FORM 10-Q

               SECURITIES AND EXCHANGE COMMISSION

                     Washington, D.C.  20549
(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934
        FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997

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

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

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


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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file


<PAGE>



such reports), and (2) has been subject to such filing requirements for the past
90 days.

YES    X     NO
    -------     -------
              APPLICABLE ONLY TO CORPORATE ISSUERS:

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

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



<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  December 31,          September 30,
                                                                                      1997                1997
                                                                                      ----                ----
                                                                                  (Unaudited)
                                                         ASSETS
<S>                                                                               <C>                 <C>    
Cash - Total Current Assets                                                       $     30,666        $      65,046

Advances to officers                                                                   268,365              258,365
Accrued interest receivable - officers                                                  29,368               23,669
Property and equipment, at cost:
  Equipment                                                                             14,818               14,818
  Furniture and fixtures                                                                 4,991                4,991
  Less accumulated depreciation                                                        (17,686)             (16,978)
                                                                                 -------------       --------------
                                                                                         2,123                2,831
                                                                                --------------      ---------------

                                                                                   $   330,522         $    349,911
                                                                                   ===========         ============


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable                                                                   $   820,031         $    778,712
Accrued expenses:
   Salaries                                                                            648,960              590,976
   Interest - stockholders                                                             116,264               92,893
   Deferred compensation                                                               238,519              233,516
Notes payable to stockholders (Note 2)                                               1,072,900            1,052,900
                                                                                   -----------          -----------
      Total Current Liabilities                                                      2,896,674            2,748,997
                                                                                   -----------          -----------

Stockholders' equity (deficit) (Notes 3 and 6):


<PAGE>



  Preferred stock, non-voting, $1 par value:
    Authorized - 10,000,000 shares; none issued
  Common Stock, $.001 par value: Series A Common Stock;  Authorized - 10,000,000
    shares; no shares issued and outstanding Series B Common Stock; Authorized -
    65,000,000 shares; issued - 3,486,797 shares; outstanding -
    3,402,968 shares                                                                     3,487                3,487
  Additional paid-in capital                                                         4,334,864            4,334,864
  Deficit accumulated during the development stage                                  (6,904,503)          (6,737,437)
                                                                                   -----------          -----------
                                                                                    (2,566,152)          (2,399,086)
                                                                                   -----------          -----------

                                                                                   $   330,522         $    349,911
                                                                                   ===========         ============

</TABLE>



See notes to financial statements.




                                                 THERMOENERGY CORPORATION
                                              (A Development Stage Company)

                                                 STATEMENTS OF OPERATIONS

                                       Cumulative
                                         During
                                      Development
                                     Stage Through            Three Months Ended
                                     December 31,               December 31,
                                       1997               1997             1996
                                       ----               ----                 
                                      (Unaudited)                 (Unaudited)


Operating Expenses:
  General and administrative        $5,135,224          120,526          176,208
  Payments under licenses              652,266
  Travel and entertainment             947,631           29,024           34,802

                                    6,735,121           149,550          211,010
                                                                                

Loss From Operations
                                   (6,735,121)        (149,550)        (211,010)
                                                                                

Other Income (Expense)
  Interest income
                                        82,489            5,855            2,313



<PAGE>




  Interest expense                    251,871)         (23,371)         (13,087)
                                      --------         --------         --------
                                    (169,382)         (17,516)         (10,774)
                                                                                
Net Loss                           (6,904,503)        (167,066)        (221,784)
                                   ===========        =========        ========

Basic and Diluted

  Per Common Share (Note 4)
    Loss From Operations              $ (1.81)        $  (0.04)         $ (0.06)

    Net Loss                          $ (1.85)        $  (0.04)         $ (0.06)



See notes to financial statements.


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

             STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                Three Months Ended December 31, 1997 (Unaudited)



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

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

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

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

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

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

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

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

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

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

</TABLE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                Three Months Ended December 31, 1997 (Unaudited)



<TABLE>
<CAPTION>
                                                                                         Deficit
                                                                                      Accumulated
                                                                   Additional          During the
                                                  Common             Paid-in          Development
                                                   Stock             Capital               Stage           Total  
<S>                                            <C>                <C>               <C>                  <C>   
Issuance of stock for
  expenses incurred by
  stockholders, July 1991
  (5,081 shares at $1.60 per share)              $       5        $     8,124       $                    $    8,129

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

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

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

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

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

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

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

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

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

</TABLE>




<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                Three Months Ended December 31, 1997 (Unaudited)

<TABLE>
<CAPTION>


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

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

Issuance of warrants to
  stockholder                                  $                  $     6,333         $                $     6,333

