UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q




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




For
the quarterly period ended March 31, 2010





o
            TRANSITION
      REPORT UNDER 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 Registrant as Specified in Its Charter)





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





124
      West Capitol Avenue, Suite 880,Little
      Rock, Arkansas
            72201(Address
      of Principal Executive Offices)
            (Zip
      Code)





Registrant’s
Telephone Number, Including Area Code: (501) 376-6477





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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  x   No o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


Large
      accelerated filer o
                  Accelerated filer oNon-accelerated
      filer o(Do not check if a
      smaller reporting company)
                  Smaller
      reporting company x




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.


Class
      – Common Stock, $.001 par value
                        Outstanding
      at May 7, 2010 - 53,679,473
shares











THERMOENERGY
CORPORATION




INDEX




Page
                No.Part
      I.
              Financial InformationITEM 1.
              Financial
      Statements
              3Consolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2009
              3Consolidated
      Statements of Operations for the three months ended March 31, 2010
      and 2009 (Unaudited)
              4Consolidated
      Statements of Cash Flows for the three months ended March 31, 2010
      and 2009 (Unaudited)
              5Notes
      to Consolidated Financial Statements (Unaudited)
              6ITEM 2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              14ITEM 3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              16ITEM 4.
              Controls
      and Procedures
              16Part
      II.
              Other InformationITEM 1.
              Legal
      Proceedings
              17ITEM 1A.
              Risk
      Factors
              17ITEM 2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              17ITEM 3.
              Defaults
      Upon Senior Securities
              17ITEM 4.
              Other
      Information
              17ITEM 5.
              Exhibits
              17Signature
              
              
              19






2




PART
I – FINANCIAL INFORMATION




ITEM
1.  Financial Statements





THERMOENERGY
CORPORATION


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share and par value amounts)





(unaudited)
                  March 31,
                  2010
                
                
                December 31,
                  2009ASSETSCurrent
      Assets:Cash
                
                $
                1,695
                
                
                $
                1,109Accounts
      receivable, net
                
                
                141
                
                
                
                7Inventories,
      net
                
                
                65
                
                
                
                74Other
      current assets
                
                
                256
                
                
                
                205Total
      Current Assets
                
                
                2,157
                
                
                
                1,395Property
      and equipment, net
                
                
                245
                
                
                
                241Other
      assets
                
                
                124
                
                
                
                74Total
      Assets
                
                $
                2,526
                
                
                $
                1,710LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      Liabilities:Accounts
      payable
                
                $
                968
                
                
                $
                812Short-term
      borrowings
                
                
                1,305
                
                
                
                —Convertible
      debt in default
                
                
                4,579
                
                
                
                4,133Contingent
      liability reserves
                
                
                2,981
                
                
                
                3,053Deferred
      revenue
                
                
                132
                
                
                
                398Other
      current liabilities
                
                
                3,667
                
                
                
                3,627Total
      Current Liabilities
                
                
                13,632
                
                
                
                12,023Long
      Term Liabilities:Deferred
      compensation retirement plan for officers, net of current
      portion
                
                
                217
                
                
                
                229Warrant
      liability
                
                
                2,444
                
                
                
                2,559Convertible
      debt
                
                
                1,075
                
                
                
                1,370Total
      Long Term Liabilities
                
                
                3,736
                
                
                
                4,158Total
      Liabilities
                
                
                17,368
                
                
                
                16,181Stockholders'
      Equity (Deficit):Preferred
      Stock, $0.01 par value, 20,000,000 shares authorized:Class
      A Preferred Stock, liquidation value of $1.20 per share: designated:
      10,000,000 shares;
                  issued
      and outstanding: 208,334 shares at March 31, 2010 and December 31,
      2009
                
                
                2
                
                
                
                2Class
      B Preferred Stock, liquidation preference of $2.40 per share: designated:
      4,371,287 shares;
                  issued
      and outstanding: 3,037,954 shares at March 31, 2010 and December 31,
      2009
                
                
                30
                
                
                
                30Common
      Stock, $.001 par value: authorized - 300,000,000 shares; issued:
      53,763,270 shares at
                  March
      31, 2010 and December 31, 2009; outstanding: 53,679,473 shares at March
      31, 2010 and
                  December
      31, 2009
                
                
                54
                
                
                
                54Additional
      paid-in capital
                
                
                68,328
                
                
                
                66,711Accumulated
      deficit
                
                
                (83,256
                )
                
                
                (81,268
                )Total
      Stockholders’ Equity (Deficit)
                
                
                (14,842
                )
                
                
                (14,471
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                
                $
                2,526
                
                
                $
                1,710





See notes
to consolidated financial statements.




3





THERMOENERGY
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


In
thousands, except share and per share amounts


(Unaudited)





Three
      Months Ended March 31,2010
                
                
                2009Contract
      and grant income
                
                $
                1,160
                
                
                $
                375Less:
      cost of contract and grant income
                
                
                1,166
                
                
                
                480Gross
      income (loss)
                
                
                (6
                )
                
                
                (105
                )Operating
      Expenses:General
      and administrative
                
                
                773
                
                
                
                936Engineering
      and R&D
                
                
                195
                
                
                
                287Sales
      and marketing
                
                
                273
                
                
                
                84Stock
      Option expense
                
                
                412
                
                
                
                161Warrant
      expense
                
                
                —
                
                
                
                1,030Total
      operating expenses
                
                
                1,653
                
                
                
                2,498Loss
      from operations
                
                
                (1,659
                )
                
                
                (2,603
                )Other
      income (expense):Derivative
      investment income
                
                
                115
                
                
                
                —Interest
      expense
                
                
                (444
                )
                
                
                (566
                )Net
      loss
                
                $
                (1,988
                )
                
                $
                (3,169
                )Loss
      per share, basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.06
                )Shares
      used in computing loss per share, basic and diluted
                
                
                53,679,473
                
                
                
                50,971,816





See notes
to consolidated financial statements.




