##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROMTO COMMISSION FILE NUMBER 33-46104-FW THERMOENERGY CORPORATION (Exact Name of Small Business Issuer as Specified in Its Charter)
 ARKANSAS
    
    71-00659511(State or Other Jurisdiction
of Incorporation or Organization)
    
    (IRS Employer Identification No.)
 323 CENTER STREET, SUITE 1300, LITTLE ROCK, ARKANSAS 72201
(Address of Principal Executive Offices) (501) 376-6477(Issuers Telephone Number, Including Area Code) 
  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 þ No o APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes o No o APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 21,211,370 shares of common
stock as of August 10, 2004. Transitional Small Business Disclosure Format (Check one): Yeso Noþ




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TABLE OF CONTENTS  PART 1  FINANCIAL INFORMATIONItem 1. Financial Statements.Item 2. Managements Discussion and Analysis or Plan of Operation.Item 3. Controls and Procedures.PART II  OTHER INFORMATIONItem 1. Legal Proceedings.Item 2. Change in Securities and Small Business Issuer Purchases of Equity Securities.Item 3. Defaults Upon Senior Securities.Item 4. Submission of Matters to a Vote of Securities Holders.Item 5. Other Information.Item 6. Exhibits and Report on Form 8-K.SIGNATUREEX-31.1 SECTION 302 CERTIFICATION OF THE CEO & PFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & PFO    Table of Contents  
 PART 1  FINANCIAL INFORMATION 
 Item 1. Financial Statements. THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS June 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCash  Total Current Assets
    
    $
    124,266
    
    
    $
    62,303Property and equipment, at cost:Equipment, furniture and fixtures
    
    
    19,809
    
    
    
    19,809Less accumulated depreciation
    
    
    (19,809
    )
    
    
    (19,809
    )
    
    
    
    
    
    
    
    $
    124,266
    
    
    $
    62,303LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    684,610
    
    
    $
    763,410Deferred compensation
    
    
    297,665
    
    
    
    101,923Total Current Liabilities
    
    
    982,275
    
    
    
    865,333Deferred compensation retirement plan for officer
    
    
    3,245,000
    
    
    
    3,245,000Total Liabilities
    
    
    4,227,275
    
    
    
    4,110,333Stockholders equity (deficit) (Notes 3 and 5):Preferred stock, non-voting, $1 par value:Authorized - 10,000,000 shares; none issuedCommon Stock, $.001 par value: authorized - 75,000,000 shares;
June 30, 2004: issued - 21,255,554 shares; outstanding -
21,171,725 shares; December 31, 2003: issued - 17,781,073
shares; outstanding - 17,697,244 shares
    
    
    21,256
    
    
    
    17,781Additional paid-in capital
    
    
    21,069,290
    
    
    
    19,949,589Deficit accumulated during the development stage
    
    
    (25,193,555
    )
    
    
    (24,015,400
    )(4,103,009
    )
    
    
    (4,048,030
    )$
    124,266
    
    
    $
    62,303
 See notes to financial statements. 2




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THERMOENERGY CORPORATION
(A Development Stage Company) STATEMENTS OF OPERATIONS CumulativeDuring
DevelopmentStage ThroughJune 30,
    
    Six Months EndedJune 30,
    
    Three Months EndedJune 30,2004
    
    2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating Expenses:General and administrative
    
    $
    16,370,634
    
    
    $
    1,037,688
    
    
    $
    521,634
    
    
    $
    436,983
    
    
    $
    235,392Payments under licenses
    
    
    1,237,266
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    25,000
    
    
    
    25,000Travel and entertainment
    
    
    2,205,849
    
    
    
    91,910
    
    
    
    75,809
    
    
    
    60,054
    
    
    
    34,44719,813,749
    
    
    
    1,179,598
    
    
    
    647,443
    
    
    
    522,037
    
    
    
    294,839Loss From Operations
    
    
    (19,813,749
    )
    
