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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-QSB



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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005



OR



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



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THERMOENERGY CORPORATION

(Exact Name of Small Business Issuer as Specified in
Its Charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|ARKANSAS                                                       |  | 71-00659511                      
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)



323 CENTER STREET,
SUITE 1300,

LITTLE ROCK, ARKANSAS 72201

(Address of Principal Executive Offices)



(501) 376-6477

(Issuers Telephone Number, Including Area Code)





(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



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



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY



PROCEEDINGS DURING THE PRECEDING FIVE YEARS



Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.    Yes ̈No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of shares
outstanding of each of the issuers classes of common equity, as of the latest practicable date: 23,142,622 shares of common stock as of June 30, 2005.



Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



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##### Table of Contents

THERMOENERGY CORPORATON



INDEX



|          |  |                       |  |                                                                                                                                                                   |  |        
|--------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|          |  |                       |  |                                                                                                                                                                   |  | PageNo.
|Part I.   |  | Financial Information |  |                                                                                                                                                                  
|          |  | Item 1.               |  | Financial Statements                                                                                                                                              |  |        
|          |  |                       |  | Balance Sheets as of June 30,, 2005 (Unaudited) and December 31, 2004                                                                                             |  | 3      
|          |  |                       |  | Statements of Operations for the six months and three months ended June 30, 2005 and 2004 (Unaudited)                                                             |  | 4      
|          |  |                       |  | Statements of Changes in Stockholders Equity (Deficit) for the periods ended September 30, 1988 through December 31, 2004 and the six months ended June 30, 2005 |  | 5      
|          |  |                       |  | Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (Unaudited)                                                                              |  | 11     
|          |  |                       |  | Notes to Financial Statements (Unaudited)                                                                                                                         |  | 12     
|          |  | Item 2.               |  | Managements Discussion and Analysis or Plan of Operation                                                                                                         |  | 15     
|          |  | Item 3.               |  | Controls and Procedures                                                                                                                                           |  | 19     
|Part II.  |  | Other Information     |  |                                                                                                                                                                  
|          |  | Item 1.               |  | Legal Proceedings                                                                                                                                                 |  | 19     
|          |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                       |  | 19     
|          |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                                                                   |  | 19     
|          |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                                                               |  | 19     
|          |  | Item 5.               |  | Other Information                                                                                                                                                 |  | 20     
|          |  | Item 6.               |  | Exhibits                                                                                                                                                          |  | 20     
|Signature |  |                       |  | 21                                                                                                                                                               



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##### Table of Contents

P
ART I  FINANCIAL INFORMATION

Item 1  Financial Statements

THERMOENERGY CORPORATION

(A
Development Stage Company)

BALANCE SHEETS



|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | -------------------------- | - | ----------- | -
|                                                                                                                                                            |  | June 30, 2005(Unaudited) |             |   | December 31, 2004 (Note 1) |  
|ASSETS                                                                                                                                                      |  |                          |             |   |                            |   |             |  
|                                                                                                                                                            |  |                         
|Cash  Total Current Assets                                                                                                                                 |  | $                        | 13,434      |   |                            | $ | 364,337     |  
|                                                                                                                                                            |  |                         
|Advances to officers, including accrued interest                                                                                                            |  |                          | 328,428     |   |                            |   | 212,654     |  
|Property and equipment, at cost:                                                                                                                            |  |                          |             |   |                            |   |             |  
|Equipment, furniture and fixtures                                                                                                                           |  |                          | 19,809      |   |                            |   | 19,809      |  
|Less accumulated depreciation                                                                                                                               |  |                          | (19,809     | ) |                            |   | (19,809     | )
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|                                                                                                                                                            |  | $                        | 341,862     |   |                            | $ | 576,991     |  
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                              |  |                          |             |   |                            |   |             |  
|                                                                                                                                                            |  |                         
|Accounts payable                                                                                                                                            |  | $                        | 336,890     |   |                            | $ | 539,946     |  
|Notes Payable (Bridge Loan)                                                                                                                                 |  |                          | 100,000     |   |                            |   |            |  
|Deferred compensation                                                                                                                                       |  |                          | 974,186     |   |                            |   | 663,165     |  
|Deferred compensation retirement plan for officer                                                                                                           |  |                          | 125,000     |   |                            |   |            |  
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|Total Current Liabilities                                                                                                                                   |  |                          | 1,536,076   |   |                            |   | 1,203,111   |  
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|Deferred compensation retirement plan for officer                                                                                                           |  |                          | 397,250     |   |                            |   | 3,245,000   |  
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|Total Liabilities                                                                                                                                           |  |                          | 1,933,326   |   |                            |   | 4,448,111   |  
|                                                                                                                                                            |  |                         
|Stockholders equity (deficit):                                                                                                                             |  |                          |             |   |                            |   |             |  
|Preferred stock, non-voting, $1 par value:                                                                                                                  |  |                          |             |   |                            |   |             |  
|Authorized - 10,000,000 shares; none issued                                                                                                                 |  |                          |             |   |                            |   |             |  
|Common Stock, $.001 par value; authorized  75,000,000 shares;                                                                                              |  |                          |             |   |                            |   |             |  
|June 30, 2005: Issued  23,226,451 shares; outstanding  23,142,622 shares; December 31, 2004: Issued  22,692,274 shares; outstanding  22,608,445 shares. |  |                          | 23,226      |   |                            |   | 22,692      |  
|                                                                                                                                                            |  |                         
|Additional paid-in capital                                                                                                                                  |  |                          | 25,459,044  |   |                            |   | 22,046,714  |  
|Deficit accumulated during the development stage                                                                                                            |  |                          | (27,073,734 | ) |                            |   | (25,940,526 | )
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|                                                                                                                                                            |  |                          | (1,591,464  | ) |                            |   | (3,871,120  | )
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  
|                                                                                                                                                            |  | $                        | 341,862     |   |                            | $ | 576,991     |  
|                                                                                                                                                            |  |                          |             |   |                            |   |             |  



See notes to financial statements.



