##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

FOR THE TRANSITION PERIOD FROM _________________ TO _________________

COMMISSION FILE NUMBER 33-46104-FW

THERMOENERGY CORPORATION

(Exact name of small business
issuer as specified in its charter)


|                                  |  |                                  
|--------------------------------- |  | ---------------------------------
|ARKANSAS                          |  | 71-00659511                      
|(State or other jurisdiction      |  | (IRS Employer Identification No.)
|of incorporation or organization) |  |                                  

323 CENTER STREET, SUITE 1300, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive offices)

(501) 376-6477(Issuers telephone number)



---

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


APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 5,900,772 shares of common
stock as of November 8, 2002.

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





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TABLE OF CONTENTS



|                                                        |  |  |  |  |  |  |  | 
|------------------------------------------------------- |  |  |  |  |  |  |  | 
|BALANCE SHEETS                                         
|STATEMENTS OF OPERATIONS                               
|STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
|STATEMENTS OF CASH FLOWS                               
|SIGNATURES                                             
|CERTIFICATIONS                                         
|Section 906 Certification of the CEO                   
|Section 906 Certification of the CFO                   



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##### Table of Contents



PART I  FINANCIAL INFORMATION

Item 1. Financial Statements.

THERMOENERGY CORPORATION
(A Development Stage Company)




BALANCE SHEETS


|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |             |   |           | 
|----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------- | ----------- | ------------- | --------- | ------------ | ----------- | - | --------- | 
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             | September 30, |           | December 31,
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             | 2002          |           | 2001        
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |             
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             | (Unaudited)   |           | (Note 1)    
|ASSETS                                                                  |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|Cash  Total Current Assets                                             |                                                                                                                                                                                                                            | $                                           | 102,659                   |             |               | $         | 557,870      |            
|Advances to officers (Note 3)                                           |                                                                                                                                                                                                                            |                                             |                          |             |               |           | 101,018      |            
|Accrued interest receivable  officers (Note 3)                         |                                                                                                                                                                                                                            |                                             |                          |             |               |           | 880          |            
|Property and equipment, at cost:                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        | Equipment, furniture and fixtures                                                                                                                                                                                          |                                             |                           | 19,809      |               |           |              | 19,809      |  
|                                                                        | Less accumulated depreciation                                                                                                                                                                                              |                                             |                           | (19,809     | )             |           |              | (19,809     | )
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                          |             |               |           |             |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            | $                                           | 102,659                   |             |               | $         | 659,768      |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                          |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|Convertible Debentures  current maturities (Notes 2, 3 and 4)          |                                                                                                                                                                                                                            | $                                           | 4,484,345                 |             |               | $         |             |            
|Accounts payable                                                        |                                                                                                                                                                                                                            |                                             | 220,721                   |             |               |           | 242,248      |            
|Accrued interest payable  primarily to related parties (Notes 2 and 4) |                                                                                                                                                                                                                            |                                             | 2,526,906                 |             |               |           | 1,777,858    |            
|Deferred compensation (Note 3)                                          |                                                                                                                                                                                                                            |                                             |                          |             |               |           | 117,010      |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            |                                             | Total Current Liabilities |             |               | 7,231,972 |              |             |   | 2,137,116 | 
|Convertible Debentures, less current maturities (Notes 2, 3 and 4)      |                                                                                                                                                                                                                            |                                             | 961,266                   |             |               |           | 5,545,611    |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            |                                             | Total Liabilities         |             |               | 8,193,238 |              |             |   | 7,682,727 | 
|Stockholders equity (deficit) (Notes 2, 3 and 4):                      |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        | Preferred stock, non-voting, $1 par value:                                                                                                                                                                                 |                                             |                           |             |               |           |              |             |  
|                                                                        |                                                                                                                                                                                                                            | Authorized - 10,000,000 shares; none issued |                           |             |               |           |              |             |   |          
|                                                                        | Common Stock, $.001 par value: authorized  75,000,000 shares;
September 30, 2002: issued  5,984,601 shares; outstanding -
5,900,772 shares; December 31, 2001: issued  5,041,519
shares; outstanding  4,957,690 shares |                                             |                           | 5,985       |               |           |              | 5,041       |  
|                                                                        | Additional paid-in capital                                                                                                                                                                                                 |                                             |                           | 9,158,209   |               |           |              | 6,540,886   |  
|                                                                        | Deficit accumulated during the development stage                                                                                                                                                                           |                                             |                           | (17,254,773 | )             |           |              | (13,568,886 | )
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            |                                             | (8,090,579                | )           |               |           | (7,022,959   | )          
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            
|                                                                        |                                                                                                                                                                                                                            | $                                           | 102,659                   |             |               | $         | 659,768      |            
|                                                                        |                                                                                                                                                                                                                            |                                             |                           |             |               |           |              |            

See notes to financial statements.

