FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                   (Mark One)

           [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

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

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

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


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

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

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

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

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


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

3,523,148 shares of Common Stock, par value $.001 per share


<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                                 BALANCE SHEETS

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

<S>                                                                               <C>                 <C>
Cash - Total Current Assets                                                        $   411,275        $     242,486

Advances to officers                                                                   507,015              381,015
Accrued interest receivable - officers                                                  76,231               49,567
Property and equipment, at cost:
  Equipment                                                                             14,818               14,818
  Furniture and fixtures                                                                 4,991                4,991
  Less accumulated depreciation                                                        (19,809)             (19,809)
                                                                                   -----------        -------------
                                                                                             -                    -
                                                                                   -----------        -------------

                                                                                   $   994,521         $    673,068
                                                                                   ===========         ============


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable                                                                   $   775,542         $    590,903
Accrued interest payable - primarily to related parties                                308,528              246,671
Deferred compensation                                                                1,467,909            1,192,779
Notes payable to stockholders (Notes 2 and 5)                                          526,560              932,900
                                                                                   -----------         ------------
      Total Current Liabilities                                                      3,078,539            2,963,253

Convertible Debentures (Notes 2 and 4)                                               1,737,631              906,000
                                                                                   -----------         ------------
      Total Liabilities                                                              4,816,170            3,869,253

Stockholders' equity (deficit) (Notes 3, 4 and 6):
  Preferred stock,  non-voting,  $1 par value:
     Authorized - 10,000,000 shares; none issued
  Common Stock, $.001 par value: Series A Common Stock;
     Authorized - 10,000,000 shares; no shares issued and
     outstanding Series B Common Stock; Authorized - 65,000,000
     shares; June 30, 1999:  issued - 3,606,977 shares; outstanding -
     3,523,148 shares;  September 30, 1998:  issued - 3,486,797
     shares;  outstanding - 3,402,968 shares                                              3,607                3,487
  Additional paid-in capital                                                         4,439,971            4,334,864
  Deficit accumulated during the development stage                                  (8,265,227)          (7,534,536)
                                                                                   -----------         ------------
                                                                                    (3,821,649)          (3,196,185)
                                                                                   -----------         ------------

                                                                                   $   994,521         $    673,068
                                                                                   ===========         ============


</TABLE>


See notes to financial statements.





<PAGE>




                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                           Cumulative
                                             During
                                           Development
                                          Stage Through             Six Months Ended                  Three Months Ended
                                             June 30,                   June 30,                           June 30,
                                              1999               1999             1998             1999              1998
                                              ----               ----             ----             ----              ----
                                           (Unaudited)                 (Unaudited)                       (Unaudited)

<S>                                       <C>                 <C>             <C>               <C>               <C>
Operating Expenses:
  General and administrative
                                          $6,278,356          $535,642         $345,014          $356,471         $303,693
  License and royalties fees                 744,766            67,500                             32,500
  Travel and entertainment
                                           1,111,619            75,094           35,199            31,678            9,596
                                           ----------         ---------         --------          --------         ---------

                                           8,134,741           678,236          380,213           420,649          313,289
                                           ----------         ---------         --------          --------         ---------


Loss From Operations
                                          (8,134,741)         (678,236)        (380,213)         (420,649)        (313,289)
                                           ----------         ---------         --------          --------         ---------

Other Income (Expense)
  Interest income                            133,837            18,791           13,182            10,035            6,721
  Gain on settlement of
    lawsuit (Note 6)                         243,779           243,779                            243,779
  Other                                       49,550            49,550                             49,550
  Interest expense
                                            (557,585)         (120,848)         (74,320)          (56,452)         (40,429)
                                           ----------         ---------         --------          --------         ---------


                                            (130,419)          191,272          (61,138)          246,912          (33,708)
                                           ----------         ---------         --------          --------         ---------


Net Loss
                                         $(8,265,160)        $(486,964)       $(441,351)        $(173,737)       $(346,997)
                                          ===========       ===========      ===========       ===========      ===========

Basic and Diluted

  Per Common Share (Note 4)
    Loss From Operations
                                         $     (2.16)       $    (0.16)       $   (0.09)        $   (0.10)       $   (0.08)

    Net Loss
                                         $     (2.19)       $    (0.12)       $   (0.11)        $   (0.04)       $   (0.09)


</TABLE>


See notes to financial statements.


