FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                   (Mark One)

           [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                        FOR THE TRANSITION PERIOD FROM TO
                       COMMISSION FILE NUMBER 33-46104-FW
                                   -----------

                            THERMOENERGY CORPORATION
                            ------------------------
            (EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)

                       Arkansas                     71-00659511
            --------------------------------- ----------------------
             (State or other jurisdiction of      (I.R.S.Employer
            of incorporation or organization)    Identification Number)


           323 Center Street, Suite 1300, Little Rock, Arkansas 72201
           -----------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (501) 376-6477
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                               Innotek Corporation
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

YES    X     NO
    -------     -------
       

     The number of shares  outstanding of each of the issuer's  classes
of common stock, as of March 31, 1999:

3,470,568 shares of Common Stock, par value $.001 per share



<PAGE>

ITEM 1.  FINANCIAL STATEMENTS.
                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      March 31,          September 30,
                                                                                       1999                  1998
                                                                                       ----                  ----
                                                                                    (Unaudited)            (Note 1)
ASSETS

<S>                                                                               <C>                 <C>          
Cash - Total Current Assets                                                       $     23,801        $     242,486

Advances to officers                                                                   465,015              381,015
Accrued interest receivable - officers                                                  66,785               49,567
Property and equipment, at cost:
  Equipment                                                                             14,818               14,818
  Furniture and fixtures                                                                 4,991                4,991
  Less accumulated depreciation                                                        (19,809)             (19,809)
                                                                                   -----------         ------------
                                                                                             -                    -
                                                                                   -----------         ------------
Total Assets                                                                       $   555,601         $    673,068
                                                                                   ===========         ============
</TABLE>

<TABLE>
<CAPTION>

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<S>                                                                                    <C>                  <C> 
Accounts payable                                                                   $   546,542         $    590,903
Accrued interest payable - related parties                                             363,526              246,671
Deferred compensation                                                                1,374,705            1,192,779
Notes payable to stockholders (Notes 2 and 5)                                          932,900              932,900
                                                                                  ------------        -------------
      Total Current Liabilities                                                      3,217,673            2,963,253

Convertible Debentures (Notes 2 and 4)                                               1,091,000              906,000
                                                                                    ----------        -------------
      Total Liabilities                                                              4,308,673            3,869,253

Stockholders' equity (deficit) (Notes 3, 4 and 6): Preferred stock,  non-voting,
  $1 par value:
    Authorized - 10,000,000 shares; none issued Common Stock, $.001 par value:
    Series A Common Stock;  Authorized - 10,000,000 shares; no shares issued and
    outstanding Series B Common Stock; Authorized - 65,000,000
    shares; March 31, 1999:  issued - 3,554,397 shares; outstanding -
    3,470,568 shares;  September 30, 1998:  issued - 3,486,797
    shares;  outstanding - 3,402,968 shares                                              3,554                3,487
  Additional paid-in capital                                                         4,334,864            4,334,864
  Deficit accumulated during the development stage                                  (8,091,490)          (7,534,536)
                                                                                   -----------          -----------
                                                                                    (3,753,072)          (3,196,185)
                                                                                   -----------          -----------

                                                                                   $   555,601         $    673,068
                                                                                   ===========         ============
</TABLE>




See notes to financial statements.


<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                         Cumulative
                                      During Development
                                        Stage Through             Three Months Ended
                                          March 31,                   March 31,
                                            1999              1999               1998
                                            ----              ----               ----
                                         (Unaudited)                 (Unaudited)

<S>                                         <C>                <C>              <C>   
Operating Expenses:
  General and administrat                   5,921,885          179,171           41,321
  Payments under licenses                                       35,000
                                              712,266
  Travel and entertainment
                                            1,079,941           43,416           25,603
                                           ----------         ---------         --------                        

                                            7,714,092          257,587           66,924
                                           ----------         ---------         --------                              
 
Loss From Operations
                                           (7,714,092)        (257,587)         (66,924)
                                          -----------         ---------         --------                                

Other Income (Expense)
  Interest income
                                              123,802            8,756            6,461
  Interest expense
                                             (501,133)         (64,396)         (33,891)
                                            ---------         ---------         --------                              

                                             (377,331)         (55,640)         (27,430)
                                            ---------         ---------         --------                                

Net Loss                                 $ (8,091,423)       $(313,227)       $ (94,354)
                                          ===========        ==========         ======== 

Basic and Diluted

  Per Common Share (Note 4)
    Loss From Operations                     $  (2.05)        $  (0.06)       $   (0.02)

    Net Loss                                 $  (2.15)        $  (0.08)        $  (0.02)


</TABLE>


See notes to financial statements.

<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               (DEFICIT) Periods Ended September 30, 1988 Through
                           September 30, 1998 and the
                   Six Months Ended March 31, 1999 (Unaudited)


<TABLE>
<CAPTION>

                                                                                                      Deficit
                                                                                                    Accumulated
                                                                                   Additional       During the
                                                                  Common            Paid-in        Development
                                                                   Stock            Capital           Stage                Total
                                                                 --------          ---------       --------------         ---------
<S>                                                            <C>               <C>                <C>                 <C>  
Issuance of stock, January 1988,
  (2,205,762 shares at $.08 per share                          $     2,206        $   178,094         $                 $   180,300

Net loss                                                          (290,483)          (290,483)
                                                               -----------        -----------        -----------        -----------

Balance (deficit), September 30, 1988                                2,206            178,094           (290,483)          (110,183)

Conversion of $412,000 of debentures
  and accrued interest, September 1989
  (306,335 shares)                                                     306            456,695            457,001

Net loss                                                          (338,985)          (338,985)
                                                               -----------        -----------        -----------        -----------

Balance (deficit), September 30, 1989                                2,512            634,789           (629,468)             7,833