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

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

Net loss                                                                              (1,207,921)       (1,207,921)
                                               -----------    ---------------        -----------         ----------

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

Issuance of warrants to
  stockholders                                                        226,000                               226,000

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

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

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

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


</TABLE>




<PAGE>




                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                Three Months ended December 31, 1997 (Unaudited)

<TABLE>
<CAPTION>
                                                                                          Deficit
                                                                                       Accumulated
                                                                   Additional          During the
                                                 Common             Paid-in            Development
                                                 Stock              Capital               Stage           Total
<S>                                            <C>                 <C>                 <C>             <C>    
Issuance of warrants to stockholders           $                 $      9,760         $               $     9,760

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

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

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

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

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

Issuance of warrants to stockholders                                    5,340                               5,340

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

Balance (deficit), September 30, 1996                3,241          3,843,918        (5,541,401)      (1,694,242)

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

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

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

Balance (deficit), September 30, 1997                3,487          4,334,864       (6,737,437)       (2,399,096)

Net loss                                                                               (167,066)        (167,066)
                                             --------------------------------       ------------     ------------

Balance (deficit), December 31, 1997
  (Unaudited)                                      $ 3,487         $4,334,864        $(6,904,503)    $(2,566,152)
                                                   =======         ==========        ============     ===========


</TABLE>

See notes to financial statements



<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                   Cumulative
                                                     During
                                                 Development
                                                 Stage Through                  Three Months Ended December 31,
                                               December 31, 1997                  1997                1996
                                                  (Unaudited)                   (Unaudited)        (Unaudited)
<S>                                            <C>                              <C>               <C>    
Operating activities:
  Net loss                                      $(6,904,503)                    $(167,066)        $(221,784)
  Items not requiring
  (providing) cash:
    Depreciation                                     17,686                           708                406
    Expenses funded by Common
      Stock issuance                                596,279
    Other                                             3,341
  Changes in:
    Advances to officers                           (467,348)                      (10,000)          (26,000)
    Other assets                                    (29,368)                       (5,699)           (2,313)
    Accounts payable                                820,031                        41,319           (30,637)
    Accrued expenses                                765,224                        81,355             73,187
    Deferred compensation                           437,501                         5,003              4,480
                                              -------------                  ------------       ------------
        Net cash used in
         operating activities                    (4,761,157)                      (54,380)         (202,661)
                                                -----------                   -----------         ----------

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

Financing activities:
  Proceeds from issuance of
    Common Stock and warrants                     2,720,562
  Proceeds from notes payable                     1,665,609                        20,000            185,000
  Proceeds from convertible debentures              475,000
  Payments on notes payable                        (154,609)
  Other                                             108,410
         Net cash provided by
           financing activities                   4,814,972                        20,000            185,000
                                                -----------                    ----------         ----------

Increase (decrease) in cash                          30,666                       (34,380)          (17,661)

Cash, beginning of period                                 0                        65,046             62,333
                                          -----------------                    ----------        -----------

Cash, end of period                            $     30,666                     $  30,666         $   44,672
                                               ============                     =========         ==========

</TABLE>


See notes to financial statements.


<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997
                                    UNAUDITED


NOTE 1:  FINANCIAL STATEMENTS

The balance sheet as of December 31, 1997, the statements of operations and cash
flows  cumulative  during  development  stage  through  December 31,  1997,  the
statements of operations  for the three months ended  December 31, 1997 and 1996
and the statements of changes in  stockholders'  equity (deficit) and cash flows
for the three months ended December 31, 1997, have been prepared by ThermoEnergy
Corporation (the "Company"), formerly Innotek Corporation, without audit. In the
opinion of management,  all  adjustments  (consisting  only of normal  recurring
items) necessary to present fairly the financial position, results of operations
and cash flows at  December  31, 1997 and for all  periods  presented  have been
made.  Operating  results for the three months  ended  December 31, 1997 are not
necessarily  indicative  of the results that may be expected for the entire year
ending September 30, 1998.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  omitted in  accordance  with  Article  10 of  Regulation  S-X.  These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's September 30, 1997 Form 10-K.

NOTE 2:  NOTES PAYABLE TO STOCKHOLDERS

During  November 1997, the Company  executed a 10% note payable to a stockholder
for $20,000,  which increased the aggregate  outstanding amount of such notes to
$676,000.  At December 31, 1997 the Company was committed to issue 67,600 shares
of Series B Common Stock to the holders of the notes (see Note 6).