    
    (1,179,598
    )
    
    
    (647,443
    )
    
    
    (522,037
    )
    
    
    (294,839
    )Other Income (Expense)Interest income
    
    
    238,717
    
    
    
    1,443
    
    
    
    115
    
    
    
    830
    
    
    
    33Gain on settlement of lawsuit
    
    
    317,423Other
    
    
    59,574Interest expense
    
    
    (4,217,488
    )
    
    
    
    
    
    
    (585,739
    )
    
    
    
    
    
    
    (303,209
    )(3,601,774
    )
    
    
    1,443
    
    
    
    (585,624
    )
    
    
    830
    
    
    
    (303,176
    )Net Loss
    
    $
    (23,415,523
    )
    
    $
    (1,178,155
    )
    
    $
    (1,233,067
    )
    
    $
    (521,207
    )
    
    $
    (598,015
    )Basic and Diluted
per Common Share (Note 2)Loss From Operations
    
    $
    (3.77
    )
    
    $
    (0.06
    )
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )Net Loss
    
    $
    (4.46
    )
    
    $
    (0.06
    )
    
    $
    (0.21
    )
    
    $
    (0.02
    )
    
    $
    (0.10
    )
 See notes to financial statements. 3




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, January 1988,
(2,205,762 shares at $.08
per share)
    
    $
    2,206
    
    
    $
    178,094
    
    
    $
    
    
    
    $
    180,300Net loss
    
    
    
    
    
    
    
    
    
    
    (290,483
    )
    
    
    (290,483
    )Balance (deficit),
September 30, 1988
    
    
    2,206
    
    
    
    178,094
    
    
    
    (290,483
    )
    
    
    (110,183
    )Conversion of $412,000 of
debentures and accrued
interest, September 1989
(306,335 shares)
    
    
    306
    
    
    
    456,695
    
    
    
    
    
    
    
    457,001Net loss
    
    
    
    
    
    
    
    
    
    
    (338,985
    )
    
    
    (338,985
    )Balance (deficit),
September 30, 1989
    
    
    2,512
    
    
    
    634,789
    
    
    
    (629,468
    )
    
    
    7,833Net loss
    
    
    
    
    
    
    
    
    
    
    (255,036
    )
    
    
    (255,036
    )Balance (deficit),
September 30, 1990
    
    
    2,512
    
    
    
    634,789
    
    
    
    (884,504
    )
    
    
    (247,203
    )Conversion of $63,000 of
unsecured debentures and
accrued interest at 10%,
March 1991, (44,286 shares)
    
    
    44
    
    
    
    70,813
    
    
    
    
    
    
    
    70,857Issuance of
stock, May - June
1991, (387,880 shares: 366,630 at $1.60 per share;
21,250 shares at $.80 per
share)
    
    
    388
    
    
    
    603,219
    
    
    
    
    
    
    
    603,607Issuance of stock for interest,
June 1991, (1,375 shares at
$1.60 per share)
    
    
    1
    
    
    
    2,199
    
    
    
    
    
    
    
    2,200Issuance of stock for
expenses incurred by
stockholders, July 1991
(5,081 shares at $1.60 per share)
    
    
    5
    
    
    
    8,124
    
    
    
    
    
    
    
    8,129Net loss
    
    
    
    
    
    
    
    
    
    
    (670,179
    )
    
    
    (670,179
    )Balance (deficit), September 30,
1991
    
    
    2,950
    
    
    
    1,319,144
    
    
    
    (1,554,683
    )
    
    
    (232,589
    )
 4




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, October -
December 1991 (150,925
shares at $1.60 per share)
    
    $
    151
    
    
    $
    241,329
    
    
    $
    
    
    
    $
    241,480Shares purchased in rescission
offer (10,562 shares)
    
    
    (11
    )
    
    
    (16,888
    )
    
    
    
    
    
    
    (16,899
    )Issuance of stock, public
offering, August - September
1992 (344 shares at $16.00 per
share)
    