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)



STATEMENTS OF OPERATIONS



|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|------------------------------------------------------- |  | --------------------------------------------------------- | ----------- | - | ------------------------- | ---- | ---------- | --------------------------- | ---- | - | ---------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                        |  | Cumulative During Development Stage Through June 30, 2005 |             |   | Six Months Ended June 30, |      |            | Three Months Ended June 30, |     
|                                                        |  |                                                           | 2005        |   |                           | 2004 |            |                             | 2005 |   |            | 2004 | 
|                                                        |  | (Unaudited)                                               |             |   | (Unaudited)               |      |            | (Unaudited)                 |     
|Operating Expenses:                                     |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|General and administrative                              |  | $                                                         | 18,042,421  |   |                           | $    | 1,035,830  |                             |      | $ | 1,037,688  |      |  | $ | 874,448  |   |  | $ | 436,983  |  
|Payments under licenses                                 |  |                                                           | 1,307,266   |   |                           |      | 20,000     |                             |      |   | 50,000     |      |  |   | 10,000   |   |  |   | 25,000   |  
|Travel and entertainment                                |  |                                                           | 2,376,264   |   |                           |      | 85,054     |                             |      |   | 91,910     |      |  |   | 54,338   |   |  |   | 60,054   |  
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|                                                        |  |                                                           | 21,725,951  |   |                           |      | 1,140,884  |                             |      |   | 1,179,598  |      |  |   | 938,786  |   |  |   | 522,037  |  
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|Loss From Operations                                    |  |                                                           | (21,725,951 | ) |                           |      | (1,140884  | )                           |      |   | (1,179,598 | )    |  |   | (938,786 | ) |  |   | (522,037 | )
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|Other Income (Expense)                                  |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|Interest income                                         |  |                                                           | 250,743     |   |                           |      | 7,599      |                             |      |   | 1,443      |      |  |   | 4,406    |   |  |   | 830      |  
|Gain on settlement of lawsuit                           |  |                                                           | 317,423     |   |                           |      |           |                             |      |   |           |      |  |   |         |   |  |   |         |  
|Other                                                   |  |                                                           | 59,651      |   |                           |      | 77         |                             |      |   |           |      |  |   | 77       |   |  |   |         |  
|Interest expense                                        |  |                                                           | (4,217,488  | ) |                           |      |           |                             |      |   |           |      |  |   |         |   |  |   |         |  
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|                                                        |  |                                                           | (3,589,671  | ) |                           |      | 7,676      |                             |      |   | 1,443      |      |  |   | 4,483    |   |  |   | 830      |  
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|Net Loss                                                |  | $                                                         | (25,315,622 | ) |                           | $    | (1,133,208 | )                           |      | $ | (1,178,155 | )    |  | $ | (934,303 | ) |  | $ | (521,207 | )
|                                                        |  |                                                           |             |   |                           |      |            |                             |      |   |            |      |  |   |          |   |  |   |          |  
|Basic and Diluted per Common Share Loss From Operations |  | $                                                         | (3.49       | ) |                           | $    | (0.05      | )                           |      | $ | (0.06      | )    |  | $ | (0.04    | ) |  | $ | (0.02    | )
|Net Loss                                                |  | $                                                         | (4.07       | ) |                           | $    | (0.05      | )                           |      | $ | (0.06      | )    |  | $ | (0.04    | ) |  | $ | (0.02    | )



See notes to financial statements.



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                  |  |              |       |                          |   |                                                 |  |   |            |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ------------------------ | - | ----------------------------------------------- |  | - | ---------- | - |  | - | -------- | -
|                                                                                                                  |  | Common Stock |       | AdditionalPaid-inCapital |   | Deficit Accumulated During the DevelopmentStage |  |   | Total      |  
|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   | ) |  |   | (290,483 | )
|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 | )



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

CONTINUED

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                               |  |             |       |   |                          |   |           |                                               |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----- | - | ------------------------ | - | --------- | --------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                               |  | CommonStock |       |   | AdditionalPaid-inCapital |   |           | DeficitAccumulatedDuring the DevelopmentStage |  |   | Total      |  
|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 at $16.00 per share) |  |             | 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    |  
|Net loss                                                                                                                       |  |             |       |   |                          |   |           |                                               |  |   | (1,207,921 | ) |  |   | (1,207,921 | )
|                                                                                                                               |  |             |       |   |                          |   |           |                                               |  |   |            |   |  |   |            |  
|Balance (deficit), September 30, 1993                                                                                          |  |             | 3,202 |   |                          |   | 3,296,856 |                                               |  |   | (3,325,355 | ) |  |   | (25,297    | )