Notes  payable of  $30,000,  $60,000 and  $50,000  matured on October 25,  1997,
December 1, 1997 and  February 1, 1998,  respectively.  The holders of these 10%
notes did not execute  modification  agreements  extending  the  maturity of the
notes past those dates.  During February 1998, the stockholders agreed to accept
Series 98, 15%  Convertible  Debentures (see Note 6) in exchange for the amounts
owed to them by the Company.

NOTE 3:  COMMON STOCK

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



<PAGE>




                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997
                                    UNAUDITED


NOTE 3:  COMMON STOCK (CONTINUED)

During  October  1996,  the  Board of  Directors  of the  Company  approved  the
execution of a nonbinding  letter of intent with a NASD member  broker-dealer to
act as managing  underwriter in connection with a proposed public  offering.  In
order to comply with the  preconditions  set forth in the letter of intent,  the
Board of Directors  approved a resolution for a four-to-one  reverse stock split
of the  Company's  Common Stock in addition to the  four-to-  one reverse  stock
split  approved by  stockholders  in 1994.  The Board of Directors also approved
amendments  to the  Company's  Articles  of  Incorporation  as  follows:  (1) To
authorize  the  designation  of  10,000,000  shares as Series A Common Stock and
65,000,000  shares as Series B Common Stock,  which are  convertible to Series A
Common Stock  commencing  12 months after the effective  date of a  registration
statement  for the proposed  offering  subject to certain  conditions,  from the
75,000,000  shares of $0.001 par value Common Stock authorized  originally under
the Company's Articles of Incorporation; (2) To authorize the designation of and
reclassification  of all shares of Common  Stock issued prior to the adoption of
the  proposed  amendments  to the Articles of  Incorporation  to Series B Common
Stock;  and (3) To change the name of the Company  from Innotek  Corporation  to
ThermoEnergy  Corporation.  Stockholders' approval of these matters was obtained
on December 12, 1996 during a special stockholders' meeting.

During  October 1997,  the  broker-dealer  informed the Company that it would be
unable to complete the proposed  public  offering.  The Company  terminated  its
relationship with the broker -dealer and filed a complaint with the NASD against
the firm.

The Company's  1997 Stock Option Plan contains  automatic  grant  provisions for
non-employee  Directors  of the Company.  At December 31, 1997,  the Company was
committed to issue options under the automatic grant provisions for 5,000 shares
of Series B Common Stock.

NOTE 4:  LOSS PER COMMON SHARE

During 1997, the Financial  Accounting Standards Board issued Statement No. 128,
"Earnings  per Share".  Statement  No. 128,  which was  effective for the period
ended December 31, 1997,  simplifies  the  calculation of earnings per share and
requires  that all prior  period  earnings per share data be restated to conform
with  the  provisions  of  the  Statement.   Since  the  Company  must  use  the
computational guidance contained in SAB 83 Topic 4D as described below, adoption
of this Statement had no effect on prior period loss per share data.




<PAGE>





                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997
                                    UNAUDITED




NOTE 4:  LOSS PER COMMON SHARE (CONTINUED)

Loss per common share is computed by dividing the net loss for the period by the
weighted average number of shares  outstanding  during the period,  adjusted for
stock options and warrants issued within twelve months of the Company's  initial
public offering filing date (February 27, 1992) which are treated as outstanding
for all periods  presented  in  accordance  with SAB 83 Topic 4D,  after  giving
effect to the reverse stock splits described in Note 3.

The  adjusted  weighted  average  number of common  shares used in the basic and
diluted  loss per  share  computations  were  3,722,213  shares  for the  period
cumulative  since  inception  through  December  31,  1997,  and  4,045,558  and
3,799,554  shares for the three month periods ended  December 31, 1997 and 1996,
respectively.

Warrants to purchase  approximately  736,000  shares Series B Common Stock,  and
stock options under the 1997 Stock Option Plan,  which provides for the issuance
of up to  750,000  shares of Series B Common  Stock,  were not  included  in the
computation  of diluted loss per share since the effect  would be  antidilutive.
See Note 6 for information regarding convertible debentures issued during 1998.

NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS

The Company has incurred net losses since inception.  Additionally,  substantial
capital will likely be required to commercialize the Company's technologies. The
financial  statements have been prepared assuming the Company will continue as a
going  concern,  realizing  assets and  liquidating  liabilities in the ordinary
course of business and do not reflect any adjustments that might result from the
outcome of the aforementioned  uncertainties.  Management is considering several
alternatives  for  mitigating  these  conditions,  including  the  sale of stock
pursuant  to a public  or  private  placement  offering,  sales  of  convertible
debentures  and warrants for Common Stock and fees from  projects  involving the
Company's  technologies.  Additional  funds  may be  necessary  in the event the
Company takes on other projects or makes an  acquisition  of another  company to
facilitate the Company's  commercial  demonstration of the Technologies.  If the
Company is unable to enter into commercially  attractive  collaborative  working
arrangements for one or more commercial or industrial projects,  the Company may
sub-license the Technologies to third parties.