    
    1
    
    
    
    5,499
    
    
    
    
    
    
    
    5,500Net loss
    
    
    
    
    
    
    
    
    
    
    (562,751
    )
    
    
    (562,751
    )Balance (deficit), September 30,
1992
    
    
    3,091
    
    
    
    1,549,084
    
    
    
    (2,117,434
    )
    
    
    (565,259
    )Issuance of stock, public offering
October 1992 - September 1993
(92,785 shares at $16.00 per
share)
    
    
    93
    
    
    
    1,484,457
    
    
    
    
    
    
    
    1,484,550Issuance of stock for exercise
of stock options, May 1993
(2,500 shares at $1.60 per share)
    
    
    3
    
    
    
    3,997
    
    
    
    
    
    
    
    4,000Issuance of warrants to
stockholder
    
    
    
    
    
    
    6,333
    
    
    
    
    
    
    
    6,333Conversion of $103,000 of notes
payable to stockholders and accrued
interest, December 1992 (6,438 shares
at $16.00 per share)
    
    
    6
    
    
    
    102,994
    
    
    
    
    
    
    
    103,000Issuance of stock for
consulting services, June
1993 (9,375 shares at
$16.00 per share)
    
    
    9
    
    
    
    149,991
    
    
    
    
    
    
    
    150,000Net loss
    
    
    
    
    
    
    
    
    
    
    (1,207,921
    )
    
    
    (1,207,921
    )Balance (deficit), September 30,
1993
    
    
    3,202
    
    
    
    3,296,856
    
    
    
    (3,325,355
    )
    
    
    (25,297
    )
 5




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of warrants to stockholders
    
    $
    
    
    
    $
    226,000
    
    
    $
    
    
    
    $
    226,000Issuance of stock for exercise
of stock options, March 1994
(3,750 shares at $1.60 per share)
    
    
    4
    
    
    
    5,996
    
    
    
    
    
    
    
    6,000Issuance of stock for exercise
of warrants by stockholder,
August 1994 (3,677 shares at
$13.60 per share)
    
    
    4
    
    
    
    49,997
    
    
    
    
    
    
    
    50,001Net loss
    
    
    
    
    
    
    
    
    
    
    (767,427
    )
    
    
    (767,427
    )Balance (deficit), September 30,
1994
    
    
    3,210
    
    
    
    3,578,849
    
    
    
    (4,092,782
    )
    
    
    (510,723
    )Issuance of warrants to stockholders
    
    
    
    
    
    
    9,760
    
    
    
    
    
    
    
    9,760Issuance of stock, May 1995
(6,250 shares at $8.00 per share)
    
    
    6
    
    
    
    49,994
    
    
    
    
    
    
    
    50,000Issuance of stock for
exercise of warrants by
stockholder, June 1995
(6,250 shares at $8.00 per share)
    
    
    6
    
    
    
    49,994
    
    
    
    
    
    
    
    50,000Issuance of stock for expenses, July 1995
(18,750 shares at $8.00 per share)
    
    
    19
    
    
    
    149,981
    
    
    
    
    
    
    
    150,000Net loss
    
    
    
    
    
    
    
    
    
    
    (896,998
    )
    
    
    (896,998
    )Balance (deficit), September 30, 1995
    
    
    3,241
    
    
    
    3,838,578
    
    
    
    (4,989,780
    )
    
    
    (1,147,961
    )Issuance of warrants to stockholders
    
    
    
    
    
    
    5,340
    
    
    
    
    
    
    
    5,340Net loss
    
    
    
    
    
    
    
    
    
    
    (551,621
    )
    
    
    (551,621
    )Balance (deficit), September 30, 1996
    
    
    3,241
    
    
    
    3,843,918
    
    
    
    (5,541,401
    )
    
    
    (1,694,242
    )Issuance of stock, July 1997
(50,000 shares at $2.00 per share)
    
    
    50
    
    
    
    99,950
    
    
    
    
    