1



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF OPERATIONS

|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |          |       |  
|------------------------------------------- | ----------------------------- | -------------------- | ----------- | ------------- | ----- | ----------------- | ---------- | ------------------ | ----- | ---- | ---------- | -------- | ----- | - | -------- | -------- | ----- | - | -------- | -------- | ----- | -
|                                            |                               |                      |             | Cumulative    |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | During        |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | Development   |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | Stage Through |       | Nine Months Ended |            | Three Months Ended
|                                            |                               |                      |             | September 30, |       | September 30,     |            | September 30,     
|                                            |                               |                      |             | 2002          |       | 2002              |            | 2001               |       | 2002 |            | 2001    
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |         
|                                            |                               |                      |             | (Unaudited)   |       | (Unaudited)       |            | (Unaudited)       
|Operating Expenses:                         |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            | General and administrative    |                      | $           | 10,224,522    |       |                   | $          | 904,293            |       |      | $          | 899,472  |       |   | $        | 281,822  |       |   | $        | 230,327  |      
|                                            | Payments under licenses       |                      |             | 1,062,266     |       |                   |            | 75,000             |       |      |            | 75,000   |       |   |          | 25,000   |       |   |          | 25,000   |      
|                                            | Travel and entertainment      |                      |             | 1,842,350     |       |                   |            | 189,160            |       |      |            | 217,167  |       |   |          | 63,531   |       |   |          | 73,849   |      
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      | 13,129,138  |               |       |                   | 1,168,453  |                    |       |      | 1,191,639  |          |       |   | 370,353  |          |       |   | 329,176  |         
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Loss From Operations                        |                               |                      | (13,129,138 | )             |       |                   | (1,168,453 | )                  |       |      | (1,191,639 | )        |       |   | (370,353 | )        |       |   | (329,176 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Other Income (Expense)                      |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            | Interest income               |                      |             | 236,745       |       |                   |            | 9,555              |       |      |            | 25,379   |       |   |          | 2,144    |       |   |          | 7,841    |      
|                                            | Gain on settlement of lawsuit |                      |             | 317,423       |       |                   |            |                   |       |      |            |         |       |   |          |         |       |   |          |         |      
|                                            | Other                         |                      |             | 49,550        |       |                   |            | 10,024             |       |      |            |         |       |   |          | 10,024   |       |   |          |         |      
|                                            | Interest expense              |                      |             | (2,951,321    | )     |                   |            | (759,048           | )     |      |            | (608,589 | )     |   |          | (263,902 | )     |   |          | (209,629 | )    
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      | (2,347,603  | )             |       |                   | (739,469   | )                  |       |      | (583,210   | )        |       |   | (251,734 | )        |       |   | (201,788 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Net Loss                                    |                               | $                    | (15,476,741 | )             |       | $                 | (1,907,922 | )                  |       | $    | (1,774,849 | )        |       | $ | (622,087 | )        |       | $ | (530,964 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Basic and Diluted
per Common Share (Note 2) |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               | Loss From Operations |             | $             | (3.00 | )                 |            | $                  | (0.21 | )    |            | $        | (0.23 | ) |          | $        | (0.06 | ) |          | $        | (0.06 | )
|                                            |                               | Net Loss             |             | $             | (3.54 | )                 |            | $                  | (0.34 | )    |            | $        | (0.35 | ) |          | $        | (0.11 | ) |          | $        | (0.10 | )

See notes to financial statements.

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)


Periods Ended September 30, 1988 Through December 31, 2001 and the Nine Months Ended
September 30, 2002 (Unaudited)


|                                                                                                                 |  |        |       |         |  |             |           |            |  |             |            |   |  |   |          |  
|---------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | -------- | -
|                                                                                                                 |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                 |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                 |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                 |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                 |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                 |  |        |       |         |  |             |           |           
|Issuance of stock, January 1988,
(2,205,762 shares at $.08 per share                                             |  | $      | 2,206 |         |  | $           | 178,094   |            |  | $           |           |   |  | $ | 180,300  |  
|Net loss                                                                                                         |  |        |      |         |  |             |          |            |  |             | (290,483   | ) |  |   | (290,483 | )
|                                                                                                                 |  |        |       |         |  |             |           |            |  |             |            |   |  |   |          |  
|Balance (deficit), September 30, 1988                                                                            |  |        | 2,206 |         |  |             | 178,094   |            |  |             | (290,483   | ) |  |   | (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 | )
|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    |  

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED

Periods Ended September 30, 1988 Through December 31, 2001 and the Nine Months Ended
September 30, 2002 (Unaudited)


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

4



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2001 and the Nine Months Ended
September 30, 2002 (Unaudited)

|                                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                                          |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                          |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                          |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                          |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                          |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                          |  |        |       |         |  |             |           |           
|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 | )
|Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value)         |  |        | 67    |         |  |             |          |            |  |             | (67        | ) |  |   |           |  
|Conversion of $238,165 of notes payable to
stockholders and accrued interest, various
months during 1999 (147,602 shares) |  |        | 148   |         |  |             | 295,056   |            |  |             |           |   |  |   | 295,204    |  