<PAGE>

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



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

<S>                                                            <C>                <C>              <C>                   <C>
Issuance of stock, January 1988,
  (2,205,762 shares at $.08 per share                           $                 $   178,094       $                   $   180,300

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>


<PAGE>


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



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


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

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

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

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

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

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

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

Issuance of warrants to stockholder                                                     6,333                                 6,333

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

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

</TABLE>

<PAGE>



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


<TABLE>
<CAPTION>

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

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

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

Issuance of warrants to stockholders                                  226,000                               226,000

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

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

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

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

Issuance of warrants to stockholders                                    9,760                                 9,760

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

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


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

Net loss                                                                                (896,998)          (896,998)
                                                   -------          ---------         -----------         ----------
Balance (deficit), September 30, 1995                3,241          3,838,578         (4,989,780)        (1,147,961)

Issuance of warrants to stockholders                                    5,340                                 5,340

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

</TABLE>

<PAGE>


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



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

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

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

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

Net loss                                                                              (1,196,036)         (1,196,036)
                                                   -------          ---------         -----------          ----------
Balance (deficit), September 30, 1997                3,487          4,334,864         (6,737,437)         (2,399,086)

Net loss                                                                                (797,099)           (797,099)
                                                   -------          ---------         -----------          ----------

Balance (deficit), September 30, 1998                3,487          4,334,864         (7,534,536)         (3,196,185)

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

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

Conversion of $81,340 of notes payable to
   stockholders and accrued interest, April
   and May, 1999 (52,580 shares)                        53            105,107                               105,160

Net loss                                                                                (486,964)           (486,964)
                                                   -------          ---------         -----------          ----------
Balance (deficit), June 30, 1999                   $ 3,607         $4,439,971        $(8,265,227)        $(3,821,649)
                                                   =======          =========         ==========          ===========

</TABLE>


See notes to financial statements.



<PAGE>



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

<TABLE>
<CAPTION>

                                                   Cumulative
                                                     During
                                                 Development
                                                 Stage Through                   Six Months Ended June 30,
                                                  June 30, 1999                   1999               1998
                                                ---------------                   ----               ----
                                                  (Unaudited)                 (Unaudited)         (Unaudited)
<S>                                              <C>                            <C>                 <C>
Operating activities:
  Net loss                                      $(8,265,160)                    $(486,964)          $(441,351)
  Items not requiring
  (providing) cash:
    Depreciation                                     19,809                                             1,416
    Expenses funded by Common
      Stock issuance                                596,279
    Other (Note 6)                                 (215,438)                    (218,779)
  Changes in:
    Advances to officers                           (705,998)                      (84,000)            (70,000)
    Other receivables                               (76,231)                      (17,984)            (12,827)
    Accounts payable                                775,542                       211,359             (37,715)
    Accrued expenses                                419,979                       120,849              59,416
    Deferred compensation                         1,666,891                       185,795             137,560
                                                ------------                    ----------          ----------
        Net cash used in
         operating activities                    (5,784,327)                     (289,724)           (363,501)
                                                ------------                    ----------          ----------

Investing activities:
  Purchase of fixed assets                          (19,808)
  Proceeds from sales of securities (Note 6)        218,779                       218,779
  Other                                              (3,341)
                                                ------------
         Net cash used in
          investing activities                      195,630                       218,779
                                                ------------                    ----------

Financing activities:
  Proceeds from issuance of
    Common Stock and warrants                     2,720,562
  Proceeds from notes payable                     1,665,609
  Proceeds from convertible debentures            1,660,000                       369,000             516,000
  Payments on notes payable                        (154,609)
  Other                                             108,410
         Net cash provided by
           financing activities                   5,999,972                       369,000             516,000
                                                -----------                     ---------           ---------

Increase (decrease) in cash                         411,275                       298,055             152,499

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

Cash, end of period                             $   411,275                     $ 411,275           $ 183,165
                                                ===========                     =========           =========

</TABLE>


See notes to financial statements.


<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                  June 30, 1999



NOTE 1:  BASIS OF PRESENTATION

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

The accompanying unaudited financial statements statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information and with the  instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly,  they do not include  all of the  information  and  footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements. In the opinion of management,  all adjustments (consisting of normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included.  Operating results for the three- and six-month periods ended June 30,
1999 are not necessarily  indicative of the results that may be expected for the
year ended December 31, 1999.