    
    
    100,000Conversion of $338,100 of notes payable
to stockholders and accrued interest, July
1997 (195,596 shares at $2.00 per share)
    
    
    196
    
    
    
    390,996
    
    
    
    
    
    
    
    391,192Net loss
    
    
    
    
    
    
    
    
    
    
    (1,196,036
    )
    
    
    (1,196,036
    )Balance (deficit), September 30, 1997
    
    
    3,487
    
    
    
    4,334,864
    
    
    
    (6,737,437
    )
    
    
    (2,399,086
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (797,099
    )
    
    
    (797,099
    )
 6




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalBalance (deficit), September 30, 1998
    
    $
    3,487
    
    
    $
    4,334,864
    
    
    $
    (7,534,536
    )
    
    $
    (3,196,185
    )Net loss (three months)
    
    
    
    
    
    
    
    
    
    
    (243,660
    )
    
    
    (243,660
    )Balance (deficit), December 31, 1998
    
    
    3,487
    
    
    
    4,334,864
    
    
    
    (7,778,196
    )
    
    
    (3,439,845
    )Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value)
    
    
    67
    
    
    
    
    
    
    
    (67
    )Conversion of $238,165 of notes payable to
stockholders and accrued interest, various months
during 1999 (147,602 shares at $2.00 per share)
    
    
    148
    
    
    
    295,056
    
    
    
    
    
    
    
    295,204Issuance of stock for exercise of warrants by
stockholders, August 1999 (181,619 shares
at $.16 per share)
    
    
    182
    
    
    
    28,877
    
    
    
    
    
    
    
    29,059Net loss
    
    
    
    
    
    
    
    
    
    
    (1,200,792
    )
    
    
    (1,200,792
    )Balance (deficit), December 31, 1999
    
    
    3,884
    
    
    
    4,658,797
    
    
    
    (8,979,055
    )
    
    
    (4,316,374
    )Issuance of stock for exercise of warrants
by stockholders, various months during 2000 (130,000 shares at $2.00 per share)
    
    
    130
    
    
    
    259,870
    
    
    
    
    
    
    
    260,000Conversion of $158,735 of notes payable to
stockholders and accrued interest, various
months during 2000 (110,206 shares at
$2.00 per share)
    
    
    110
    
    
    
    220,302
    
    
    
    
    
    
    
    220,412Issuance of compensatory stock options
    
    
    
    
    
    
    190,536
    
    
    
    
    
    
    
    190,536Net loss
    
    
    
    
    
    
    
    
    
    
    (2,021,863
    )
    
    
    (2,021,863
    )Balance (deficit), December 31, 2000
    
    
    4,124
    
    
    
    5,329,505
    
    
    
    (11,000,918
    )
    
    
    (5,667,289
    )Issuance of stock for exercise of warrants
by stockholders, various months during
2001 (496,250 shares at $2.00 per share
and 338,637 shares at $.16 per share)
    
    
    834
    
    
    
    1,045,848
    
    
    
    
    
    
    
    1,046,682Conversion
of $117,377 of Convertible Debentures plus accrued interest, various
months during 2001 (82,808 shares at $2.00
per share)
    
    
    83
    
    
    
    165,533
    
    
    
    
    
    
    
    165,616Net loss
    
    
    
    
    
    
    
    
    
    
    (2,567,968
    )
    
    
    (2,567,968
    )Balance (deficit), December 31, 2001
    
    
    5,041
    
    
    
    6,540,886
    
    
    
    (13,568,886
    )
    
    
    (7,022,959
    )
 7




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, various months 2002
(282,358 shares at $2.00 per share)
    
    $
    283
    
    
    $
    564,433
    
    
    $
    
    
    
    $
    564,716Conversion of $100,000 of Convertible
Debentures plus accrued interest, various
months 2002 (55,000 shares at $2.00 per
share)
    
    
    55
    
    
    
    109,945
    
    
    
    
    
    
    
