**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-QSB**




QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934




FOR
      THE
      QUARTERLY PERIOD ENDED September 30, 2007




OR




TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)




OF
      THE
      SECURITIES EXCHANGE ACT OF 1934




FOR
      THE
      TRANSITION PERIOD FROM _________________ TO _________________




COMMISSION
      FILE NUMBER 33-46104-FW




THERMOENERGY
      CORPORATION


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





DELAWARE
              (State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            71-0659511
              (IRS
                Employer Identification No.)




124
      WEST
      CAPITOL AVENUE, SUITE 880,


LITTLE
      ROCK, ARKANSAS 72201


(Address
      of Principal Executive Offices)




(501)
      376-6477


(Issuer’s
      Telephone Number, Including Area Code)





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





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


Yes
x
      No o







Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No
x




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 34,062,552  shares
      of
      common stock as of November 15, 2007.




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








**THERMOENERGY
      CORPORATON**




**INDEX**




****
            ****
            ****
            ****
            ****
            ****
            **Page**
              **No.**Part
                I.
            
            Financial
                InformationItem
                1.
            
            Financial
                StatementsConsolidated
                Balance Sheets as of September 30, 2007 (Unaudited) and
                December 31, 2006
            
            3Consolidated
                Statements of Operations for the nine months ended September 30, 2007
                and 2006 (Unaudited)
            
            4Consolidated
                Statements of Changes in Stockholders’ Equity (Deficit) for the period
                ended January 1, 2006 through December 31, 2006 and the nine months
                ended
                September 30, 2007
            
            5Consolidated
                Statements of Cash Flows for the nine months ended September 30, 2007
                and 2006 (Unaudited)
            
            6Consolidated
                Notes to Financial Statements (Unaudited)
            
            7Item
                2.
            
            Management's
                Discussion and Analysis or Plan of Operation
            
            16Item
                3.
            
            Controls
                and Procedures
            
            22Part
                II.
            
            Other
                InformationItem
                1.
            
            Legal
                Proceedings
            
            22Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            22Item
                3.
            
            Defaults
                Upon Senior Securities
            
            23Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            23Item
                5.
            
            Other
                Information
            
            23Item
                6.
            
            Exhibits
                and Reports on Form 8-K
            
            23Signature
            
            24







2


**THERMOENERGY
                  CORPORATION****CONSOLIDATED
                  BALANCE SHEETS****(in
                  thousands, except for share and par value amounts
                  )**
  **September
                  30, 2007**
              
              **December
                  31, 2006****(Unaudited)****ASSETS**Current
                  Assets:Cash
              
              $
              455
              
              $
              637Accounts
                  Receivable
              
              
              1,242
              
              
              874Note
                  Receivable - CAStion
              
              
              -
              
              
              493Inventories
              
              
              258
              
              
              -Other
                  Current Assets
              
              
              143
              
              
              152Total
                  Current Assets
              
              
              2,098
              
              
              2,156Property
                  and Equipment, net
              
              
              337
              
              
              252Goodwill
              
              
              8,055Other
                  Assets
              
              
              5**Total
                  Assets**
              
              $
              10,495
              
              $
              2,408**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                  Liabilities:Accounts
                  Payable
              
              $
              1,139
              
              $
              498Short
                  Term Notes Payable
              
              
              969
              
              
              -Deferred
                  Revenue
              
              
              187
              
              
              -Other
                  Current Liabilities
              
              
              575
              
              
              350Total
                  Current Liabilities
              
              
              2,870
              
              
              848Long
                  Term Liabilities:Deferred
                  Comp Retirement Plan for Officers Net of Current Portion
              
              
              313
              
              
              347Convertible
                  Debt
              
              
              3,236
              
              
              -Minority
                  Interest in Subsidiary
              
              
              (656
              )
              
              -Total
                  Long Term Liabilities
              
              
              2,893
              
              
              347**Total
                  Liabilities**
              
              
              5,763
              
              
              1,195Stockholders'
                  Equity (Deficit):Preferred
                  Stock, $0.01 par value(2007), $1 par value (2006): authorized
                  -20,000,000shares
                  (2007), 10,000,000 shares (2006); issued and outstanding: 2007
                  -5,306,670
                  shares; 2006 - 6,198,671 shares
              
              
              53
              
              
              6,198Common
                  Stock, $.001 par value: authorized - 150,000,000 shares (2007),
                  75,000,000shares
                  (2006); issued: 2007 - 34,146,349 shares; 2006 - 23,220,612 shares;outstanding:
                  2007 - 34,062,552 shares; 2006 - 23,136,815 shares
              
              
              34
              
              
              23Additional
                  Paid-In Capital
              
              
              44,923
              
              
              29,862Accumulated
                  Deficit
              
              
              (40,278
              )
              
              (34,870
              )**Total
                  Equity**
              
              
              4,732
              
              
              1,213**TOTAL
                  LIABILITIES AND EQUITY**
              
              $
              10,495
              
              $
              2,408
 3
  **THERMOENERGY
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****(in
                  thousands, except per share
                  amounts)**
  **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****(Unaudited)**
              
              **(Unaudited)**Operating
                  Income
              
              $
              594
              
              $
              397
              
              $
              1,704
              
              $
              808Cost
                  of Goods Sold
              
              
              383
              
              
              21
              
              
              1,609
              
              
              185Gross
                  Operating Income
              
              
              211
              
              
              376
              
              
              95
              
              
              623Operating
                  Expenses:General
                  and Admin.
              
