**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 MARCH 31, 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)





ARKANSAS
              (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: 24,657,244 shares
      of
      common stock as of March 31, 2007.




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








**THERMOENERGY
      CORPORATON**




**INDEX**




****
            ****
            ****
            ****
            ****
            ****
            **Page**
              **No.**Part
                I.
            
            Financial
                InformationItem
                1.
            
            Financial
                StatementsBalance
                Sheets as of March 31, 2007 (Unaudited) and December 31,
                2006
            
            1Statements
                of Operations for the three months ended March 31, 2007 and 2006
                (Unaudited)
            
            2Statements
                of Changes in Stockholders’ Equity (Deficit) for the period ended January
                1, 2006 through December 31, 2006 and the three months ended March
                31,
                2007
            
            3Statements
                of Cash Flows for the three months ended March 31, 2007 and 2006
                (Unaudited)
            
            4Notes
                to Financial Statements (Unaudited)
            
            5Item
                2.
            
            Management's
                Discussion and Analysis or Plan of Operation
            
            6Item
                3.
            
            Controls
                and Procedures
            
            11Part
                II.
            
            Other
                InformationItem
                1.
            
            Legal
                Proceedings
            
            11Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            11Item
                3.
            
            Defaults
                Upon Senior Securities
            
            12Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            12Item
                5.
            
            Other
                Information
            
            12Item
                6.
            
            Exhibits
                and Reports on Form 8-K
            
            12Signature
            
            13








**THERMOENERGY
        CORPORATION**
 **BALANCE
        SHEETS**
  **March
                  31, 2007**
              
              **December
                  31, 2006****(Unaudited)****ASSETS**Current
                  Assets:Cash
              
              
              996,873
              
              
              637,041Accounts
                  Receivable
              
              
              947,737
              
              
              874,282Note
                  Receivable - CAStion
              
              
              503,376
              
              
              493,376Prepaid
                  Insurance
              
              
              87,833
              
              
              117,111Other
                  Current Assets
              
              
              34,088
              
              
              34,688Total
                  Current Assets
              
              
              2,569,907
              
              
              2,156,498Property
                  and Equipment, at cost:Equipment,
                  Furniture and Fixtures
              
              
              295,653
              
              
              295,704Less
                  Accumulated Depreciation
              
              
              (49,868
              )
              
              (43,350
              )Total
                  Fixed Assets
              
              
              245,785
              
              
              252,354**Total
                  Assets**
              
              
              2,815,692
              
              
              2,408,852**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                  Liabilities:Accounts
                  Payable
              
              
              378,958
              
              
              497,855Other
                  Current Liabilities
              
              
              299,991
              
              
              350,521Total
                  Current Liabilities
              
              
              678,949
              
              
              848,376Long
                  Term Liabilities:Deferred
                  Comp Retirement Plan for Officers Net of Current Portion
              
              
              332,000
              
              
              347,000Long-Term
                  Note Payable (Net of Discount)
              
              
              469,000
              
              
              -Total
                  Long Term Liabilities
              
              
              801,000
              
              
              347,000**Total
                  Liabilities**
              
              
              1,479,949
              
              
              1,195,376Stockholders'
                  Equity (Deficit):Series
                  A Convertible Preferred Stock, $1 par value: authorized -10,000,000
                  shares; issued and outstanding: 2007 - 5,940,004 shares; 2006 -
                  6,198,671
                  shares
              
              
              5,940,004
              
              
              6,198,671Common
                  Stock, $.001 par value: authorized - 75,000,000 shares;
                  issued:2007
                  - 24,741,041 shares; 2006 - 23,220,612 shares; outstanding: 2007
                  -
                  24,657,244 shares; 2006 - 23,136,815 shares
              
              
              24,741
              
              
              23,221Additional
                  Paid-In Capital
              
              
              31,024,431
              
              
              29,862,326Accumulated
                  Deficit
              
              
              (35,653,433
              )
              
              (34,870,742
              )Total
                  Equity
              
              
              1,335,743
              
              
              1,213,476TOTAL
                  LIABILITIES AND EQUITY
              
              
              2,815,692
              
              
              2,408,852




-1-


**THERMOENERGY
        CORPORATION**
 **STATEMENTS
        OF OPERATIONS**
  **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****(Unaudited)**Operating
                  Income:Water
                  Group
              
              $
              -
              
              $
              60,000Power
                  Group
              
              
              73,455
              
              
              192,123Total
                  Operating Income
              
              
              73,455
              
              
              252,123Cost
                  of Water and Power Group Income
              
              
              39,399
              
              
              59,920Gross
                  profit
              
              
              34,056
              
              
              192,203Operating
                  Expenses:General
                  and Admin.
              