    110,000Issuance of stock in satisfaction of deferred
compensation balances with officers, various
months 2002, (82,793 shares at $2.00 per share)
    
    
    83
    
    
    
    165,503
    
    
    
    
    
    
    
    165,586Issuance of stock for 10% stock dividend,
June 2002, (522,931 shares at $3.40 per share)
    
    
    523
    
    
    
    1,777,442
    
    
    
    (1,777,965
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (2,565,483
    )
    
    
    (2,565,483
    )Balance (deficit), December 31, 2002
    
    
    5,985
    
    
    
    9,158,209
    
    
    
    (17,912,334
    )
    
    
    (8,748,140
    )Issuance of stock in exchange for outstanding
warrants held by stockholder, January 2003
(50,000 shares at $2.00 per share)
    
    
    50
    
    
    
    (50
    )Conversion of $15,000 of Convertible
Debentures plus accrued interest, April 2003
(26,597 shares at $1.05 per share)
    
    
    26
    
    
    
    27,901
    
    
    
    
    
    
    
    27,927Issuance of stock for compensatory awards
to non-officer members of the Board of Directors,
July 2003 (15,000 shares at $1.00 per share)
    
    
    15
    
    
    
    14,985
    
    
    
    
    
    
    
    15,000Conversion of all outstanding Convertible
Debentures plus accrued interest, July and
August 2003 (9,647,759 shares at $1.05 per
share)
    
    
    9,648
    
    
    
    10,120,499
    
    
    
    
    
    
    
    10,130,147Issuance of stock for consulting services, various
months 2003 (54,493 shares at an average price
of $.54 per share)
    
    
    55
    
    
    
    29,260
    
    
    
    
    
    
    
    29,315Issuance of stock in partial satisfaction of deferred
compensation balances with officers, November
2003, (1,006,287 shares at $.30 per share)
    
    
    1,006
    
    
    
    300,880
    
    
    
    
    
    
    
    301,886Issuance of stock, various months 2003
(996,336 shares at $.30 per share)
    
    
    996
    
    
    
    297,905
    
    
    
    
    
    
    
    298,901Net loss
    
    
    
    
    
    
    
    
    
    
    (6,103,066
    )
    
    
    (6,103,066
    )Balance (deficit), December 31, 2003
    
    
    17,781
    
    
    
    19,949,589
    
    
    
    (24,015,400
    )
    
    
    (4,048,030
    )
 8




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Six Months Ended
June 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock for accounts payable balances,
various months 2004 (330,966 shares at an
average price of $.544228 per share)
    
    $
    331
    
    
    $
    179,790
    
    
    $
    
    
    
    $
    180,121Issuance of stock, various months 2004
(3,018,515 shares at $.30 per share)
    
    
    3,019
    
    
    
    902,536
    
    
    
    
    
    
    
    905,555Issuance of stock in partial satisfaction of
deferred compensation balance with an
officer, May 2004 (125,000 shares at $.30
per share)
    
    
    125
    
    
    
    37,375
    
    
    
    
    
    
    
    37,500Net loss
    
    
    
    
    
    
    
    
    
    
    (1,178,155
    )
    
    
    (1,178,155
    )Balance (deficit), June 30, 2004
    
    $
    21,256
    
    
    $
    21,069,290
    
    
    $
    (25,193,555
    )
    
    $
    (4,103,009
    )
 See notes to financial statements. 9




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THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS CumulativeDuringDevelopmentStage Through
    
    Six Months Ended June 30,June 30, 2004
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating activities:Net loss
    
    $
    (23,415,523
    )
    
    $
    (1,178,155
    )
    
    $
    (1,233,067
    )Items not requiring
(providing) cash:Depreciation
    
    
    19,809Expenses funded by Common
Stock issuance
    
    
    737,653Other
    
    
    (123,546
    )
    
    
    
    
    
    
    6,492Changes in:Advances to officers
    
    
    (1,437,516
    )Other receivables
    
    
    (142,468
    )Accounts payable
    
    
    1,639,817
    
    
    
