**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      DC 20549**

**FORM      10-QSB**

| ARKANSAS(State                or Other Jurisdiction ofIncorporation                or Organization) | 71-00659511(IRS                Employer Identification No.) |
|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------------|

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**THERMOENERGY      CORPORATON**

**INDEX      **

| ** **              | ** ** | ** **                           | ** ** | ** **                                                                                                                                                                                                                        | ** ** | **Page****No.** |
|-------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| Part                I.  |       | Financial                Information |
|                    |       | Item                1.               |       | Financial                Statements                                                                                                                                                                                               |       |            |
|                    |       |                                 |       | Balance                Sheets as of June 30, 2006 (Unaudited) and December 31,                2005                                                                                                                           |       | 3               |
|                    |       |                                 |       | Statements                of Operations for the three months ended June 30, 2006 and 2005                (Unaudited)                                                                                                              |       | 4               |
|                    |       |                                 |       | Statements                of Changes in Stockholders’ Equity (Deficit) for the period ended January                1, 2005 through December 31, 2005 and the three months ended June                30,                2006 |       | 5               |
|                    |       |                                 |       | Statements                of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)                                                                                                                               |       | 6               |
|                    |       |                                 |       | Notes                to Financial Statements (Unaudited)                                                                                                                                                                          |       | 7               |
|                    |       | Item                2.               |       | Management's                Discussion and Analysis or Plan of Operation                                                                                                                                                          |       | 8               |
|                    |       | Item                3.               |       | Controls                and Procedures                                                                                                                                                                                            |       | 11              |
| Part                II. |       | Other                Information     |
|                    |       | Item                1.               |       | Legal                Proceedings                                                                                                                                                                                                  |       | 12              |
|                    |       | Item                2.               |       | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                                        |       | 12              |
|                    |       | Item                3.               |       | Defaults                Upon Senior Securities                                                                                                                                                                                    |       | 12              |
|                    |       | Item                4.               |       | Submission                of Matters to a Vote of Security Holders                                                                                                                                                                |       | 12              |
|                    |       | Item                5.               |       | Other                Information                                                                                                                                                                                                  |       | 13              |
|                    |       | Item                6.               |       | Exhibits                and Reports on Form 8-K                                                                                                                                                                                   |       | 13              |
| Signature               |       |                                 |

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**THERMOENERGY      CORPORATION**

