FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                   (Mark One)

          [] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

          [X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
       FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
                       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)

                       Fiscal Year End September 30, 1998
              ----------------------------------------------------
              (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
    -------     -------
                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

3,402,968 shares of Common Stock, par value $.001 per share



<PAGE>

                            THERMOENERGY CORPORATIO

                                   FORM 10-Q

                               FEBRUARY 12, 1999

                               Table of Contents


PART 1 -  FINANCIAL INFORMATION

          Balance Sheets .....................................................3

          Statements of Operations............................................4

          Statement of Changes in Stockholders' Equity .......................5

          Statements of Cash Flows............................................9

          Notes to Financial Statements .....................................10

          Management's Discussion and Analysis of Financial Condition
          and Results of Operations .........................................14

PART 2    OTHER INFORMATION .................................................20

<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                     December 31,  September 30,
                                                                                      1998            1998
                                                                                      ----            ----
                                                                                   (Unaudited)      (Audited)
                                                        ASSETS

<S>                                                                                  <C>            <C>      
Cash - Total Current Assets                                                          $ 113,220      $ 242,486

Advances to officers                                                                   423,015        381,015
Accrued interest receivable - officers                                                  58,247         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)
                                                                                     ---------      ---------
                                                                                             -              -
                                                                                     ---------      ---------
                                                                                     $ 594,482      $ 673,068
                                                                                     =========      =========


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable                                                                   $   564,183    $   590,903
Accrued interest payable - related parties                                             299,130        246,671
Deferred compensation                                                                1,282,114      1,192,779
Notes payable to stockholders (Note 5)                                                 932,900        932,900
                                                                                   -----------    -----------
      Total Current Liabilities                                                      3,078,327      2,963,253

Convertible Debentures (Notes 2 and 4)                                                 956,000        906,000
                                                                                   -----------    -----------
      Total Liabilities                                                              4,034,327      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; issued - 3,486,797 shares; outstanding -
    3,402,968 shares                                                                     3,487          3,487
  Additional paid-in capital                                                         4,334,864      4,334,864
  Deficit accumulated during the development stage                                  (7,778,196)    (7,534,536)
                                                                                   -----------    -----------
                                                                                    (3,439,845)    (3,196,185)
                                                                                   -----------    -----------

                                                                                   $   594,482    $   673,068
                                                                                   ===========    ===========

</TABLE>

See notes to financial statements.

<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS

                                         Cumulative
                                          During
                                        Development
                                       Stage Through    Three Months Ended
                                        December 31,       December 31,
                                            1998         1998        1997
                                            ----         ----        ----      
                                         (Unaudited)        (Unaudited)

Operating Expenses:
  General and administrative             $ 5,742,714    $171,773    $120,526
  Payments under licenses                                            677,266

  Travel and entertainment                 1,036,525      27,446      29,024
                                           ---------     --------   --------
                                           7,456,505     199,219     149,550
                                           ----------    ---------  --------

Loss From Operations                     (7,456,505)    (199,219)   (149,550)
                                         ------------   ---------   ---------

Other Income (Expense)
  Interest income                            115,046      10,018       5,855

  Interest expense                          (436,737)    (54,459)    (23,371)
                                            ----------  ----------   --------
                                            (321,691)    (44,441)    (17,516)
                                            ----------  ----------   --------

Net Loss                                 $(7,778,196)  $(243,660)  $(167,066)
                                          ============  =========   =========

Basic and Diluted

  Per Common Share (Note 4)
    Loss From Operations                   $   (1.99)   $  (0.05)   $  (0.04)

    Net Loss                               $   (2.07)   $  (0.06)   $  (0.04)


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)


<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

Issuance of stock, May - June 1991, (387,880 shares:

  366,630 at $1.60 per share;
  21,250 shares at $.80 per
  share)                                                     388      603,219                   603,607

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

</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)



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

<S>                                                         <C>                 <C>                <C>                  <C>   
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)

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

</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)



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


<S>                                                            <C>              <C>                 <C>                 <C>
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

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
  $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)
</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)

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

<S>                                            <C>                <C>                   <C>            <C>               
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)                           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)
                                                   =======         ==========       ============       ===========
</TABLE>