              
              723,134
              
              
              1,409,131Payments
                  under licenses
              
              
              10,000
              
              
              10,000Travel
                  & Entertainment
              
              
              87,642
              
              
              124,268Total
                  Operating Expenses
              
              
              820,776
              
              
              1,543,399Loss
                  from Operations
              
              
              (786,720
              )
              
              (1,351,196
              )Other
                  Income (Expense):Interest
                  Income
              
              
              4,029
              
              
              20,000Total
                  Other Income
              
              
              4,029
              
              
              20,000Net
                  Loss
              
              
              (782,691
              )
              $
              (1,331,196
              )Per
                  Common Share:Loss
                  from Operations
              
              $
              (0.03
              )
              $
              (0.06
              )Net
                  Loss
              
              $
              (0.03
              )
              $
              (0.06
              )




-2-


**THERMOENERGY
        CORPORATION**
 **STATEMENTS
        OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**
 **Period
        Ended December 31, 2006 and the Three Months Ended**
 **March
        31, 2007 (Unaudited)**
  **Common
                  Stock**
              
              **Series
                  A Convertible Preferred Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Accumulated
                  Deficit**
              
              **Total**Balance
                  (Deficit) January 1, 2006
              
              $
              23,221
              
              $
              6,198,671
              
              $
              29,130,717
              
              $
              (31,177,350
              )
              $
              4,175,259Options:
                  issued to officers and directors
              
              
              -
              
              
              -
              
              
              298,333
              
              
              -
              
              
              298,333Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              433,276
              
              
              -
              
              
              433,276Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,693,392
              )
              
              (3,693,392
              )Balance
                  December 31, 2006
              
              $
              23,221
              
              $
              6,198,671
              
              $
              29,862,326
              
              $
              (34,870,742
              )
              $
              1,213,476Options:
                  issued to director
              
              
              -
              
              
              -
              
              
              10,040
              
              
              -
              
              
              10,040Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              83,075
              
              
              -
              
              
              83,075Issuance
                  of Common Stock (1,238,095 at $0.42 per share)
              
              
              1,238
              
              
              -
              
              
              518,762
              
              
              -
              
              
              520,000Stock
                  issued for services
              
              
              23
              
              
              -
              
              
              10,820
              
              
              -
              
              
              10,843Converted
                  Preferred Stock to Common Stock
              
              
              259
              
              
              (258,667
              )
              
              258,408
              
              
              -
              
              
              -Warrants
                  and beneficial conversion option issued with Convertible
                  Note-
              
              
              
              
              
              -
              
              
              281,000
              
              
              
              
              
              281,000Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (782,691
              )
              
              (782,691
              )Balance
                  March 31, 2007
              
              $
              24,741
              
              $
              5,940,004
              
              $
              31,024,431
              
              $
              (35,653,433
              )
              $
              1,335,743




-3-


**THERMOENERGY
        CORPORATION** **STATEMENTS
          OF CASH FLOWS**
 **Three
                  Months Ended**
                **March
                  31,****2007**
              
              **2006****(Unaudited)**Operating
                  Activities:Net
                  Loss
              
              $
              (782,691
              )
              $
              (1,331,196
              )Items
                  not requiring (providing) cash:Depreciation
              
              
              6,518
              
              
              5,552Expense
                  of options issued to officers and directors
              
              
              10,040
              
              
              298,333Expense
                  of warrants vesting during the first quarter
              
              
              83,075
              
              
              83,079Restricted
                  Stock issued for services
              
              
              10,820
              
              
              -Changes
                  in:Accounts
                  Receivable
              
              
              (73,455
              )
              
              (216,697
              )Other
                  Receivables
              
              
              (10,000
              )
              
              (65,000
              )Note
                  Receivable CASTion
              
              
              (10,000
              )
              
              -Other
                  Current Assets
              
              
              (600
              )
              
              -Prepaid
                  Expenses
              
              
              29,278
              
              
              -Accounts
                  Payable
              
              
              (118,897
              )
              
              (64,378
              )Accrued
                  Expenses
              
              
              (39,230
              )
              