    101,321
    
    
    
    14,205Accrued expenses
    
    
    4,314,117
    
    
    
    
    
    
    
    590,432Deferred compensation
    
    
    3,811,823
    
    
    
    233,242
    
    
    
    307,095Deferred compensation retirement plan
    
    
    3,245,000
    
    
    
    
    
    
    
    Net cash used in
operating activities
    
    
    (11,350,834
    )
    
    
    (843,592
    )
    
    
    (314,843
    )Investing activities:Purchase of fixed assets
    
    
    (19,808
    )Other
    
    
    314,082Net cash provided by
investing activities
    
    
    294,274Financing activities:Proceeds from issuance of
Common Stock and warrants
    
    
    5,713,416
    
    
    
    905,555Proceeds from notes payable and
advances from officers
    
    
    1,803,609
    
    
    
    
    
    
    
    70,000Proceeds from Convertible Debentures
    
    
    3,798,000
    
    
    
    
    
    
    
    73,000Payments on notes payable and advances
from officers
    
    
    (242,609
    )
    
    
    
    
    
    
    (20,000
    )Other
    
    
    108,410Net cash provided by
financing activities
    
    
    11,180,826
    
    
    
    905,555
    
    
    
    123,000Increase (decrease) in cash
    
    
    124,266
    
    
    
    61,963
    
    
    
    (191,843
    )Cash, beginning of period
    
    
    0
    
    
    
    62,303
    
    
    
    211,329Cash, end of period
    
    $
    124,266
    
    
    $
    124,266
    
    
    $
    19,486
 See notes to financial statements. 10




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THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 2004 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 and six-month
periods ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 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 Companys annual report on Form 10-KSB for the year
ended December 31, 2003. 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 after
giving effect, where appropriate, to stock dividends, stock splits and nominal
issuances of Common Stock, warrants and stock options which occurred within
twelve months of the initial public offering filing date (February 27, 1992).
Stock options and warrants issued after the one year period referred to above,
and the dilutive effect of convertible debentures 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 5,255,265 shares for the period
cumulative since inception through June 30, 2004, and 20,205,997 and 5,958,220
shares for the six-month periods ended June 30, 2004 and 2003, respectively,
and 21,054,211 and 5,973,277 shares for the three-month periods ended June 30,
2004 and 2003, respectively. NOTE 3: COMMON STOCK During the six months ended June 30, 2004, the Company issued 330,966 shares of
Common Stock to settle accounts payable balances aggregating $180,121 and
3,018,515 shares for cash at $.30 per share. 12




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THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 2004 NOTE 3: COMMON STOCK (continued) During February 2004, the Board of Directors granted stock options to a member
of the Board of Directors for the purchase of 50,000 shares of the Companys
Common Stock at $.50 per share. On March 23, 2004, the Board of Directors approved a rescission offer to
stockholders who purchased the Companys Common Stock during the fourth quarter
of 2003 and the first quarter of 2004 due to the determination that an
exemption from the registration requirements of the Securities Act of 1933 was
not available. The purchasers did not require the Company to repurchase any of
the shares pursuant to this offer. During May 2004, the Company issued 125,000 shares at $.30 per share in partial
satisfaction of a deferred compensation balance with an officer. NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTTERS The Company has incurred net losses since inception and will likely require
substantial capital to continue commercialization of the Technologies. The
financial statements have been prepared assuming the Company will continue as a
going concern, realizing assets and liquidating liabilities in the ordinary
course of business and do not reflect any adjustments that might result from
the outcome of the aforementioned uncertainties. Management is considering
several alternatives for mitigating these conditions. Management is actively pursuing commercial contracts to produce fees from
projects involving the Technologies. The sale of stock pursuant to private
placement or public offerings is another alternative under consideration by
management. NOTE 5: COMMITMENTS At June 30, 2004, the Company was committed to issue approximately 415,000
shares of Common Stock in payment of accounts payable balances. 
 Item 2. Managements Discussion and Analysis or Plan of Operation. Forward-Looking Statements The following discussion should be read in conjunction with the financial
statements and the notes to the financial statements appearing elsewhere in
this quarterly report on Form 10-QSB. The following discussion and the
information contained elsewhere in this quarterly report contains statements
that are forward-looking statements as defined within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
give the 13