**Balance      Sheet**

|                                                                                                                                                                                                                                          |   | **June                  30, 2006** |        | **December                  31, 2005** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|----------------------------------------|--------|
| **Assets**                                                                                                                                                                                                                                    |   |                               |        |                                   |   |
| Current                  Assets:                                                                                                                                                                                                              |   |                               |        |                                   |   |
| Cash                                                                                                                                                                                                                                          |   | $                                  | 1,808,304   |                                   | $      | 4,325,801 |   |
| Accounts                  Receivable                                                                                                                                                                                                          |   |                               | 672,832     |                                   |   | 310,467 |   |
| Other                  Current Assets                                                                                                                                                                                                         |   |                               | 209,609     |                                   |   | 118,450 |   |
| Total                  Current Assets                                                                                                                                                                                                         |   |                               | 2,690,745   |                                   |   | 4,754,718 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Property                  and Equipment, at cost:                                                                                                                                                                                             |   |                               |        |                                   |   |   |   |
| Equipment,                  Furniture and Fixtures                                                                                                                                                                                            |   |                               | 131,672     |                                   |   | 108,622 |   |
| Less                  Accumulated Depreciation                                                                                                                                                                                                |   |                               | (30,913     | )                                      |   | (19,809 | ) |
| Total                  Fixed Assets                                                                                                                                                                                                           |   |                               | 100,759     |                                   |   | 88,813 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Other                  Assets:                                                                                                                                                                                                                |   |                               |        |                                   |   |   |   |
| Mobile                  ARP Unit                                                                                                                                                                                                              |   |                               | 150,020     |                                   |   |   |   |
| Total                  Other Assets                                                                                                                                                                                                           |   |                               | 150,020     |                                   |   |   |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Total                  Assets                                                                                                                                                                                                                 |   | $                                  | 2,941,524   |                                   | $      | 4,843,531 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| **Liabilities                  and Stockholders' Equity (Deficit)**                                                                                                                                                                           |   |                               |        |                                   |   |   |   |
| Liabilities                                                                                                                                                                                                                                   |   |                               |        |                                   |   |   |   |
| Current                  Liabilities:                                                                                                                                                                                                         |   |                               |        |                                   |   |   |   |
| Accounts                  Payable                                                                                                                                                                                                             |   | $                                  | 162,300     |                                   | $      | 318,272 |   |
| Total                  Current Liabilities                                                                                                                                                                                                    |   |                               | 162,300     |                                   |   | 318,272 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Long                  Term Liabilities:                                                                                                                                                                                                       |   |                               |        |                                   |   |   |   |
| Deferred                  Comp Retirement Plan for Officer                                                                                                                                                                                    |   |                               | 325,000     |                                   |   | 350,000 |   |
| Total                  Long Term Liabilities                                                                                                                                                                                                  |   |                               | 325,000     |                                   |   | 350,000 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Total                  Liabilities                                                                                                                                                                                                            |   |                               | 487,300     |                                   |   | 668,272 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| **Equity**                                                                                                                                                                                                                                    |   |                               |        |                                   |   |   |   |
| Stockholders'                  Equity (Deficit):                                                                                                                                                                                              |   |                               |        |                                   |   |   |   |
| Preferred                  stock, $1 par value: authorized - 10,000,000 shares; issued: 2006                  -                  6,198,671 shares; 2005 - 6,198,671; outstanding: 2006 and 2005                  -                  6,198,671 |   |                               | 6,198,671   |                                   |   | 6,198,671 |   |
| Common                  Stock, $.001 par value; authorized - 75,000,000 shares; issued:                  2006 and                  2005 - 23,220,612 shares; outstanding: 2006 and 2005 - 23,136,815                  shares                  |   |                               | 23,221      |                                   |   | 23,221 |   |
| Additional                  paid-in Capital                                                                                                                                                                                                   |   |                               | 29,595,208  |                                   |   | 29,130,717 |   |
| Accumulated                  Deficit                                                                                                                                                                                                          |   |                               | (33,362,876 | )                                      |   | (31,177,350 | ) |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Total                  Equity                                                                                                                                                                                                                 |   |                               | 2,454,254   |                                   |   | 4,175,259 |   |
|                                                                                                                                                                                                                                          |   |                               |        |                                   |   |   |   |
| Total                  Liabilities and Stockholders' Equity                                                                                                                                                                                   |   | $                                  | 2,941,524   |                                   | $      | 4,843,531 |   |

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**THERMOENERGY      CORPORATION **