4




THERMOENERGY
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





(Unaudited)
                  Three
      Months Ended
                  March
      31,2010
                
                
                2009Operating
      Activities:Net
      loss
                
                $
                (1,988
                )
                
                $
                (3,169
                )Adjustment
      to reconcile net loss to net cash used in operating
      activities:Options
      issued to officers and directors
                
                
                412
                
                
                
                468Warrant
      expense
                
                
                —
                
                
                
                1,030Common
      stock issued for services
                
                
                —
                
                
                
                9Change
      in fair value of warrant liability
                
                
                (115
                )
                
                
                —Depreciation
                
                
                13
                
                
                
                16Provision
      for inventory reserves
                
                
                9
                
                
                
                —Amortization
      of discount on convertible debt
                
                
                209
                
                
                
                369Increase
      (decrease) in cash arising from changes in assets and
      liabilities:Accounts
      receivable
                
                
                (134
                )
                
                
                (17
                )Inventories
                
                
                —
                
                
                
                5Other
      current assets
                
                
                (51
                )
                
                
                2Accounts
      payable
                
                
                156
                
                
                
                215Deferred
      revenue
                
                
                (266
                )
                
                
                (74
                )All
      other current liabilities
                
                
                10
                
                
                
                304Deferred
      compensation retirement plan
                
                
                (12
                )
                
                
                (11
                )Net
      cash used in operating activities
                
                
                (1,757
                )
                
                
                (853
                )Investing
      Activities:Investment
      in joint venture
                
                
                (50
                )
                
                
                —Purchase
      of property and equipment
                
                
                (17
                )
                
                
                —Net
      cash used in investing activities
                
                
                (67
                )
                
                
                —Financing
      Activities:Proceeds
      from short-term borrowings
                
                
                2,410
                
                
                
                —Proceeds
      from issuance of Common Stock and warrants
                
                
                —
                
                
                
                500Proceeds
      from convertible promissory notes
                
                
                —
                
                
                
                250Net
      cash provided by financing activities
                
                
                2,410
                
                
                
                750Net
      change in cash
                
                
                586
                
                
                
                (103
                )Cash,
      beginning of period
                
                
                1,109
                
                
                
                115Cash,
      end of period
                
                $
                1,695
                
                
                $
                12





See notes
to consolidated financial statements.




5




THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)




Note 1:  Basis of
presentation and summary of signification accounting
policies





Principles
of consolidation and basis of presentation




The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated in consolidation. Results of operations of
companies purchased are included from the dates of acquisition. Certain prior
year amounts have been reclassified to conform to current year
classifications.





In the
Notes to the Consolidated Financial Statements, we use the terms “Company”,
“we”, “our” and “us” to refer to ThermoEnergy Corporation and its
subsidiaries.  The accompanying unaudited financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 8-03 of Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted  in the
United States of America for complete financial statements.  In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.




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 convertible debt,
short-term notes payable, Class A Convertible Preferred Stock and Class B
Convertible Preferred Stock were not included in the computation of diluted loss
per share since the effect would be anti-dilutive.




The
balance sheet at December 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.




For
further information, refer to the financial statements and footnotes thereto
included in the annual report on Form 10-K/A for the year ended December 31,
2009 of ThermoEnergy Corporation.




Revenue
recognition





Revenues
earned from grants are based on allowable costs and labor.  Revenues
from fixed-price contracts are recognized on the percentage of completion
method, measured by the percentage of costs incurred to total estimated
costs.  Contract costs include all direct material and labor costs and
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation.  Selling and general and
administrative costs are charged to expense as incurred.  Provisions
for estimated losses on uncompleted contracts are made in the period in which
losses are determined.  Changes in job performance, job conditions,
and estimated profitability may result in revisions to costs and income and
recognized in the period in which revisions are determined.





In
circumstances when the Company cannot estimate the final outcome of a contract,
or when the Company cannot reasonably estimate revenue, the Company utilizes the
percentage-of-completion method based on a zero profit margin until more precise
estimates can be made.  If and when the Company can make more precise
estimates, revenues will be adjusted accordingly and recorded as a change in an
accounting estimate.





Accounts
receivable, net





Accounts
receivable are recorded at their estimated net realizable
value.  Receivables related to the Company’s contracts and grants have
realization and liquidation periods of less than one year and are therefore
classified as current.  The allowance for doubtful accounts totaled
$9,000 at March 31, 2010 and December 31, 2009.  The Company’s method
for estimating its allowance for doubtful accounts is based on judgmental
factors, including known and inherent risks in the underlying balances, adverse
situations that may affect the customer’s ability to pay and current economic
conditions.  Amounts considered uncollectible are written off based on
the specific customer balance outstanding.





6




THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)


Inventory





Inventory
are stated at the lower of cost of market using the first-in, first-out method
and consist primarily of raw materials and supplies.





We
evaluate our inventory for excess and obsolescence on an annual
basis.  In preparing our evaluation, we look at the expected demand
for our products for the next three to twelve months in order to determine
whether such equipment requires a change in the inventory reserve in order to
record the inventory at net realizable value.  Based on this
evaluation, we establish and maintain a reserve so that inventory is
appropriately stated at the lower of cost or net realizable
value.  Inventory reserves totaled $83,000 and $74,000 at March 31,
2010 and December 31, 2009, respectively.





Property
and equipment





Property
and equipment are stated at cost and are depreciated over the estimated useful
life of each asset. Depreciation is computed primarily using the straight-line
method. The Company evaluates long-lived assets based on estimated future
undiscounted net cash flows or other fair value measures whenever significant
events or changes in circumstances occur that indicate the carrying amount may
not be recoverable. If that evaluation indicates that an impairment has
occurred, a charge is recognized to the extent the carrying amount exceeds the
discounted cash flows or fair values of the asset, whichever is more readily
determinable.