              16,952Deferred
                  Compensation Retirement Plan
              
              
              (15,026
              )
              
              (15,000
              )Net
                  Cash used in operating activities
              
              
              (910,168
              )
              
              (1,288,355
              )Investing
                  Activities:Purchase
                  of fixed assets
              
              
              -
              
              
              (17,934
              )Net
                  Cash used in investing activities
              
              
              -
              
              
              (17,934
              )Financing
                  Activities:Issue
                  Restricted Common Stock in Private Placement
              
              
              520,000
              
              
              -Executed
                  Convertible Debt Financing
              
              
              750,000
              
              
              -Net
                  cash provided by financing activities
              
              
              1,270,000
              
              
              -Increase
                  (Decrease) in cash
              
              
              359,832
              
              
              (1,306,289
              )Cash,
                  beginning of period
              
              
              637,041
              
              
              4,325,801Cash,
                  end of period
              
              $
              996,873
              
              $
              3,019,512




-4-


**THERMOENERGY
      CORPORATION**




**NOTES
      TO FINANCIAL STATEMENTS (Unaudited)**


**March
      31, 2007**




**NOTE
      1: BASIS OF PRESENTATION**




The
      accompanying unaudited financial statements have been prepared in accordance
      with generally accepted accounting principles for interim financial information
      and with the instructions to Form 10-QSB and 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 three-month period ended March 31, 2007 are not
      necessarily indicative of the results that may be expected for the year ended
      December 31, 2007.




The
      balance sheet at December 31, 2006 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-KSB for the year ended December 31,
      2006 of ThermoEnergy Corporation (the “Company”).




**NOTE
      2: LOSS PER COMMON SHARE**




Loss
      per
      common share is computed by dividing the net loss for the period by the weighted
      average number of shares outstanding during the period. 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 were 23,830,717 and 23,136,815
      shares for the periods ended March 31, 2007 and 2006, respectively.




**NOTE
      3: 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.




-5-


**THERMOENERGY
      CORPORATION**





**NOTES
      TO FINANCIAL STATEMENTS (Unaudited)**


**March
      31, 2007**




**NOTE
      3: MANAGEMENT’S CONSIDERATION OF GOING CONCERN MATTERS
      (Continued)**




Management
      is actively pursuing commercial contracts to produce fees from projects
      involving the Technologies. Management is currently negotiating on a convertible
      debt transaction as well as the sale of stock pursuant to a private placement.
      A
      public offerings is another alternative under consideration by management as
      previously disclosed.


**NOTE
        4: ISSUANCE OF CONVERTIBLE PROMISSORY NOTE AND WARRANT**
 
 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 therefor 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.
 
 **NOTE
        5: 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 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.
 
 **NOTE
        6: SUBSEQUENT EVENT**
 
 On
        April
        13, 2007, the Company entered into an agreement with CASTion Corporation,
        a
        Massachusetts corporation, pursuant to which CASTion will become a wholly-owned
        subsidiary of the Company. Under the agreement, the Company expects to issue
        to
        the holders of CASTion’s outstanding common stock and preferred stock the
        following consideration in exchange for their CASTion shares: (i) an aggregate
        of 5,000,000 shares of the Company’s common stock, plus (ii) Convertible
        Promissory Notes in the aggregate principal amount of $4,000,000, plus (iii)
        six-year Common Stock Purchase Warrants for the purchase of shares of an
        aggregate of 5,000,000 shares of common stock at an exercise price of $0.50
        per
        share. The Notes will have a term of three years and will bear interest at
        the
        rate of 6.5% per annum; if the Notes remain outstanding after the earlier
        of (i)
        18 months following the date of issuance or (ii) the closing by the Company
        of a
        private placement of equity or convertible debt, the interest rate will be
        increased to 10%. Interest on the Notes will be payable semi-annually, and
        the
        Company will have the option of deferring interest payments and rolling the
        deferred amount into the principal amount of the Notes. Twenty-five percent
        of
        all amounts raised by the Company in private placements of equity or convertible
        debt, net of expenses, will be applied toward prepayment of the Notes. The
        outstanding principal and accrued interest on the Notes will be convertible,
        at
        any time at the election of the holders, into shares of common stock at the
        rate
        of $0.50 per share. The Warrants and the Notes will 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
        the
        Company issues additional shares of common stock (or securities convertible
        into
        common stock) at a price per share less than the then-effective exercise
        price
        or conversion price. The Company also intends to purchase for face value
        (and
        cancel) up to $2,000,000 of promissory notes issued by CASTion to certain
        of its
        stockholders. The Company will maintain the separate corporate existence
        of
        CASTion, and will operate it as a separate division, until the Notes have
        been
        paid in full. The Company will grant 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. The consummation of the transactions
        contemplated by the agreement are subject to certain conventional
        conditions.