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

CONTINUED

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                            |  |             |       |                          |   |                                              |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | ------------------------ | - | -------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                            |  | CommonStock |       | AdditionalPaid-inCapital |   | DeficitAccumulatedDuring theDevelopmentStage |  |   | Total      |  
|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 $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   | )
|                                                                                                                            |  |             |       |                          |   |                                              |  |   |            |   |  |   |            |  
|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 at $2.00 per share) |  |             | 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   | )
|                                                                                                                            |  |             |       |                          |   |                                              |  |   |            |   |  |   |            |  



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

CONTINUED

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                                                                |  |             |       |                            |   |                                                 |  |   |             |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | -------------------------- | - | ----------------------------------------------- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                                                |  | CommonStock |       | Additional Paid-in Capital |   | Deficit Accumulated During the DevelopmentStage |  |   | Total       |  
|Balance (deficit), September 30, 1998                                                                                                                           |  | $           | 3,487 |                            | $ | 4,334,864                                       |  | $ | (7,534,536  | ) |  | $ | (3,196,185 | )
|Net loss (three months)                                                                                                                                         |  |             |       |                            |   |                                                 |  |   | (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         | ) |  |   |            |  
|Conversion of $238,165 of notes payable to stockholders and accrued interest, various months during 1999 (147,602 shares at $2.00 per
share)                    |  |             | 148   |                            |   | 295,056                                         |  |   |             |   |  |   | 295,204    |  
|Issuance of stock for exercise of warrants by stockholders, August 1999 (181,619 shares at $.16 per share)                                                      |  |             | 182   |                            |   | 28,877                                          |  |   |             |   |  |   | 29,059     |  
|Net loss                                                                                                                                                        |  |             |       |                            |   |                                                 |  |   | (1,200,792  | ) |  |   | (1,200,792 | )
|                                                                                                                                                                |  |             |       |                            |   |                                                 |  |   |             |   |  |   |            |  
|Balance (deficit), December 31, 1999                                                                                                                            |  |             | 3,884 |                            |   | 4,658,797                                       |  |   | (8,979,055  | ) |  |   | (4,316,374 | )
|Issuance of stock for exercise of warrants by stockholders, various months during 2000 (130,000 shares at $2.00 per share)                                      |  |             | 130   |                            |   | 259,870                                         |  |   |             |   |  |   | 260,000    |  
|Conversion of $158,735 of notes payable to stockholders and accrued interest, various months during 2000 (110,206 shares at $2.00 per
share)                    |  |             | 110   |                            |   | 220,302                                         |  |   |             |   |  |   | 220,412    |  
|Issuance of compensatory stock options                                                                                                                          |  |             |       |                            |   | 190,536                                         |  |   |             |   |  |   | 190,536    |  
|Net loss                                                                                                                                                        |  |             |       |                            |   |                                                 |  |   | (2,021,863  | ) |  |   | (2,021,863 | )
|                                                                                                                                                                |  |             |       |                            |   |                                                 |  |   |             |   |  |   |            |  
|Balance (deficit), December 31, 2000                                                                                                                            |  |             | 4,124 |                            |   | 5,329,505                                       |  |   | (11,000,918 | ) |  |   | (5,667,289 | )
|Issuance of stock for exercise of warrants by stockholders, various months during 2001 (496,250 shares at $2.00 per share and 338,637 shares
at $.16 per share) |  |             | 834   |                            |   | 1,045,848                                       |  |   |             |   |  |   | 1,046,682  |  
|Conversion of $117,377 of Convertible Debentures plus accrued interest, various months during 2001 (82,808 shares at $2.00 per
share)                           |  |             | 83    |                            |   | 165,533                                         |  |   |             |   |  |   | 165,616    |  
|Net loss                                                                                                                                                        |  |             |       |                            |   |                                                 |  |   | (2,567,968  | ) |  |   | (2,567,968 | )
|                                                                                                                                                                |  |             |       |                            |   |                                                 |  |   |             |   |  |   |            |  