**Statements      of Operations**

|                                                                     |   | **Six                  Months Ended June 30,** |       | **Three                  Months Ended June 30,** |   |
|--------------------------------------------------------------------------|--------|------------------------------------------------|------------|--------------------------------------------------|--------|
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |
|                                                                     |   | **2006**                                       |       | **2005**                                         |   | **2006** |   | **2005** |   |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |
| Operating                  Revenue:                                      |   | $                                              | -          |                                             | $      | - |   | $ | - |   | $ | - |   |
| Water                  Group Revenue                                     |   |                                           | 85,000     |                                             |   | - |   |   | 25,000 |   |   | - |   |
| ThermoEnergy                  Power Systems Revenue                      |   |                                           | 325,825    |                                             |   | - |   |   | 133,702 |   |   | - |   |
| Total                  operating revenue                                 |   |                                           | 410,825    |                                             |   | - |   |   | 158,702 |   |   | - |   |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses:                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| General                  and Administrative                              |   | $                                              | 2,358,479  |                                             | $      | 1,035,830 |   | $ | 889,428 |   | $ | 874,448 |   |
| Payments                  under licenses                                 |   |                                           | 20,000     |                                             |   | 20,000 |   |   | 10,000 |   |   | 10,000 |   |
| Travel                  and Entertainment                                |   |                                           | 271,312    |                                             |   | 85,054 |   |   | 147,044 |   |   | 54,338 |   |
| Total                  operating expenses                                |   |                                           | 2,649,791  |                                             |   | 1,140,884 |   |   | 1,046,472 |   |   | 938,786 |   |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Loss                  from operations                                    |   |                                           | (2,238,966 | )                                                |   | (1,140,884 | ) |   | (887,770 | ) |   | (938,786 | ) |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Other                  income (expense):                                 |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Interest                  income                                         |   |                                           | 53,440     |                                             |   | 7,599 |   |   | 33,440 |   |   | 4,406 |   |
| Other                                                                    |   |                                           | -          |                                             |   | 77 |   |   | - |   |   | 77 |   |
| Total                  other income (expense)                            |   |                                           | 53,440     |                                             |   | 7,676 |   |   | 33,440 |   |   | 4,483 |   |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Net                  Loss                                                |   |                                           | (2,185,526 | )                                                |   | (1,133,208 | ) |   | (854,330 | ) |   | (934,303 | ) |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
|                                                                     |   |                                           |       |                                             |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted per Common Share loss from operations |   |                                           | (0.10      | )                                                |   | (0.05 | ) |   | (0.04 | ) |   | (0.04 | ) |
| Net                  Loss                                                |   |                                           | (0.09      | )                                                |   | (0.05 | ) |   | (0.03 | ) |   | (0.04 | ) |

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**THERMOENERGY      CORPORATION **

**Statement      of Changes in Stockholder’s Equity (Deficit)**

**Period      Ended December 31, 2005 and the Six Months Ended June 30, 2006      (Unaudited)**

|                                                                                                                                                                                                                                                                             |   |       |   | **Series                  A** |   |           |   |            |       |      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|-------------------------------|--------|----------------|--------|-----------------|------------|-----------|--------|
|                                                                                                                                                                                                                                                                             |   |       |   | **Convertible**               |   | **Additional** |   |            |       |      |   |
|                                                                                                                                                                                                                                                                             |   | **Common** |   | **Preferred**                 |   | **Paid-in**    |   | **Accumulated** |       |      |   |
|                                                                                                                                                                                                                                                                             |   | **Stock**  |   | **Stock**                     |   | **Capital**    |   | **Deficit**     |       | **Total** |   |
| Balance                  (Deficit), January 1, 2005                                                                                                                                                                                                                              |   | $          | 22,692 |                          |   |           |   | $               | 22,046,714 |      | $      | (25,940,526 | ) | $ | (3,871,120 | ) |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Issuance                  of stock for accounts payable balances (534,177 shares at a price                  of $1.32                  per share                                                                                                                                 |   |       | 534    |                          |   |           |   |            | 704,580    |      |   |   |   |   | 705,114 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Settlement                  of Deferred Compensation Retirement Plan of Officer                                                                                                                                                                                                  |   |       |   |                          |   |           |   |            | 2,707,750  |      |   |   |   |   | 2,707,750 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Issuance                  of Series A Convertible Preferred Stock and Warrants ("units")                  July 2005,                  net of issuance costs of $452,619 (6,198,571 shares and 2,798,400                  Warrants                  at a price of $1.20 per unit) |   |       |   |                          |   | 6,198,671      |   |            | 787,115    |      |   |   |   |   | 6,985,786 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Issuance                  of stock for Officer bonus (25,000 shares at a price of $1.40 per                  share)                                                                                                                                                              |   |       | 25     |                          |   |           |   |            | 34,975     |      |   |   |   |   | 35,000 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Accquired                  and cancelled stock from shareholder, August 2005 (141,383 shares                  at a                  price of $0.89 per share)                                                                                                                    |   |       | (141   | )                             |   |           |   |            | (125,690   | )         |   |   |   |   | (125,831 | ) |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Issuance                  of stock in partial retirement of deferred compensation, September                  2005                  (110,544 shares at a price of $1.29 per share)                                                                                               |   |       | 111    |                          |   |           |   |            | 142,491    |      |   |   |   |   | 142,602 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Warrant                  issued for services                                                                                                                                                                                                                                     |   |       |   |                          |   |           |   |            | 1,775,245  |      |   |   |   |   | 1,775,245 |   |
| Warrant                  price adjustment - private placement units                                                                                                                                                                                                              |   |       |   |                          |   |           |   |            | 261,803    |      |   |   |   |   | 261,803 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Reduction                  in balance of deferred compensation by issuing Stock Options, September                  2005                                                                                                                                                         |   |       |   |                          |   |           |   |            | 795,734    |      |   |   |   |   | 795,734 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Net                  Loss                                                                                                                                                                                                                                                        |   |       |   |                          |   |           |   |            |       |      |   | (5,236,824 | ) |   | (5,236,824 | ) |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Balance,                  December 31, 2005                                                                                                                                                                                                                                      |   | $          | 23,221 |                          | $      | 6,198,671      |   | $               | 29,130,717 |      | $      | (31,177,350 | ) | $ | 4,175,259 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Share-based                  compensation expence - grant of options on January 19, 2006 for                  545,000                  shares at $0.94 per share                                                                                                                 |   |       |   |                          |   |           |   |            | 298,333    |      |   |   |   |   | 298,333 |   |
|                                                                                                                                                                                                                                                                             |   |       |   |                          |   |           |   |            |       |      |   |   |   |   |   |   |
| Warrants                  issued for services                                                                                                                                                                                                                                    |   |       |   |                          |   |           |   |            | 166,158    |      |   |   |   |   | 166,158 |   |
| Net                  Loss                                                                                                                                                                                                                                                        |   |       |   |                          |   |           |   |            |       |      |   | (2,185,526 | ) |   | (2,185,526 | ) |
| Balance,                  March 31, 2006                                                                                                                                                                                                                                         |   | $          | 23,221 |                          | $      | 6,198,671      |   | $               | 29,595,208 |      | $      | (33,362,876 | ) | $ | 2,454,224 |   |