**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.




Forward-Looking
      Satetments




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.




-6-


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, an Arkansas corporation (the “Company”), was incorporated in
      January 1988, for the purpose of developing and marketing certain municipal
      and
      industrial wastewater treatment technologies. 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, and (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. Each of these process technologies is more fully described in the
      following section. These three 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.”




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.




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.”




-7-


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, if issued, would be 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 not
      generated any material operating revenues.




Because
      the Company currently does not possess the technical, operational or financial
      resources necessary to construct or operate ThermoFuel, ARP or TIPS commercial
      facilities without external project funding and the ability to source
      engineering skills, 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.




The
      Company continues to search for possible acquisition targets that possess both
      products and services which complement or enhance the Company’s Technologies and
      which have revenues from operations. Management believes that the acquisition
      of, or merger with, a business with a recurring stream of revenue would enhance
      the Company’s ability to obtain long-term financing. Accordingly,
      on April 13, 2007, the Company entered into an agreement with CASTion
      Corporation, a Massachusetts corporation, pursuant to which CASTion will become
      a wholly-owned subsidiary of the Company. The Company will maintain the separate
      corporate existence of CASTion, and will operate it as a separate division,
      until the Notes that will be issued in partial payment of the purchase price
      have been paid in full. The Company will grant 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. The consummation of
      the transactions contemplated by the agreement are subject to certain
      conventional conditions. Closing is anticipated to occur during the second
      quarter of 2007.


*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.




-8-




The
      Company has sufficient working capital to satisfy its anticipated operating
      expenses for the next 12 months. As of March 31, 2007, the Company had a cash
      balance of $996,873 and current liabilities of $678,949. 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. The 2006 operating
      expenses include general and administrative expense charges of $433,276 relating
      to the issuance of warrants for services. The accrual of $3,245,000 for the
      deferred compensation retirement plan for the Company’s President, P.L. Montesi
      was adjusted by $2,707,750 due to a settlement agreement entered into on May
      27,
      2005.




Management
      anticipates that its cash requirements during the next 12 months to implement
      the Company’s marketing and development strategies will be approximately
      $3,000,000, but will increase proportionally with the additional business
      resulting from the acquisition of CASTion Corporation.




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, 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
      July
      2005, the Company completed a $7,438,400 private equity placement. The proceeds
      of the private placement were used primarily in connection with the Company’s
      contract with the City of New York, to hire additional employees, and to open
      an
      office/laboratory in Hudson, MA. In addition to 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.




*First
      Quarter 2007 Compared to First Quarter 2006*




The
      Company recorded total operating revenue of $73,455 and $252,123 respectively
      for the quarters ended March 31, 2007 and 2006. The decrease in revenue resulted
      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 ARP project at
      NYCDEP. The Company had total operating expenses of $820,776 and $1,543,399
      for
      the quarters ended March 31, 2007 and 2006 respectively. The decrease of
      approximately $722,000 in 2007 over 2006 was due primarily from the decreased
      activity related to the NYCDEP project and the expensing of $731,609 in 2006
      related to the recognition of an expense for options and warrants. Travel and
      entertainment expenses were $87,642 and $124,268 respectively for the quarters
      ended March 31, 2007 and 2006 respectively. Management believes that, as a
      result of the acquisition of CASTion Corporation, which had total revenues
      in
      excess of $4,000,000 during the year ended December 31, 2006, the Company’s
      consolidated operating results should improve in 2007.




-9-




Total
      assets decreased from $3,814,399 on March
      31, 2006 to $2,815,692 on March 31, 2007. The decrease is a direct result from
      the operating loss recorded in 2006. Total cash decreased from $3,019,512 to
      $996,873, but total accounts receivable, notes receivable and other current
      assets increased from $693,693 at March 31, 2006 to $1,573,034 on March 31,
      2007. Total liabilities increased from $588,894 on March 31, 2006 to $1,479,949
      on March 31, 2007 due to the increased activities of the company and the
      issuance of $750,000 of convertible debt. During the same period total equity
      decreased $1,889,731.




