMENT’S CONSIDERATION OF GOING CONCERN MATTERS**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      3: MANAGEMENT’S CONSIDERATION OF GOING CONCERN MATTERS      (Continued)**

**NOTE      4: ISSUANCE OF COMMON STOCK, CONVERTIBLE PROMISSORY NOTES AND WARRANTS**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      4: ISSUANCE OF COMMON STOCK, CONVERTIBLE PROMISSORY NOTES AND WARRANTS      (Continued)**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      4: ISSUANCE OF COMMON STOCK, CONVERTIBLE PROMISSORY NOTES AND WARRANTS      (Continued)**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      4: ISSUANCE OF COMMON STOCK, CONVERTIBLE PROMISSORY NOTES AND WARRANTS      (Continued)**

**NOTE      5: LEGAL MATTERS**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      6: SEGMENTS**

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      6: SEGMENTS (Continued)**

**For      the Nine Months ended September 30, 2008**

|                                                                   |   | **Water Group** |   | **Power Group** |   | **Total** |   |
|------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|-----------|--------|
|                                                                   |   |                 |   |                 |   |      |   |
| Operating                income:                                       |   |                 |        |                 |   |           |   |   |  |   |
| Sales                of wastewater treatment and recovery systems      |   | $                    | 1,085  |                 | $      | -         |   | $ | 1,085 |   |
| Grant                revenue                                           |   |                 | -      |                 |   | 426       |   |   | 426 |   |
| Total                operating income                                  |   |                 | 1,085  |                 |   | 426       |   |   | 1,511 |   |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Operating                expenses:                                     |   |                 |   |                 |   |      |   |   |   |   |
| Cost                of wastewater treatment and recovery systems sales |   |                 | 1,446  |                 |   | 83        |   |   | 1,529 |   |
| General                and administrative                              |   |                 | 3,868  |                 |   | 343       |   |   | 4,211 |   |
| Selling                expenses                                        |   |                 | 257    |                 |   | -         |   |   | 257 |   |
| Total                operating expenses                                |   |                 | 5,571  |                 |   | 426       |   |   | 5,997 |   |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Segment                operating loss                                  |   | $                    | (4,486 | )                    | $      | -         |   | $ | (4,486) | ) |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Total                assets                                            |   | $                    | 1,927  |                 | $      | -         |   | $ | 1,927 |   |
|                                                                   |   |                 |   |                 |   |           |   |   |   |   |
| Reconciliation                to net loss:                             |   |                 |        |                 |   |           |   |   |   |   |
| Total                segment operating loss                            |   |                 |        |                 |   |           |   | $ | (4,486) | ) |
| Warrant                and stock options                               |   |                 |        |                 |   |           |   |   | (3,007) | ) |
| Minority                interest                                       |   |                 |        |                 |   |           |   |   | 157 |   |
| Other                income (expense)                                  |   |                 |        |                 |   |           |   |   | (930) | ) |
|                                                                   |   |                 |        |                 |   |           |   |   |   |   |
| Net                loss                                                |   |                 |        |                 |   |           |   | $ | (8,266) | ) |

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      6: SEGMENTS (Continued)**