Contingencies





The
Company accrues for costs relating to litigation, including litigation defense
costs, claims and other contingent matters, including liquidated damage
liabilities, when such liabilities become probable and reasonably
estimable.  Such estimates may be based on advice from third parties
or on management’s judgment, as appropriate.  Revisions to contingent
liability reserves are reflected in income in the period in which different
facts or information become known or circumstances change that affect the
Company’s previous assumptions with respect to the likelihood or amount of
loss.  Amounts paid upon the ultimate resolution of contingent
liabilities may be materially different from previous estimates and could
require adjustments to the estimated reserves to be recognized in the
period such new information becomes known.





Stock
options





The
Company accounts for stock options in accordance with Accounting Standards
Codification (“ASC”) Topics 505 and 718 .  This  requires
that the cost of all share-based payments to employees, including grants of
employee stock options, be recognized in the financial statements based on their
fair values on the measurement date, which is generally the date of
grant.  Such cost is recognized over the vesting period of the
awards.  The Company uses the Black-Scholes option pricing model to
estimate the fair value of stock option awards.





Series B
Convertible Preferred Stock





The
Company initially accounted for its Series B Convertible Preferred Stock by
allocating the proceeds based on the relative fair value of the Series B
Convertible Preferred Stock and the warrants issued to the investors, and then
to any beneficial conversion features contained in the Preferred
Stock.  The Company determined the initial value of the Series B
Convertible Preferred Stock and investor warrants using valuation models it
considers to be appropriate.  Because the Series B Convertible
Preferred Stock has an indefinite life, it is classified within the
stockholders’ equity (deficit) section of the Company's consolidated balance
sheet.  The value of the warrants and beneficial conversion features
are considered a “deemed dividend”.





Note
2:  Management’s consideration of going concern
matters




The
Company has incurred net losses since inception and will require substantial
additional capital to continue commercialization of the Company’s wastewater
treatment and clean energy technologies (“the Technologies”) and to fund the
Company’s liabilities, which included approximately $2,246,000 of payroll tax
liabilities (see Note 10), $4,579,000 of convertible debt securities in default,
net of debt discounts of $42,000, and $2,981,000 of contingent liability
reserves (see Note 10).  In addition, the Company may be subject to
tax liens if it cannot satisfactorily settle the outstanding payroll tax
liabilities and may also face criminal and/or civil action with respect to the
impact of the payroll tax matters (see Note 10).  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. In addition, the Comapny's former
independant registered public accounting firm included in it's report an
explanatory paragraph indicating its doubts about the Company's ability to
continue as a going concern. Management is considering several alternatives for
mitigating these conditions.




7




THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)


Management
has determined that obtaining substantial additional funding is essential to its
continued existence.  Management is actively engaged in negotiations
with a group of investors that have provided funding to the Company in the
past.  The Company and an investor group entered into a Series B
Convertible Preferred Stock Financing (“the 2009 Financing”) in September 2009
that, if fully funded, would result in cash proceeds to the Company of
$6,250,000. This Financing was amended in March 2010 in conjunction with the
Bridge Loan Agreement as discussed in Note 4 to accelerate the funding of the
third and fourth tranches of the 2009 Financing.  As of March 31, 2010
the Company has received $3,050,000 from the first and second tranches of the
Financing and $2,410,000 in proceeds from the Bridge Loan
Agreement.





Management
is actively pursuing commercial contracts to generate revenues from projects
involving the Technologies.  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.  As discussed
more fully in Note 3, the Company entered into a Limited Liability Company
Agreement with Babcock Power Development, LLC, a subsidiary of Babcock Power,
Inc., for the purpose of developing and commercializing our ZEBS
technology.





Note 3:  Babcock-Thermo
Carbon Capture LLC





On
February 25, 2009, the Company’s subsidiary, ThermoEnergy Power Systems LLC
(“TEPS”), and  Babcock Power Development, LLC (“BPD”), a subsidiary of
Babcock Power, Inc.,  entered into a Limited Liability Company
Agreement (the “LLC Agreement”) establishing Babcock-Thermo Carbon Capture
LLC, a Delaware limited liability company (the “Joint Venture”) for the purpose
of developing and commercializing the Company’s proprietary Zero Emission Boiler
System (“ZEBS”) technology.





TEPS has
entered into a license agreement with the Joint Venture and BPD pursuant to
which it has granted to the Joint Venture an exclusive, irrevocable (except as
otherwise provided therein), worldwide, fully paid up and royalty-free license
to TEPS’s intellectual property related to or necessary to practice the ZEBS
technology (the “ZEBS License”).   In the LLC Agreement, BPD has
agreed to develop, at its own expense, intellectual property in connection with
three critical subsystems relating to the ZEBS technology: a combustor
subsystem, a steam generating heating surface subsystem, and a condensing heat
exchangers subsystem. (collectively, the “Subsystems”)  BPD has
entered into a license agreement with the Joint Venture and TEPS pursuant to
which it has granted the Joint Venture an exclusive, irrevocable (except as
otherwise provided therein), worldwide, fully paid up and royalty-free license
to BPD’s know-how and other proprietary intellectual property related to or
necessary to practice the Subsystems.




Pursuant
to the LLC Agreement, TEPS and BPD each own a 50% membership interest in the
Joint Venture.  The LLC Agreement provides that each member may be
required, from time to time, to make capital contributions to the Joint Venture
to fund its operations.  The Company made its initial capital
contribution of $50,000 in the third quarter of 2009 and made an additional
capital contribution of $50,000 in the first quarter of 2010.  Amounts
invested in the Joint Venture are classified as Other Assets on the Company’s
Consolidated Balance Sheets, and the Company accounts for the Joint Venture
using the equity method of accounting.