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

CONTINUED

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                                               |  |              |        |                            |   |            |                                                  |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | -------------------------- | - | ---------- | ------------------------------------------------ |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                               |  | Common Stock |        | Additional Paid-in Capital |   |            | Deficit Accumulated During the Development Stage |  |   | Total       |  
|Issuance of stock, various months 2002 (282,358 shares at $2.00 per share)                                                                     |  | $            | 283    |                            | $ | 564,433    |                                                  |  | $ |             |   |  | $ | 564,716    |  
|Conversion of $100,000 of Convertible Debentures plus accrued interest, various months 2002 (55,000 shares at $2.00 per share)                 |  |              | 55     |                            |   | 109,945    |                                                  |  |   |             |   |  |   | 110,000    |  
|Issuance of stock in satisfaction of deferred compensation balances with officers, various months 2002, (82,793 shares at $2.00 per
share)     |  |              | 83     |                            |   | 165,503    |                                                  |  |   |             |   |  |   | 165,586    |  
|Issuance of stock for 10% stock dividend, June 2002, (522,931 shares at $3.40 per share)                                                       |  |              | 523    |                            |   | 1,777,442  |                                                  |  |   | (1,777,965  | ) |  |   |            |  
|Net loss                                                                                                                                       |  |              |        |                            |   |            |                                                  |  |   | (2,565,483  | ) |  |   | (2,565,483 | )
|                                                                                                                                               |  |              |        |                            |   |            |                                                  |  |   |             |   |  |   |            |  
|Balance (deficit), December 31, 2002                                                                                                           |  |              | 5,985  |                            |   | 9,158,209  |                                                  |  |   | (17,912,334 | ) |  |   | (8,748,140 | )
|Issuance of stock in exchange for outstanding warrants held by stockholder, January 2003 (50,000 shares at $2.00 per share)                    |  |              | 50     |                            |   | (50        | )                                                |  |   |             |   |  |   |            |  
|Conversion of $15,000 of Convertible Debentures plus accrued interest, April 2003 (26,597shares at $1.05 per share)                            |  |              | 26     |                            |   | 27,901     |                                                  |  |   |             |   |  |   | 27,927     |  
|Issuance of stock for compensatory awards to non-officer members of the Board of Directors, July 2003 (15,000 shares at $1.00 per
share)       |  |              | 15     |                            |   | 14,985     |                                                  |  |   |             |   |  |   | 15,000     |  
|Conversion of all outstanding Convertible Debentures plus accrued interest, July and August 2003 (9,647,759 shares at $1.05 per
share)         |  |              | 9,648  |                            |   | 10,120,499 |                                                  |  |   |             |   |  |   | 10,130,147 |  
|Issuance of stock for consulting services, various months 2003 (54,493 shares at an average price of $.54 per share)                           |  |              | 55     |                            |   | 29,260     |                                                  |  |   |             |   |  |   | 29,315     |  
|Issuance of stock in partial satisfaction of deferred compensation balances with officers, November 2003, (1,006,287 shares at $.30 per
share) |  |              | 1,006  |                            |   | 300,880    |                                                  |  |   |             |   |  |   | 301,886    |  
|Issuance of stock, various months 2003 (996,336 shares at $.30 per share)                                                                      |  |              | 996    |                            |   | 297,905    |                                                  |  |   |             |   |  |   | 298,901    |  
|Net loss                                                                                                                                       |  |              |        |                            |   |            |                                                  |  |   | (6,103,066  | ) |  |   | (6,103,066 | )
|                                                                                                                                               |  |              |        |                            |   |            |                                                  |  |   |             |   |  |   |            |  
|Balance (deficit), December 31, 2003                                                                                                           |  |              | 17,781 |                            |   | 19,949,589 |                                                  |  |   | (24,015,400 | ) |  |   | (4,048,030 | )





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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

CONTINUED

Periods Ended September 30, 1988 Through December 31, 2004

and the Six Months Ended

June 30, 2005 (Unaudited)



|                                                                                                                                       |  |             |        |                          |   |                                              |  |   |             |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------------------ | - | -------------------------------------------- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                       |  | CommonStock |        | AdditionalPaid-inCapital |   | DeficitAccumulatedDuring theDevelopmentStage |  |   | Total       |  
|Issuance of stock for accounts payable balances, various months 2004 (593,349 shares at an average price of $.76579 per share)         |  | $           | 593    |                          | $ | 453,788                                      |  | $ |             |   |  | $ | 454,381    |  
|Issuance of stock, various months 2004 (3,018,515 shares at $.30 per share)                                                            |  |             | 3,019  |                          |   | 902,536                                      |  |   |             |   |  |   | 905,555    |  
|Issuance of stock, various months 2004 (1,174,337 shares at $.60 per share)                                                            |  |             | 1,174  |                          |   | 703,426                                      |  |   |             |   |  |   | 704,600    |  
|Issuance of stock in partial satisfaction of deferred compensation balance with an officer, May 2004 (125,000 shares at $.30 per
share |  |             | 125    |                          |   | 37,375                                       |  |   |             |   |  |   | 37,500     |  
|Net loss                                                                                                                               |  |             |        |                          |   |                                              |  |   | (1,925,126  | ) |  |   | (1,925,126 | )
|Balance (deficit), December 31, 2004                                                                                                   |  |             | 22,692 |                          |   | 22,046,714                                   |  |   | (25,940,526 | ) |  |   | (3,871,120 | )
|Issuance of stock for account payable balances, June 2005 (534,177 shares at a price of $1.32 per share)                               |  |             | 534    |                          |   | 704,580                                      |  |   |             |   |  |   | 705,114    |  
|Settlement of Deferred Compensation Retirement Plan of Officer                                                                         |  |             |        |                          |   | 2,707,750                                    |  |   |             |   |  |   | 2,707,750  |  
|Net loss                                                                                                                               |  |             |        |                          |   |                                              |  |   | (1,133,208  | ) |  |   | (1,133,208 | )
|Balance (deficit), June 30, 2005                                                                                                       |  | $           | 23,226 |                          | $ | 25,459,044                                   |  | $ | (27,073,734 | ) |  | $ | (1,591,464 | )
|                                                                                                                                       |  |             |        |                          |   |                                              |  |   |             |   |  |   |            |  



See notes to financial statements.