              
              3,404
              
              
              541
              
              
              4,130
              
              
              2,192Selling
                  Expenses
              
              
              62
              
              
              -
              
              
              210
              
              
              -Payments
                  under Licenses
              
              
              11
              
              
              10
              
              
              68
              
              
              30Professional
                  Fees
              
              
              257
              
              
              285
              
              
              903
              
              
              829Travel
                  & Entertainment
              
              
              93
              
              
              110
              
              
              350
              
              
              381Total
                  Operating Expenses
              
              
              3,827
              
              
              946
              
              
              5,661
              
              
              3,432Loss
                  from Operations
              
              
              (3,616
              )
              
              (570
              )
              
              (5,566
              )
              
              (2,809
              )Other
                  Income (Expense):Net
                  Interest Income (expense)
              
              
              (42
              )
              
              8
              
              
              (197
              )
              
              62Total
                  Other Income
              
              
              (42
              )
              
              8
              
              
              (197
              )
              
              62Net
                  loss before minority interest in subsidiary
              
              
              (3,658
              )
              
              (562
              )
              
              (5,763
              )
              
              (2,747
              )Minority
                  interest in subsidiary
              
              
              270
              
              
              -
              
              
              355
              
              
              -Net
                  Loss
              
              $
              (3,388
              )
              $
              (562
              )
              $
              (5,408
              )
              $
              (2,747
              )Per
                  Common Share:Loss
                  from Operations
              
              $
              (0.11
              )
              $
              (0.02
              )
              $
              (0.20
              )
              $
              (0.12
              )Net
                  Loss
              
              $
              (0.10
              )
              $
              (0.02
              )
              $
              (0.20
              )
              $
              (0.12
              )
 4
  **THERMOENERGY
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  (DEFICIT)****Period
                  Ended December 31, 2006 and the Nine Months Ended****September
                  30, 2007 (Unaudited)****(in
                  thousands)**
  **Common
                  Stock**
              
              **Series
                  A Convertible Preferred Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Accumulated
                  Deficit**
              
              **Total**Balance
                  (Deficit) January 1, 2006
              
              $
              23
              
              $
              6,198
              
              $
              29,131
              
              $
              (31,177
              )
              $
              4,175Options:
                  issued to officers and directors
              
              
              -
              
              
              -
              
              
              298
              
              
              -
              
              
              298Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              433
              
              
              -
              
              
              433Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,693
              )
              
              (3,693
              )Balance
                  December 31, 2006
              
              $
              23
              
              $
              6,198
              
              $
              29,862
              
              $
              (34,870
              )
              $
              1,213Options
                  issued to directors
              
              
              
              
              
              
              
              
              128
              
              
              
              
              
              128Stock
                  issued for services
              
              
              -
              
              
              -
              
              
              51
              
              
              -
              
              
              51Warrants
                  issued for services
              
              
              
              
              
              
              
              
              249
              
              
              
              
              
              249Converted
                  Preferred Stock to Common Stock
              
              
              1
              
              
              (686
              )
              
              685
              
              
              
              
              
              -Issuance
                  of Common Stock (1,238,095 at $0.42 per share)
              
              
              1
              
              
              -
              
              
              519
              
              
              -
              
              
              520Issuance
                  of Common Stock from Cashless Exerciseof
                  Warrants, April 2007
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Issuance
                  of Common Stock from Cashless Exercise ofWarrants,
                  September 2007
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Issuance
                  of Common Stock, June 2007, net of IssuanceCosts
                  of $99,721.17 (4,000,000 shares at $0.75 per share)and
                  2,000,000 warrants at a price equal to a 12 monthaverage
                  with a floor of $0.75 and a ceiling of $1.50 per share
              
              
              4
              
              
              
              
              
              2,896
              
              
              
              
              
              2,900Warrants
                  and beneficial conversion option issued withConvertible
                  Notes
              
              
              
              
              
              
              
              
              881
              
              
              
              
              
              881Reincorporated
                  in Delaware and reduced par value of preferredshares
              
              
              
              
              
              (5,459
              )
              
              5,459
              
              
              
              
              
              -Issuance
                  of common stock (4,588,088 shares at $.55 per share) and
              
              
              5
              
              
              
              
              
              4,163
              
              
              
              
              
              4,168common
                  stock warrants for CASTion acquisitionIssuance
                  of common stock, July 2007 (30,000 shares at $.99 per
                  share)
              
              
              -
              
              
              
              
              
              30
              
              
              
              
              
              30Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              (5,408
              )
              
              (5,408
              )Balance
                  September 30, 2007
              
              $
              34
              
              $
              53
              
              $
              44,923
              
              $
              (40,278
              )
              $
              4,732
 5
  **THERMOENERGY
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(in
                  thousands)**
  **Nine
                  Months Ended September 30,****2007**
              
              **2006****(Unaudited)**Operating
                  Activities:Net
                  Loss
              
              $
              (5,408
              )
              $
              (2,747
              )Items
                  not requiring (providing) cash:Depreciation
              
              
              94
              
              
              16Expense
                  of options issued to officers and directors
              
              
              128
              
              
              298Expense
                  of warrants vesting during the period
              
              
              249
              
              
              249Goodwill
                  Impairment Charge
              
              
              2,734Restricted
                  Stock issued for services
              
              
              51
              
              
              -Discount
                  on Convertible Debt
              
              
              94
              
              
              -Changes
                  in:Accounts
                  Receivable
              
              
              (54
              )
              
              (387
              )Other
                  Receivables
              
              
              -
              
              
              (241
              )Note
                  Receivable CASTion
              
              
              493
              
              
              -Inventory
              
              
              (15
              )
              
              -Other
                  Current Assets
              
              
              34
              
              
              -Prepaid
                  Expenses
              
              
              -
              
              
              (108
              )Accounts
                  Payable
              
              
              42
              
              
              (61
              )Short
                  Term Notes Payable
              
              
              (2,554
              )
              
              -Deferred
                  Revenue
              
              
              (192
              )Other
                  Current Liabilities
              
              
              (117
              )
              
              -Minority
                  Interest In Subsidiary
              
              
              (656
              )Deferred
                  Compensation Retirement Plan
              
              
              (34
              )
              
              (40
              )Net
                  Cash used in operating activities
              
              
              (5,111
              )
              
              (3,021
              )Investing
                  Activities:Purchase
                  of CASTion, net of cash required
              
              
              (269
              )Purchase
                  of fixed assets
              
              
              (2
              )
              
              (187
              )Net
                  Cash used in investing activities
              
              
              (271
              )
              
              (187
              )Financing
                  Activities:Executed
                  Convertible Debt and Equity Financing
              
              
              5,200
              
              
              -Net
                  cash provided by financing activities
              
              
              5,200
              
              
              -Increase
                  (Decrease) in cash
              
              
              (182
              )
              
              (3,208
              )Cash,
                  beginning of period
              
              
              637
              
              
              4,325Cash,
                  end of period
              
              $
              455
              
              $
              1,117


6




**THERMOENERGY
      CORPORATION**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**







**NOTE
      1: BASIS OF PRESENTATION**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information and with the instructions to Form 10-QSB and Item 310(b) of
      Regulation S-B. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments (consisting
      of normal recurring accruals) considered necessary for a fair presentation
      have
      been included. Operating results for the nine-month period ended September
      30,
      2007 are not necessarily indicative of the results that may be expected for
      the
      year ended December 31, 2007.