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**THERMOENERGY      CORPORATION **

**Statements      of Cash Flows**

|                                                                 |   |                                           |       |     |   |
|----------------------------------------------------------------------|--------|------------------------------------------------|------------|----------|--------|
|                                                                 |   | **Six                  Months Ended June 30,** |       |
|                                                                 |   |                                           |       |     |   |
|                                                                 |   | **2006**                                       |       | **2005** |   |
|                                                                 |   |                                           |       |     |   |
| Operating                  Activities:                               |   |                                           |       |     |   |
| Net                  Loss                                            |   | $                                              | (2,185,496 | )        | $      | (1,133,208 | ) |
| Items                  not requiring (providing) cash:               |   |                                           |       |     |   |   |   |
| Depreciation                                                         |   | $                                              | 11,104     |     |   |   |   |
| Expense                  of options issued to officers and directors |   |                                           | 298,333    |     |   |   |   |
| Expense                  of warrants vesting during the period       |   | $                                              | 166,158    |     |   |   |   |
| Changes                  in:                                         |   |                                           |       |     |   |   |   |
| Advances                  to officers                                |   |                                           | -          |     |   | (115,774 | ) |
| Accounts                  Receivable                                 |   |                                           | (362,365   | )        |   |   |   |
| Other                  Receivables                                   |   |                                           | (125,000   | )        |   |   |   |
| Accounts                  Payable                                    |   |                                           | (156,002   | )        |   | (203,056 | ) |
| Accrued                  Expenses                                    |   |                                           | 124,980    |     |   | 690,114 |   |
| Deferred                  Compensation                               |   |                                           | -          |     |   | 311,021 |   |
| Deferred                  Compensation Retirement Plan               |   |                                           | (25,000    | )        |   | 15,000 |   |
| Net                  cash used in operating activities               |   | $                                              | (2,253,288 | )        | $      | (435,903 | ) |
|                                                                 |   |                                           |       |     |   |   |   |
| Investing                  Activities:                               |   |                                           |       |     |   |   |   |
| Purchase                  of fixed assets                            |   |                                           | -173,050   |     |   |   |   |
| Prepaid                  expenses and advances                       |   |                                           | -91,159    |     |   |   |   |
| Net                  cash provided by investing activities           |   | $                                              | (264,209   | )        | $      | - |   |
|                                                                 |   |                                           |       |     |   |   |   |
| Financing                  Activities:                               |   |                                           |       |     |   |   |   |
| Proceeds                  from Bridge Loan                           |   |                                           | -          |     |   | 100,000 |   |
| Net                  cash provided by financing activities           |   | $                                              | -          |     | $      | 100,000 |   |
|                                                                 |   |                                           |       |     |   |   |   |
| Increase                  (decrease) in cash                         |   |                                           | (2,517,497 | )        |   | (350,903 | ) |
| Cash,                  beginning of period                           |   |                                           | 4,325,801  |     |   | 364,337 |   |
| Cash,                  end of period                                 |   | $                                              | 1,808,304  |     | $      | 13,434 |   |