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

STATEMENTS OF CASH FLOWS



|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|------------------------------------------------------ |  | --------------------------------------------------------- | ----------- | - | ------------------------- | ---- | ---------- | ----------- |  | - | ---------- | -
|                                                       |  | Cumulative During Development Stage Through June 30, 2005 |             |   | Six Months Ended June 30, |     
|                                                       |  |                                                           | 2005        |   |                           | 2004 |           
|                                                       |  | (Unaudited)                                               |             |   | (Unaudited)               |      |            | (Unaudited) | 
|Operating activities:                                  |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Net loss                                               |  | $                                                         | (25,315,622 | ) |                           | $    | (1,133,208 | )           |  | $ | (1,178,155 | )
|Items not requiring (providing) cash:                  |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Depreciation                                           |  |                                                           | 19,809      |   |                           |      |            |             |  |   |            |  
|Expenses funded by Common Stock issuance               |  |                                                           | 737,653     |   |                           |      |            |             |  |   |            |  
|Other                                                  |  |                                                           | (123,546    | ) |                           |      |            |             |  |   |            |  
|Changes in:                                            |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Advances to officers                                   |  |                                                           | (1,824,556  | ) |                           |      | (115,774   | )           |  |   |            |  
|Other receivables                                      |  |                                                           | (142,468    | ) |                           |      |            |             |  |   |            |  
|Accounts payable                                       |  |                                                           | 1,410,135   |   |                           |      | (203,056   | )           |  |   | 101,321    |  
|Accrued expenses                                       |  |                                                           | 5,068,864   |   |                           |      | 690,114    |             |  |   |            |  
|Deferred compensation                                  |  |                                                           | 4,643,465   |   |                           |      | 311,021    |             |  |   | 233,242    |  
|Deferred compensation retirement plan                  |  |                                                           | 3,260,000   |   |                           |      | 15,000     |             |  |   |            |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Net cash used in operating activities                  |  |                                                           | (12,266,266 | ) |                           |      | (450,903   | )           |  |   | (843,592   | )
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Investing activities:                                  |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Purchase of fixed assets                               |  |                                                           | (19,808     | ) |                           |      |            |             |  |   |            |  
|Other                                                  |  |                                                           | 314,082     |   |                           |      |            |             |  |   |            |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Net cash provided by investing activities              |  |                                                           | 294,274     |   |                           |      |            |             |  |   |            |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Financing activities:                                  |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Proceeds from issuance of Common Stock and warrants    |  |                                                           | 6,418,016   |   |                           |      |            |             |  |   | 905,555    |  
|Proceeds from notes payable and advances from officers |  |                                                           | 1,803,609   |   |                           |      |            |             |  |   |            |  
|Proceeds from Convertible Debentures                   |  |                                                           | 3,798,000   |   |                           |      |            |             |  |   |            |  
|Proceeds from Bridge Loan                              |  |                                                           | 100,000     |   |                           |      | 100,000    |             |  |   |            |  
|Payments on notes payable and advances from officers   |  |                                                           | (242,609    | ) |                           |      |            |             |  |   |            |  
|Other                                                  |  |                                                           | 108,410     |   |                           |      |            |             |  |   |            |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Net cash provided by financing activities              |  |                                                           | 12,279,700  |   |                           |      | 100,000    |             |  |   | 905,555    |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Increase (decrease) in cash                            |  |                                                           | 13,434      |   |                           |      | (350,903   | )           |  |   | 61,963     |  
|Cash, beginning of period                              |  |                                                           | 0           |   |                           |      | 364,337    |             |  |   | 62,303     |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  
|Cash, end of period                                    |  | $                                                         | 13,434      |   |                           | $    | 13,434     |             |  | $ | 124,266    |  
|                                                       |  |                                                           |             |   |                           |      |            |             |  |   |            |  



See notes to financial statements.



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Unaudited)

June 30, 2005



NOTE 1: BASIS OF PRESENTATION



The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. 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 six-month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.



The balance sheet at December 31, 2004 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 ThermoEnergy Corporations (the Company) annual report on Form 10-KSB for the year ended December 31, 2004.



NOTE 2: 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 after giving effect, where appropriate, to stock dividends, stock splits and nominal issuances of Common Stock, warrants and stock options which occurred within twelve months of the initial
public offering filing date (February 27, 1992). Stock options and warrants issued after the one year period referred to above, and the dilutive effect of convertible debentures were not included in the computation of diluted loss per share since
the effect would be antidilutive. The adjusted weighted average number of common shares used in the basic and diluted loss per share computations were 22,611,396 and 20,205,957 for the six month periods ended June 30, 2005 and 2004, respectively and
22,614,315 and 21,054,211 for the three month periods ended June 30, 2005 and 2004, respectively and 6,216,240 shares cumulative since inception through June 30, 2005.



NOTE 3: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTERS



The Company has incurred net losses since inception and will likely require substantial
capital to continue commercialization of the Technologies and to fund the Companys liabilities. 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.



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##### Table of Contents

THERMOENERGY CORPORATION

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Unaudited)

June 30, 2005



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



Management entered into a $7 million contract on April 13, 2005 with the City of New Yorks Department of Environmental Protection to
employ the companys Ammonia Recovery Process (ARP) at the Bowery Bay Water Pollution Control Plant in Queens.



The sale of stock pursuant to private placement or public offering is another source of additional operating funds that may be pursued by management (See Note 4:
Subsequent Events).