Net loss                                                          (255,036)          (255,036)
                                                               -----------        -----------        -----------        -----------

Balance (deficit), September 30, 1990                                2,512            634,789           (884,504)          (247,203)

Conversion of $63,000 of unsecured
  debentures and accrued interest at 10%,
  March 1991, (44,286 shares)                                           44             70,813             70,857

Issuance of stock, May - June 1991
  (387,880 shares:  366,630 at $1.60
  per share;  21,250 shares at $.80 per
  share)                                                               388            603,219            603,607

Issuance of stock for interest, June 1991,
 (1,375 shares at $1.60 per share)                                       1              2,199              2,200

Issuance of stock for expenses
  incurred by stockholders, July 1991
  (5,081 shares at $1.60 per share)                                      5              8,124              8,129

Net loss                                                          (670,179)          (670,179)
                                                               -----------        -----------        -----------        -----------

Balance (deficit), September 30, 1991                                2,950          1,319,144         (1,554,683)          (232,589)

</TABLE>


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
       Periods Ended September 30, 1988 Through September 30, 1998 and the
                   Six Months Ended March 31, 1999 (Unaudited)

<TABLE>
<CAPTION>

                                                                                          Deficit
                                                                                        Accumulated
                                                                    Additional           During the
                                                     Common          Paid-in            Development
                                                      Stock          Capital               Stage          Total
                                                     ------         ---------           ------------      -----

<S>                                                <C>              <C>                 <C>              <C>
Issuance of stock, October - December
  1991 (150,925 shares at $1.60 per
  share)                                           $   151          $ 241,329         $                   $ 241,480

Shares purchased in rescission offer
  (10,562 shares)                                      (11)           (16,888)                              (16,899)

Issuance of stock, public offering, August-
  September 1992 (344 shares at $16.00
  per share)                                             1              5,499                                 5,500

Net loss                                                                                (562,751)          (562,751)
                                                    -------         -----------        -----------         ---------

Balance (deficit), September 30, 1992                3,091          1,549,084         (2,117,434)          (565,259)

Issuance of stock, public offering October
  1992 - September 1993 (92,785 shares
  at $16.00 per share)                                  93          1,484,457                             1,484,550

Issuance of stock for exercise of stock
  options, May 1993 (2,500 shares at
  $1.60 per share)                                       3              3,997                                 4,000

Issuance of warrants to stockholder                                     6,333                                 6,333

Conversion of $103,000 of notes payable
  to stockholders and accrued interest,
  December 1992 (6,438 shares)                           6            102,994                               103,000

Issuance of stock for consulting
  services, June 1993 (9,375 shares
  at $16.00 per share)                                   9            149,991                               150,000

</TABLE>


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
       Periods Ended September 30, 1988 Through September 30, 1998 and the
                   Six Months Ended March 31, 1999 (Unaudited)


<TABLE>
<CAPTION>

                                                                                        Deficit
                                                                                      Accumulated
                                                                 Additional            During the
                                                  Common          Paid-in             Development
                                                   Stock          Capital               Stage              Total
                                                  ------         ----------           -----------         -------

<S>                                            <C>            <C>                    <C>                <C>        
Net loss                                       $              $                      $(1,207,921)       $(1,207,921)
                                                ----------      -------------         ----------         -----------

Balance (deficit), September 30, 1993                3,202          3,296,856         (3,325,355)           (25,297)

Issuance of warrants to stockholders                                  226,000                               226,000

Issuance of stock for exercise of stock options
 March 1994 (3,750 shares at $1.60 per share)            4              5,996                                 6,000

Issuance of stock for exercise of warrants by
  stockholder, August 1994 (3,677 shares at
  at $13.60 per share)                                   4             49,997                                50,001

Net loss                                                                                (767,427)          (767,427)
                                                ----------      -------------         -----------        -----------

Balance (deficit), September 30, 1994                3,210          3,578,849         (4,092,782)          (510,723)

Issuance of warrants to stockholders                                    9,760                                 9,760

Issuance of stock, May 1995 (6,250
  shares at $8.00 per share)                             6             49,994                                50,000

Issuance of stock for exercise of
  warrants by stockholder, June 1995
 (6,250 shares at $8.00 per share)                       6             49,994                                50,000

 Issuance of stock for expenses, July
  1995 (18,750 shares at $8.00 per share)               19            149,981                               150,000

Net loss                                                                                (896,998)          (896,998)
                                                ----------      -------------         -----------         -----------

Balance (deficit), September 30, 1995                3,241          3,838,578         (4,989,780)        (1,147,961)

Issuance of warrants to stockholders                                    5,340                                 5,340

Net loss                                                                                (551,621)         (551,621)
                                                ----------      -------------         -----------        ----------

</TABLE>

<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
       Periods Ended September 30, 1988 Through September 30, 1998 and the
                   Six Months ended March 31, 1999 (Unaudited)


<TABLE>
<CAPTION>
                                                                                    Deficit
                                                                                   Accumulated
                                                                   Additional       During the
                                                    Common          Paid-in        Development
                                                    Stock           Capital            Stage               Total
                                                    ------         ---------       ------------            -------

<S>                                                 <C>            <C>               <C>               <C>                          
Balance (deficit), September 30, 1996               $3,241         $3,843,918        $(5,541,401)       $(1,694,242)

Issuance of stock, July 1997 (50,000
  shares at $2.00 per share                             50             99,950                               100,000

Conversion of $338,100 of notes payable
  to stockholders and accrued interest,
  July 1997 (195,596 shares)                           196            390,996                               391,192

Net loss                                                                              (1,196,036)        (1,196,036)
                                                -----------         ----------        -----------        -----------

Balance (deficit), September 30, 1997                3,487          4,334,864         (6,737,437)        (2,399,086)

Net loss                                                                                (797,099)          (797,099)
                                                -----------         ----------        -----------        -----------
Balance (deficit), September 30, 1998                3,487          4,334,864         (7,534,536)        (3,196,185)

Net loss                                                                                (243,660)          (243,660)
                                                -----------         ----------        -----------        -----------
Balance (deficit), December 31, 1998                 3,487          4,334,864         (7,778,196)        (3,439,845)

Issuance of stock in connection with 10%
  notes payable to stockholders, January
  1999 (67,600 shares at par value)                     67                                   (67)

Net loss                                                                                (313,227)          (313,227)
                                                -----------         ----------        -----------        -----------

Balance (deficit), March 31, 1999                  $ 3,554         $4,334,864        $(8,091,490)       $(3,753,072)
                                                ===========         ==========        ============       ===========

</TABLE>

See notes to financial statements.