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**THERMOENERGY      CORPORATION**

**NOTES      TO FINANCIAL STATEMENTS (Unaudited)**

**June      30, 2006**

**NOTE      1: BASIS OF PRESENTATION**

**NOTE      2: LOSS PER COMMON SHARE**

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

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

*Forward-Looking      Statements*

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*General*

*Plan      of Operation *

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* Current      Cash Requirements; Need for Additional Funds *

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*Research      and Development During the Next 12 Months *

*Expected      Changes in the Number of Employees *

*Off-Balance      Sheet Arrangements *

**Item      3. Controls and Procedures.**

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**PART      II. OTHER INFORMATION**

**Item      1. Legal Proceedings**

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

**Item      3. Defaults upon Senior Securities**

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

| 1.   | The                election of one director to serve a term of five years, expiring                in                2011. |
|----------------|----------------------------------------------------------------------------------------------------------------------------|

| 2.   | The                election of two directors to serve terms of three years, expiring                in                2009 |
|----------------|----------------------------------------------------------------------------------------------------------------------------|

| 3.   | Ratification                of the appointment of Kemp & Company as our independent registered                public accounting firm for the fiscal year ending December 31,                2006. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***Nominee***                             | ***For*** | ***Withheld*** |
|-------------------------------------------|-----------|----------------|
| ***For                a Five-Year Term*** |      |           |
| Dennis                C. Cossey           | 9,815,013 | 5,937,165      |
|                                      |      |           |
| ***For                Three-Year Terms*** |      |           |
| Lowell                E. Faulkenberry     | 9,869,977 | 5,882,181      |
| Paul                A. Loeffler           | 9,869,977 | 5,882,181      |

----

| ***For***  | ***Against*** | ***Abstained*** |
|------------|---------------|-----------------|
| 15,599,412 | 28,671        | 124,095         |

**Item      5. Other Information**

**Item      6. Exhibits**

| ***Exhibit                No.*** |   | ***Exhibit                Description***                                                                    |   | ***Location***                |
|----------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------|
|                             |   |                                                                                                        |   |                          |
| 31.1                             |   | Certification                of C.E.O. pursuant to Rule 13a-14(a)                                           |   | Filed                herewith |
|                             |   |                                                                                                        |   |                          |
| 31.2                             |   | Certification                of C.F.O. pursuant to Rule 13a-14(a)                                           |   | Filed                herewith |
|                             |   |                                                                                                        |   |                          |
| 32.1                             |   | Certification                of C.E.O. pursuant to Rule 13a-14(b)                and 18 U.S.C. Section 1350 |   | Filed                herewith |
|                             |   |                                                                                                        |   |                          |
| 32.2                             |   | Certification                of C.F.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section                1350 |   | Filed                herewith |

----

**SIGNATURE**

|         |                                                                              |                                                |
|--------------|-----------------------------------------------------------------------------------|-----------------------------------------------------|
|         | THERMOENERGY              CORPORATION                                             |
|    |                                                                         |                                           |
|         | By:                                                                     | /s/ Dennis              C.              Cossey |
|         | Dennis              C. Cossey, Chairman, and Chief              Executive Officer |

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