NOTE 4: SUBSEQUENT EVENTS



On July 14, 2005 the Company entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) with 16 non-affiliated accredited investors, with two additional investors becoming a party to the Securities Purchase Agreement during July, 2005. Pursuant to the Securities Purchase Agreement, the Company
completed a $7,438,400 private equity placement (the Private Placement), in which we issued 6,198,671 units (the Units), with each Unit consisting of one share of our Series A Convertible Preferred Stock, $1.00 par value per
share (the Series A Preferred Stock) and a three-year warrant (Warrant) entitling the holder to purchase 0.45 share of our Common Stock, $.001 par value per share (the Common Stock) at an exercise price of $1.50
per share. A complete description can be found in the 8-K filed with the Securities and Exchange Commission dated July 19, 2005.



On May 27, 2005, the Company entered in an agreement with the Estate and widow of P.L. Montesi (the Estate), its former President and Principal Financial
Officer on the terms of a restructured retirement compensation package for Mr. Montesi. Under the terms of the proposed settlement, the Company agreed to pay the Estate $5,000 a month for 10 years beginning April 1, 2005. To the extent that the
Companys cash and cash equivalents fall below $100,000 at the end of any month, the Company shall issue 3,500 shares of Common Stock to the Estate in lieu of cash; but in no event shall the Company issue more than 15,000 shares of Common Stock
per year. The agreement also provided for a one-time payment to the Estate in the amount of $65,000 which was paid in July, 2005. The Company also issued the Estate options to purchase for 1,000,000 shares of our common stock at a price of $1.09 per
share, exercisable for a ten year period. The expiration date of the stock options currently held by the Estate have been extended to May 27, 2010.



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##### Table of Contents

Per the terms of the agreement, on August 2, 2005 the Company purchased 141,383 shares of common stock from the Estate
for a total purchase price of $125,830.87.



We had accounted for the Retirement
Plan as a deferred compensation arrangement and had accrued a liability with respect thereto of $3,245,000 at December 31, 2003 for payments required to be made under the Retirement Plan. As a result of the agreement, the previously recorded
liability was reduced by a total of $2,707,750 to $537,250 and reduced further by payments made during the second quarter (which amount represents the present value of the estimated payments required to be made under the Agreement). No liability was
recorded for the stock options granted to Mrs. Montesi under the Agreement, as the exercise price of such options was equal to the market value of the underlying common stock on the date of the grant.



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##### Table of Contents

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



Forward-Looking Statements



The following discussion should be read in conjunction with the financial statements and the notes to the financial statements appearing elsewhere in this quarterly report on Form 10-QSB. The following discussion and the information
contained elsewhere in this quarterly report contains statements that are considered forward-looking statements. Forward-looking statements give the current expectations of forecasts of future events of ThermoEnergy Corporation (the
Company). All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding the Companys future financial position, business strategy, budgets, projected costs and
plans and objectives of management for future operations, are forward-looking statements. The words anticipate, believe, continue, estimate, expect, intend, may,
plan, and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Companys current plans, and the Companys actual future activities, and
results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the
statements made. These include, but are not limited to, the risks and uncertainties associated with statements relating to: (i) the ability of the Company to fund its continued operations and development activities, primarily through the
availability of debt and equity financing on terms that are acceptable or otherwise to the Company; (ii) the Companys ability to commercialize its Technologies (as defined below); (iii) changes in government policy and in legislation and
regulation of the waste treatment industry that adversely affect the Companys business prospects; and (iv) general economic and market conditions.



Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate. The Company has based these forward-looking
statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs.



The Company undertakes no obligation to publicly revise these forward-looking
statements occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in
this quarterly report.



The Companys filings with the
Securities and Exchange Commission (the Commission), including its reports under the Securities and Exchange Act of 1934, as amended (the Exchange Act), can be found through the Companys website at
http://www.thermoenergy.com/financial.htm. The information contained in the Companys website is not deemed to be a part of this filing.



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General



ThermoEnergy Corporation, an Arkansas corporation (the Company), was incorporated in January 1988, for the purpose of developing and marketing
certain municipal and industrial wastewater treatment technologies. The Companys current wastewater treatment technologies include: (1) the ThermoFuel process, a renewable energy process that converts sewage sludge (a/k/a
biosolids) into a high-energy solid fuel, (2) the Enhanced Biogas Production process, and (3) the Ammonia Recovery Process (ARP), that converts the nitrogen (ammonia) found in wastewater plants to ammonium sulfate, a
commercial grade fertilizer utilized by agriculture worldwide. Each of these process technologies is more fully described in the following section. These three technologies are primarily aimed at solving wastewater problems for broad-based
municipal, industrial and agricultural markets and are collectively referred to as the Water Technologies.



The Company licenses ARP from Battelle Memorial Institute (BMI) and licenses the ThermoFuel and Enhanced Biogas Production technologies from
Alexander G. Fassbender, the Companys Executive Vice President of Corporate Technology and the inventor of TIPS.



The Company is also majority owner of a patented clean energy technology known as the ThermoEnergy Integrated Power System (TIPS), which
converts fossil fuels (including coal, oil and natural gas) and biomass into electricity without producing air emissions, and is aimed at competing with conventional energy conversion technologies. In addition, TIPS removes and captures carbon
dioxide (CO2) in liquid form for sequestration or beneficial reuse. The TIPS technology has been assigned to ThermoEnergy Power Systems, LLC, a Delaware corporation of which the Company owns 85% and Alex Fassbender owns 15%
(ThermoEnergy Power Systems). ThermoEnergy Power Systems has not been capitalized and has not engaged in any business operations. TIPS and the Water Technologies are collectively referred to as the Technologies.