The Joint
Venture is managed by a six-person Board of Managers, with three managers
appointed by each member.  The Board of Managers has adopted a set of
milestones by which it will measure the progress of the Joint
Venture.  Pursuant to the LLC Agreement, either member may withdraw
from the Joint Venture if any milestone is not met (unless the failure to meet
such milestone is primarily attributable to a failure by such member to perform
its obligations under the LLC Agreement or any related
agreements).  If a member exercises its right to withdraw, the
license that such member has granted to the Joint Venture will automatically
terminate.




8




THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)


The LLC
Agreement obligates the Joint Venture and each member to indemnify and hold the
other member and its affiliates harmless against damages and losses resulting
from such member’s fraud, gross negligence or intentional misconduct with
respect to the Joint Venture.  The Company and Babcock Power, Inc.
have entered into separate agreements to indemnify the joint venture and its
members (other than our respective subsidiary-members) and their respective
affiliates against damages and losses resulting from fraud, gross negligence or
intentional misconduct of our respective subsidiary-members with respect to the
Joint Venture.




The LLC
Agreement contains other conventional terms, including provisions relating to
governance of the entity, allocation of profits and losses, and restrictions on
transfer of a member’s interest.





Note
4:  Short-term borrowings





Short-term
borrowings consisted of the following at March 31, 2010 and December 31, 2009
(in thousands):





2010
                  
                  
                  2009Bridge
      Loan dated March 1, 2010, 3%, due February 28, 2011, net of discount of
      $1,105 at March 31, 2010
                  
                  $
                  1,305
                  
                  
                  $
                  -—$
                  1,305
                  
                  
                  $
                  -—





On March
10, 2010, the Company entered into a Bridge Loan Agreement, effective March 1,
2010, with six of its principal investors (“the Investors”) pursuant to which
the Investors agreed to make bridge loans to the Company up to $2.7 million in
exchange for 3% Secured Convertible Promissory Notes (the “Bridge
Notes”).  The Bridge Notes bear interest at the rate of 3% per year
and are due and payable on February 28, 2011.  The entire unpaid
principal amount, together with all interest then accrued and unpaid under each
Bridge Note, is convertible, at the election of the holder, into shares of
Common Stock at a conversion price of $0.24 per share.





The
Bridge Loan Agreement amends the Series B Convertible Preferred Stock Financing
Agreement entered in September 2009 such that the Investors shall surrender the
Bridge Notes as payment for the Third Tranche Closing and/or the Fourth Tranche
Closing upon the execution of certain events as detailed in said
agreement.  The Agreement also makes further amendments to the Series
B Convertible Preferred Stock financing to provide for additional warrant
coverage based on the amounts advanced and makes changes to funding commitments
among the various Investors.





The
Bridge Notes contain other conventional provisions, including for the
acceleration of repayment obligations upon the occurrence of certain specified
Events of Default.  The Bridge Notes are secured by all of the
Company’s assets except for the shares of the Company’s subsidiary, CASTion
Corporation (in which no security interest has been granted).





The
Company calculated the difference between the effective conversion price of the
Note and the fair value of the Company’s common stock on the date of issuance,
resulting in a beneficial conversion feature amounting to $1,205,000, the
intrinsic value of the conversion feature on that date.  The value of
the beneficial conversion feature is recorded as a discount on the Bridge Notes
and is amortized to interest expense over the stated term of the
Notes.







9


THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)


Note
5:  Convertible debt in default





Convertible
debt in default consisted of the following at March 31, 2010 and December 31,
2009 (in thousands):





2010
                  
                  
                  2009Convertible
      Promissory Notes dated July 2, 2007, 18%, due May 31, 2010,
                    net
      of discount of $42 at March 31, 2010 and $104 at December 31,
      2009
                  
                  $
                  4,195
                  
                  
                  $
                  4,133Convertible
      Promissory Notes dated January 5, 2009, 10%, due May 31,
    2010
                  
                  
                  384
                  
                  
                  
                  —$
                  4,579
                  
                  
                  $
                  4,133





The
Company issued Convertible Promissory Notes in the aggregate principal amount of
$3,353,127 as part of the consideration for the acquisition of CASTion in July
2007.  The Company then issued additional Convertible Promissory Notes
in the aggregate principal amount of $351,614 as part of the consideration for
the acquisition of the minority shareholders’ interst in CASTion in January
2009.  The outstanding principal and accrued interest are convertible
into shares of the Company’s Common Stock at a conversion price of $0.50 per
share at the holders’ discretion.  The Notes contain conventional
weighted-average anti-dilution provisions for the adjustment of the conversion
price of the Notes in the event the Company issues additional shares of Common
Stock (or securities convertible into Common Stock) at a price less than the
then-effective exercise price or conversion price.  The Notes mature
on May 31, 2010.





Interest
on the Notes is payable semi-annually, and the Company has the option of
deferring interest payments and rolling the deferred amount into the principal
amount of the Notes.  Deferred accrued interest amounts added to the
principal balances of the Notes totaled $912,000 at March 31, 2010 and $884,000
at December 31, 2009.





The Notes
are technically in default as of March 31, 2010 and December 31, 2009, as the
Company had not made required prepayments as detailed in the Convertible
Promissory Note agreements.  Because the Notes are in default, the
Company accrues interest at the default interest rate of 18%.  The
Company is presently in negotiations with these Noteholders to obtain a
forbearance agreement, and we are working to extend the maturity dates of these
Notes, convert these Notes into equity or enter a settlement agreement with the
Noteholders.