**For      the Nine Months ended September 30, 2007**

|                                                                     |   | **Water Group**           |   | **Power Group** |   | **Total**          |   |
|--------------------------------------------------------------------------|--------|--------------------------------|--------|----------------------|--------|--------------------|--------|
|                                                                     |   |       |   |       |   |     |   |
| Operating                  income:                                       |   |                           |        |                 |   |                    |   |   |  |   |
| Sales                  of wastewater treatment and recovery systems      |   | $                              | 1,389  |                 | $      | -                  |   | $ | 1,389 |   |
| Grant                  revenue                                           |   |                           | -      |                 |   | 315                |   |   | 315 |   |
| Total                  operating income                                  |   |                           | 1,389  |                 |   | 315                |   |   | 1,704 |   |
|                                                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Operating                  expenses:                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Cost                  of wastewater treatment and recovery systems sales |   |                           | 1,518  |                 |   | 91                 |   |   | 1,609 |   |
| General                  and administrative                              |   |                           | 4,850  |                 |   | 224                |   |   | 5,074 |   |
| Selling                  Expenses                                        |   |                           | 210    |                 |   | -                  |   |   | 210 |   |
| Total                  operating expenses                                |   |                           | 6,578  |                 |   | 315                |   |   | 6,893 |   |
|                                                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Segment                  operating loss                                  |   | $                              | (5,189 | )                    | $      | -                  |   | $ | (5,189 | ) |
|                                                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Total                  assets                                            |   | $                              | 10,495 |                 | $      | -                  |   | $ | 10,495 |   |
|                                                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Reconciliation                  to net loss:                             |   |                           |        |                 |   |                    |   |   |  |   |
| Total                  segment operating loss                            |   |                           |        |                 |   |                    |   | $ | (5,189 | ) |
| Warrant                  and stock options                               |   |                           |        |                 |   |                    |   |   | (377 | ) |
| Minority                  Interest                                       |   |                           |   |                 |   |               |   |   | 355 |   |
| Other                  income (expense)                                  |   |                           |        |                 |   |                    |   |   | (197 | ) |
|                                                                     |   |                           |        |                 |   |                    |   |   |  |   |
| Net                  loss                                                |   |                           |        |                 |   |                    |   | $ | (5,408 | ) |

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      6: SEGMENTS (Continued)**

**For      the Three Months ended September 30, 2008**

|                                                                   |   | **Water Group** |   | **Power Group** |   | **Total** |   |
|------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|-----------|--------|
|                                                                   |   |                 |   |                 |   |      |   |
| Operating                income:                                       |   |                 |        |                 |   |           |   |   |  |   |
| Sales                of wastewater treatment and recovery systems      |   | $                    | 183    |                 | $      | -         |   | $ | 183 |   |
| Grant                revenue                                           |   |                 | -      |                 |   | 143       |   |   | 143 |   |
| Total                operating income                                  |   |                 | 183    |                 |   | 143       |   |   | 326 |   |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Operating                expenses:                                     |   |                 |   |                 |   |      |   |   |   |   |
| Cost                of wastewater treatment and recovery systems sales |   |                 | 377    |                 |   | 18        |   |   | 395 |   |
| General                and administrative                              |   |                 | 898    |                 |   | 125       |   |   | 1,023 |   |
| Selling                expenses                                        |   |                 | 102    |                 |   | -         |   |   | 102 |   |
| Total                operating expenses                                |   |                 | 1,377  |                 |   | 143       |   |   | 1,520 |   |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Segment                operating loss                                  |   | $                    | (1,194 | )                    | $      | -         |   | $ | (1,194) | ) |
|                                                                   |   |                 |   |                 |   |      |   |   |   |   |
| Total                assets                                            |   | $                    | 1,927  |                 | $      | -         |   | $ | 1,927 |   |
|                                                                   |   |                 |   |                 |   |           |   |   |   |   |
| Reconciliation                to net loss:                             |   |                 |        |                 |   |           |   |   |   |   |
| Total                segment operating loss                            |   |                 |        |                 |   |           |   | $ | (1,194) | ) |
| Warrant                and stock options                               |   |                 |        |                 |   |           |   |   | (1,031) | ) |
| Minority                interest                                       |   |                 |        |                 |   |           |   |   | 71 |   |
| Other                income (expense)                                  |   |                 |        |                 |   |           |   |   | (437) | ) |
|                                                                   |   |                 |        |                 |   |           |   |   |   |   |
| Net                loss                                                |   |                 |        |                 |   |           |   | $ | (2,591) | ) |

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      6: SEGMENTS (Continued)**