Management continues to search for a joint venture partner to pursue
potential business opportunities within the municipal and industrial wastewater treatment markets utilizing the Companys ARP and ThermoFuel technologies. The Company is seeking a partner with the financial resources, and engineering skills and
experience in designing, building and operating wastewater treatment plants, and which has a presence in the target markets. Management also is looking for a similar partner to join with the Company in developing and commercializing the TIPS
process. The Company has not been able to formalize a strategic relationship with any party that has the resources to exploit the Technologies. The Companys ability to continue seeking such strategic partners or such strategic relationships is
dependent on having the available cash to sustain its activities.



Plan of
Operation



The Company seeks to derive revenues from the
commercialization of the Technologies. The Water Technologies address wastewater problems for municipal and broad-based industrial markets. TIPS is aimed at competing with conventional energy combustion technologies for both large stationary power
plants and small Combined Heat & Power plants for industry. Although the Company has submitted several proposals to municipal wastewater authorities and may



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receive some funding from federal grants that, if issued, would be used to further the development of its TIPS
technology, the Company cannot predict the acceptability of its Technologies in such markets. Since inception in 1988, the Company has not generated any material revenues.



Because the Company currently does not possess the technical, operational or financial resources necessary to construct or
operate ThermoFuel, ARP or TIPS commercial facilities without external project funding and the ability to source engineering skills, the Company has sought and continues to seek strategic relationships with larger corporate partners to expedite the
marketing and commercialization of the Technologies. The Company does not currently have such a strategic relationship with any party that has the human and financial resources capable of exploiting the Technologies. The Companys ability to
continue seeking such strategic partners or such strategic relationships is dependent on its ability to obtain adequate financing to sustain its activities.



The Company and its financial advisor, Rock Capital, LLC, continue to search for possible acquisition targets that possess both products and services
which complement or enhance the Companys Technologies and which have revenues from operations. Management believes that the acquisition of, or merger with, a business with a recurring stream of revenue would enhance the Companys ability
to obtain longer-term financing. While the current financial condition of the Company would make an acquisition in the next 12 months difficult, management hopes that debt or equity acquisition financing would become available if an appropriate
target was found.



Current Cash Requirements; Need for Additional Funds



The Company has historically lacked the financial and
other resources necessary to market the Technologies or to build demonstration projects without the financial backing of government or industrial customers. The private equity placement completed during July provides the Company with sufficient cash
balances to fund current operations for the next 24-30 months. The following summary sets forth the Companys plan of operations for the next 12 months.



As of June 30, 2005, the Company had a cash balance of approximately $13,434 and current liabilities of $1,536,076. During the years ended December 31,
2004, 2003 and 2002, the Companys operating expenses were $1,930,996, $5,117,925, and $1,545,517, respectively. During the first six months ended June 30, 2005 and June 30, 2004, the Companys operating expenses were $1,140,884 and
$1,179,598, respectively. This small decrease was due to a significant reduction in general and administrative expenses as part of the Companys efforts to manage costs while seeking financing and opportunities to employ the Technologies offset
by expenses related to the private placement of equity closed during July. Management anticipates that its cash requirements during the next 12 months to implement the Companys marketing and development strategies will be approximately
$3,000,000 to cover expenses associated with the New York ARP contract and various TIPS Government Grant projects.



During the first six months of 2005, as well as during the 2004, 2003 and 2002 fiscal years, the Company funded its operations primarily from borrowings,
generally from shareholders, executive officers and other related parties, through the issuance of debentures for cash or in settlement payments of other obligations. The Company and its financial advisor are reviewing



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various strategic alternatives to fund the Companys operations and development activities. These alternatives
include the issuance of additional restricted shares of Common Stock, the issuance of Preferred Stock, derivatives, bridge financing arrangements with commercial lenders, or the possibility of additional private placement offerings. Management is
currently discussing a multi-million dollar hybrid credit facility with an unrelated investment banking company to fund further ARP projects. Such an arrangement would improve the economic return to the Company for these projects while allowing the
Company to implement its business model on a more timely basis. There is no guarantee that this financing will ultimately be completed.



Recent Developments



In a letter dated April 5, 2005, the Company received an official Notice of Award from New York City for a 500,000 gallon per day ARP facility to be
located at the Citys Bowery Bay Water Pollution Control Plant. This contract was in part due to the success of the Companys ARP pilot-plant demonstration at New York Citys Oak Wood Beach Water Pollution Control Plant in 1999 and
2000. The Company and New York City officials signed the $7 million contract on April 13, 2005, and the contract was registered on May 27, 2005. Construction is currently underway by the Company with two primary subcontractors, and the Company
expects to complete the facility within 10-12 months.



Research and
Development During the Next 12 Months



The Company
conducted no product research and development activities in 2003 and 2004. The Company was awarded three (3) grants by the U.S. Department of Energy for the budget period of June 1, 2005 through May 31, 2006. The Company entered into an agreement
with the University of Nevada, Reno on July 25, 2005 for the project entitled Pressurized Oxidative Recovery of Energy from BIOMASS. We plan to conduct further research on developing the TIPS technology during the next twelve months.



In conjunction with the construction of the New York Bowery
Bay ARP facility, the Company opened a laboratory in Worcester, MA to conduct testing on various materials and resins for ARP, for process efficiency and quality control purposes. The lab is currently staffed by one technician and operates under the
supervision of the Companys Chief Technology Officer. The Company plans to expand the labs capabilities in the coming months, and is currently interviewing potential candidates to increase the staffing levels.