See notes to financial statements



<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                   Cumulative
                                                     During
                                                 Development
                                                 Stage Through                  Three Months Ended December 31,
                                               December 31, 1998                  1998                1997
                                               -----------------                  ----                ----
                                                  (Unaudited)                  (Unaudited)         (Unaudited)

<S>                                             <C>                             <C>                 <C>    
Operating activities:
  Net loss                                      $(7,778,196)                    $(243,660)          $(167,066)
  Items not requiring
  (providing) cash:
    Depreciation                                     19,809                                               708
    Expenses funded by Common
      Stock issuance                                596,279
    Other                                             3,341
  Changes in:
    Advances to officers                           (621,998)                      (42,000)            (10,000)
    Other receivables                               (58,247)                       (8,680)             (5,699)
    Accounts payable                                564,183                       (26,720)             41,319
    Accrued expenses                                299,130                        52,459              81,355
    Deferred compensation                         1,481,096                        89,335               5,003
                                               ------------                  ------------        ------------
        Net cash used in
         operating activities                    (5,494,603)                     (179,266)            (54,380)
                                                -----------                    ----------          ----------

Investing activities:
  Purchase of fixed assets                          (19,808)
  Other                                              (3,341)
                                                 -----------                   -----------         -----------
         Net cash used in
          investing activities                      (23,149)
                                                 -----------                   -----------          ----------
Financing activities:
  Proceeds from issuance of
    Common Stock and warrants                     2,720,562
  Proceeds from notes payable                     1,665,609                                            20,000
  Proceeds from convertible debentures            1,291,000                        50,000
  Payments on notes payable                        (154,609)
                                                  ----------                   ----------           ---------
  Other                                             108,410
         Net cash provided by
           financing activities                   5,630,972                        50,000              20,000
                                                -----------                    ----------          ----------

Increase (decrease) in cash                         113,220                      (129,266)            (34,380)

Cash, beginning of period                                 0                       242,486              65,046
                                                -----------                     ---------         -----------

Cash, end of period                             $   113,220                     $ 113,220          $   30,666
                                                ===========                     =========          ==========


</TABLE>
See notes to financial statements.



<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1998
                                    UNAUDITED


NOTE 1:  FINANCIAL STATEMENTS

The balance sheet as of December 31, 1998, the statements of operations and cash
flows  cumulative  during  development  stage  through  December 31,  1998,  the
statements of operations  for the three months ended  December 31, 1998 and 1997
and the statements of changes in  stockholders'  equity (deficit) and cash flows
for the three months ended  December  31, 1998 and 1997,  have been  prepared by
ThermoEnergy  Corporation  (the  "Company")  without  audit.  In the  opinion of
management,   all  adjustments  (consisting  only  of  normal  recurring  items)
necessary to present  fairly the financial  position,  results of operations and
cash flows at December  31, 1998 and for all periods  presented  have been made.
Operating  results  for  the  three  months  ended  December  31,  1998  are not
necessarily indicative of the results that may be expected for the entire year.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  omitted in  accordance  with  Article  10 of  Regulation  S-X.  These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's September 30, 1998 Form 10-K.

On September 21, 1998, the Board of Directors approved a change in the Company's
fiscal year end from  September  30 to December  31. This report on Form 10-Q is
the Company's  transition  report for the period October 1, 1998 to December 31,
1998,  required by the Securities and Exchange Commission in connection with the
change in fiscal year end.

NOTE 2:  CONVERTIBLE DEBENTURES

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

NOTE 3:  COMMON STOCK

During 1994 and 1996, the Company's  stockholders  approved  four-to-one reverse
stock splits of the  Company's  Common  Stock.  These  reverse stock splits were
implemented  on March 5, 1997.  All numbers of Common Stock shares and per share
data have been restated to reflect the reverse stock splits.


<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1998
                                    UNAUDITED


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 in accordance  with SAB Topic 4D, after giving effect
to the reverse stock splits described in Note 3.

The  adjusted  weighted  average  number of common  shares used in the basic and
diluted  loss per  share  computations  were  3,751,814  shares  for the  period
cumulative  since inception  through December 31, 1998, and 4,045,557 shares for
the three month periods ended December 31, 1998 and 1997, respectively.