As
      more
      fully described in Note 2, the Company acquired a majority interest in an entity
      as of July 2, 2007. In accordance with generally accepted accounting principles,
      consolidated financial statements were prepared for periods subsequent to the
      date of the acquisition. The consolidated financial statements presented herein
      for periods prior to July 2, 2007 reflect the operations of ThermoEnergy
      Corporation only. All significant intercompany amounts have been eliminated
      in
      consolidation.




The
      balance sheet at December 31, 2006 has been derived from the audited financial
      statements of ThermoEnergy Corporation (the “Company”)  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 annual report on Form 10-KSB for the year ended December 31,
      2006.




**NOTE
      2: ACQUISITION**




On
      July
      2, 2007, the Company entered into an Agreement for the Purchase and Sale of
      Securities with CASTion Corporation, a Massachusetts corporation (“CASTion”),
      and six investment funds (the “Funds”), pursuant to which the Company acquired,
      from certain of the Funds, shares of the preferred stock of CASTion
      representing, in the aggregate, 90.31% of the total issued and outstanding
      shares of CASTion’s common stock on an as-converted basis and, from certain of
      the Funds, $2,000,000 face amount of promissory notes and other debt obligations
      of CASTion (the “CASTion Debt”).




7




**THERMOENERGY
      CORPORATION**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      2: ACQUISITION (Continued)**




Under
        the
        Agreement for the Purchase and Sale of Securities, on July 2, 2007 the Company
        paid to the Funds the following consideration: (i) $2,000,000 in cash, (ii)
        an
        aggregate of 4,394,338shares of the Company’s common stock, (iii) Convertible
        Promissory Notes in the aggregate principal amount of $3,353,126.62 (the
        “Notes”), and (iv) six-year Common Stock Purchase Warrants for the purchase of
        an aggregate of 4,232,425 shares of the Company’s common stock at an exercise
        price of $0.50 per share (the “Warrants”). The Notes are due May 31, 2010 and
        bear interest at the rate of 6.5% per annum; if the Notes remain outstanding
        after November 30, 2008, the interest rate will be increased to 10%. Interest
        on
        the Notes is payable semi-annually, and we will have the option of deferring
        interest payments and rolling the deferred amount into the principal amount
        of
        the Notes. We agreed that 23.125% of the amount by which funds raised by
        us in
        private placements of equity or convertible debt, net of expenses, exceed
        $3,000,000 will be applied toward prepayment of the Notes; if such proceeds
        have
        not been so applied within 30 days after the closing of such a financing,
        the
        interest rate on the Notes will be increased to 10%. The outstanding principal
        and accrued interest on the Notes are convertible, at any time at the election
        of the holders, into shares of the Company’s common stock at the rate of $0.50
        per share. The Warrants and the Notes contain conventional weighted-average
        anti-dilution provisions for the adjustment of the exercise price of the
        Warrants and the conversion price of the Notes in the event we issue additional
        shares of the Company’s common stock (or securities convertible into common
        stock) at a price per share less than the then-effective exercise price or
        conversion price. The Warrants include conventional provisions permitting
        “cashless” exercise. The Warrants also include a provision permitting us to
        accelerate their expiration date if, at any time after July 2, 2009, the
        market
        price for the Company’s common stock equals or exceeds 200% of the market price
        on July 2, 2007 ($1.39 per share) for a period of thirty consecutive trading
        days.




We
      agreed
      to maintain the separate corporate existence of CASTion, and to operate it
      as a
      separate division, until the Notes have been paid in full. We have granted
      to
      the Note holders a security interest in the shares of CASTion as collateral
      security for payment and performance of the Company’s obligations under the
      Notes.




In
      connection with the Agreement for the Purchase and Sale of Securities, on July
      2, 2007 a portion of the purchase price went to the officers of CASTion.
      $150,000 of the $2,000,000 cash paid to pay off existing CASTion debt, was
      paid
      to three officers and employees of CASTion and issued to three other officers
      and employees of CASTion an aggregate of 175,000 shares of the Company’s common
      stock. On July 2, 2007, we also issued to Jeffrey L. Powell, the President
      and
      CEO of CASTion, a six-year Common Stock Purchase Warrant (in form similar to
      the
      Warrants issued to the Funds but without provision for acceleration of the
      expiration date) for the purchase of 300,000 shares of the Company’s common
      stock at an exercise price of $0.50 per share. On July 2, 2007, we entered
      into
      a Bonus Agreement which provides for the payment to Mr. Powell and five other
      officers and employees of CASTion of bonuses in the aggregate amount of
      $300,000. Such bonuses are payable upon a change of control of the Company.
      We
      also agreed that 1.875% of the amount by which the amounts raised by us in
      private placements of equity or convertible debt, net of expenses, exceed
      $3,000,000 will be applied toward prepayment of the amounts due under the Bonus
      Agreement. All of the payments to the employees are a reduction in the overall
      purchase price.




8


**THERMOENERGY
      CORPORATION**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      2: ACQUISITION (Continued)**





Also
      in
      connection with the Agreement for the Purchase and Sale of Securities, on July
      2, 2007 we issued to Farley & Associates, Inc., an affiliate of two of the
      Funds, 18,750 shares of the Company’s common stock and a six-year Common Stock
      Purchase Warrant (kin form identical to the Warrants issued to the Funds) for
      the purchase of 37,500 shares of the Company’s common stock at an exercise price
      of $0.50 per share.





In
      the
      Agreement for the Purchase and Sale of Securities, we agreed to include in
      any
      registration statement that we may file under the Securities Exchange Act of
      1934 (with certain specified exceptions) (i) the shares of the Company’s common
      stock issued to the Funds, (ii) the shares of the Company’s common stock
      issuable to the Funds upon conversion of Notes or exercise of Warrants, (iii)
      the shares of the Company’s common stock issued to the officers and employees of
      CASTion and to Farley & Associates, Inc. in connection with the Agreement
      for the Purchase and Sale of Securities and (iv) the shares of the Company’s
      common stock issuable to the officers and employees of CASTion and to Farley
      & Associates, Inc. upon exercise of Warrants.