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2001 and the Nine Months Ended
September 30, 2002 (Unaudited)

|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ----------- | - |  | - | ---------- | -
|                                                                                                                                           |  |        |       |         |  |             |           |            |  | Deficit     |             |   |  |  
|                                                                                                                                           |  |        |       |         |  |             |           |            |  | Accumulated |             |   |  |  
|                                                                                                                                           |  |        |       |         |  | Additional  |           | During the |  |             |             |  
|                                                                                                                                           |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                                           |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                                           |  |        |       |         |  |             |           |           
|Issuance of stock for expenses, August
1999 (181,619 shares at $.16 per share)                                                             |  | $      | 182   |         |  | $           | 28,877    |            |  | $           |             |   |  | $ | 29,059     |  
|Net loss                                                                                                                                   |  |        |      |         |  |             |          |            |  |             | (1,200,792  | ) |  |   | (1,200,792 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 1999                                                                                                       |  |        | 3,884 |         |  |             | 4,658,797 |            |  |             | (8,979,055  | ) |  |   | (4,316,374 | )
|Issuance of stock for exercise of warrants
by stockholders, various months
(130,000 shares at $2.00 per share)                             |  |        | 130   |         |  |             | 259,870   |            |  |             |            |   |  |   | 260,000    |  
|Conversion of $158,735 of notes payable to
stockholders and accrued interest, various
months (110,206 shares)                              |  |        | 110   |         |  |             | 220,302   |            |  |             |            |   |  |   | 220,412    |  
|Issuance of compensatory stock options                                                                                                     |  |        |      |         |  |             | 190,536   |            |  |             |            |   |  |   | 190,536    |  
|Net loss                                                                                                                                   |  |        |      |         |  |             |          |            |  |             | (2,021,863  | ) |  |   | (2,021,863 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2000                                                                                                       |  |        | 4,124 |         |  |             | 5,329,505 |            |  |             | (11,000,918 | ) |  |   | (5,667,289 | )
|Issuance of stock for exercise of warrants by
stockholders, various months (496,250 shares at
$2.00 and 338,637 shares at $.16 per share)  |  |        | 834   |         |  |             | 1,045,848 |            |  |             |            |   |  |   | 1,046,682  |  
|Conversion of $117,377 of Convertible Debentures
plus interest (82,808 shares at $2.00 per share)                                          |  |        | 83    |         |  |             | 165,533   |            |  |             |            |   |  |   | 165,616    |  
|Net loss                                                                                                                                   |  |        |      |         |  |             |          |            |  |             | (2,567,968  | ) |  |   | (2,567,968 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2001                                                                                                       |  |        | 5,041 |         |  |             | 6,540,886 |            |  |             | (13,568,886 | ) |  |   | (7,022,959 | )
|Issuance of stock, various months 2002
(282,358 shares at $2.00 per share)                                                                 |  |        | 283   |         |  |             | 564,433   |            |  |             |            |   |  |   | 564,716    |  
|Conversion of $100,000 of Convertible
Debentures plus interest, February 2002
(55,000 shares at $2.00 per share)                           |  |        | 55    |         |  |             | 109,945   |            |  |             |            |   |  |   | 110,000    |  
|Issuance of stock in satisfaction of deferred
compensation balances with officers, various
months 2002, (82,793 shares at $2.00 per share) |  |        | 83    |         |  |             | 165,503   |            |  |             |            |   |  |   | 165,586    |  
|Issuance of stock for 10% stock dividend, June
2002 (522,931 shares at $3.40 per share)                                                    |  |        | 523   |         |  |             | 1,777,442 |            |  |             | (1,777,965  | ) |  |   |           |  
|Net loss                                                                                                                                   |  |        |      |         |  |             |          |            |  |             | (1,907,922  | ) |  |   | (1,907,922 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), September 30, 2002                                                                                                      |  | $      | 5,985 |         |  | $           | 9,158,209 |            |  | $           | (17,254,773 | ) |  | $ | (8,090,579 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  

See notes to financial statements.