Note
6:  Convertible debt





Convertible
debt consisted of the following at March 31, 2010 and December 31, 2009 (in
thousands):





March
      31,
                  2010
                
                
                December
      31,
                  2009Convertible
      Promissory Note, 5% dated March 21, 2007, due March 21, 2013,
                  less
      discounts of $168 at March 31, 2010 and $180 at December 31,
      2009
                
                $
                704
                
                
                $
                671Convertible
      Promissory Note dated March 7, 2008, 5%, due March 7, 2013, less
                  discount
      of $458 at March 31, 2010 and $494 at December 31, 2009
                
                
                371
                
                
                
                315Convertible
      Promissory Notes dated January 5, 2009, 10%, due May 31,
    2010
                
                
                —
                
                
                
                384$
                1,075
                
                
                $
                1,370





On March
21, 2007 the Company issued to Mr. Martin A. Roenigk, a member of the Company’s
Board of Directors as of that date, a 5% Convertible Promissory Note due March
21, 2013 in the principal amount of $750,000. The principal amount and accrued
interest on the Note is convertible into shares of Common Stock at a conversion
price of $0.50 per share at any time at the election of the holder. 
Interest on the Note is payable semi-annually.  The Company may, at
its discretion, defer any scheduled interest payment until the maturity date of
the Note upon payment of a $2,500 deferral fee.  The Company added
$21,000 of accrued interest to the principal balance of the Note as of March 31,
2010.




10


THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)




On March
7, 2008, Mr. Roenigk exercised his option to make an additional $750,000
investment in the Company under the terms of the Securities Purchase Agreement
between the Company and Mr. Roenigk dated March 21, 2007.  The Company
issued to Mr. Roenigk a 5% Convertible Promissory Note due March 7, 2013 in the
principal amount of $750,000.  The principal amount and accrued
interest on the Note is convertible into shares of Common Stock at a conversion
price of $0.50 per share at any time at the election of the
holder.  Interest on the Note is payable semi-annually.  The
Company may, at its discretion, defer any scheduled interest payment until the
maturity date of the Note upon payment of a $2,500 deferral fee.  The
Company added $20,000 of accrued interest to the principal balance of the Note
as of March 31, 2010.




Note
7:  Equity





At
March  31, 2010, approximately 127 million shares of Common Stock were
reserved for future issuance under convertible debt and warrant agreements,
stock option arrangements and other commitments.





Stock
Options





During
the quarter ended March 31, 2010, the Board of Directors awarded officers,
employees, and various members of the Board of Directors a total of 13,039,102
stock options in conjunction with the Company’s 2008 Incentive Stock
Plan.  The options are exercisable at $0.30 per share for a ten year
period.  The exercise price was equal to or greater than the market
price on the respective grant dates during the quarter.





The fair
value of options granted during the quarters ended March 31, 2010 and 2009 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:





2010
                
                
                2009Risk-free
      interest rate
                
                
                3.6%
      - 3.8%
                
                
                
                3.0%Expected
      option life (years)
                
                
                10.0
                
                
                
                10.0Expected
      volatility
                
                
                80%
                
                
                
                77%Expected
      dividend rate
                
                
                0%
                
                
                
                0%





A summary
of the Company’s stock option activity and related information for the quarters
ended March 31, 2010 and 2009 follows:


2010
                              
                              2009Number
      of Shares
                              
                              
                              Wtd.
      Avg. Price per Share
                              
                              Number
      of Shares
                              
                              Wtd.
      Avg. Price per ShareOutstanding,
      beginning of period
                              
                              11,203,800
                              
                              
                              $1.18
                              
                              8,213,800
                              
                              $1.23Granted
                              
                              13,039,102
                              
                              
                              $0.30
                              
                              1,030,000
                              
                              $1.49Canceled
                              
                              (30,000
                              )
                              
                              $0.30
                              
                              (100,000
                              )
                              $0.54Outstanding,
      end of period
                              
                              24,212,902
                              
                              
                              $0.71
                              
                              9,143,800
                              
                              $1.27Exercisable,
      end of period
                              
                              8,583,800
                              
                              
                              $1.44
                              
                              9,143,800
                              
                              $1.27


The
weighted average fair value of options granted were approximately $0.25 per
share and $0.31 per share for the quarters ended March 31, 2010 and 2009,
respectively.  The weighted average fair value of options vested was
approximately $32,000 for the quarter ended March 31, 2010.  No
options vested in the quarter ended March 31, 2010.





Exercise
prices for options outstanding as of March  31, 2010 ranged from $0.30
to $6.36.  The weighted average remaining contractual life of those
options was approximately 7.7 years at March 31, 2010.  The weighted
average remaining contractual life of options vested and exercisable was
approximately 4.1 years at March 31, 2010.




11


THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)




As of
March 31, 2010, there was $3,413,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Company’s stock option plans.  That cost is expected to be recognized
over a weighted-average period of 1.9 years.  The Company recognizes
stock-based compensation on the straight-line method.





Warrants





At
March  31, 2010, there were outstanding warrants for the purchase of
48,419,710 shares of the Company’s Common Stock at prices ranging from $0.24 per
share to $1.82 per share (weighted average exercise price was $0.55 per share)
until expiration (3,000,000 shares in 2010, 13,833,333 shares in 2012, 8,479,884
shares in 2013, 19,715,389 in 2014, 2,711,104 shares in 2015 and 680,000 shares
in 2019).





Note 8:  Fair Value
      Measurements





The
carrying amount of cash, accounts receivable, inventories, other current assets,
accounts payable, short-term notes payable and other current liabilities in the
consolidated financial statements approximate fair value because of the
short-term nature of the instruments.  The carrying amount of the
Company’s convertible debt in default and long-term convertible debt was
$5,654,000 and $5,503,000 at March 31, 2010 and December 31, 2009,
respectively.  The Company is unable to estimate the fair value of
that debt because a quoted market price is not available, and the Company
has not developed the valuation model necessary to make the
estimate.  The Company’s warrant liabilities are recorded at fair
value.





The
Company's assets and  liabilities are measured using inputs from the
three levels of fair value hierarchy, as follows:


Level
      1:Quoted prices in active markets for identical assets or
      liabilities.


Level
      2:Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.


Level
      3:Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the
    liabilities.