<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                   Cumulative
                                                     During
                                                 Development
                                                 Stage Through                 Three Months Ended March 31,
                                                 March 31, 1999                  1999                 1998
                                               ----------------                  ----                 ----
                                                  (Unaudited)                 (Unaudited)          (Unaudited)
<S>                                              <C>                             <C>               <C>    
Operating activities:
  Net loss                                      $(8,091,423)                    $(313,227)         $  (94,354)
  Items not requiring
  (providing) cash:
    Depreciation                                     19,809                                               708
    Expenses funded by Common
      Stock issuance                                596,279
    Other                                             3,341
  Changes in:
    Advances to officers                           (663,998)                      (42,000)            (35,000)
    Other receivables                               (66,785)                       (8,538)             (5,988)
    Accounts payable                                546,542                       (17,641)            (51,021)
    Accrued expenses                                363,526                        64,396              82,767
    Deferred compensation                         1,573,687                        92,591               5,000
                                                -----------                     ---------            --------
        Net cash used in
         operating activities                    (5,719,022)                     (224,419)            (97,888)
                                                -----------                     ---------            --------

Investing activities:
  Purchase of fixed assets                          (19,808)
  Other                                              (3,341)
         Net cash used in
          investing activities                      (23,149)

Financing activities:
  Proceeds from issuance of
    Common Stock and warrants                     2,720,562
  Proceeds from notes payable                     1,665,609
  Proceeds from convertible debentures            1,426,000                       135,000             316,000
  Payments on notes payable                        (154,609)
  Other                                             108,410
         Net cash provided by
           financing activities                   5,765,972                       135,000             316,000
                                                -----------                     ---------           ---------

Increase (decrease) in cash                          23,801                       (89,419)            218,112

Cash, beginning of period                                 0                       113,220              30,666
                                                -----------                     ---------            --------

Cash, end of period                            $     23,801                     $  23,801           $ 248,778
                                               ============                     =========           =========
</TABLE>


See notes to financial statements.



<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                 March 31, 1999



NOTE 1:  BASIS OF PRESENTATION

     On September 21, 1998, the Board of Directors of  ThermoEnergy  Corporation
(the  "Company")  approved  a  change  in the  Company's  fiscal  year  end from
September  30 to  December  31. A  transition  report on Form 10-Q for the three
months  ended  December  31,  1998 was filed with the  Securities  and  Exchange
Commission in connection with the change in fiscal year end.

     The  accompanying  unaudited  financial  statements  statements  have  been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1999
are not necessarily  indicative of the results that may be expected for the year
ended December 31, 1999.

     The balance  sheet at September  30, 1998 has been derived from the audited
financial  statements  at that date but does not include all of the  information
and footnotes required by generally accepted accounting  principles for complete
financial statements.

     For further  information,  refer to the financial  statements and footnotes
thereto  included in the Company's annual report on Form 10-K for the year ended
September 30, 1998.


NOTE 2: NOTES PAYABLE TO STOCKHOLDERS AND CONVERTIBLE DEBENTURES

     During  November  1998,  the  Company's  Board of  Directors  approved  the
issuance of up to $1,500,000 (an increase of $500,000 from the amount previously
authorized) of the Series 98, 15% Convertible Debentures,  due January 15, 2003.
The Company  issued  $50,000 of such  Debentures  during the three  months ended
December 31, 1998 and $135,000 during the quarter ended March 31, 1999.

     During  the  quarter  ended  March  31,  1999,  a total of  $71,540  of the
Company's  6.63% notes payable to stockholders  matured.  The Company's Board of
Directors  approved  the issuance of Series B Common Stock at $2.00 per share in
lieu of cash payment of the notes and related accrued interest and the extension
of the warrant agreements executed in connection with the note agreements for an
additional  two-year  period (see Note 3). An additional  $215,625 of such notes
mature during the period April 1, 1999 through December 31, 1999.



<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                 March 31, 1999


NOTE 3:  COMMON STOCK

     In January 1999,  the Company issued 67,600 shares of Series B Common Stock
to the holders of the 10% notes payable to  stockholders  in accordance with the
related note  agreements.  In April 1999,  the Company  issued  39,910 shares of
Series B Common Stock to the holders of 6.63% notes payable to  stockholders  in
the aggregate amount of $79,815, including $18,075 of accrued interest.

NOTE 4:  LOSS PER COMMON SHARE

     Loss per common  share is computed by dividing  the net loss for the period
by the weighted average number of shares outstanding during the period, adjusted
for stock  options and warrants  issued  within  twelve  months of the Company's
initial  public  offering  filing date  (February 27, 1992) which are treated as
outstanding for all periods  presented.  The adjusted weighted average number of
common  shares used in the basic and diluted  loss per share  computations  were
3,759,659  shares for the period  cumulative  since inception  through March 31,
1999, and 4,107,148 and 4,045,557 shares for the three-month periods ended March
31, 1999 and 1998, respectively.