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

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


NOTE 2: NOTES PAYABLE TO STOCKHOLDERS AND CONVERTIBLE
DEBENTURES

During November 1998, the Company's Board of Directors  approved the issuance of
up to $1,500,000 (an increase of $500,000 from the amount previously authorized)
of the Series 98, 15% Convertible Debentures,  due January 15, 2003. During June
1999, the Company's  Board of Directors  increased the authorized  amount of the
Debentures to $2,500,000.  The Company issued $50,000 of such Debentures  during
the three  months ended  December  31, 1998 and  $781,631  during the six months
ended June 30, 1999 of which  $412,631  were issued in payment of certain of the
Company's  10% notes  payable to  stockholders  and  related  accrued  interest.
Subsequent  to June 30, 1999,  Debentures  aggregating  $232,124  were issued in
exchange  for the  remainder  of the 10% notes and a Debenture  in the amount of
$129,623 was issued in  satisfaction  of accounts  payable to Battelle  Memorial
Institute.

During  the  six-month  period  ended June 30,  1999,  a total of $81,340 of the
Company's  6.63% notes payable to stockholders  matured.  The Company's Board of
Directors approved the


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                  June 30, 1999


NOTE 2: NOTES PAYABLE TO STOCKHOLDERS AND CONVERTIBLE
DEBENTURES (continued)

issuance of Series B Common  Stock at $2.00 per share in lieu of cash payment of
the  notes  and  related  accrued  interest  and the  extension  of the  warrant
agreements  executed in connection  with the note  agreements  for an additional
two-year period (see Note 3). An additional  $205,825 of the notes mature during
the period July 1, 1999 through December 31, 1999 and the remainder of the notes
($109,735) matures during 2000.

NOTE 3:  COMMON STOCK

In January  1999,  the Company  issued 67,600 shares of Series B Common Stock to
the holders of the 10% notes  payable to  stockholders  in  accordance  with the
related note  agreements.  During the quarter  ended June 30, 1999,  the Company
issued  52,580  shares of Series B Common  Stock to the  holders of 6.63%  notes
payable to stockholders in the aggregate amount of $105,160,  including  $23,820
of accrued interest.

During June 1999,  the Board of  Directors  approved  executive  bonuses for two
officers in the form of 150,000 non-qualified stock options to each officer. The
options expire in five years and are  exercisable at $2.00 per share.  Since the
exercise  price  approximates  the fair value of the  Company's  Series B Common
Stock,  no  compensation  expense  was  accrued  in the  accompanying  financial
statements.

NOTE 4:  LOSS PER COMMON SHARE

Loss per common share is computed by dividing the net loss for the period by the
weighted average number of shares  outstanding  during the period,  adjusted for
stock options and warrants issued within twelve months of the Company's  initial
public offering filing date (February 27, 1992) which are treated as outstanding
for all periods presented. The adjusted weighted average number of common shares
used in the basic and diluted loss per share  computations were 3,768,381 shares
for the period cumulative since inception  through June 30, 1999,  4,133,272 and
4,045,558  shares  for the  six-month  periods  ended  June 30,  1999 and  1998,
respectively,  and 4,159,110 and 4,045,558  shares for the  three-month  periods
ended June 30, 1999 and 1998, respectively.

Warrants  to purchase  approximately  799,000  shares of Series B Common  Stock,
stock  options for up to 750,000  shares of Series B Common Stock under the 1997
Stock  Option  Plan and for  300,000  shares  for  executive  bonuses,  were not
included in the  computation of diluted loss per share since the effect would be
antidilutive.  At June 30,  1999,  the  Company  had  issued  $1,737,631  of 15%
Convertible Debentures,  due January 15, 2003. The holders of the Debentures can
convert the principal amount and accrued interest into shares of Series B Common
Stock  at the  conversion  price  of $2.00  per  share at any time  prior to the
maturity date.