The
      acquisition was accounted for using the purchase method of accounting.
      Accordingly, the assets and liabilities of CASTion were recorded at their
      respective fair values as of the date of acquisition based on a preliminary
      analysis of such fair values. The final allocation of the purchase price will
      be
      determined after additional analyses are performed to determine the fair values
      of CASTion’s tangible and identifiable intangible assets and liabilities as of
      the date of acquisition. The Company is
      in the
      process of engaging an
      unrelated third party to assist management in completing the final valuation.
      In
      addition, the Company must perform impairment tests in accordance with SFAS
      No.
      142 in order to determine that the carrying value of goodwill recorded in
      connection with the acquisition does not exceed its implied fair value as
      defined in SFAS No. 142. The Company plans to perform these tests during the
      fourth quarter of 2007 (see information below for impairment review as of
      September 30, 2007). The final adjustments to the purchase price allocation,
      including the amount of recorded goodwill, may be materially different from
      the
      information presented herein.




9


**THERMOENERGY
      CORPORATION**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**








**NOTE
      2: ACQUISITION (Continued)**





The
      calculation of the purchase price is as follows:





Shares
                  of the Company’s common stock issued
              
              
              4,588,088Assigned
                  stock price (1)
              
              $
              .55Fair
                  Value of common stock issued
              
              
              2,523,448Plus:
                  Acquisition costs incurred
              
              
              200,000Total
                  cash and common stock
              
              
              2,723,448Plus
                  other consideration:Convertible
                  Note, net of valuation discount of $313,425 and discount forbeneficial
                  conversion feature of $313,182 (2)
              
              
              2,726,520Common
                  stock warrants (3)
              
              
              1,644,259Total
                  purchase price
              
              $
              7,094,227


(1)
            Estimate
                based on value assigned to common stock purchases for 4,000,000 shares
                during late June 2007, approximately $.52, and the 365-day trailing
                average quoted price for the Company’s common stock prior to the date of
                acquisition, approximately $.60. The Company’s quoted stock price on July
                2, 2007 was $1.39. Due to the Company’s small average trading volume and
                the price volatility of the Company’s common stock during 2007, management
                believes that the recent large-block cash sales of common stock and
                the
                365-day trailing average stock price provide a better estimate of
                the
                value of the Company’s common
                stock.


(2)
            Valuation
                discount of $313,425 computed based on an assumed fair market value
                interest rate of 10% compared to the stated rate of 6.5%. The valuation
                discount results in a beneficial conversion feature of $313,182,
                the
                intrinsic value of the conversion feature on that
                date.


(3)
            The
                value of the warrants was computed using a Black-Scholes option pricing
                model.








10





**THERMOENERGY
      CORPORATION**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**








**NOTE
      2: ACQUISITION (Continued)**





The
      consolidated financial statements as of and for the periods ended September
      30,
      2007 financial statements reflect the following preliminary purchase price
      allocation for CASTion:


Historical
                  net assets applicable to the Company’s purchase of a
                  90.31%interest
                  in CASTion’s common stock on July 2, 2007
              
              $
              (3,694,468
              )Goodwill
              
              
              10,788,695Total
                  purchase price
              
              $
              7,094,227




The
      Company performed an impairment analysis of goodwill as of September 30, 2007
      due to the decrease in sales at CASTion during 2007 compared to 2006. This
      analysis resulted in the recording of an impairment loss of $2,734,750. The
      Company is in the process of engaging an unrelated third party to perform a
      valuation for recording a fair value for Goodwill as of December 31,
      2007.





The
      results of operations of CASTion subsequent to the acquisition date are included
      in the Company’s consolidated statements of operations for the period ended
      September 30, 2007. The following pro forma information for the nine- and
      three-month periods ended September 30, 2007 and 2006 reflects the Company’s
      estimated consolidated results of operations as if the acquisition of CASTion
      occurred at January 1, 2007.


Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,(dollars
                  in thousands, except per share date)
              
              2007
              
              2006
              
              2007
              
              2006Gross
                  operating income
              
              $
              95
              
              $
              935
              
              $
              211
              
              $
              884Loss
                  from operations
              
              
              (6,507
              )
              
              (3,282
              )
              
              (3,771
              )
              
              (338
              )Net
                  loss
              
              
              (6,349
              )
              
              (3,259
              )
              
              (3,543
              )
              
              (427
              )Net
                  loss from operations per share
              
              $
              (0.20
              )
              $
              (0.14
              )
              $
              (0.11
              )
              $
              (0.04
              )Net
                  loss per share
              
              $
              (0.20
              )
              $
              (0.14
              )
              $
              (0.11
              )
              $
              (0.05
              )




11





**THERMOENERGY
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      3: 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. Stock options, warrants,
      and dilutive effect of the Company’s Series A Convertible Preferred Stock were
      not included in the computation of diluted loss per share since the effect
      would
      be antidilutive. The adjusted weighted average number of common shares used
      in
      the basic and diluted loss per share computations was 27,628,661 and 23,136,815
      shares for the nine-month periods ended September 30, 2007 and 2006,
      respectively, and 33,687,597 and 23,136,815 shares for the three-month periods
      ended September 30, 2007 and 2006, respectively.




**NOTE
      4: MANAGEMENT’S CONSIDERATION OF GOING CONCERN MATTERS**




The
      Company has incurred net losses since inception and will likely require
      substantial capital to continue commercialization of the Technologies and to
      fund the Company’s liabilities. The financial statements have been prepared
      assuming the Company will continue as a going concern, realizing assets and
      liquidating liabilities in the ordinary course of business and do not reflect
      any adjustments that might result from the outcome of the aforementioned
      uncertainties. Management is considering several alternatives for mitigating
      these conditions.




Management
      is actively pursuing commercial contracts to produce fees from projects
      involving the Technologies. Management is currently engaged in discussions
      with
      various investment bankers, private equity funds and high net worth individuals
      to raise additional funds through a private placement of debt or equity, and
      anticipates closing on such a private placement before the end of
      2007.