     Warrants to purchase approximately 799,000 shares of Series B Common Stock,
and stock  options  under the 1997 Stock  Option  Plan,  which  provides for the
issuance of up to 750,000 shares of Series B Common Stock,  were not included in
the   computation   of  diluted  loss  per  share  since  the  effect  would  be
antidilutive.  At March 31,  1999,  the  Company  had issued  $1,091,000  of 15%
Convertible Debentures,  due January 15, 2003. The holders of the Debentures can
convert the principal amount and accrued interest into shares of Series B Common
Stock  at the  conversion  price  of $2.00  per  share at any time  prior to the
maturity date.

NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS

     The Company has incurred net losses since inception and, is in default on a
$200,000 note payable (10% note  payable) to a  stockholder  and has $215,625 of
the 6.63% notes  payable to  stockholders  maturing  during 1999.  Additionally,
substantial capital will likely be required to continue commercialization of the
Technologies.  The financial  statements have been prepared assuming the Company
will continue as a going concern,  realizing assets and liquidating  liabilities
in the ordinary course of business and do not reflect any adjustments that might
result  from the  outcome of the  aforementioned  uncertainties.  Management  is
considering several alternatives for mitigating these conditions during the next
year.  The Company is authorized  to issue an  additional  $409,000 of Series 98
Convertible  Debentures and to issue Series B Common Stock to the holders of the
6.63% notes payable to stockholders upon maturity. The sale of stock pursuant to
private  placement or public  offerings  and fees from  projects  involving  the
Technologies are other alternatives management is pursuing. Additional funds may
be  necessary  in the event the Company  takes on other  projects,  is unable to
obtain extensions on the 10%


<PAGE>

                                        
                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                 March 31, 1999
                                                    
NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS (CONTINUED)

notes to  stockholders  which are not in default  at March 31,  1999 or makes an
acquisition  of  another   company  to  facilitate   the  Company's   commercial
demonstration  of the  Technologies.  If the  Company  is unable  to enter  into
commercially  attractive  collaborative  working  arrangements  for  one or more
commercial or industrial projects,  the Company may sub-license the Technologies
to third parties. The overall goal of the Company is to successfully  complete a
demonstration  project for STORS, NitRem and/or ARP. Management plans to utilize
any  demonstration  facilities  to  expand  the  visibility  of the  Company  in
municipal, industrial, Department of Defense and Department of Energy markets. A
successful demonstration project is the single most important business factor in
implementation  of the Company's plan of  operations.  Management has determined
that the  financial  success of the  Company may be largely  dependent  upon the
ability and financial resources of established third parties  collaborating with
the Company with respect to projects involving the Technologies. The Company has
entered  into  agreements  with third  parties in order to pursue this  business
strategy.

NOTE  6:  COMMITMENTS  AND CONTINGENCIES  

     During October 1998, the Company filed a lawsuit seeking  compensatory  and
punitive  damages from the  broker-dealer  involved in the Company's 1997 failed
public  offering.  During  November 1998, the Company  entered into a consulting
agreement  with  a  third  party  in  connection  with  the  City  of  New  York
demonstration  project.  The agreement specifies  compensation at an hourly rate
plus expenses for services rendered.  In the event the Company sells an ARP unit
to or  operates  an ARP  unit  for the  City  of New  York  under  a  privatized
agreement,  the agreement provides for additional cash compensation based upon a
percentage of the overall capital cost of the ARP demonstration facility and for
the issuance of warrants to purchase  62,500  shares of Series B Common Stock of
the  Company at an  exercise  price of $4.00 per share,  exercisable  within two
years from the date of issuance  of the  warrants.  During  November  1998,  the
Company entered into an employment  agreement with an individual to serve as the
Company's  Executive  Vice  President  and Senior Vice  President  of  Corporate
Technology.  In order to assist the Company in conserving  cash, an amendment to
the  agreement  was  executed  which  provides  the  executive  with a half-time
position for a period not to exceed  twelve  months.  The  employment  agreement
provides for, among other things, basic, incentive and other compensation.



<PAGE>




ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

     ThermoEnergy   Corporation  ("Company")  is  a  development  stage  company
involved in the marketing and development of certain environmental  technologies
primarily  used for solving waste water  problems.  These  technologies  include
three chemical  processes  known as the  Sludge-To-Oil  Reactor System  (STORS),
Nitrogen Removal  (NitRem) and the Ammonia Recovery Process ("ARP").  The fourth
technology,  a  dual-shell  pressure  balance  vessel,  known as the  Dual-Shell
Reactor ("DSR"),  is the unique reactor  equipment in which the STORS and NitRem
chemistries  are  conducted  (STORS,   NitRem,  ARP  and  DSR  are  referred  to
collectively  as the  "Technologies").  The Company's  application  of STORS and
NitRem  through the use of a STORS-DSR,  NitRem-DSR,  or a  combination  of both
types of equipment,  are designed to eliminate  damaging organic and nitrogenous
contaminants,  respectively,  from municipal and industrial  waste streams.  The
Company's  ARP process is designed to recover  ammonia from fluid waste  streams
resulting in the  manufacture of various  by-products  such as ammonium  sulfate
fertilizer,  when  sulfuric  acid is added to the  highly  concentrated  ammonia
stream that is recovered.