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF CASH FLOWS


|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |          |          |           | 
|--------------------------- | --------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ----------------------------------------- | ---------- | ------------------ | --------- | ------------------------------- | -------- | ----------- | --------- | ---------- | -------- | -------- | --------- | 
|                            |                                                     |                                          |                                       |                                           |            | Cumulative         |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | During             |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | Development        |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | Stage Through      |           | Nine Months Ended September 30,
|                            |                                                     |                                          |                                       |                                           |            | September 30, 2002 |           | 2002                            |          | 2001       
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |            
|                            |                                                     |                                          |                                       |                                           |            | (Unaudited)        |           | (Unaudited)                     |          | (Unaudited)
|Operating activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            | Net loss                                            |                                          | $                                     | (15,476,741                               | )          |                    | $         | (1,907,922                      | )        |             | $         | (1,774,849 | )       
|                            | Items not requiring
(providing) cash:               |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |         
|                            |                                                     | Depreciation                             |                                       |                                           | 19,809     |                    |           |                                 |         |             |           |            |         |         
|                            |                                                     | Expenses funded by Common
Stock issuance |                                       |                                           | 708,338    |                    |           |                                 |         |             |           |            | 75,000   |         
|                            |                                                     | Other                                    |                                       |                                           | (123,546   | )                  |           |                                 |         |             |           |            |         |         
|                            | Changes in:                                         |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |         
|                            |                                                     | Advances to officers                     |                                       |                                           | (1,437,516 | )                  |           |                                 | (110,500 | )           |           |            | (245,018 | )       
|                            |                                                     | Other receivables                        |                                       |                                           | (142,468   | )                  |           |                                 | (4,182   | )           |           |            | (12,604  | )       
|                            |                                                     | Accounts payable                         |                                       |                                           | 995,807    |                    |           |                                 | (21,527  | )           |           |            | 43,997   |         
|                            |                                                     | Accrued expenses                         |                                       |                                           | 2,835,533  |                    |           |                                 | 759,048  |             |           |            | 627,536  |         
|                            |                                                     | Deferred compensation                    |                                       |                                           | 2,875,799  |                    |           |                                 | 265,156  |             |           |            | 290,513  |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          | Net cash used in
operating activities |                                           |            | (9,744,985         | )         |                                 |          | (1,019,927  | )         |            |          | (995,425 | )        
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Investing activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            | Purchase of fixed assets                            |                                          |                                       | (19,808                                   | )          |                    |           |                                |          |             |           |           |         
|                            | Other                                               |                                          |                                       | 314,082                                   |            |                    |           |                                |          |             |           |           |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          |                                       | Net cash provided by
investing activities |            |                    | 294,274   |                                 |          |             |          |            |          |          |          | 
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Financing activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            | Proceeds from issuance of
Common Stock and warrants |                                          |                                       | 4,508,960                                 |            |                    |           | 564,716                         |          |             |           | 958,682    |         
|                            | Proceeds from notes payable                         |                                          |                                       | 1,665,609                                 |            |                    |           |                                |          |             |           |           |         
|                            | Proceeds from Convertible Debentures                |                                          |                                       | 3,425,000                                 |            |                    |           |                                |          |             |           | 613,000    |         
|                            | Payments on notes payable                           |                                          |                                       | (154,609                                  | )          |                    |           |                                |          |             |           |           |         
|                            | Other                                               |                                          |                                       | 108,410                                   |            |                    |           |                                |          |             |           |           |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          |                                       | Net cash provided by
financing activities |            |                    | 9,553,370 |                                 |          |             | 564,716   |            |          |          | 1,571,682 | 
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Increase (decrease) in cash |                                                     |                                          | 102,659                               |                                           |            |                    | (455,211  | )                               |          |             | 576,257   |           
|Cash, beginning of period   |                                                     |                                          | 0                                     |                                           |            |                    | 557,870   |                                 |          |             | 495,959   |           
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Cash, end of period         |                                                     | $                                        | 102,659                               |                                           |            | $                  | 102,659   |                                 |          | $           | 1,072,216 |           
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           

See notes to financial statements.

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2002

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and 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 nine-month
periods ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002.

The balance sheet at December 31, 2001 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-KSB for the year ended December 31, 2001.

Certain amounts in the 2001 financial statements have been reclassified to
conform to the reporting format used for the 2002 financial statements.

NOTE 2: LOSS PER COMMON SHARE

Loss per common share is computed by dividing the net loss for the period by
the weighted average number of shares outstanding during the period after
giving effect, where appropriate, to stock dividends (see Note 3), reverse
stock splits and nominal issuances of Common Stock, warrants and stock options,
which occurred within twelve months of the initial public offering filing date
(February 27, 1992). The adjusted weighted average number of common shares
used in the basic and diluted loss per share computations were 4,373,496 shares
for the period cumulative since inception through September 30, 2002, 5,692,656
and 5,134,553 shares for the nine-month periods ended September 30, 2002 and
2001, respectively, and 5,804,056 and 5,357,768 shares for the three-month
periods ended September 30, 2002 and 2001, respectively.

Warrants to purchase shares of Common Stock (572,197 shares at $1.82 per share
as of September 30, 2002), stock options awarded to officers and others
(2,056,000 shares at a weighted average exercise price of $2.84 per share as of
September 30, 2002) and the dilutive effect of the Companys Convertible
Debentures (an aggregate principal and accrued interest balance as of September
30, 2002 of $6,899,196 can be converted to the Companys Common Stock prior to
January 15, 2003 at $1.82 per share and an aggregate principal and accrued
interest balance as of September 30, 2002 of $1,073,321 can be converted to
Common Stock

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2002

NOTE 2: LOSS PER COMMON SHARE (continued)

prior to July 15, 2006 at $5.45 per share) were not included in the computation
of diluted loss per share since the effect would be antidilutive.

NOTE 3: COMMON STOCK

Pursuant to the approval of the Companys Board of Directors (see Note 4), the
Company issued 365,151 shares of Common Stock during the nine-month period
ended September 30, 2002 (282,358 shares to current stockholders for cash at
$2.00 per share and 82,793 shares to the officers of the Company at $2.00 per
share in satisfaction of deferred compensation balances, net of advances and
related accrued interest). The Company also issued 55,000 shares of Common
Stock at $2.00 per share upon conversion during the first quarter of 2002 of
$100,000 of the Companys 15% Convertible Debentures plus accrued interest.

On May 21, 2002, the Companys Board of Directors declared a 10% Common Stock
dividend to shareholders of record as of the close of business on June 10,
2002. The dividend, issued on or about June 21, 2002, was charged to retained
earnings (deficit) in the aggregate amount of $1,777,965, which is based on the
closing price of $3.40 per share of Common Stock on the declaration date.
Average shares outstanding and per share amounts, where appropriate, included
in the accompanying financial statements are based on the increased number of
shares giving retroactive effect to the stock dividend.

NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTTERS

The Company has incurred net losses since inception and will require
substantial capital to continue commercialization of the Companys Technologies
(as hereinafter defined). Furthermore, the Companys 15% Convertible
Debentures, which had an aggregate principal and accrued interest balance of
$6,899,196 at September 30, 2002, mature on January 15, 2003. 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. As discussed below, management is
considering several alternatives for mitigating these conditions.

During 2001 and 2002, the Company generated cash primarily from issuances of
Common Stock and 10% Convertible Debentures to related parties. These sources
of cash are not presently anticipated, however, to be available or sufficient
to fund the Companys continued operations and development activities. As
such, the Company will be required to raise additional equity or debt capital
from other sources in the immediate or near-term. Accordingly, management has
engaged the services of SBI USA, a member of the Softbank Investment Group
(Softbank), to assist the Company in obtaining necessary funds to finance the
Companys continued operations

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2002

NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTTERS (continued)

and development activities. In connection with this process, the Company is
exploring and has attempted to complete a broad range of alternatives,
including, but not limited to, the sale of equity and/or debt securities in
either a single transaction or in a series of related transactions. Due to,
among other things, the existing trading price of the Common Stock and the
Companys financial condition, the Company has been unsuccessful in completing
any such transactions to date. The Company had cash-on-hand of $102,659 and
$30,070 as of September 30, 2002 and October 31, 2002, respectively.
Accordingly, the Company will likely be required to secure bridge financing in
the immediate or near-term to provide the necessary liquidity to enable the
Company to raise additional capital through the sale of equity or debt
securities in a private or public offering or through other alternatives. To
date, the Company has been unable to identify any available sources for such
bridge financing. As such, no assurances can be given that such financing will be
available to the Company on favorable terms or otherwise or
in a timely manner. In addition, no assurance can be given as to when and if
any longer-term financings or strategic alternatives will be effected. In the
event that no bridge or other longer-term financings or strategic alternatives are effected, there can
be no assurance that the Company will remain solvent. Moreover, in the event
the Company is unable to obtain financing necessary to fund its continued
operations and development activities, the Company will consider various
alternatives, including, but not limited to, the sale of assets and/or seeking
protection under federal bankruptcy laws.

The Companys board of directors previously authorized the Company to sell up
to 500,000 shares of Common Stock to current stockholders at $2.00 per share to
raise working capital. As of September 30, 2002, a total of 365,151 shares
(see Note 3) had been issued. Given the existing trading price of the Companys Common
Stock and the Companys financial condition, the Company does not currently
believe that it will be able to sell the balance of such shares at $2.00 per
share.

Management anticipates that the Companys 15% Convertible Debentures plus
accrued interest due on January 15, 2003, will be settled by conversion by the
holders to Common Stock of the Company at a price of $1.82 per share. In the
event the holders of a material amount of the 15% Convertible Debentures
determine not to convert, the Company does not anticipate that it will have the
resources available to pay any amounts outstanding to such holders upon
maturity.

Management is also actively pursuing commercial contracts to produce fees from
projects involving the Technologies and from its Energy Resources Divisions
activities. However, revenues generated from commercial contracts secured
subsequent to the date hereof will not provide the necessary resources to
offset the Companys immediate and near-term expected

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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2002

NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTTERS (continued)

operating losses. While revenues generated by the Energy Resources Division
could be earned during the near-term, no significant revenues were generated by
the Energy Resources Division during the nine months ended September 30, 2002
and the Company does not expect revenues from the Energy Resources Division to
significantly offset the Companys operating losses.

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
Companys Technologies. The Company has entered into and is currently seeking
additional agreements with third parties in order to pursue this business
strategy.

NOTE 5: COMMITMENT

During June 2002, the Company signed a letter of intent with Shenzhen Fuhaoheng
Investment Co. LTD, a Chinese corporation, to form a joint venture company to
design, construct and operate wastewater treatment plants within the Peoples
Republic of China. The Company is continuing to negotiate the
formation this joint venture, although to date, no joint venture has been
formed.

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

Forward-Looking Statements

The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB. The following discussion and the information contained elsewhere
in this quarterly report contains statements that are forward-looking
statements as defined within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give the Companys current
expectations of forecasts of future events. All statements other than
statements of current or historical fact contained herein, including statements
regarding the Companys future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. The words anticipate, believe, continue,
estimate, expect, intend, may, plan, will, and similar expressions,
as they relate to the Company, are intended to identify forward-looking
statements. These statements are based on the Companys current plans and
actual future activities, and the Companys results of operations may be
materially different from those set forth in the forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that
could cause actual

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##### Table of Contents



results to differ materially from the statements made. These include, but are
not limited to the risks and uncertainties associated with statements relating
to: (i) the ability of the Company to fund its continued operations and
development activities, primarily through the availability of debt and equity
financing on terms that are favorable or otherwise to the Company; (ii) the
Companys ability to commercialize its Technologies (as hereinafter defined);
(iii) the Companys ability to establish itself as an energy consultant to the
Tribal Nations; (iv) changes in government policy and in legislation and
regulation of the waste treatment or energy production industries that
adversely affect the Companys business; and (v) general economic and market
conditions.