Liabilities
measured at fair value on a recurring basis as of March 31, 2010 are as
follows: (in thousands)





Fair
      Value Measurements at Reporting Date UsingDescription
                    Balance
      as of
                      March 31,
                      2010
                    
                    Quoted
      Prices
                      in
      Active
                      Markets
      for
                      Identical
                      Assets
                      (Level 1)
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)LiabilitiesLong-term
      warrant liability
                    
                    $
                    2,444
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,444Total
      Liabilities
                    
                    $
                    2,444
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,444





The
following table sets forth a reconciliation of changes in the fair value of
derivatives classified as Level 3 (in thousands):


Long-Term
      Warrant LiabilityBalance
      at December 31, 2009
                        
                        $
                        2,559Change
      in fair value
                        
                        
                        (115
                        )Balance
      at March 31, 2010
                        
                        $
                        2,444




12




THERMOENERGY
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (Unaudited)


Note
9:  Segments





Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available to the chief operating decision
maker, or decision-making group, in assessing performance and allocating
resources.  The Company markets and develops advanced municipal and
industrial wastewater treatment and carbon reducing clean energy
technologies.  The Company currently generates almost all of its
revenues from the sale and application of its water treatment
technologies.  Revenues from its clean energy technologies have been
limited to grants received from governmental and other agencies for continued
development.  In 2009, the Company established Babcock-Thermo Carbon
Capture, LLC, a joint venture with Babcock Power Development, LLC, for the
purpose of developing and commercializing the Company’s clean energy
technology.  Because revenues and costs related to the Company’s clean
energy technologies is immaterial to the entire Company taken as a whole, the
financial information presented in these financial statements represents all the
material financial information related to the Company’s water treatment
technologies. As such, the Company has only one operating segment.





The
Company’s operations are currently conducted solely in the United
States.  The Company will continue to evaluate how its business is
managed and, as necessary, adjust the segment reporting
accordingly.





Note
10:  Commitments and contingencies





The
Company’s contingent liability reserves total $2,981,000 and $3,053,000 at March
31, 2010 and December 31, 2009, respectively, and consist of the following: (in
thousands):





March
      31,
                  2010
                
                
                December
      31,
                  2009Estimated
      penalties and interest – payroll tax liabilities
                
                $
                2,351
                
                
                $
                2,351Other,
      including unasserted claims
                
                
                630
                
                
                
                702$
                2,981
                
                
                $
                3,053





The
Company has accrued $3,667,000 in other current liabilities, which amount
includes $2,246,000 for unpaid payroll taxes as of March 31, 2010 in addition to
the contingency accrual for estimated penalties and interest, as detailed
above.  Management has filed the payroll tax returns and is working
with the various federal and state taxing authorities to present an offer in
compromise for settlement of the payroll tax liabilities.  The Company
has made payments to the various taxing authorities totaling $377,000 in the
first quarter of 2010.  The Company cannot predict the outcome of the
offer in compromise proceedings. The remaining liability is for various other
operating accruals.





The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities.  Furthermore, due to the actions
of the Company’s former CFO, the Company may also face criminal and/or civil
action with respect to the impact of the payroll tax matters.  The
Company cannot predict what, if any, actions may be taken by the tax
authorities, the Securities and Exchange Commission or other parties or the
effect the actions may have on the Company’s results of operations, financial
condition or cash flows.





At March
31, 2010, the Company had cash in financial institutions that exceeded the limit
insured by the Federal Deposit Insurance Corporation.








In
the ordinary course of business the Company is subject to litigation and threats
of litigation. At the
present time, there is no significant litigation or threats of litigation that
are probable or estimatable.




13




ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report.




Overview





We are a
clean technologies company engaged in the worldwide development of advanced
municipal and industrial wastewater treatment systems and carbon reducing clean
energy technologies.





We
develop and manufacture innovative wastewater treatment and recovery systems to
industrial and municipal clients.  Our process systems not only
meet local, state and federal environmental regulations, but typically
provide a rapid rate of return on investment by recovering and reusing expensive
feedstocks, reducing contaminated wastewater discharge and recovering and
reusing wastewater used in process operations.  Our patented Ammonia
Recovery Process (“ARP”) is an environmentally effective, low-cost method of
treating wastewater discharge streams containing nitrogen in the form of
ammonia.  It has been identified as a key technological and
competitive advantage in the industrial and municipal wastewater treatment
markets.  Our patented and proprietary platform technology is combined
with off-the-shelf technologies to provide systems that are inexpensive, easy to
operate and reliable.  Our wastewater treatment systems have
applications in aerospace, food and beverage processing, metal finishing, pulp
& paper, petrochemical, refining, microchip and circuit board manufacturing,
heavy manufacturing and municipal wastewater.





We are
also the majority owner of a patented clean energy technology known as the Zero
Emissions Boiler System (“ZEBS”), formerly known as ThermoEnergy Integrated
Power System (“TIPS”), which converts fossil fuels (including coal, oil and
natural gas) and biomass into electricity without producing air emissions, and
at the same time removes and captures carbon dioxide in liquid form for
sequestration or beneficial reuse.  In conjunction with our joint
venture partner, Babcock Power, Inc., we have changed the name of our carbon
reducing energy technology from TIPS to ZEBS.  As our joint venture
continues to develop this technology for commercialization, we believe that the
name change better reflects the broad application of this radical new technology
to build new or retrofit old fossil fuel power plants globally with no emissions
while capturing carbon dioxide as a liquid for ready sequestration far more
economically than any other competing technology.  We, through our
majority-owned subsidiary, ThermoEnergy Power Systems, LLC, entered into a joint
venture with Babcock Power, Inc. called Babcock-Thermo Carbon Capture, LLC
("BTCC") to obtain the resources necessary to facilitate the development and
commercialization of this technology.