     The  Company  is the  exclusive  worldwide  licensee  for the  Technologies
(except for STORS in Japan) which were developed by Battelle Memorial  Institute
("Battelle"), an independent research and development organization.  The Company
intends to sell equipment (i.e. STORS-DSR,  NitRem-DSR,  or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties,  or build, own and operate  municipal and/or  industrial waste
water  treatment  facilities.  The  Company's  business  strategy  is based upon
entering into collaborative working  relationships with established  engineering
and environmental  companies, or formal joint venture agreements relative to the
application  of  the  technologies  for  specified  industries  or  markets.  On
September  11,  1998,  the  Company  agreed to form  ThermoEnergy  Environmental
Corporation ("TENC") with Foster Wheeler Environmental  Corporation ("FWENC") of
Lvingston,  New Jersey to pursue clean water projects worldwide. The new company
will  combine  the  Company's  state-of-the-art  clean water  technologies  with
FWENC's  engineering  expertise  and global  presence to pursue  industrial  and
municipal  water/wastewater projects around the world and is the Company's first
joint venture.  The Company also has joint  marketing  arrangements  with Roy F.
Weston,  Inc.,  Dan Cowart  Inc.,  and Mitusi & Co.  (U.S.A.) and plans to enter
project  specific  working  arrangements  when such projects are  identified and
funding is obtained.  (See strategic corporate alliances ). The Company does not
currently possess the technical, operational or financial resources necessary to
construct or operate STORS , NitRem or ARP facilities at either a  demonstration
or  commercial  facility  level and has  relied on U.S.  Government  grants  and
funding from its strategic partners to fund its demonstration projects.

     The  Radford  Army  Ammunition  Plant and the New York  City  demonstration
projects  were  funded  by  the  U.S.  Army  and  Foster  Wheeler   Corporation,
respectively. The Colton STORS Project is funded by a federal grant administered
by the U.S. EPA. ( See summary  below)  Consequently,  the Company's  operations
continue to depend upon its ability to attract adequate capital,  so that it may
in turn acquire the technical and  operational  expertise and services  required
for the commercialization of the STORS, NitRem the ARP technologies. With regard
to STORS,  no facilities  have yet been built,  outside  Japan,  on a commercial
basis.

<PAGE>

STORS Project

     In  May  of  1996,  ThermoEnergy  and  Battelle  representatives  met  with
officials at San Bernardino Valley Water District ("SBVWD") to discuss siting of
a  full-scale   STORS   demonstration   project  in  the  San  Bernardino  area.
Subsequently,  the United  States  House and  Senate  approved,  in PL  104-204,
September  26,  1996, a  $3,000,000  federal  grant to the SBVWD for the design,
construction  and  operation  of  a  large-scale  STORS  Waste  Water  Treatment
Demonstration  Facility.  The General Accounting Office has authorized the EPA's
San Francisco  office to disburse the funds  accordingly  and to administer this
grant for the SBVWD  project.  In March,  1998,  the SBVWD  selected the City of
Colton, California to host the STORS demonstration project. The Company will not
be required to make capital  contributions  to this project and the Company will
not receive any revenues or earnings but will be reimbursed  for  administrative
and  operating  costs for this  project.  The design plans for the STORS project
have  been   completed.   The  Company  has   contracted   with  Foster  Wheeler
Environmental Company ( See strategic  relationships) to fabricate,  install and
operate  the STORS  demonstration  unit.  Once in  operation,  the Colton  STORS
facility  will  have a  larger  processing  capacity  than  70% of the  existing
municipal  wastewater plants in the U.S. The demonstration  project is scheduled
to begin in the third quarter of 1999.

                  United States Department of the Army Program

     ThermoEnergy and Sam Houston State University,  doing business as the Texas
Regional  Institute for  Environmental  Studies ("TRIES") signed an agreement in
October 1994  allowing  ThermoEnergy  to  demonstrate  its NitRem  technology to
evaluate the nitrogen removal process and its ability to economically and safely
treat TNT redwater,  DNT  contaminated  wastewater  and various other RCRA waste
streams  within  the  Department  of  Defense  ("DoD")  industrial  base and DoD
commercial facilities. ThermoEnergy is the lead subcontractor on this project.

     The first NitRem  commercial scale DSR unit was demonstrated at the Radford
Army Ammunition Plant, in Radford, Virginia. The $5,000,000 NitRem demonstration
project  has been  completed  and been  approved by the Army  Armament  Research
Development  Command  ("ARDEC").  Pursuant to a purchase  order issued by ARDEC,
ThermoEnergy  engaged Glitsch Process System Inc. (a wholly-owned  subsidiary of
Foster Wheeler Corporation) to fabricate the NitRem unit. The demonstration unit
was delivered to Radford on June 16, 1997 and began testing and  processing  DoD
waste streams July 21, 1997. Under the Company's supervision, this demonstration
facility  was used to  process a number of  different  hazardous  waste  streams
resulting from the  manufacture of explosives,  including TNT, DNT, HMX and RDX.
This  NitRem  system has been  designed  as a mobile  system in order to process
additional waste streams from other Department of Defense sites.

     Testing and  processing  of the of the DoD RAPP test material was concluded
on September 5, 1997. The final results and report from TRIES indicates that the
NitRem DSR  reduces  DNT in  contaminated  wastewater  to a level which could be
discharged without further  wastewater  treatment.  Based on these results,  the
Company is actively marketing NitRem to the DoD and to private industry.