Warrants to purchase  approximately  799,000  shares Series B Common Stock,  and
stock options under the 1997 Stock Option Plan,  which provides for the issuance
of up to  750,000  shares of Series B Common  Stock,  were not  included  in the
computation of diluted loss per share since the effect would be antidilutive. At
December  31,  1998,  the  Company  had  issued   $956,000  of  15%  Convertible
Debentures,  due January 15, 2003. The holders of the Debentures can convert the
principal  amount and accrued  interest  into shares of Series B Common Stock at
the conversion price of $2.00 per share at any time prior to the maturity date.

NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS

The Company has  incurred  net losses  since  inception  and, is in default on a
$200,000 note payable (10% note  payable) to a  stockholder  and has $287,165 of
the 6.63% notes  payable to  stockholders  maturing  during 1999.  Additionally,
substantial capital will likely be required to continue commercialization of the
Technologies (as defined in Item 2). The financial statements have been prepared
assuming  the Company will  continue as a going  concern,  realizing  assets and
liquidating  liabilities  in the ordinary  course of business and do not reflect
any  adjustments  that  might  result  from the  outcome  of the  aforementioned
uncertainties.  Management is considering  several  alternatives  for mitigating
these  conditions  during the next year.  The Company is  authorized to issue an
additional  $544,000  of Series  98  Convertible  Debentures.  The sale of stock
pursuant  to  private  placement  or public  offerings  and fees  from  projects
involving  the  Technologies  are other  alternatives  management  is  pursuing.
Additional  funds  may be  necessary  in the event  the  Company  takes on other
projects,  is unable to obtain extensions on the 10% notes to stockholders which
are not in default at December  31,  1998,  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.

<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1998
                                    UNAUDITED


NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS (CONTINUED)

The overall  goal of the  Company is to  successfully  complete a  demonstration
project  for  STORS,   NitRem  and/or  ARP.  Management  plans  to  utilize  any
demonstration  facilities to expand the  visibility of the Company in municipal,
industrial, Department of Defense and Department of Energy markets. A successful
demonstration   project  is  the  single  most  important   business  factor  in
implementation  of the Company's plan of  operations.  Management has determined
that the  financial  success of the  Company may be largely  dependent  upon the
ability and financial resources of established third parties  collaborating with
the Company with respect to projects involving the Technologies. The Company has
entered  into  agreements  with third  parties in order to pursue this  business
strategy.

NOTE 6: COMMITMENTS AND CONTINGENCIES . During October 1998, the Company filed a
lawsuit  seeking  compensatory  and  punitive  damages  from  the  broker-dealer
involved in the Company's 1997 failed public offering. During November 1998, the
Company  entered into a consulting  agreement  with a third party in  connection
with  the  City of New  York  demonstration  project.  The  agreement  specifies
compensation at an hourly rate plus expenses for services rendered. In the event
the  Company  sells an ARP unit to or  operates  an ARP unit for the City of New
York under a privatized  agreement,  the agreement  provides for additional cash
compensation  based upon a  percentage  of the overall  capital  cost of the ARP
demonstration  facility  and for the  issuance of  warrants  to purchase  62,500
shares of Series B Common Stock of the Company at an exercise price of $4.00 per
share,  exercisable  within two years from the date of issuance of the warrants.
During November 1998, the Company  entered into an employment  agreement with an
individual to serve as the Company's  Executive  Vice  President and Senior Vice
President of Corporate Technology.  In order to assist the Company in conserving
cash, an amendment to the agreement  was executed  which  provides the executive
with a  half-time  position  for a  period  not to  exceed  twelve  months.  The
employment  agreement  provides for,  among other things,  basic,  incentive and
other compensation.



<PAGE>
   


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1998
                                    UNAUDITED



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

General

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

The Company is the exclusive worldwide licensee for the Technologies (except for
STORS  in  Japan)   which  were   developed  by  Battelle   Memorial   Institute
("Battelle"), an independent research and development organization.  The Company
intends to sell equipment (i.e. STORS-DSR,  NitRem-DSR,  or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties,  or build, own and operate  municipal and/or  industrial waste
water  treatment  facilities.  The  Company's  business  strategy  is based upon
entering into collaborative working  relationships with established  engineering
and environmental  companies, or formal joint venture agreements relative to the
application of the technologies for specified industries or markets. 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 theU.S.  Army and Foster Wheeler  Corportion,  respectively.  The
Colton  STORS  Project  will be funded 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 and ARP technologies. With regard to STORS, no facilities have yet
been built, outside Japan, on a commercial basis.