12




**THERMOENERGY
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      5: ISSUANCE OF CONVERTIBLE PROMISSORY NOTE, WARRANTS AND COMMON
      STOCK**




On
      March
      21, 2007, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with Martin A. Roenigk, pursuant to which the Company
      issued and sold to Mr. Roenigk, at face value, its 5% Convertible Promissory
      Note due March 21, 2013 (the “Maturity Date”) in the principal amount of
      $750,000 (the “Note”). Mr. Roenigk may elect to convert the Note at any time
      into shares of common stock at a price of $0.50 per share. Interest on the
      outstanding principal amount is payable semi-annually, subject to our right,
      upon payment of a $2,500 deferral fee, to defer any scheduled interest payment
      until the Maturity Date. As further consideration to Mr. Roenigk, on March
      21,
      2007 the Company issued to him a six-year warrant (the “Warrant”) to purchase an
      aggregate of 750,000 shares of common stock at an exercise price equal to the
      daily volume weighted average price (“VWAP”) per share of the




Company’s
      common stock for the 356-day period immediately preceding the date on which
      the
      Warrant is exercised, subject to a minimum exercise price of $0.50 per share
      and
      a maximum exercise price of $1.00 per share. The Purchase Agreement permits
      Mr.
      Roenigk, at his election at any time on or before March 21, 2008, to purchase,
      on the same terms as the original Note, one or more additional Notes in an
      aggregate principal amount of up to $750,000 and to receive as additional
      consideration therefore additional Warrants for the purchase, on the same terms
      as the original Warrant, of that number of shares of common stock determined
      by
      dividing the principal amount of such additional Note or Notes by $1.00; if
      Mr.
      Roenigk, exercises this right in full, he will acquire additional $750,000
      principal amount of Notes and Warrants for the purchase of $750,000 additional
      shares of common stock.




The
      Company estimated the fair value of the warrants issued using a Black-Scholes
      option pricing model and allocated $193,000 of the proceeds received to the
      warrants on a relative fair value basis. In addition, the difference between
      the
      effective conversion price of the Note into the Company’s common stock on the
      date of issuance of the Note resulted in a beneficial conversion feature
      amounting to $88,000, the intrinsic value of the conversion feature on that
      date. The total debt discount of $281,000 will be amortized to interest expense
      over the stated term of the Note.




13





**THERMOENERGY
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      5: ISSUANCE OF CONVERTIBLE PROMISSORY NOTE, WARRANTS AND COMMON STOCK
      (Continued)**




In
      two
      separate transactions during the quarter ended March 31, 2007, the Company
      issued shares of Common Stock to The Focus Fun, LP. In the aggregate, the
      Company issued and sold 1,238,095 shares of Common Stock for an aggregate
      purchase price of $520,000. The securities were issued in private placements
      not
      involving any public offering and exempt from registration under the Securities
      Act of 1933 pursuant to the exemption provided by Section 4(2) of such Act.
      No
      brokers or placement agents were involved in the offering of such
      securities.




On
      June
      21, 2007, the Company issued and sold 1,000,000 shares of Common Stock to The
      Focus Fund at a price of 0.75 per share in cash. In connection with such
      issuance, on June 21, 2007, the Company also issued to The Focus Fund a Common
      Stock Purchase Warrant entitling The Focus Fund to purchase up to 500,000
      additional shares of Common Stock, at any time on or before June 22, 2010,
      at a
      price per share equal to the volume-weighted average price per share of the
      Company’s Common Stock for the 365 day period immediately preceding the date of
      exercise (subject to a minimum exercise price of $0.75 per share and a maximum
      exercise price of $1.50 per share). The Warrant includes a provision permitting
      the Company to accelerate its expiration date if at any time the market price
      for its Common Stock equals or exceeds 125% of the minimum exercise price of
      $0.75 per share for a period of thirty consecutive trading days. ****





On
      June
      27, 2007, the Company issued and sold 3,000,000 shares of Common Stock to Robert
      S. Trump at a price of $0.75 per share in cash. In connection with such
      issuance, on June 27, 2007, the Company also issued to Mr. Trump a Common Stock
      Purchase Warrant entitling him to purchase up to 1,500,000 additional shares
      of
      Common Stock, at any time on or before June 28, 2010, at a price per share
      equal
      to the volume-weighted average price per share of the Company’s Common Stock for
      the 365 day period immediately preceding the date of exercise (subject to a
      minimum exercise price of $0.75 per share and a maximum exercise price of $1.50
      per share). The Warrant includes a provision permitting the Company to
      accelerate its expiration date if at any time the market price for its Common
      Stock equals or exceeds 125% of the minimum exercise price of $0.75 per share
      for a period of thirty consecutive trading days.




14





**THERMOENERGY
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      5: ISSUANCE OF CONVERTIBLE PROMISSORY NOTE, WARRANTS AND COMMON STOCK
      (Continued)**




On
      August
      23, 2007, the Company entered into financing agreements with two existing
      shareholders (the “Holders”) that consisted of the Company issuing $1,000,000 of
      7.5% convertible debt maturing on December 31, 2007 (the “Notes”). At the
      election of the Company by written notice to the Holders (a “Deferral
      Notice”) and payment to the Holders of a deferral fee in the amount equal to ten
      percent (10%) of the principal amount then outstanding (the “Deferral Fee”) no
      later than five business days after the Maturity Date, the Maturity Date may
      be
      extended to March 31, 2008. At the election of the Company, the Deferral Fee
      may
      be paid by adding such amount of the Deferral Fee to the principal amount of
      the
      Notes. The Company may pay off the Notes in full or in part at any time without
      any prepayment penalties. In the event that the Company has not paid off these
      Notes in full with interest and penalty by March 31, 2008, the full amount
      of
      principal, accrued interest and penalty will convert to restricted common stock
      at $0.50 per share. In addition to the interest on the Notes, the Company
      granted to the Holders a Warrant to purchase one share of Common Stock for
      each
      Dollar invested at any time during the three year period from December 31,
      2007
      to December 31, 2010 for an exercise price of $0.75 per share.




The
      Company estimated the fair value of the warrants issued using a Black-Scholes
      option pricing model and allocated $300,000 of the proceeds received to the
      warrants on a relative fair value basis. In addition, the difference between
      the
      effective conversion price of the Notes into the Company’s common stock on the
      date of issuance of the Notes resulted in a beneficial conversion feature
      amounting to $300,000, the intrinsic value of the conversion feature on that
      date. The total debt discount of $600,000 will be amortized to interest expense
      over the stated term of the Note.