**For      the Three Months ended September 30, 2007**

|                                                                  |   | **Water Group** |   | **Power Group** |   | **Total**          |   |
|---------------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|--------------------|--------|
|                                                                  |   |       |   |       |   |     |   |
| Operating                  income:                                    |   |                 |        |                 |   |                    |   |   |  |   |
| Sales                  of wastewater treatment and recovery systems   |   | $                    | 460    |                 | $      | -                  |   | $ | 460 |   |
| Grant                  revenue                                        |   |                 | -      |                 |   | 134                |   |   | 134 |   |
| Total                  operating income                               |   |                 | 460    |                 |   | 134                |   |   | 594 |   |
|                                                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Operating                  expenses:                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Cost                  of wastewater treatment and recovery systems sales        |   |                 | 368    |                 |   | 15                 |   |   | 383 |   |
| General                  and administrative                           |   |                 | 3,563  |                 |   | 119                |   |   | 3,682 |   |
| Selling                  expenses                                     |   |                 | 62     |                 |   | -                  |   |   | 62 |   |
| Total                  operating expenses                             |   |                 | 3,993  |                 |   | 134                |   |   | 4,127 |   |
|                                                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Segment                  operating loss                               |   | $                    | (3,533 | )                    | $      | -                  |   | $ | (3,533 | ) |
|                                                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Total                  assets                                         |   | $                    | 10,495 |                 | $      | -                  |   | $ | 10,495 |   |
|                                                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Reconciliation                  to net loss:                          |   |                 |        |                 |   |                    |   |   |  |   |
| Total                  segment operating loss                         |   |                 |        |                 |   |                    |   | $ | (3,533 | ) |
| Warrant                  and stock options                                      |   |                 |   |                 |   |               |   |   | (83 | ) |
| Minority                  interest                                    |   |                 |        |                 |   |                    |   |   | 270 |   |
| Other                  income (expense)                               |   |                 |        |                 |   |                    |   |   | (42 | ) |
|                                                                  |   |                 |        |                 |   |                    |   |   |  |   |
| Net                  loss                                             |   |                 |        |                 |   |                    |   | $ | (3,388 | ) |

----

**THERMOENERGY      CORPORATION**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September      30, 2008**

**NOTE      7: SUBSEQUENT EVENTS**

----

**Item      2. Management’s Discussion and Analysis or Plan of      Operation.**

*General*

----

----

*Current      Cash Requirements; Need for Additional Funds*

----

----

----

*Third      Quarter 2008 Compared to Third Quarter 2007 *

----

*Nine      Months Ended September 30, 2008 Compared to Nine Months Ended September 30,      2007*

*Recent      Developments*

----

*Research      and Development*

*Expected      Changes in the Number of Employees*

*Off-Balance      Sheet Arrangements *

**Item      3. Quantitative and Qualitative Disclosures About Market      Risk.**

**Item      4. Controls and Procedures.**

----

**PART      II — OTHER INFORMATION**

**Item      1. Legal Proceedings.**

**Item      1A. Risk Factors.**

----

**Item      2. Unregistered Sales of Equity Securities and Use of      Proceeds.**

| *Date*                         |   | *Shareholder*                                                                                               |   | *Number of Shares* |    |
|--------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| July                  19, 2008 |   | Security                Equity Fund, Mid Cap Value Series                                                   |   |                         | 218,964 |   |
| July                  19, 2008 |   | SBL                Fund, Series V                                                                           |   |                         | 141,793 |   |
| July                  19, 2008 |   | Security                Mid Cap Growth Fund                                                                 |   |                         | 68,387  |   |
| July                  19, 2008 |   | SBL                Fund, Series J                                                                           |   |                         | 135,519 |   |
| July                  21, 2008 |   | Lagunitas                Partners LP                                                                        |   |                         | 95,940  |   |
| July                  21, 2008 |   | Donaghy                Sales Inc.                                                                           |   |                         | 7,560   |   |
| July                  21, 2008 |   | Gruber                & McBaine International                                                           |   |                         | 7,560   |   |
| July                  21, 2008 |   | Karl                Mathies Trust                                                                           |   |                         | 585     |   |
| July                  21, 2008 |   | Jon                D. and Linda W. Gruber Trust                                                             |   |                         | 33,435  |   |
| July                  21, 2008 |   | Linsday                Gruber Dunham                                                                        |   |                         | 900     |   |
| July                  21, 2008 |   | Jonathan                Wyatt Gruber Trust                                                                  |   |                         | 1,800   |   |
| July                  21, 2008 |   | Gruber                Family Foundation                                                                     |   |                         | 13,545  |   |
| July                  21, 2008 |   | J.                Patterson McBaine                                                                         |   |                         | 7,200   |   |
| July                  21, 2008 |   | Jon D Gruber Bank of America Securities Custodian Rollover IRA |   |                         | 6,959   |   |
| July                  21, 2008 |   | Lockheed                Martin Corporation Master Retirement Trust                                          |   |                         | 11,011  |   |
| July                  23, 2008 |   | Enid                Feinberg                                                                                |   |                         | 3,239   |   |
| August 22, 2008      |   | Tyler                Smith                                                                                  |   |                         | 10,000  |   |