STORS Project

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


The EPA continues to maintain discretionary control over the disbursement of the
$3,000,000  federal  grant  discussed  above.  While it is  currently  the EPA's
intention to disburse the funds for the SBVWD  project,  it is possible that the
EPA, in its sole  discretion,  may redirect  these funds for use on a full-scale
STORS demonstration project in another EPA region.


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  preliminary
results,  the  Company  anticipates  marketing  NitRem to the DoD and to private
industry.

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 three 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 allows 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
has decided to demonstrate the capabilities of its newly acquired 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 CAR process are excellent when compared
to alternative sources such as steam stripping, hot air stripping and biological
nitrogen  reduction  technologies.  On a privatized  basis, and depending on the
throughput of the commercial  system,  the cost to the client  (municipality) to
treat ammonia laden wastes at the concentrations found in the centrate, would be
between 2 cents and 4 cents per gallon,  including  capital  equipment  recovery
overhead.

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   ("TENC")  with  Foster   Wheeler   Environmental   Corporation  of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
combines 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  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.


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.  If no project  contracts have been signed
by March 28, 1998,  the  exclusivity of the contract can be terminated by either
party upon one month's  written  notice  and,  thereafter,  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.

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.

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  working  arrangement  with  Foster  Wheeler   Environmental
Corporation has enabled the Company to identify hosts and to fund these projects
as well. 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
NitRemplants  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 its 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  in Form 10-K for the year ended  September  30,  1998,  the managing
underwriter  of the  proposed  offering  notified the Company in October of 1997
that it would be unable to complete the  offering.  The Company now plans to use
the proceeds from the sale of $1,500,000  of  convertible  debentures to satisfy
the cash requirements of its basic operation for the next year.

<PAGE>

The company raised  $536,000 in interim  financing from current  shareholders to
fund the Company through the  registration  period.  The notes were for original
terms of six months at 10%,  renewable  at the option of the holder.  In July of
1998,  a holder for  $200,000  failed to renew his note for which the Company is
now in default  with  interest  accruing  at 18% per  annum.  All or part of the
remaining  $336,000  six month  notes may be in default if the  holders  fail or
refuse to renew their notes after December 31, 1998.  Additionally,  $287,165 of
the Company's 6.63 notes payable to stockholders mature during 1999.  Additional
funds may be  necessary  in the event the  company is unable to pay the notes as
they  become  due and as the  Company  takes  on  other  projects  or  makes  an
acquisition  of  another  company to  facilitate  the  commercialization  of its
technologies.

On September 11, 1998,  the Company  agreed to form  ThermoEnergy  Environmental
Corporation  with Foster Wheeler  Environmental  Corporation  of Lvingston,  New
Jersey to pursue clean water projects  worldwide.  The new company  combines 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  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  second  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.


Results of Operations

For the three months ended December 31 1998, the Company incurred a net loss of
$243,660 as compared to $167,066 for the three months ended December 31, 1997.

General and  administrative  expenses  increased  during the three month  period
ended  December 31, 1998,  compared to December 31, 1997,  due to the  Company's
efforts  regarding the projects  discussed  above.  Interest  expense  increased
significantly  between  the  same two  periods  due to the  issuance  of the 15%
Convertible Debentures during 1998.

Liquidity and Capital Resources

During the period ended  December 31, 1998, the Company used $179,266 of cash in
operations  compared to $54,380 in 1997.  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 Seriesf B Common Stock.  As previously  discussed,  the
Company's proposed 1997 public offering did not occur.

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

Recent Pronouncements of the Financial Accounting Standards Board.

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

Net Operating Losses

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



<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings


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


Item 2.  Change in Securities

     None

Item 3.  Defaults Upon Senior Securities

On June 1, 1998,  a $200,000  note bearing 10% interest per annum became due and
the Company  failed to meet the  obligation.  Upon the  default,  the note began
accruing  interest at 18% per annum or the maximum  allowed by applicable  state
law. Applicable law limits the interest to 10%. Accordingly,  as of February 12,
1998, the amount due and owing is $244,566.

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) 27.1 Financial Data Schedule

     (b) No other reports on Form 8-K have been filed during the quarter  ending
         December 31, 1998.
<PAGE>



                          SIGNATURES

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

     Date: February 12, 1998

                              THERMOENERGY CORPORATION


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



<PAGE>





<PAGE>