<PAGE>

         New York City Project

     The second  commercial  scale nitrogen removal  demonstration  project is a
team effort between ThermoEnergy,  Foster Wheeler Environmental  Corporation and
the  City of New  York to test  the  Company's  capability  to  cost-effectively
eliminate the concentrated  ammonia  discharge,  or centrate,  from eight of New
York City's  fourteen  waste water  treatment  facilities.  The City of New York
currently  produces over 4.5 million gallons of centrate  daily,  which the City
projects  will reach  five  million  gallons  daily by 2001.  This  concentrated
ammonia  waste stream is a leading  cause of  eutrophication  in the Long Island
Sound. Laboratory tests conducted on actual samples of New York City centrate in
May of 1996, and June of 1997, by Battelle  successfully resulted in eliminating
the ammonia present in the centrate. The City of New York and the Company signed
a No Cost Test Agreement in July 1996 which allowed the Company to  demonstrate,
on site, the Company's  nitrogen removal  processes,  including NitRem and other
such  nitrogen  removal  processes as the Company may acquire,  to wit: ARP. The
Company  decided to demonstrate  the  capabilities  of its ARP technology at New
York City's Staten Island wastewater treatment facility.  On August 4, 1998, the
Company  signed  an  agreement  with  FWEC to  provide  up to  $500,000  funding
necessary to demonstrate ARP and to design,  fabricate and operate the ARP pilot
plant. (See Strategic Corporate  relationships).  The New York ARP demonstration
was  successfully  completed on December 18, 1998.  Based on the data  generated
during the  demonstration  and  computer  modeling  for  large-scale  commercial
systems,  the  economics of the Centrate  Ammonia  Recovery or (ARP) process are
excellent when compared to alternative sources such as steam stripping,  hot air
stripping  and  biological  nitrogen  reduction  technologies.  Depending on the
throughput of the  commercial  system,  on a privatized  basis,  the cost to the
client   (municipality)   to  treat   ammoni   laden  wastes  with  ARP  at  the
concentrations found in the centrtate,  would be between 3 cents and 4 cents per
gallon,   including  capital  equipment  recovery   overhead.   Based  upon  the
demonstrations results, the Company is actively seeking a privatized contract to
process all of New York City's centrate through it's joint venture with FWENC.

STRATEGIC CORPORATE RELATIONSHIPS

     In September 1994, the Company and Foster Wheeler USA Corporation  executed
a non-binding  Worldwide  Marketing Agreement whereby both companies have agreed
to jointly market, develop and commercialize the Technologies on a non-exclusive
basis.  The  companies  have  agreed in  principle  to work  together to develop
marketing  strategies,  identify potential projects and develop joint proposals.
The agreement  contemplates  that when a potential  project is  identified,  the
Company will provide Foster Wheeler USA Corporation  with the necessary  process
and design information,  and Foster Wheeler USA Corporation will design, procure
and  construct the required  processing  facilities  for any contracts  awarded.
Under the agreement, each party is subject to confidentiality  obligations.  The
initial  term  of  the  agreement  is  ten  years  and  the  agreement  will  be
automatically  extended in three-year periods  thereafter.  The agreement may be
terminated  by the mutual  agreement  of the  parties.  The  Company  and Foster
Wheeler USA Corporation  are working on a marketing  strategy for private sector
business,   initially   targeting  the   pharmaceutical,   pulp  and  paper  and
petrochemical  industries in the U.S. and Europe.  In addition,  the Company and
Foster Wheeler USA Corporation  have begun a joint  marketing  effort within the
Department of Navy Surface Systems Command.

     On  September   11,  1998,   the  Company   agreed  to  form   ThermoEnergy
Environmental  Corporation  with Foster  Wheeler  Environmental  Corporation  of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will  combine  the  Company's  state-of-the-art  clean water  technologies  with
FWENC's  engineering  expertise  and global  presence to pursue  industrial  and
municipal  water/wastewater projects around the world and is the Company's first
joint venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture,  among  other  things,  is to  develop,  market  and  utilize  the  ARP
technology.  Concurrently with agreeing to form TENC, the Company entered into a
Shareholders  agreement by an among FWENC,  the Company and TENC and a worldwide
sublicense  of the  ARP  technology  to  TENC  for  municipal  and  agricultural
livestock production facilities.

<PAGE>

     In March 1996,  the Company  entered  into a Marketing  Agreement  with the
Atlanta based Dan Cowart, Inc. ("DCI") to market,  develop and commercialize the
Technologies in Georgia and Florida. DCI is a multi-discipline  construction and
development firm for large scale real estate projects.  Under the agreement, the
Company has granted DCI the exclusive right to exploit any and all  applications
of  the  Technologies  for  municipal,   local   governmental  and  real  estate
development  markets in  Georgia  and  Florida,  and the  nonexclusive  right to
exploit any and all applications of NitRem for industrial markets in Georgia and
Florida. The agreement contemplates the formation of a joint venture between the
companies to construct  and operate  future  projects.  The Company will provide
technical and administrative support to assist DCI in its efforts to obtain such
projects. The Company will derive revenue upon the sale of a STORS DSR or NitRem
DSR  unit to an  end-user,  and  fees  associated  with  the  operation  of such
projects.  DCI  is  to be  paid  a one  time  success  fee  of  62,500  warrants
convertible   into  62,500  shares  of  ThermoEnergy   Series  B  Common  Stock,
exercisable  within ten years from the date of granting  the warrants at a price
of $2.00 per  share,  within 90 days upon the  signing  of an  agreement  with a
target  customer  to purchase  or utilize  any of one of the  Technologies.  The
agreement  is for a term of ten years and required DCI to produce a contract for
a project by March 28, 1998 to retain exclusivity.  Thereafter, the contract can
be terminated by either party upon one month's  written  notice and DCI's rights
to the  Technologies  in Georgia  and Florida  would  become  nonexclusive.  The
Company in conjunction with Battelle, is developing a comprehensive audio-visual
presentation to be used by DCI in its marketing  efforts.  In addition,  DCI has
engaged the services of a regional  engineering  firm to work  directly with the
Company and Battelle to work on  scheduling  meetings  with  municipal and state
waste water authorities in Georgia and Florida.  Currently, no specific projects
are being negotiated.

     In April  1996,  the  Company  entered  into a  non-binding  Memorandum  of
Understanding with Roy F. Weston, Inc. ("Weston") of West Chester, Pennsylvania,
which may be  terminated  by either  company upon  written  notice to the other.
Weston is an engineering  firm which  participates  in the  development of large
scale civil engineering projects.  The purpose of the memorandum is to provide a
preliminary  framework  for the  joint  pursuit  by the  companies  of  business
opportunities   for  the  application  of  the   Technologies.   The  memorandum
contemplates  that Weston will  provide  engineering,  construction  management,
installation,  operations  and  maintenance  services  in  connection  with such
projects, while the Company will provide the Technologies at a reasonable fee no
greater than the Company's most favored licensees.  The memorandum  incorporates
by  reference  a  Proprietary  Information  Agreement  dated  August  22,  1995,
previously  signed by the parties  pursuant to which each  company has agreed to
maintain in  confidence  all  proprietary  information  furnished  by the other.
Currently, no specific projects are being negotiated.