Any or all of the forward-looking statements in this quarterly report may turn
out to be inaccurate. The Company has based these forward-looking statements
largely on its current expectations and projections about future events and
financial trends that it believes may affect its financial condition, results
of operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions. In light of these risks, uncertainties
and assumptions, the forward-looking events and circumstances discussed in this
quarterly report may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements. We undertake
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements
contained in this report and in the Companys 2001 Form 10-KSB for the year
ended December 31, 2001 as filed with the Commission on March 29, 2002. (Form
10-KSB).

Business Plan

A description of the business plan of the Company over the next 12 months is
described as follows:

Cash Requirements. The Company has incurred net losses since inception and will
require substantial additional capital to continue commercialization of its
Technologies. The exact cash requirements of the Company for the next 12 months
are not currently known and will depend on the level of activity required in
pursuing commercialization of its Technologies. Reference is made to the
financial statements in the Companys Form 10-KSB for past cash requirements.
It is unlikely that cash requirements will decrease, and if there is a
substantial increase in business activity the cash requirements will likely
increase. The Company had cash-on-hand of $102,659 and $30,070 as of September
30, 2002 and October 31, 2002, respectively. As more fully described in Note 4
to the financial statements and herein under Liquidity and Capital Resources,
the Company is seeking both short-term and longer-term financing and
considering various strategic alternatives to fund the Companys present and
future operations and development activities. In the event that no such
financings or strategic alternatives are effected, there can be no assurance
that the Company will remain solvent. Moreover, in the event the Company is
unable to obtain financing necessary to fund its continued operations and
development activities, the Company will consider various alternatives,
including, but not limited to, the sale of assets and/or seeking protection
under federal bankruptcy laws.

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As disclosed in prior filings, the Company entered into a warrant agreement
with Dan Cowart, Atlanta, Georgia, which provided $250,000 of working capital
for each of the quarters during the period October 1, 2000 through September
30, 2001 and could have provided $250,000 each quarter during the period
October 1, 2001 through September 30, 2002. Mr. Cowart did not exercise his
warrants to purchase an aggregate of 500,000 shares of the Companys Common
Stock, $0.001 par value per share (the Common Stock), at a price of $2.00 per
share during the fourth quarter of 2001, the first quarter of 2002, the second
quarter of 2002 and the third quarter of 2002. As more fully discussed in Note
4 to the financial statements, the Board of Directors previously approved the
sale of 500,000 shares of Common Stock at $2.00 per share to current
stockholders in order to provide the Company with the funds it would have
received if the warrants discussed above had been exercised. Given
the existing trading
price of the Companys Common Stock and the Companys financial condition,
however, the Company does not currently believe that it will be able to sell
the balance of such shares at $2.00 per share.

The Company halted the sale of its Series 98 15% Convertible Debentures, which
are convertible into shares of the Companys Common Stock at a price of $1.82
per share (as adjusted for the Companys Common Stock dividend during 2002),
as of June 20, 2001. As of that date, the Board of Directors authorized a new
series of convertible debentures in the principal amount of $3,000,000,
designated Series 01. The Series 01 Convertible Debentures bear interest at
the rate of 10% per annum, mature July 15, 2006 and are convertible into shares
of Common Stock at a price of $5.45 per share, (as adjusted for the Companys
Common Stock dividend during 2002).

Management anticipates that the Companys 15% Convertible Debentures plus
accrued interest due on January 15, 2003, will be settled by conversion by the
holders to Common Stock of the Company at a price of $1.82 per share. In the
event the holders of a material amount of the 15% Convertible Debentures
determine not to convert, the Company does not anticipate that it will have the
resources available to pay any amounts outstanding to such holders upon
maturity.

Development and Commercialization of Technologies.The Company is the
exclusive worldwide licensee (except for STORS in Japan) for three clean water
process technologies and one process equipment technology developed by Battelle
Memorial Institute (BMI). The four BMI licensed technologies address
wastewater problems for municipal and broad-based industrial markets. These
technologies include two chemical process technologies known as the
Sludge-To-Oil Reactor System (STORS), and the Nitrogen Removal process known
as NitRem. The Company has a hardware technology known as the Dual-Shell
Reactor system (DSR), in which the STORS and NitRem chemistries are
conducted. The fourth BMI licensed technology is the Ammonia Recovery Process
(ARP), an adsorption process that captures and removes ammonia from
concentrated and/or diluted wastewater streams and converts it to ammonia
sulfate  a commercial grade fertilizer. STORS, NitRem, ARP and DSR are
collectively referred to as the Water Technologies. The Company is also the
exclusive owner of a newly patented clean energy technology known as the
ThermoEnergy Integrated Power System (TIPS), which converts fossil fuels
(including coal, oil and natural gas) into electricity without producing air
emissions, and is aimed at competing with conventional energy conversion
technologies. In addition, TIPS removes and captures carbon dioxide (CO2) in
liquid form for sequestration or beneficial reuse. TIPS and the Water
Technologies are collectively referred to herein as the Technologies.