<PAGE>




                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997
                                    UNAUDITED




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


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

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

NOTE 6:  SUBSEQUENT EVENTS

During January 1998, the Company's  Board of Directors  approved the issuance of
up to $1,000,000 of Series 98, 15% Convertible Debentures, due January 15, 2003.
Debentures with an aggregate principal balance of $300,000 were sold for cash in
January 1998.  Debentures with an aggregate  principal  balance of $156,000 were
issued to  stockholders  during  February 1998 in exchange for the 10% notes and
related accrued interest due to them by the Company (see Note 2). The holders of
the Debentures can convert the principal amount and accrued interest into shares
of Series B Common Stock at the conversion  price of $2.00 per share at any time
prior to the maturity  date.  

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

General

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

     The  Company  is the  exclusive  worldwide  licensee  for the  Technologies
(except for STORS in Japan) which were developed by Battelle Memorial  Institute
("Battelle"), an independent research and development organization.  The Company
intends to sell equipment (i.e. STORS-DSR,  NitRem-DSR,  or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties,  or build, own and operate  municipal and/or  industrial waste
water  treatment  facilities.  The  Company's  business  strategy  is based upon
entering into collaborative working  relationships with established  engineering
and environmental  companies, or formal joint venture agreements relative to the
application of the technologies for specified industries or markets. The Company
is  currently  negotiating  project-specific  working  arrangements  with Foster
Wheeler  Environmental  Corporation.   The  Company  also  has  joint  marketing
arrangements  with Roy F.  Weston,  Inc.,  Dan  Cowart,  Inc.,  and Mitsui & Co.
(U.S.A.),  Inc. and plans to enter project  specific working  arrangements  when
such  projects  are  identified  and  funding is  obtained.  The Company has not
generated  any  operating  revenues or any  profits.  The  Company has  recently
completed  demonstration of its NitRem-DSR technology at the TRIES, Radford Army
Ammunition Plant project in Radford,  Virginia.  This NitRem-DSR  project took a
wastewater stream containing  dinitrotoluene  (DNT) and successfully reduced the
concentration  of  DNT  from  120,000  ppb to  less  than  5  ppb,  acheiving  a
destruction  efficiency  of 99.996%,  well below  National  Pollution  Discharge
Elimination  System (NPDES) discharge limits.  Based on these test results,  the
Company, individually and jointly with Foster Wheeler Environmental Corporation,
is actively  marketing the NitRem-DSR units to potential  industrial clients and
to various  divisions  within the DOD. The Company has a project to  demonstrate
its ARP  technology  at New  York  City's  Staten  Island  wastewater  treatment
facility. The demonstration project is scheduled to begin March of 1998 and will
run for 150  consecutive  days.  In  addition,  the Company is in the process of
negotiating  a  STORS  demonstration  facility  for the  San  Bernardino  Valley
Municipal  Water  District.  The Company  will not be  required to make  capital
contributions to any such projects and the Company will not receive any revenues
or earnings from these  demonstration  projects.  The Company will be reimbursed
for  administrative  and  operating  costs from the two  demonstration  projects
underway and is negotiating  similar  arrangements  for the third  demonstration
project.iating similar arrangements for the third demonstration project.

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

Plan of Operations

     The  Company  had  planned to use the net  proceeds  of a  proposed  public
offering to fund the  operations  of the Company and  complete  the Radford Army
Ammunition Plant and the New York City demonstration  projects.  As discussed in
Note 3 of  Notes  to  Financial  Statements,  the  managing  underwriter  of the
proposed  offering  notified the Company in October 1997 that it would be unable
to complete the  offering.  The Company now plans to use the  proceeds  from the
sale of its Series 98 Convertible  Debentures  (see Note 6 of Notes to Financial
Statements) to satisfy the cash  requirements  for its basic  operations for the
next year ending  September 30, 1998.  Additional  funds may be necessary in the
event the Company  takes on other  projects or makes an  acquisition  of another
company  to  facilitate   the   Company's   commercial   demonstration   of  its
technologies.

     The overall goal of the Company is to successfully complete a demonstration
project for STORS  and/or  NitRem  through  all of the  projects  and  strategic
working  arrangements  discussed  above.   Management  plans  to  utilize  these
demonstration  facilities  to  expand  the  visibility  of  the  Company  in the
municipal, industrial, Department of Defense and Department of Energy markets. A
successful demonstration project is the single most important business factor in
the implementation of the Company's plan of operation.