<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                  June 30, 1999




NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS

The Company has  incurred  net losses  since  inception  and has $205,825 of the
6.63% notes payable to  stockholders  maturing  during the remainder of 1999 and
$109,735 of such notes maturing during 2000.  Additionally,  substantial capital
will likely be required to continue  commercialization of the Technologies.  The
financial  statements have been prepared assuming the Company will continue as a
going  concern,  realizing  assets and  liquidating  liabilities in the ordinary
course of business and do not reflect any adjustments that might result from the
outcome of the aforementioned  uncertainties.  Management is considering several
alternatives for mitigating  these conditions  during the next year. The Company
is authorized to issue up to $2,500,000 of Series 98 Convertible  Debentures and
to issue  Series B Common  Stock to the  holders of the 6.63%  notes  payable to
stockholders  upon maturity.  The sale of stock pursuant to private placement or
public  offerings and fees from projects  involving the  Technologies  are other
alternatives  management is pursuing.  Additional  funds may be necessary in the
event the Company  takes on other  projects or makes an  acquisition  of another
company  to  facilitate   the   Company's   commercial   demonstration   of  the
Technologies.  If the  Company is unable to enter into  commercially  attractive
collaborative  working  arrangements  for one or more  commercial  or industrial
projects, the Company may sub-license the Technologies to third parties.

The overall  goal of the  Company is to  successfully  complete a  demonstration
project  for  STORS,   NitRem  and/or  ARP.  Management  plans  to  utilize  any
demonstration  facilities to expand the  visibility of the Company in municipal,
industrial, Department of Defense and Department of Energy markets. A successful
demonstration   project  is  the  single  most  important   business  factor  in
implementation of the Company's plan of operations.

Management  has  determined  that the  financial  success of the  Company may be
largely dependent upon the ability and financial  resources of established third
parties  collaborating  with the Company with respect to projects  involving the
Technologies.  The Company has entered  into  agreements  with third  parties in
order to pursue this business strategy.

NOTE 6:  COMMITMENTS AND CONTINGENCIES

During  1998,  the Company  filed a lawsuit  seeking  compensatory  and punitive
damages from the  broker-dealer  involved in the  Company's  1997 failed  public
offering.  During June 1999,  the Company and the  broker-dealer  entered into a
release and settlement agreement. In connection with this agreement, the Company
received  $25,000 in cash and a commitment to receive an  additional  $50,000 in
cash  prior to the end of 1999,  50,000  shares  of common  stock of the  parent
company of the  broker-dealer  (the  "Stock"),  and 20,000  warrants to purchase
shares of the  Stock at a price of $4.00  per  share for a period of five  years
from the date of the agreement.

<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)
                                  June 30, 1999


NOTE 6:  COMMITMENTS AND CONTINGENCIES (continued)

The Company sold all 50,000  shares of the Stock  during June 1999.  The Company
also  exercised  warrants  for 5,000  shares of the Stock which were sold during
June 1999. A gain of $243,779 was recorded in the  accompanying  1999  financial
statements in connection with the release and settlement agreement.

During  November  1998, the Company  entered into a consulting  agreement with a
third party in connection with the City of New York demonstration  project.  The
agreement  specifies  compensation  at an hourly rate plus expenses for services
rendered.  In the event the Company sells an ARP unit to or operates an ARP unit
for the City of New York under a privatized  agreement,  the agreement  provides
for additional cash compensation  based upon a percentage of the overall capital
cost of the ARP  demonstration  facility  and for the  issuance  of  warrants to
purchase  62,500  shares of Series B Common  Stock of the Company at an exercise
price of $4.00 per share, exercisable within two years from the date of issuance
of the warrants.

During November 1998, the Company  entered into an employment  agreement with an
individual to serve as the Company's  Executive  Vice  President and Senior Vice
President of Corporate Technology.  In order to assist the Company in conserving
cash, an amendment to the agreement  was executed  which  provides the executive
with a  half-time  position  for a  period  not to  exceed  twelve  months.  The
employment  agreement  provides for,  among other things,  basic,  incentive and
other compensation.

The  Company  is  the  general   contractor  in  connection  with  a  Technology
demonstration  for the City of Colton,  California,  which is being  funded by a
federal  grant.  The Company has contracted  with Foster  Wheeler  Environmental
Corporation  ("FWEC") to fabricate,  install and operate the demonstration unit.
The Company has received funds  aggregating  approximately  $1,000,000  from the
City of Colton of which approximately  $900,000 have been paid to FWEC and other
subcontractors.  The  custodial  funds held by the  Company  pending  payment to
subcontractors for the project,  are maintained in a separate bank account which
is not included in the accompanying financial statements.