In October 2001, the Company formed its Energy Resources Division, located in
Denver, Colorado, primarily to work with Tribal Nations as a consultant to
develop a comprehensive energy strategy consistent with Tribal values and
community. In the quarter ended September

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30, 2002, the Energy Resources Division generated $10,023.71 in revenue as a
result of providing consulting services to the Iowa Indian Tribe. To date, the
overall business strategy of the Energy Resources Division has included working
with public and private energy trading firms as a broker of energy from the
Tribes and other sources. While the Company began brokering energy through its
Energy Resources Division in February 2002, the Company has successfully
brokered only a minor amount of energy transactions that produced no revenue
for the Company. The Company did not broker any energy transactions during the
quarter ended September 30, 2002. As a result, the Company is presently
reevaluating its immediate and long-term energy brokerage strategy. At
present, management believes that the operations of the Energy Resources
Division will constitute the Companys sole source of income from operations
during 2002, although the amount and timing of such revenue cannot be
accurately predicted at this time. Furthermore, there can be no assurance that
the Company will successfully integrate its Energy Resources Division with its
core competencies in the Technologies or that this division will be able to
maintain its niche position in providing services to Tribal Nations. There can
also be no assurance that the Energy Resources Division will realize any
material income, and, accordingly, no assurance can be given that the Energy
Resources Division will generate any future revenue for the Company in the
immediate or near-term, including any additional revenue generated by the
provision of consulting services to the Tribal Nations.

Because the Company does not currently possess the technical, operational or
financial resources necessary to construct or operate STORS, NitRem, ARP or
TIPS facilities or a commercial facility without external project funding and
the ability to source engineering skills, the Company continues to pursue
strategic partners with the ability to assist in the marketing and
commercialization of the Technologies.

On June 19, 2002, the Company announced that it had signed a Letter of Intent
with Shenzhen Fuhaoheng Investment Co., LTD, a Chinese corporation, to form a
joint venture company to design, construct and operate wastewater treatment
plants within the Peoples Republic of China using the Technologies. The
Company is continuing to negotiate the formation of this joint
venture, although to date, no joint venture has been formed. If the joint
venture is formed, its first project will be a commercial scale pilot plant
located in Shenzhen, PRC. Assuming that the pilot project performs as is
expected, the joint venture plans to pursue commercial, municipal and
industrial wastewater treatment projects throughout China. There can be no
assurance, however, that the joint venture will be formed or that the pilot
project will be successful. There also can be no assurance that the Company
will be successful in continuing to acquire such strategic partners or that any
such strategic relationship will ultimately succeed in marketing and/or
commercializing the Technologies.

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. Even though
demonstration units have been successfully operated and the Water Technologies
have been proven commercially viable, none of the Technologies have been
implemented on a permanent basis by a municipal or industrial customer. As
such, the Company still requires additional investment capital and/or debt
financing to continue its operations. The Company has historically lacked the
financial and other resources necessary to market the

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Technologies or to build demonstration projects. Management believes that its
collaborative working arrangements are the most efficient and effective way to
commercialize the Technologies. A key stated goal of the Company has been to
successfully complete a full-scale demonstration of the Water Technologies and
to form strategic corporate alliances to market the technologies discussed
above. The Company has successfully completed demonstrations of the NitRem,
STORS, DSR and ARP technologies. The TIPS technology has recently been
developed, and the Company is actively pursuing a demonstration of its
capabilities. Management plans to utilize these demonstration projects 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 factor in implementing the
Companys plan of operations as the Company attempts to commercialize its
Technologies.

The Company cannot predict the required capital expenditures for the Companys
participation into the wastewater and sludge treatment markets and the energy
market, or the acceptability of its Technologies in such markets. The Companys
ability to penetrate these markets depends on 1) successfully raising the
necessary capital to execute its marketing plan, 2) fully developing and
demonstrating the TIPS technology and 3) successfully commercializing one or
more of its Technologies.

Sales or Purchases of Plant and Equipment. The Company currently owns no plants
and equipment. Purchases or sales of equipment, if any, will be based on a firm
contract from a governmental entity or corporation acquiring equipment for use
with one of the Technologies. That equipment would be financed in reliance on
the credit of the prospective customer.

Results of Operations

For the nine months ended September 30, 2002, the Company incurred a net loss
of $1,907,922 compared to $1,774,849 for the nine months ended September 30,
2001. For the three months ended September 30, 2002, the Company incurred a
net loss of $622,087 compared to $530,964 for the three months ended September
30, 2001. The principal factor for the increase in the net loss between the
nine and three-month periods was an increase of approximately 25% in interest
expense due to the timing of the issuance of the Companys 10% Convertible
Debentures during the third quarter of 2001.

General and administrative expenses increased during the three-month periods
ended September 30, 2002, compared to September 30, 2001, due primarily to
professional fees, including fees paid to Softbank incurred during the third
quarter of 2002 which were not present in the 2001 quarter.

Liquidity and Capital Resources

During the nine-month period ended September 30, 2002, the Company used
$1,019,927 of cash in operations compared to $995,425 in the comparable period
of 2001.