     Management is seeking other sources of funding to complete the Radford Army
Ammunition  Plant  and the New York City  demonstration  projects.  The  Company
believes that such projects,  if successful,  will allow the Company to generate
income through the commercialization of the Technologies.

Results of Operations

     Three  months  ended  December  31,  1997  compared to three  months  ended
December 31, 1996

     For the three months ended  December 31, 1997,  the Company  incurred a net
loss of $167,066 as compared to $221,784 for the three months ended December 31,
1996.

     General and  administrative  expenses and travel expenses  decreased during
the period  ended  December  31, 1997  compared to December  31, 1996 due to the
Company's  efforts to reserve  cash due to the  failure of the  proposed  public
offering.  Interest  expense  increased  between the same two periods due to the
increase in notes payable to stockholders.

Liquidity and Capital Resources

     During the period ended December 31, 1997, the Company used $54,380 of cash
in operations compared to $202,661 in 1996. During 1992, the Company initiated a
public  offering of 125,000 shares of Series B Common Stock at a price of $16.00
per share.  The offering was conducted on a "best efforts"  basis,  primarily by
directors and officers of the Company.  Effective  January 5, 1994, the offering
was  terminated.  A total of 93,129  shares  were sold at a price of $16.00  per
share  and an  additional  6,438  shares  were  issued  at  $16.00  per share in
satisfaction of notes payable and related accrued interest.  Currently, there is
no public market for the Series B Common Stock.  As  previously  discussed,  the
Company's proposed 1997 public offering did not occur.

     During 1997,  1996 and 1995, the Company met its liquidity  needs primarily
from borrowings from stockholders (see Note 4 of Notes to Financial Statements).
Management  plans to meet the Company's  liquidity  needs during the year ending
September  30, 1998 with proceeds from the sale of  convertible  debentures  and
public or private placement offerings of Common Stock.  Management plans to meet
long-term  liquidity  needs  primarily  from  revenues  derived from  commercial
contracts the Company hopes to obtain subsequent to successful demonstrations of
its  Technologies,  such as the  Radford  NitRem,  New York City  NitRem and San
Bernardino STORS demonstration projects.

Recent Pronouncements of the Financial Accounting Standards Board.

     During 1997, the Financial  Accounting Standards Board issued Statement No.
128, "Earnings per Share",  Statement No. 130, "Reporting Comprehensive Income",
and Statement No. 131,  "Disclosures about Segments of an Enterprise and Related
Information".  See Note 4 of  Notes  to  Financial  Statements  for  information
regarding  Statement No. 128.  Statement No. 130, which is effective  during the
year ending  September  30, 1999,  establishes  new rules for the  reporting and
display of comprehensive income and its components. Application of Statement No.
130 will not impact  amounts  previously  reported  for net income or affect the
comparability  of previously  issued  financial  statements.  Statement No. 131,
which is  effective  during the year  ending  September  30,  1999,  changes the
requirements for reporting  segment  information in annual and interim financial
statements.  The  industry  segment  approach  under  Statement  No.  14 will be
replaced  with a management  approach of  reporting  financial  and  descriptive
information about operating segments.

Net Operating Losses

     The Company has net operating loss carry forwards as of September 30, 1997,
of  approximately  $5,500,000  which expire in the years 2003 through 2012.  The
amount of net  operating  loss carried  forward that can be used in any one year
will be limited by the  applicable tax laws which are in effect at the time such
carry forward can be utilized. A valuation allowance of approximately $2,125,000
has been  established  to offset any benefit from the net  operating  loss carry
forward  as it  cannot  be  determined  when or if the  Company  will be able to
utilize the net operating losses.

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     Neither the Company nor any of its  subsidiaries  is a party to any pending
legal  proceedings,  nor are any legal  proceedings  pending of which any of the
Company's property is the subject.

Item 2.  Change in Securities

     None

Item 3.  Defaults Upon Senior Securities

     None

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

     None

Item 5.  Other Information

     None

Item 6.  Exhibits and Report on Form 8-K

     (a)  None.

     (b) One report onm Form 8-K was filed by the Company on January  13,  1998,
listing in Item 5 - Other Events (The  Company's  inability to obtain  financing
necessary  to engage  its  independent  auditors  for  providing  the  financial
information  required for the Form 10-K for the year ending September 30, 1997.)
No other reports on Form 8-K have been filed during the quarter ending  December
31, 1997.
<PAGE>



                          SIGNATURES

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

     Date: February 14, 1998

                              THERMOENERGY CORPORATION


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



<PAGE>