*Recent
      Developments*




In
      April
      2005, the Company entered into an agreement with New York City 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 2006 and the Company is in the process of entering into a
      new
      larger contract for a facility at the 26th Ward WPCP. Construction by the
      Company with two primary subcontractors was delayed during 2006, but the Company
      expects to complete construction of the facility during 2007. If the operating
      results of the demonstration plant over the twelve month period after completion
      are successful, the Company expects to enter into a long-term agreement with
      the
      city of New York.




*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 new resins for its ARP system, testing various
      waste streams for potential clients, testing various waste streams for third
      parties including the Shaw Group, 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 expand its R&D capabilities when it consolidates the
      Hudson laboratory with CASTion’s R&D laboratory in Worchester, Massachusetts
      in the coming months.




*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 to the acquisition
      of
      CASTion Corporation. Upon completion of the acquisition, the Company will have
      approximately 30 employees.




-10-




*Off-Balance
      Sheet Arrangements*




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




**Item
      3. Controls and Procedures.**




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




The
      Chief
      Executive Officer and Principal Financial Officer have reviewed and evaluated
      the Company’s disclosure controls and procedures as of the end of the period
      covered by this report. Based on, and as of the effective date of, that review
      and evaluation, the Chief Executive Officer and Principal Financial Officer
      have
      concluded that the Company’s disclosure controls and procedures are effectively
      serving the stated purposes.




No
      changes in the Company’s internal control over financial reporting occurred
      during the period covered by this report that materially affected, or are
      reasonably likely to materially affect, the Company’s internal controls over
      financial reporting.




**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. The Company intends to pursue the appeal vigorously.
      There are currently no pending legal proceedings against the Company.




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




On
      March
      21, 2007, the Company issued to Martin A. Roenigk the Company’s 5% Convertible
      Promissory Note due March 21, 2013 in the principal amount of $750,000 and
      a
      Common Stock Purchase Warrant. The principal amount of, and accrued interest
      on,
      the Note is convertible, at any time at the election of the holder, into shares
      of the Company’s Common Stock at a conversion price of $0.50 per share. If the
      entire principal amount of the Note were converted, the Company would issue
      to
      the holder an aggregate of 1,500,000 shares of Common Stock. The Warrant
      entitles the holder to purchase up to 750,000 shares of Common Stock, at any
      time on or before March 21, 2013, at an exercise price equal to the daily volume
      weighted average price (“VWAP”) per share of the 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 Note and Warrant 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
      and
      by Regulation D promulgated under such Act. The Note and Warrant were sold
      for
      cash at an aggregate offering price of $750,000. No brokers or placement agents
      were involved in the offering of such securities.




-11-




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 and the
      fair value of 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.





In
      two
      separate transactions during the quarter ended March 31, 2007, the Company
      issued shares of Common Stock to The Focus Fund, 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.




**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
      March 31, 2007.




**Item
      5. Other Information.**




None.




**Item
      6. Exhibits.**




The
      following exhibits are filed as part of this report:




***Exhibit***
                ***Number***
              
              ***Description***
                ***of
                  Exhibit***
              ***Location***4.1
              
              Securities
                  Purchase Agreement, dated as of March 21, 2007, between ThermoEnergy
                  Corporation and Martin A. Roenigk
              (1)4.2
              
              Form
                  of 5% Convertible Promissory Note due March 21, 2013 issued pursuant
                  to
                  Securities Purchase Agreement, dated as of March 21, 2007, between
                  ThermoEnergy Corporation and Martin A. Roenigk
              (2)4.3
              
              Form
                  of Warrant issued pursuant to Securities Purchase Agreement, dated
                  as of
                  March 21, 2007, between ThermoEnergy Corporation and Martin A.
                  Roenigk
              (3)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
              *32.3
              
              Certification
                  of C.F.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section
                  1350
              *


*
        Filed
        herewith
 
 (1)
        Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed
        March 22, 2007.
 
 (2)
        Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed
        March 22, 2007.
 
 (3)
        Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed
        March 22, 2007.


-12-




**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
      22, 2007


THERMOENERGY
                CORPORATION/s/
                Dennis C. CosseyDennis
                C. Cossey, Chairman and
              Chief
                Executive Officer




-13-