We
currently generate recurring revenues from the sale and development of
wastewater treatment systems.  We enter into contracts with our
customers to provide a wastewater treatment solution that meets the customer’s
present and future needs.  Our revenues are tied to the size and scale
of the wastewater treatment system required by the customer, as well as the
progress made on each customer contract.  From time to time, we
receive funding from federal grants to continue the development of ZEBS;
however, there can be no assurance that such grants will be available to us in
the future.





There are
many federal, state and local statutes and regulations enacted to protect and
restore water and air quality. Federal legislation directed at improving water
quality include programs established under the Clean Water Act of 1977, as
amended, the Coastal Zone Management Act of 1972, as amended, the 1990 and 1996
Farm Bills, the Ocean Dumping Ban Act, and the Clean Water and Watershed
Restoration Initiative.  The regulations established under these plans
are intended to improve existing water quality programs.  In order to
comply with these regulations, municipal and industrial wastewater treatment
facilities are seeking more cost-effective methods of wastewater
treatment.  We believe that the legislative environment will create
additional opportunities to market our Technologies.





We own or
license all of the technologies that we use in our business.





Results
of Operations





Comparison
of Quarter Ended March 31, 2010 and 2009





Contract
and grant revenues totaled $1,160,000 for the quarter ended March 31, 2010, an
increase of $785,000 or 209% compared to revenues of $375,000 for the quarter
ended March 31, 2009.  The large increase is due to continued work on
two large wastewater projects in the current quarter.  Consequently,
cost of contract and grant revenues for the quarter ended March 31, 2010
increased by $686,000 or 143% compared to the quarter ended March 31,
2009.  We utilize the percentage-of-completion method of revenue
recognition on our projects based on a zero profit margin until we can make more
precise estimates.  Our margins are also presently low due to our
investment in production capabilities in anticipation of major new contracts
over the next 12 months.




14




General
and administrative expenses decreased by $163,000 or 17% in the quarter ended
March 31, 2010 compared to 2009 due to reduced use of legal and other
professional services in 2010.  Engineering and R&D expenses
decreased by $92,000 or 32% in the quarter ended March 31, 2010 compared to
2009, mainly due to reduced headcount and more efforts in 2010 toward pre-sales
activity.  Sales and marketing expenses increased by $189,000 or 225%
in the quarter ended March 31, 2010 compared to 2009 due to increased pre-sales
activity and efforts made to increase our sales
infrastructure.  Non-cash stock option expense increased by $251,000
or 156% in the quarter ended March 31, 2010 due to the issuance of approximately
13 million stock options to our new Chief Executive Officer, Chief Financial
Officer and certain key employees and directors.  We issued only 1
million stock options in the first quarter of 2009.  This is partially
offset by changing the vesting terms of stock options granted in 2010 over a 4
year period; stock options granted in 2009 were immediately vested and
exercisable.  We did not issue or modify any warrants in the first
quarter of 2010.  In the quarter ended March 31, 2009, we modified
warrants held by the Quercus Trust, which resulted in the recording of an
expense of $1,030,000.





Changes
in the fair value of our warrant liabilities resulted in the recognition of
derivative investment income of $115,000 in the quarter ended March 31,
2010.  We did not recognize any such income in the first quarter of
2009.  Interest expense decreased during the first quarter of 2010
compared to 2009 by $122,000, mainly due to lower debt levels resulting from the
conversion of debt into Series B Convertible Preferred Stock in the fourth
quarter of 2009.





Liquidity
and Capital Resources





We have
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 partners.  We have funded our operations
primarily from the sale of  convertible debt, bridge loans, preferred
stock and restricted stock, generally from stockholders and other related
parties who are sophisticated investors in clean technology.  Although
we will require substantial additional funding to continue existing operations,
we are optimistic in our ability to obtain capital and debt financing given our
recent technological advantages in the markets in which we compete.





Cash used
in operations amounted to $1,757,000 and $853,000 for the quarters ended March
31, 2010 and 2009, respectively.  The increase in cash used from
operations is due to our deferring payments on operating expenses in 2009, which
increased our liabilities in the first quarter of 2009 as we sought additional
funding from our investors.  Cash used by investing activities
included an investment in our joint venture with Babcock Power of $50,000 and
purchases of property and equipment of $17,000 during the first quarter of
2010.





At March
31, 2010, we did not have sufficient working capital to satisfy our anticipated
operating expenses for the next 12 months. As of March 31, 2010, we had a cash
balance of approximately $1.7 million and current liabilities of approximately
$13.6 million, which consisted primarily of accounts payable of $968,000,
short-term borrowings of $2.4 million, convertible debt in default of $4.6
million, contingent liability reserves of $3.0 million and unpaid payroll taxes
of $2.3 million.  We are presently in negotiations with our creditors
to extend, settle or convert our obligations to equity.





In
September 2009, we and an investor group engaged in a Series B Convertible
Preferred Stock Financing (“the 2009 Financing”) that, if fully funded, will
result in cash proceeds of $6.25 million in four tranches.  As of
March 31, 2010 we have received $3.05 million from the first and second tranches
of the 2009 Financing.





On March
10, 2010, we entered into a Bridge Loan Agreement, effective March 1, 2010, with
six investors who are parties to the 2009 Financing pursuant to which the
investors agreed to make bridge loans to us up to $2.7 million.  We
issued 3% Secured Convertible Promissory Notes in the principal amount of each
investor’s funding commitment (the “Bridge Notes”).  The Bridge Notes
bear interest at the rate of 3% per annum and are due and payable on February
28, 2011.  The entire unpaid principal amount, together with all
interest then accrued and unpaid under each Bridge Note, is convertible, at the
election of the holder thereof, into shares of Common Stock at a conversion
price of $0.24 per share.