<PAGE>

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

General

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

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

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

<PAGE>

STORS Project

     In  May  of  1996,  ThermoEnergy  and  Battelle  representatives  met  with
officials at San Bernardino Valley Water District ("SBVWD") to discuss siting of
a  full-scale  STORS/NitRem  demonstration  project (the  "Project")  in the San
Bernardino area. Subsequently,  the United States House and Senate approved ( PL
104-204,  September  26, 1996) a $3,000,000  federal  grant to the SBVWD for the
design,  construction and operation of a large-scale STORS Waste Water Treatment
Demonstration  Facility.  The General Accounting Office authorized the EPA's San
Francisco office to disburse the funds  accordingly and to administer this grant
for the SBVWD  project.  In March,  1998, the SBVWD selected the City of Colton,
California  to host the Project.  On September  3, 1998,  the Company  signed an
agreement  with  the  City  of  Colton  for  the  Company  to  demonstrate   its
STORS/NitRem  technology.  The EPA grant  will pay for the  construction  of the
demonstration  test equipment.  At the conclusion of the demonstration  project,
all right,  title and interest to the test equipment shall be vested in the EPA.
The Company will not be required to make capital  contributions to this project.
The Company will not receive any  revenues or earnings  from this  project,  but
will be reimbursed for  administrative  and operating  costs.  Subsequently  the
Company contracted with Foster Wheeler Environmental Corporation ( See strategic
relationships) to fabricate,  install and operate the STORS demonstration unit .
The design plans for the Project have been completed. The Company is the general
contractor on the Project, and, as such, has received  approximately  $1,000,000
in funds from the City of Colton.  Through June 30,  1999,  The Company has paid
approximately $900,000 to subcontractors and other vendors,  primarily to FWENC.
Once in  operation,  the Colton  STORS  facility  will have a larger  processing
capacity than 70% of the existing  municipal  wastewater  plants in the U.S. The
demonstration project is scheduled to begin in the third quarter of 1999.

                  United States Department of the Army Program

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

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

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

<PAGE>

New York City Project

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

STRATEGIC CORPORATE RELATIONSHIPS

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

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

<PAGE>

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

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


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

<PAGE>


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

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

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

Plan of Operations

     The  Company had planned to use the net  proceeds  of the  proposed  public
offering to fund it's  day-to-day the operations  until such time as the Company
either  made  substantial  equipment  sales or  secured a  long-term  privatized
contract. All of the Company's demonstration projects have been funded by grants
or by its strategic corporate partners.  As discussed in Note 7 of the financial
statements  included in the  Company's  annual  report of Form 10-K for the year
ended  September 30, 1998,  the managing  underwriter  of the proposed  offering
notified the Company in October of 1997 that it would be unable to complete the
offering.  The Company now plans to use the proceeds from the sale of $2,500,000
of  convertible  debentures  to  satisfy  the  cash  requirements  of its  basic
operations  for the next year.  The  Company  also plans to repay the  remaining
6.63% notes payable ( $315,560) and related  accrued  interest by issuing shares
of Series B restricted  Common  Stock to the holders of the notes if  sufficient
funds are not available to repay the notes at maturity.  ($205,825 mature during
the remainder of 1999 and $109,735 mature during 2000).

         During June, July and August of 1999, the Company issued Series 98, 15%
Convertible  Debentures in satisfaction of the 10% notes payable to stockholders
aggregating approximately $666,000, including accrued interest.


<PAGE>

         On  September  11,  1998,  the  Company  agreed  to  form  ThermoEnergy
Environmental  Corporation  with Foster  Wheeler  Environmental  Corporation  of
Livingston, New Jersey to pursue clean water projects worldwide. The new Company
will  combine  the  Company's  state-of-the-art  clean water  technologies  with
FWENC's  engineering  expertise  and global  presence to pursue  industrial  and
municipal water/wastewater projects around the world. The Company will own 49.9%
of TENC. The main purpose of the joint venture,  among other things,  will be to
develop, market and utilize the ARP technology.  Concurrently with forming TENC,
the Company entered into a Shareholders agreement by an among FWENC, the Company
and TENC and a worldwide  sublicense of the ARP technology to TENC for municipal
and agricultural livestock production facilities. On August 4, 1998, the Company
signed  an  agreement  FWEC to  provide  up to  $500,000  funding  necessary  to
demonstrate  the ARP  technology  and to design,  fabricate  and operate the ARP
pilot plant. It is thereafter  anticipated that any commercial  business derived
from the successful  demonstration  of ARP will be engaged  through TENC. At the
option of the Company,  projects  utilizing NitRem, DSR and STORS may be engaged
through TENC.