15





**THERMOENERGY
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**


**September
      30, 2007**




**NOTE
      6: LEGAL MATTERS**




During
      August 2006, Rock Capital LLC, a former consultant to the Company, filed a
      lawsuit in the Circuit Court of Pulaski County, Arkansas, against the Company
      and personally against Dennis Cossey, the Company’s CEO, and Andrew Melton, the
      Company’s CFO, alleging breach of contract, slander, fraud in the inducement,
      fraud, and negligence. In October 2006, the Plaintiff voluntarily withdrew
      its
      slander claims against the Company and Messrs. Cossey and Melton. On February
      2,
      2007 the Court granted Messrs. Cossey and Melton’s Motion for Summary Judgment
      thereby dismissing with prejudice the Plaintiff’s claims against them
      individually on the fraud in the inducement, fraud and negligence claims. On
      February 9, 2007, in a 9 to 3 verdict, a jury found the Plaintiff on its breach
      of contract claim against the Company, awarding it $298,720.01 (which was the
      balance due under its three year consulting contract set to expire March 8,
      2008). On April 13, 2007 the Company filed an appeal of the jury verdict on
      the
      breach of contract claim. All briefs are due to be filed in December
      2007.




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




*General*




The
      following discussion should be read in conjunction with the financial statements
      and the notes to the financial statements appearing elsewhere in this quarterly
      report on Form 10-QSB.




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




16




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, including the risks, uncertainties and
      assumptions described in “Description of Business — Risk Factors.”




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




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




ThermoEnergy
      Corporation, a Delaware
      corporation (the “Company”), was incorporated in January 1988, for the purpose
      of developing and marketing certain municipal and industrial wastewater
      treatment technologies. The Company changed its jurisdiction of incorporation
      to
      Delaware in June 2007. The Company’s current wastewater treatment technologies
      include: (1) the ThermoFuel process, a renewable energy process that converts
      sewage sludge (a/k/a “biosolids”) into a high-energy solid fuel, (2) the
      Enhanced Biogas Production process, (3) the Ammonia Recovery Process (“ARP”),
      that converts the nitrogen (ammonia) found in wastewater plants to ammonium
      sulfate, a commercial grade fertilizer utilized by agriculture worldwide, and
      the CASTion technologies. The CASTion technologies consist of several patented
      and proprietary technologies, including: (1) the Controlled Atmosphere
      Separation Technology (“CAST”), (2) the Zero-Liquid-Discharge (“ZLD”) wastewater
      recycle/reuse and elimination of a discharge technology, (3) R-Cast the patented
      technology ammonium/ammonia removal from a stream, and other proprietary
      solutions for resource recovery and wastewater treatment technologies. Each
      of
      these process technologies is more fully described in the following section.
      These technologies are primarily aimed at solving wastewater problems for
      broad-based municipal, industrial and agricultural markets and are collectively
      referred to as the “Water Technologies” which are now centralized in our CASTion
      subsidiary.




17




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




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




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




The
      Company seeks to derive revenues from the commercialization of the Technologies.
      The Water Technologies address wastewater problems for municipal and broad
      range
      of industrial markets. TIPS is aimed at competing with conventional energy
      combustion technologies for both large stationary power plants and small
      combined heat and power plants. Although the Company has submitted several
      proposals to municipal wastewater authorities and may receive some funding
      from
      federal grants that is being used to further the development of its TIPS
      technology, the company cannot predict the acceptability of its Technologies
      in
      such markets. Since inception in 1988, the Company has generated only nominal
      operating revenues.




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




18




Management
      believes that the acquisition of 90.3% of the outstanding stock of CASTion
      Corporation, a Massachusetts corporation (“CASTion”) on July 2, 2007, pursuant
      to which CASTion has become a subsidiary of the Company, will give the Company
      the ability to raise additional financing and the resources to commercialize
      its
      Technologies. The Company will maintain the separate corporate existence of
      CASTion, and will operate it as the separate Water Division, until the
      Convertible Notes that were issued in partial payment of the purchase price
      have
      been paid in full. The Company has granted to the Note holders a security
      interest in the shares of CASTion as collateral security for payment and
      performance of the Company’s obligations under the Notes.




*Current
      Cash Requirements; Need for Additional Funds*




The
      Company has historically lacked the financial and other resources necessary
      to
      market the Technologies or to build demonstration projects without the financial
      backing of government or industrial customers. The following summary sets forth
      the Company’s plan of operations for the next 12 months.




As
      of
      September 30, 2007, the Company had a cash balance of $455,000, accounts
      receivable and other current assets of $1,643,000 and current liabilities of
      $2,870,000. During the years ended December 31, 2006, 2005 and 2004, the
      Company’s operating expenses were $4,825,295, $5,542,524, and $1,930,996,
      respectively. During the nine months ended September 30, 2007 and September
      30,
      2006, the Company’s operating expenses were $5,661,000 and $3,432,000,
      respectively. The 2007 and 2006 operating expenses include general and
      administrative expense charges of $4,130,000 and $2,192,000 respectively
      relating to
      the
      write down to Goodwill resulting from the acquisition of CASTion, the expense
      of
      the issuance of options to Officers and Directors, and the issuance of warrants
      for services.




Management
      anticipates that its cash requirements during the next 12 months to implement
      the Company’s marketing and development strategies will be in excess of
      approximately $5,000,000 due to the additional business resulting from the
      acquisition of CASTion Corporation. The Company will have to raise additional
      funds from private placements of equity or debt to satisfy its anticipated
      operating expenses for the next 12 months.




During
      2006, 2005 and 2004, the Company funded its operations primarily from the sale
      of restricted stock and the issuance of preferred stock in a private placement,
      borrowings, generally from shareholders, executive officers and other related
      parties, and through the issuance of debentures for cash or in settlement
      payments of other obligations. The Company is reviewing various strategic
      alternatives to fund the Company’s operations and development activities. These
      alternatives include the issuance of additional restricted shares of Common
      Stock, the issuance of additional shares of Preferred Stock, the issuance of
      Convertible Debt, other derivatives and bridge financing arrangements with
      commercial lenders. In the event that the Company cannot raise the necessary
      capital in the near-term to fund the Company’s future operations and development
      activities, the Company will not be able to continue its operations. In addition
      to these other financing alternatives, in an effort to raise capital to meet
      the
      Company’s obligations during the next 12 months, management is reviewing the
      possible benefits and ramifications of sublicensing or selling one or more
      of
      its Technologies.