The
Bridge Loan Agreement amends the 2009 Financing such that the investors shall
surrender the Bridge Notes as payment for the Third Tranche Closing and/or the
Fourth Tranche Closing upon the occurrence of certain events.  The
Agreement also makes further amendments to the Series B Convertible Preferred
Stock financing to provide for additional warrant coverage based
on  the amounts advanced and makes changes to funding commitments
among the various investors.  The Bridge Notes are secured by a lien
on all of our assets except for the shares of our subsidiary, CASTion
Corporation (in which no security interest has been granted).  As of
March 31, 2010 we have received $2,410,000 in proceeds from the Bridge Loan
Agreement.




15




As more
fully discussed in Note 10 of Notes to Consolidated Financial Statements, as of
March 31, 2010 we have accruals of $2,246,000 for payroll taxes and $2,351,000
of estimated interest and penalties related to the non-payment of payroll taxes
from 2005 through the third quarter of 2009.  We are currently in
negotiations with the applicable state and federal taxing authorities to
schedule payment of these outstanding taxes.  We may become subject to
tax liens if we cannot satisfactorily settle the outstanding payroll tax
liabilities.  Furthermore, due to the actions of the former CFO, we
may also face criminal and/or civil action with respect to the impact of the
payroll tax matters.  We cannot predict what, if any, actions may be
taken by the respective tax authorities, the Securities and Exchange Commission
or other parties or the effect the actions may have on the Company’s results of
operations, financial condition or cash flows.





Because
of our financial condition, there can be no assurance that we will be able to
obtain the funding necessary to continue its operations and development
activities.





ITEM
3.  Quantitative and Qualitative Disclosures About Market
Risk




Not
applicable.







ITEM
4.  Controls and Procedures.




The
Company, under the direction of its Chief Executive Officer and Chief 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, consisting of the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.




The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period
covered by this report.  Based on this evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that as of the end
of the period covered by this report, the Company’s disclosure controls and
procedures were ineffective as of March 31, 2010, due to the existence of
previously disclosed material weaknesses in our internal control over financial
reporting primarily related to deficient contract administration and accounting
procedures, that we have yet to fully remediate.




During
the first quarter of 2010, the Company has contracted with finance personnel
with sufficient expertise and knowledge of accounting and financial
reporting.  This has resulted in improvements in the preparation of
timely and accurate financial statements and disclosures as detailed in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2009.  There have been no other changes in the Company’s internal
control over financial reporting that occurred during the quarter ended March
31, 2010 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.




16





PART
II — OTHER INFORMATION




ITEM
1.  Legal Proceedings




None.








ITEM
1A.  Risk Factors




Not
applicable.







ITEM
2.  Unregistered Sales of Equity Securities and Use of
Proceeds




None.








ITEM
3.  Defaults Upon Senior Securities




On July
2, 2007, the Company issued Convertible Promissory Notes in the aggregate
principal amount of $3,353,127 (the “Notes”) as part of the consideration for
the acquisition of CASTion.  The balance of these Notes is technically
in default and is shown in current liabilities as of March 31, 2009, due to the
fact that the Company had not made the required prepayments on these
Notes.  The Company is seeking to obtain a forbearance agreement from
the holders of these Notes, and we are working to extend the maturity dates of
these Notes, convert these Notes into equity or enter a settlement agreement
with the Noteholders.





ITEM
4.  Other Information




None.








ITEM
5.  Exhibits




The
following exhibits are filed as part of this report:




Exhibit No.
                                            
                                            Description
      of Exhibit10.1
      *
                                            
                                            Executive
      Employment Agreement dated as of March 1, 2010 by and between ThermoEnergy
      Corporation and Dennis C. Cossey  —  Incorporated by
      reference to Exhibit 10.4 to Current  Report on Form 8-K filed
      March 9, 201010.2
      *
                                            
                                            Executive
      Employment Agreement dated January 27, 2010 by and between ThermoEnergy
      Corporation and Cary G. Bullock  —  Incorporated by
      reference to Exhibit 10.1 to Current  Report on Form 8-K filed
      February 2, 201010.3
                                            
                                            Bridge
      Loan Agreement dated as of March 1, 2010 by and among The Quercus Trust,
      Robert S. Trump, Focus Fund, L.P., Empire Capital Partners, LP, Empire
      Capital Partners, Ltd, and Empire Capital Partners Enhanced Master Fund
      Ltd  and ThermoEnergy Corporation —  Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 16,
      201010.4
                                            
                                            Form
      of 3% Secured Convertible Promissory Note issued pursuant to Bridge Loan
      Agreement dated as of March 1, 2010 by and among The Quercus Trust, Robert
      S. Trump, Focus Fund, L.P., Empire Capital Partners, LP, Empire Capital
      Partners, Ltd, and Empire Capital Partners Enhanced Master Fund
      Ltd  and ThermoEnergy Corporation —  Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 16,
      201010.5
                                            
                                            Security
      Agreement dated as of March 1, 2010 by and among ThermoEnergy Corporation,
      The Quercus Trust, Robert S. Trump, Focus Fund, L.P., Empire Capital
      Partners, LP, Empire Capital Partners, Ltd, and Empire Capital Partners
      Enhanced Master Fund Ltd  and The Quercus Trust (as agent for
      itself and the other Investors)  —  Incorporated by
      reference to Exhibit 10.2 to Current Report on Form 8-K filed March 16,
      2010  17
  31.1
                                            
                                            Sarbanes
      Oxley Act Section 302 Certificate of Principal Executive
      Officer  — Filed herewith31.2
                                            
                                            Sarbanes
      Oxley Act Section 302 Certificate of Principal Financial
      Officer  — Filed herewith32.1
                                            
                                            Sarbanes
      Oxley Act Section 906 Certificate of Principal Executive
      Officer  — Filed herewith32.2
                                            
                                            Sarbanes
      Oxley Act Section 906 Certificate of Principal Financial
      Officer  — Filed
herewith





*  May
be deemed a compensatory plan or agreement




18





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:
      May 12, 2010
                      THERMOENERGY CORPORATION/s/  Cary
      G. BullockCary G. Bullock, President andChief
      Executive Officer






19