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

<PAGE>


Results of Operations

For the six  months  ended June 30,  1999,  the  Company  incurred a net loss of
$486,964 as compared to $441,351 for the six months ended June 30, 1998. For the
three months ended June 30,  1999,  the Company  incurred a net loss of $173,737
compared to compared to $346,997 for the three months ended June 30, 1999.

     General and  administrative  expenses and travel expenses  increased during
the six-and  three-month  periods ended June 30, 1999, compared to June 30 1998,
due to the Company's  efforts regarding the projects  discussed above.  Interest
expense  increased  significantly  between the same periods primarily due to the
issuance of the 15% Convertible Debentures. As more fully discussed in Note 6 to
the  financial  statements,  during June 1999,  the  Company  recorded a gain of
$243,,779 in  connection  with the  settlement of a lawsuit filed by the Company
against the managing  underwriter of the Company's proposed 1997 public offering
and a gain of  $49,550  in  connection  with the sale of scrap  parts to a third
party.

Liquidity and Capital Resources

     During the period ended June 30, 1999, the Company used $289,724 of cash in
operations compared to $363,501,  in the comparable period of 1998. During 1992,
the  Company  initiated a public  offering of 125,000  shares of Series B Common
Stock at a price of $16.00 per share.  The  offering  was  conducted  on a "best
efforts"  basis,  primarily by directors and officers of the Company.  Effective
January 5, 1994, the offering was terminated. A total of 93,129 shares were sold
at a price of $16.00 per share and an  additional  6,438  shares  were issued at
$16.00 per share in satisfaction of notes payable and related accrued  interest.
Currently,  there  is no  public  market  for the  Series  B  Common  Stock.  As
previously discussed, the Company's proposed 1997 public offering did not occur.

     During 1999,  1998, and 1997, the Company met its liquidity needs primarily
from  borrowings from  stockholders  As discussed under Plan of Operations,  the
Company  converted all of its  outstanding  10% notes payable to stockholders to
Series 98, 15%  Convertible  Debentures and plans to convert the remaining 6.63%
notes payable to stockholders  to shares of Series B restricted  Common Stock of
the Company if sufficient funds are not available to repay the notes at maturity
($205,825  mature during the remainder of 1999 and $109,735 mature during 2000).
Management  plans to meet the Company's  liquidity  needs during the year ending
December 31, 1999 with  proceeds  from the sale of  convertible  debentures  and
public or private placement offerings of Common Stock and from the proceeds from
the  settlement  of  the  Company's  lawsuit  against  its  former  underwriter.
Management  plans to meet  long-term  liquidity  needs  primarily  from revenues
derived from  commercial  contracts the Company hopes to obtain  subsequent  the
successful  demonstrations of its  Technologies,  such as the Radford NitRem and
New York City ARP projects and the upcoming  Colton  STORS/NitRem  demonstration
project.


Net Operating Losses

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


<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings


     On October  6,  1998,  the  Company  filed an action in the  United  States
District  Court,  Eastern  District  of  Arkansas,  Western  Division,  case No.
LR-C-98-657 against National Securities  Corporation,  a wholly owned subsidiary
of Olympic Cascade Financial Corporation and Steven A. Rothstein,  Individually,
and as Chairman of National  Securities in connection with purported  efforts on
the part of the Defendants to underwrite a public offering of securities for the
Company. The Complaint alleges breach o contract, promissory estoppel, breach of
fiduciary  duty  and  intentional  or  negligent   misrepresentation  and  seeks
compensatory  and  punitive   damages,   jointly  and  severally,   against  the
Defendants.  On June 3, 1999,  Company  signed an agreement  with OCC to receive
$75,000.00, plus 50,000 shares of OCC common stock and 20,000 vested warrants to
purchase OCC common stock to settle the lawsuit the Company  brought against OCC
and Steven A, Rothstein.


Item 2.  Change in Securities

     None

Item 3.  Defaults Upon Senior Securities

         none

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

     None

Item 5.  Other Information

     None

Item 6.  Exhibits and Report on Form 8-K

     (a) Financial Data Schedule on Exhibit 27.

     (b) No other reports on Form 8-K have been filed during the quarter  ending
         June 30, 1999.
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                                   SIGNATURES

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

     Date: August 13, 1999

                              THERMOENERGY CORPORATION


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



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