19




*Third
      Quarter 2007 Compared to Third Quarter 2006*




The
      Company recorded total operating revenue of $594,000 and $396,897 respectively
      for the quarters ended September 30, 2007 and 2006. The increase in revenue
      resulted in the sales of CASTion of $397,000 offset by the decrease in revenue
      from the completion of two of the three separate grants for the Company’s TIPS
      technology and the delay in the design and site work for the proposed ARP
      project at NYCDEP. The Company had total operating expenses of $3,827,000 and
      $946,000 for the quarters ended September 30, 2007 and 2006 respectively. The
      increase of approximately $2,881,000 in 2007 over 2006 was due to the CASTion
      acquisition and a write off of $2,734,000 of Goodwill. The increased operating
      expenses due to the CASTion acquisition was partially offset by the decreased
      activity related to the ARP project at NYCDEP and the reduced expenses related
      to the recognition of an expense for options and warrants. General and
      Administration expenses were $3,404,000 and $541,000 respectively for the
      quarters ended September 30, 2007 and 2006 respectively. Travel and
      entertainment expenses were $93,000 and $110,000 respectively for the quarters
      ended September 30, 2007 and 2006 respectively.




Total
      assets increased from $2,408,000 on
      December 31, 2006 to $10,495,000 on September 30, 2007. The increase is due
      to
      the CASTion acquisition, and the private placement of debt and equity the
      Company accomplished during 2007. Total cash decreased from $637,000 to
      $455,000, and total accounts receivable, notes receivable and other current
      assets increased from $1,519,000 at December 31, 2006 to $1,643,000 on September
      30, 2007. Total liabilities increased from $1,195,000 on December 31, 2006
      to
      $5,763,000 on September 30, 2007 due to the CASTion acquisition, and the
      issuance of $1,750,000 of convertible debt. During the same period total equity
      increased $3,519,000.




*Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006*




The
      Company recorded total operating revenue of $1,704,000 and $808,000,
      respectively, for the nine months ended September 30, 2007 and 2006. The
      increase in revenue resulted from the CASTion acquisition and the decrease
      in
      revenue from the completion of two of three separate grants for the Company’s
      TIPS technology and the delay in the ARP project at NYCDEP. The Company had
      total operating expenses of $5,661,000 and $3,432,000 for the nine months ended
      September 30, 2007 and 2006, respectively. The increase of approximately
      $2,229,000 in 2007 over 2006 was due to the CASTion acquisition offset somewhat
      by the decreased activity related to the NYCDEP project and the reduced expenses
      related to the recognition of expenses for options and warrants. Travel and
      entertainment expenses were $350,000 and $381,000, respectively, for the nine
      months ended September 30, 2007 and 2006. The net loss of $5,408,000 as of
      September 30, 2007 was a large increase over the net loss of $2,747,000 as
      of
      September 30, 2006. The increase resulted from the acquisition of CASTion and
      the associated Goodwill adjustments.




20




*Recent
      Developments*




In
      April
      2005, the Company entered into an agreement with New York City (“NYCDEP”) for a
      500,000 gallon per day ARP facility to be located at the City’s Bowery Bay Water
      Pollution Control Plant (“WPCP”). The contract at the Bowery Bay WPCP was
      cancelled during September 2006 and the Company is in the process of entering
      into a new larger proposed contract for a facility at the 26th Ward WPCP. During
      the third quarter of 2007 the Company submitted all of the engineering drawings
      for the building and plant system to the NYCDEP, and the Company anticipates
      receiving a letter to proceed during the fourth quarter of 2007. Construction
      by
      the Company with its two primary subcontractors was delayed during 2006, but
      the
      Company expects to complete construction of the facility during 2008. If the
      operating results of the demonstration plant over the twelve month operating
      period after completion are successful, the Company expects to enter into a
      long-term agreement with the city of New York to operate the plant. There is
      no
      guarantee that the Company will receive the new contract that has been proposed
      for $12.4 million, and there is no guarantee that the Company will receive
      a
      long-term operating contract, but at this time Management believes that the
      Company will be successful in obtaining a long-term contract with NYCDEP.




*Research
      and Development*




Research
      and development activity has been, and the Company expects that it will continue
      to be, an integral part of the Company’s business activity. The Company
      continues to conduct research and development through its Hudson laboratory
      in a
      number of areas including, testing various waste streams for potential clients,
      Chemcad and Aspen modeling for the TIPS process, centrate testing related to
      the
      Company’s New York City project and, in conjunction with CASTion’s engineers,
      ARP process flow modifications. The Company expects to consolidate the Hudson
      laboratory with CASTion’s R&D laboratory in Worchester, Massachusetts during
      2008.




*Expected
      Changes in the Number of Employees*




The
      Company foresees increases in the number of employees in the next 12 months,
      especially with the expected growth in business related from the acquisition
      of
      CASTion. At September 30, 2007 the Company had 26 employees.




*Off-Balance
      Sheet Arrangements*




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




21




**Item
      3. Controls and Procedures.**




The
      Company, under the direction of its Chief Executive Officer and Principal
      Financial Officer, has established disclosure controls and procedures that
      are
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      Commission’s rules and forms. The disclosure controls and procedures are also
      intended to ensure that such information is accumulated and communicated to
      the
      Company’s management, as appropriate to allow timely decisions regarding
      required disclosures. The Company’s Chief Executive Officer and Principal
      Financial Officer, after consultation with the Chairman of the Audit Committee
      and representatives of the Company’s independent
      registered public accounting firm, have identified material control deficiencies
      as of September 30, 2007 and for the three-month and nine-month periods then
      ended. The Company is in the process of addressing these weaknesses and
      implementing additional disclosure controls and procedures.