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During the periods ended September 30, 2002 and 2001, the Company met its
liquidity needs primarily from the issuance of Common Stock or 10% Convertible
Debentures for cash. See Business Plan  Cash Requirements herein for a
discussion of cash requirements for the year ending December 31, 2002.

As more fully described in Note 4 to the financial statements and herein under
Business Plan  Cash Requirements, the Company is seeking both short-term and
longer-term financing and considering various strategic alternatives to fund
the Companys present and future operations and development activities and to
otherwise satisfy the Companys liquidity needs. As more fully discussed in
Note 4 to the financial statements, management is seeking the necessary funds
to meet the Companys immediate or near-term liquidity needs through various
alternatives, including through the issuance of Common Stock or other equity or
debt securities. Due to, among other things, the existing trading price of the
Companys Common Stock and the Companys financial condition, the Company has
been unsuccessful in completing any such transactions to date. As such, no
assurances can be given that such short-term financing will be available to the
Company on favorable terms or otherwise or in a timely manner. The Company is
also providing consulting services to Tribal Nations through the Companys
Energy Resources Division, although such services have not produced any
significant revenue to date. Accordingly, the Company will likely be required
to secure bridge financing in the immediate or near-term to provide the
necessary liquidity to enable the Company to raise additional capital through
the sale of equity or debt securities or through other alternatives. To date,
the Company has been unable to identify any available sources for such bridge
financing. As such, no assurances can be given that such financing will be
available to the Company on favorable terms or otherwise or in a timely manner.
In the event that the Company cannot raise the necessary capital in the
immediate or near-term to fund the Companys present and future operations and
development activities and to otherwise satisfy the Companys liquidity needs,
there can be no assurance that the Company will remain solvent.

In addition to the sale of equity and/or debt securities in either a single
transaction or in a series of related transactions, management plans to meet
the longer-term liquidity needs of the Company primarily from revenues derived
from commercial contracts the Company hopes to obtain subsequent to the
successful demonstrations of its Technologies. There can be no assurance that
the Company will be successful in raising any capital through the sale of its
securities or that it will raise sufficient capital, through the sale of
securities or otherwise, to commercialize the Technologies. In the event the
Company is unable to obtain necessary financing and obtain necessary capital in
the near or long-term to fund its continued operations and development
activities, the Company will consider various alternatives, including, but not
limited to, the sale of assets and/or seeking protection under federal
bankruptcy laws.

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Net Operating Losses

The Company had net operating loss carryforwards as of December 31, 2001 of
approximately $10,000,000, which expire in the years 2003 through 2021. 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
carryforward can be utilized. A valuation allowance of approximately $3,814,000
has been established to offset any benefit from the net operating loss
carryforwards, as it cannot be determined when or if the Company will be able
to utilize the net operating losses.

The Company has historically lacked the financial and other resources necessary
to respond to requests for proposals and market the Technologies. 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. For these reasons
the Company has entered into agreements with third parties to pursue marketing,
development and testing of the Companys Technologies. The Company believes
that establishing such relationships is the most efficient and effective way to
commercialize the Technologies. See Business Plan  Development and
Commercialization of Technologies herein.

Item 3. Controls and Procedures.

Based on their most recent evaluation, which was completed within ninety (90)
days of the filing of this Form 10-QSB, the Companys Chief Executive Officer
and Principal Financial Officer believe the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in this report is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. There were no significant changes in the Companys internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation and there were no corrective actions
with regard to significant deficiencies and material weaknesses.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Change in Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

Information concerning the status of certain matters, including (i) the
Companys immediate and near-term capital and liquidity needs, (ii) the status
of the Technologies and the Companys strategic relationships, (iii) its
relationship with Shenzhen Fuhaoheng Investment Co., LTD and (iv) the
establishment of the Companys Energy Resources Division is included elsewhere
in this quarterly report and/or in the Companys Annual Report on Form 10-KSB.

Item 6. Exhibits and Report on Form 8-K.

(a)  The following exhibits are filed as part of this report:

|        |  |                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                     
|NUMBER  |  | Description of Exhibits                                                                                                                                             
|        |  |                                                                                                                                                                     
|99.1    |  | Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.    
|        |  |                                                                                                                                                                     
|99.2    |  | Certification of the Companys Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b)  No reports on Form 8-K were filed during the quarterly period ended
September 30, 2002.

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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: November 14, 2002 |  | THERMOENERGY CORPORATION                                                           
|                       
|                        |  | /s/  P.L. MontesiP.L. Montesi, President, Treasurer
and Principal Financial Officer

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CERTIFICATIONS

CERTIFICATION OF THE CEO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Dennis C. Cossey, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of
ThermoEnergy Corporation;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        

| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date,); and                                                                                                 
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and

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|   |  |                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

| |  |                                                              
| |  | -------------------------------------------------------------
| |  | /s/  Dennis C. CosseyDennis C. Cossey
Chief Executive Officer

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CERTIFICATION OF THE CFO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, P. L. Montesi, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of
ThermoEnergy Corporation;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        

| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date,); and                                                                                                 
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and

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|   |  |                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

| |  |                                                                                     
| |  | ------------------------------------------------------------------------------------
| |  | /s/  P. L.
MontesiP. L. Montesi
President, Treasurer and Principal Financial Officer

23