**Item      3. Defaults Upon Senior Securities.**

**Item      4. Submission of Matters to a Vote of Security Holders.**

**Item      5. Other Information.**

----

**Item      6. Exhibits.**

| *Exhibit* |   | *Description*                                                                                                                                                                                                                                                 |   |                  |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|
| *Number*  |   | *Of Exhibit*                                                                                                                                                                                                                                             |   | *Location*            |
| 4.1       |   | 7.5%                  Convertible Promissory Note due December 31, 2008 issued pursuant                  to                  Securities Purchase Agreement dated as of August 12, 2008, between                  ThermoEnergy Corporation and Robert S. Trump |   | †               |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 4.2       |   | Common                  Stock Purchase Warrant issued pursuant to Securities Purchase Agreement                  dated as of August 12, 2008, between ThermoEnergy Corporation and                  Robert                  S. Trump                          |   | ††        |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 4.3       |   | Form                  of Common Stock Purchase Warrant issued pursuant to the Securities                  Purchase Agreement dated as of September 15, 2008 between ThermoEnergy                  Corporation and The Quercus Trust                           |   | ††† |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 4.4       |   | Form                  of 10% Convertible Promissory Note issued pursuant to the Securities                  Purchase Agreement dated as of September 15, 2008 between ThermoEnergy                  Corporation and The Quercus Trust                         |   | ‡               |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 4.5       |   | Amendment                  No. 1 to Common Stock Purchase Warrant No. 2007-12-1                                                                                                                                                                               |   | ‡‡        |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 10.1      |   | Securities                  Purchase Agreement dated as of August 12, 2008, between ThermoEnergy                  Corporation and Robert S. Trump                                                                                                             |   | ‡‡‡ |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 10.2      |   | Securities                  Purchase Agreement dated as of September 15, 2008 between ThermoEnergy                  Corporation and The Quercus Trust                                                                                                         |   | *                     |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 31.1      |   | Certification                  of C.E.O. pursuant to Rule 13a-14(a)                                                                                                                                                                                           |   | **                    |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 31.2      |   | Certification                  of C.F.O. pursuant to Rule 13a-14(a)                                                                                                                                                                                           |   | **                    |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 32.1      |   | Certification                  of C.E.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section                  1350                                                                                                                                               |   | **                    |
|      |   |                                                                                                                                                                                                                                                          |   |                  |
| 32.3      |   | Certification                  of C.F.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section                  1350                                                                                                                                               |   | **                    |

| † | Incorporated                  by reference to Exhibit 4.1 to Current Report on Form 8-K filed                  August 18,                  2008. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| †† | Incorporated                  by reference to Exhibit 4.2 to Current Report on Form 8-K filed                  August 18,                  2008. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| ††† | Incorporated                  by reference to Exhibit 4.1 to Current Report on Form 8-K filed                  September                  17, 2008. |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| ‡ | Incorporated                  by reference to Exhibit 4.2 to Current Report on Form 8-K filed                  September                  17, 2008. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| ‡‡ | Incorporated                  by reference to Exhibit 4.3 to Current Report on Form 8-K filed                  September                  17, 2008. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| ‡‡‡ | Incorporated                  by reference to Exhibit 10.1 to Current Report on Form 8-K filed                  August                  18, 2008. |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|

| * | Incorporated                  by reference to Exhibit 10.1 to Current Report on Form 8-K filed                  September                  17, 2008. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------|

| ** | Filed                  herewith |
|----|---------------------------------|

**SIGNATURE**

| THERMOENERGY                CORPORATION        |
|------------------------------------------------|
|                                           |
| /s/                Dennis C. Cossey            |
| Dennis                C. Cossey, Chairman, and |
| Chief                Executive Officer         |

----