**PART
      II -- OTHER INFORMATION**




**Item
      1. Legal Proceedings.**




During
      August 2006, Rock Capital LLC, a former consultant to the Company, filed a
      lawsuit in the Circuit Court of Pulaski County, Arkansas, against the Company
      and personally against Dennis Cossey, the Company’s CEO, and Andrew Melton, the
      Company’s CFO, alleging breach of contract, slander, fraud in the inducement,
      fraud, and negligence. In October 2006, the Plaintiff voluntarily withdrew
      its
      slander claims against the Company and Messrs. Cossey and Melton. On February
      2,
      2007 the Court granted Messrs. Cossey and Melton’s Motion for Summary Judgment
      thereby dismissing with prejudice the Plaintiff’s claims against them
      individually on the fraud in the inducement, fraud and negligence claims. On
      February 9, 2007, in a 9 to 3 verdict, a jury found for the Plaintiff on its
      breach of contract claim against the Company, awarding it $298,720.01 (which
      was
      the balance due under its three year consulting contract set to expire March
      8,
      2008). On April 13, 2007 the Company filed an appeal of the jury verdict on
      the
      breach of contract claim. All briefs for the appeal are due in December 2007
      and
      the Company expects to get a ruling on the appeal during the first quarter
      of
      2008. There were no other pending legal proceedings against the
      Company.




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




On
      August
      23, 2007, the Company issued 7.5% convertible debt maturing on December 31,
      2007
      (the “Notes”) to Robert Trump in the principal amount of $500,000 and to The
      Focus Fund in the principal amount of $500,000. At the election of the Borrower
      by written notice to the Holders (a “Deferral Notice”) and payment to the
      Holders of a deferral fee in the amount equal to ten percent (10%) of the
      principal amount then outstanding (the “Deferral Fee”) no later than five
      business days after the Maturity Date, the Maturity Date may be extended to
      March 31, 2008. At the election of the Borrower, the Deferral Fee may be paid
      by
      adding such amount of the Deferral Fee to the principal amount of the Notes.
      The
      Company may pay off the Notes in full or in part at any time without any
      prepayment penalties. In the event that the Company has not paid off these
      Notes
      in full with interest and penalty by March 31, 2008, the full amount of
      principal, accrued interest and penalty will convert to restricted common stock
      at $0.50 per share. In addition to the interest on the Notes, the Company
      granted to the Holders Warrants to purchase one share of Common Stock for each
      Dollar invested at any time during the three year period from December 31,
      2007
      to December 31, 2010 for an exercise price of $0.75 per share. The Notes and
      Warrants were issued in a private placement not involving any public offering
      and exempt from registration under the Securities Act of 1933 pursuant to the
      exemptions provided by Section 4(2) of such Act. The Notes and Warrants were
      sold for cash at an aggregate offering price of $1,000,000. No brokers or
      placement agents were involved in the offering of such securities.




22





The
      Company estimated the fair value of the warrants issued using a Black-Scholes
      option pricing model and allocated $300,000 of the proceeds received to the
      warrants on a relative fair value basis. In addition, the difference between
      the
      effective conversion price of the Notes into the Company’s common stock on the
      date of issuance of the Notes resulted in a beneficial conversion feature
      amounting to $300,000, the intrinsic value of the conversion feature on that
      date. The total debt discount of $600,000 will be amortized to interest expense
      over the stated term of the Notes.




**Item
      3. Defaults Upon Senior Securities.**




None.




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




No
      matters were submitted to a vote of securities holders during the quarter ended
      September 30, 2007.




**Item
      5. Other Information.**




None.




**Item
      6. Exhibits.**




The
      following exhibits are filed as part of this report:




**Exhibit**
                **No.**
              
              **Description**4.1
              
              Form
                  of Convertible Promissory Notes issued pursuant to the Agreement
                  for the
                  Purchase and Sale of Securities dated as of July 2, 2007 among
                  ThermoEnergy Corporation, CASTion Corporation, and the Sellers
                  named
                  therein (1)4.2
              
              Form
                  of Common Stock Purchase Warrants issued pursuant to the Agreement
                  for the
                  Purchase and Sale of Securities dated as of July 2, 2007 among
                  ThermoEnergy Corporation, CASTion Corporation, and the Sellers
                  named
                  therein (2)4.3
              
              Common
                  Stock Purchase Warrant issued to Jeffrey L. Powell #
                  (3)4.4
              
              Form
                  of Common Stock Purchase Warrants issued to The Focus Fund and
                  Robert S.
                  Trump *4.5
              
              Form
                  of 7.5% Convertible Promissory Notes issued to The Focus Fund and
                  Robert
                  S. Trump *10.1
              
              Agreement
                  for the Purchase and Sale of Securities dated as of July 2, 2007
                  among
                  ThermoEnergy Corporation, CASTion Corporation, and the Sellers
                  named
                  therein (4)10.2
              
              Bonus
                  Agreement dated July 2, 2007 among ThermoEnergy Corporation, CASTion
                  Corporation and Donald F. Farley, as agent for certain employees
                  of
                  CASTion Corporation identified therein # (5)10.3
              
              Employment
                  Agreement of Jeffrey L. Powell # (6)10.4
              
              Stock
                  Pledge Agreement dated July 2, 2007 by ThermoEnergy Corporation
                  in favor
                  of Spencer Trask Specialty Group, LLC (in its capacity as agent
                  for itself
                  and for other Secured Parties who become parties thereto
                  (7)
 31.1
                
                Certification
                    of C.E.O. pursuant to Rule 13a-14(a)
                *31.2
                
                Certification
                    of C.F.O. pursuant to Rule 13a-14(a)
                *32.1
                
                Certification
                    of C.E.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section
                    1350
                *32.2
                
                Certification
                    of C.F.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section
                    1350
                *
  #
        May be
        deemed to be a compensatory plan or arrangement
 *
        Filed
        herewith
 
 (1)
              Incorporated
                  by reference to Exhibit 4.1 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (2)
              Incorporated
                  by reference to Exhibit 4.2 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (3)
              Incorporated
                  by reference to Exhibit 4.3 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (4)
              Incorporated
                  by reference to Exhibit 10.1 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (5)
              Incorporated
                  by reference to Exhibit 10.2 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (6)
              Incorporated
                  by reference to Exhibit 10.3 to Current Report on Form 8-K filed
                  July 10,
                  2007
 (7)
              Incorporated
                  by reference to Exhibit 10.4 to Current Report on Form 8-K filed
                  July 10,
                  2007


23







**SIGNATURE**




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








Date:
      November 20, 2007


THERMOENERGY
      CORPORATION





/s/
      Dennis C. Cossey


Dennis
      C.
      Cossey, Chairman, and


Chief
      Executive Officer




24