     In October  1996,  the Company  entered into a  non-binding  Memorandum  of
Understanding ("MOU") with Foster Wheeler Environmental Corporation and Mitsui &
Co. (U.S.A.), Inc. ("Mitsui") regarding potential water and waste water projects
in Brazil,  Mexico and Peru.  The  purpose of the MOU is to set forth the likely
roles  of  the  companies  in  connection   with  any  business   involving  the
Technologies. As contemplated by the MOU, ThermoEnergy Corporation would provide
the rights to use the  Technologies  for projects  jointly  developed in Brazil,
Mexico and Peru,  Foster Wheeler  Environmental  Corporation  would, on contract
awards,  design,  construct  and,  possibly,  operate  the  Technologies  at the
identified   projects,   and   Mitsui   would   gather   information   regarding
opportunities,  identify projects,  and, possibly, seek to arrange financing for
various  projects.  The participants  have held several meetings pursuant to the
MOU to discuss possible projects.

<PAGE>


     The Company  has  historically  lacked the  financial  and other  resources
necessary to market the  Technologies or to build  demonstration  projects.  The
Company  believes that its joint venture (TENC) working  arrangement with Foster
Wheeler  Environmental  Corporation will enable the Company to identify and fund
future projects The Company believes that establishing such relationships is the
most efficient and effective way to commercialize the Technologies.

     Management believes the STORS/NitRem combination facility goes further than
other  technologies  to solving the total waste  problems faced by a waste water
facility.  For example, the Company believes that STORS and NitRem offer POTWs a
more  cost-effective  basis for tertiary water treatment,  allowing the recovery
and reuse of water  processed  through  the waste water  treatment  plant with a
minimal amount of processing.  STORS removes nitrogen, heavy metals, phosphorus,
many toxic  compounds  and  produces a high energy fuel.  Industrial  wastewater
often poses the same issues as does municipal wastewater.  In addition, there is
a large  volume of toxic  slurries  and  solutions  which  pose an even  greater
problem for their  generators  than exists for  municipalities.  A review of the
regulatory and technical  situation for  industrial  discharges was presented in
the  industry  journal  "Chemical  Engineering"  in June of  1992:  Part 1 - New
Environmental  Regulations Pose Challenges for Industry, and Part 2 - A Guide to
Industrial  Pretreatment.  The review  demonstrates  the diversity of wastewater
issues faced by  industrial  facilities,  and it is clear that the best solution
will vary by industry and even by facility.  However,  management  believes that
there are many  situations  where  either a robust  technology,  insensitive  to
pollutant  concentrations and solids content,  or a high destruction  efficiency
will be required. These situations will often become sales opportunities for the
Company. In addition, management believes by using smaller size STORS and NitRem
plants POTWs will be able to handle the same flow  capacity  with lower  capital
and operating costs.

     Since its formation in 1988, the Company has devoted  substantially  all of
its  resources to funding the payments due under license  agreements,  searching
for  opportunities to employ its  technologies in  demonstration  facilities and
seeking   capital   necessary  to  sustain  the  Company's   efforts.   After  a
demonstration unit has been successfully operated and the Technologies have been
proven commercially viable, the Company may still require additional  investment
capital and/or debt financing to continue its operations.

Plan of Operations

     The  Company had planned to use the net  proceeds  of the  proposed  public
offering to fund it's  day-to-day the operations  until such time as the Company
either  made  substantial  equipment  sales or  secured a  long-term  privatized
contract. All of the Company's demonstration projects have been funded by grants
or by its strategic corporate partners.  As discussed in Note 7 of the financial
statements  included in the  Company's  annual  report of Form 10-K for the year
ended  September 30, 1998,  the managing  underwriter  of the proposed  offering
notified  the Company in October of 1997 that it would be unable to complete the
offering.  The Company now plans to use the proceeds from the sale of $1,500,000
of  convertible  debentures  to  satisfy  the  cash  requirements  of its  basic
operation for the next year.

<PAGE>

     The Company raised $536,000 in interim financing from current  shareholders
to fund the Company through the registration period. The notes were for original
terms of six months at 10%,  renewable  at the option of the holder.  In July of
1998, a holder of a $200,000 note failed to renew the note for which the Company
is now in default with interest accruing at 18% per annum or the maximum allowed
under state law (see Part II, Item 3). Additionally,  $ 215,625 of the Company's
6.63% notes payable to stockholders  mature in 1999 and $109,735 mature in 2000.
Additional  funds may be necessary in the event the Company is unable to pay the
notes as they become due and as the Company takes on other  projects or makes an
acquisition  of  another  company to  facilitate  the  commercialization  of its
technologies.  On September 11, 1998,  the Company  agreed to form  ThermoEnergy
Environmental  Corporation  with Foster  Wheeler  Environmental  Corporation  of
Lvingston,  New Jersey to pursue clean water projects worldwide. The new company
will  combine  the  Company's  state-of-the-art  clean water  technologies  with
FWENC's  engineering  expertise  and global  presence to pursue  industrial  and
municipal water/wastewater projects around the world. The Company will own 49.9%
of TENC. The main purpose of the joint venture,  among other things,  will be to
develop, market and utilize the ARP technology.  Concurrently with forming TENC,
the Company entered into a Shareholders agreement by an among FWENC, the Company
and TENC and a worldwide  sublicense of the ARP technology to TENC for municipal
and agricultural livestock production facilities. On August 4, 1998, the Company
signed  an  agreement  FWEC to  provide  up to  $500,000  funding  necessary  to
demonstrate  the ARP  technology  and to design,  fabricate  and operate the ARP
pilot plant. It is thereafter  anticipated that any commercial  business derived
from the successful  demonstration  of ARP will be engaged  through TENC. At the
option of the Company,  projects  utilizing NitRem, DSR and STORS may be engaged
through TENC.