Expected Changes in the Number of Employees



The Company expects to increase the number of employees by 6-10 employees in
the next 12 months, and has already hired a Project Manager for the New York Bowery Bay facility.



Off-Balance Sheet Arrangements



The Company does not have any off-balance sheet arrangements.



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Item 3. Controls and Procedures.



The Company, under the direction of its Chief Executive Officer and Principal Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Commissions rules and forms. The disclosure controls and procedures are also intended to ensure
that such information is accumulated and communicated to the Companys management, consisting of the Chief Executive Officer and Principal Financial Officer as appropriate to allow timely decisions regarding required disclosures.



The Chief Executive Officer and Principal Financial Officer have reviewed and
evaluated the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on, and as of the effective date of, that review and evaluation, the Chief Executive Officer and Principal Financial Officer
have concluded that the Companys disclosure controls and procedures are effectively serving the stated purposes.



No changes in the Companys internal control over financial reporting occurred during the period covered by this report that materially affected, or
are reasonably likely to materially affect, the Companys internal controls over financial reporting.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



There
are currently no pending legal proceedings against the Company.



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



During the period covered by this Report there have been no unregistered sales of equity securities or repurchases of securities required to be disclosed
pursuant to this Item. On July 15 and July 18, 2005, the Company sold unregistered securities pursuant to a private equity placement. This transaction is described in Item 3.02 to the Companys current report on Form 8-K dated July 13, 2005,
filed with the Securities and Exchange Commission on July 19, 2005, which description is incorporated by reference herein.



Item 3. Defaults Upon Senior Securities.



None.



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



Our annual meeting of Shareholders was held on June 16, 2005, for the principal purpose of (a) electing two directors, and (b) ratifying the appointment of Kemp & Company as our independent auditors for the fiscal
year ending December 31, 2005.



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The following votes were cast by shareholders with respect to the election of directors named in our
Proxy Statement dated May 20, 2005:



|                        |  |                  |  |               
|----------------------- |  | ---------------- |  | --------------
|Nominee                 |  | Shares Voted For |  | Votes Withheld
|Alexander G. Fassbender |  | 16,668,373       |  | 11,258        
|                        |  |                 
|Andrew T. Melton        |  | 16,668,819       |  | 10,812        



The terms of the following directors
continue until the following annual meetings:



Dennis C. Cossey - 2006

Paul A. Loeffler - 2006

John F. Corcoran - 2007

Louis J. Ortmann - 2007

Alexander G. Fassbender - 2008

Andrew T. Melton - 2008



The following votes were cast by shareholders with respect to the ratification, confirmation and approval of Kemp & Company as the independent
certified public auditors of the Company for the fiscal year ending December 31, 2005:



|               |  |                  |  |                      |  |            
|-------------- |  | ---------------- |  | -------------------- |  | -----------
|Nominee        |  | Shares Voted For |  | Shares Voted Against |  | Abstentions
|Kemp & Company |  | 16,673,059       |  | 1,417                |  | 5,155      



Item 5. Other Information.



On April 13, 2005
(and filed on May 27, 2005), the Company entered into a $7 million contract with the City of New York Department of Environmental Protection, to employ the Companys ARP technology at the Bowery Bay Water Pollution Control Plant in Queens. This
agreement is filed as Exhibit 10.1 to this quarterly report on Form 10-Q.



Item 6. Exhibits.



The following
exhibits are filed as part of this report:



|              |  |                                                                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibits                                                                                                                                                                                                               
|10.1          |  | Contract No. PO-081 for Construction and Operational Services of an Ammonia Recovery Process Demonstration Plant, dated May 25, 2005 between the City of New York, Department of Environmental
Protection and ThermoEnergy Corporation
|10.2          |  | Agreement dated May 27, 2005 between ThermoEnergy Corporation, the Estate of Primo L. Montesi and Betty Johnson Montesi.*                                                                                                             
|              | 
|31.1          |  | Certification pursuant to Securities and Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                  
|              | 
|32.1          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                               

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|* | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 3, 2005.
|- | ---------------------------------------------------------------------------------------------------------



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SIGNATURE



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



Date: August 15, 2005



THERMOENERGY CORPORATION/s/ Dennis C. CosseyDennis C. Cossey, Chairman,Chief Executive Officer and Secretary




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Index to Exhibits



|              |  |                                                                                                                                                                                                                                        |  |         
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|ExhibitNumber |  | Description                                                                                                                                                                                                                            |  | Location
|10.1          |  | Contract No. PO-081 for Construction and Operational Services of an Ammonia Recovery Process Demonstration Plant, dated May 25, 2005 between the City of New York, Department of Environmental
Protection and ThermoEnergy Corporation |  |         
|              |  |                                                                                                                                                                                                                                       
|10.2          |  | Agreement dated May 27, 2005 between ThermoEnergy Corporation, the Estate of Primo L. Montesi and Betty Johnson Montesi.*                                                                                                              |  |         
|              |  |                                                                                                                                                                                                                                       
|31.1          |  | Certification pursuant to Securities and Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   |  |         
|              |  |                                                                                                                                                                                                                                       
|32.1          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                |  |         

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|* | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 3, 2005.
|- | ---------------------------------------------------------------------------------------------------------