     The overall  goal of the Company has been to  successfully  complete a full
scale  demonstration  of  its  technologies  and  to  form  strategic  corporate
alliances  to  market  the   technologies   discussed  above.  The  company  has
successfully completed demonstration of the NtiRem; DSR and ARP technologies and
it  scheduled  to begin a  STORS/NitRem  project  in the third  quarter of 1999.
Management  plans to utilize  these  demonstration  projects  and the TENC joint
venture to expand the  visibility of the Company in the  municipal,  industrial,
Department  of  Defense  and  Department  of Energy  markets.  These  successful
demonstration  projects  are the  single  most  important  business  factors  in
implementing the Company's plan of operations.

<PAGE>


Results of Operations

     For the three months ended March 31, 1999, the Company  incurred a net loss
of $313,227 as compared to $94,354 for the three months ended March 31, 1998.

     General and  administrative  expenses and travel expenses  increased during
the three month period ended March 31, 1999,  compared to March 31 1998,  due to
the Company's  efforts  regarding the projects  discussed above.  Payments under
licenses  increased  by $35,000  during the quarter  ended March 31, 1999 due to
payments to  Battelle  of $25,000  for a license fee and $10,000 for  Royalties.
Interest expense increased  significantly between the same two periods primarily
due to the issuance of the 15% Convertible Debentures.

Liquidity and Capital Resources

     During the period ended March 31, 1999,  the Company used  $224,419 of cash
in operations  compared to $97,888,  in the  comparable  period of 1998.  During
1992,  the  Company  initiated a public  offering of 125,000  shares of Series B
Common Stock at a price of $16.00 per share.  The  offering  was  conducted on a
"best  efforts"  basis,  primarily  by  directors  and  officers of the Company.
Effective January 5, 1994, the offering was terminated. A total of 93,129 shares
were sold at a price of $16.00 per share and an  additional  6,438  shares  were
issued at $16.00 per share in  satisfaction of notes payable and related accrued
interest. Currently, there is no public market for the Series B Common Stock. As
previously discussed, the Company's proposed 1997 public offering did not occur.

     During 1999,  1998, and 1997, the Company met its liquidity needs primarily
from  borrowings from  stockholders  As discussed under Plan of Operations,  the
Company  may require  additional  funds in 1999 to pay notes as they become due.
Management  plans to meet the Company's  liquidity  needs during the year ending
December 31, 1999 with  proceeds  from the sale of  convertible  debentures  and
public or private placement offerings of Common Stock.  Management plans to meet
long-term  liquidity  needs  primarily  from  revenues  derived from  commercial
contracts the Company hopes to obtain subsequent to successful demonstrations of
its  Technologies,  such as the Radford NitRem,  New York City NitRem and Colton
STORS demonstration projects.

Recent Pronouncements of the Financial Accounting Standards Board.

     During 1997, the Financial  Accounting Standards Board issued Statement No.
131,  effective  during the year ending  September  30, 1999,  which changes the
requirements for reporting  segment  information in annual and interim financial
statements.  The  industry  segment  approach  under  Statement  No.  14 will be
replaced  with a management  approach of  reporting  financial  and  descriptive
information about operating segments.

Net Operating Losses

     The Company had net operating loss carry forwards as of September 30, 1998,
of  approximately  $5,500,000  which expire in the years 2003 through 2018.  The
amount of net  operating  loss carried  forward that can be used in any one year
will be limited by the  applicable tax laws which are in effect at the time such
carry forward can be utilized. A valuation allowance of approximately $2,095,000
has been  established  to offset any benefit from the net  operating  loss carry
forwards  as it  cannot be  determined  when or if the  Company  will be able to
utilize the net operating losses.



<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings


     On October  6,  1998,  the  Company  filed an action in the  United  States
District  Court,  Eastern  District  of  Arkansas,  Western  Division,  case No.
LR-C-98-657 against National Securities  Corporation,  a wholly owned subsidiary
of Olympic Cascade Financial Corporation and Steven A. Rothstein,  Individually,
and as Chairman of National  Securities in connection with purported  efforts on
the part of the Defendants to underwrite a public offering of securities for the
Company. The Complaint alleges breach o contract, promissory estoppel, breach of
fiduciary  duty  and  intentional  or  negligent   misrepresentation  and  seeks
compensatory  and  punitive   damages,   jointly  and  severally,   against  the
Defendants.


Item 2.  Change in Securities

     None

Item 3.  Defaults Upon Senior Securities

     On June 1, 1998, a $200,000  note bearing 10% interest per annum became due
and the Company failed to meet the obligations. Upon the default, the note began
accruing  interest at 18% per annum or the maximum  allowed by applicable  state
law.  Applicable  law limits the  interest to 500 basis points over the discount
rate. Accordingly, as of May 12, 1999, the amount due and owing is $247,507.

Item 4.  Submission of Matters to a Vote of Securities Holders

     None

Item 5.  Other Information

     None

Item 6.  Exhibits and Report on Form 8-K

     (a) See Exhibit Index.

     (b) No other reports on Form 8-K have been filed during the quarter  ending
         March 31, 1999.
<PAGE>



                                   SIGNATURES

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

     Date: May       1999

                              THERMOENERGY CORPORATION


                              BY:  /s/ P. L. Montesi
                                 --------------------------------
                                 P. L. MONTESI
                                 President, Treasurer and
                                 Principal Financial Officer



<PAGE>