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##### Table of Contents



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, will, 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 actual future activities and the Companys
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) the Companys ability
to function efficiently and effectively until it can afford to hire a principal
financial officer to replace the deceased P.L. Montesi; (iv) changes in
government policy and in legislation and regulation of the waste treatment
industry that adversely affect the Companys business prospects; and (v)
general economic and market conditions. 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. The Company undertakes no obligation to publicly revise these forward-looking
statements after the date of this quarterly report. 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 report and in the Companys Form 10-KSB. The Companys filing with the Securities and Exchange 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. General ThermoEnergy Corporation, an Arkansas corporation (the Company), was
incorporated in January 1988, for the purpose of developing and marketing
certain environmental technologies. The Company is the exclusive worldwide
licensee (except for STORS, as defined below, in Japan) for three clean water
process technologies developed by Battelle Memorial Institute (BMI): the
Sludge-To-Oil Reactor System (STORS), the Ammonia Recovery Process (ARP),
the Nitrogen Removal Process (NitRem). In addition, the Company owns the
rights 14




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##### Table of Contents



to the ThermoFuel Process (ThermoFuel), a patent-pending renewable energy
process that represents an advancement of STORS, and also owns the rights to
Enhanced Biogas Production (Enhanced Biogas Production) under a license
agreement with Alexander G. Fassbender (Fassbender), the Companys Executive
Vice-President of Technology. The five chemical process technologies (STORS,
ThermoFuel, ARP, NitRem and Enhanced Biogas Production) are primarily aimed at
solving wastewater problems for broad-based municipal and industrial markets.
The Company also is the exclusive worldwide licensee for a hardware technology
developed by BMI known as the Dual-Shell Reactor System, in which STORS and
NitRem are conducted. These six technologies are collectively referred to as
the Water Technologies. The Company is also the owner, along with Fassbender, 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. TIPS and the Water
Technologies are collectively referred to as the Technologies. 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, ThermoFuel and
NitRem 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. Plan of Operations The Company has historically lacked the financial and other resources necessary
to market the Technologies or to build demonstration projects. The following
summary sets forth the Companys plan of operations for the next 12 months. Current Cash Requirements; Need for Additional Funds The Company will require substantially more cash to satisfy its anticipated
operating expenses for the next 12 months than it has available. As of June
30, 2004, the Company had a cash balance of $124,266 (compared to $19,486
available cash as of June 30, 2003), while its current liabilities were
$982,275. During the quarter ended June 30, 2004, the Company used
approximately $331,163 of its cash. Management continues to anticipate that its cash requirements during the next
12 months to implement the Companys marketing and development strategies will
range from $500,000 (assuming no commercialization of the Technologies) to
$1,000,000 (assuming there are expenses associated with one or more commercial
sales of the Technologies). Substantially all the anticipated cash
requirements will be for intellectual property rights, executive compensation
(including payments to the estate of P.L. Montesi pursuant to the terms of the
Retirement Plan for Founder approved by the Board of Directors during 2003) and
marketing and development expense. Based upon the Companys available cash and
its current and possible requirements and obligations, the Company must raise
additional capital to be able to fund its operations in the third quarter of
2004. The Company and Prospect Street Ventures, an investment banking and financial
advisory firm engaged by the Company in 2003 to assist in its capital raising
activities (PSV), continue to seek both short-term and longer-term financing
and are considering various strategic alternatives to fund the Companys
operations and development activities. These alternatives include the sale of
Common Stock, other equity or debt securities or bridge financing arrangements
with commercial lenders. Management believes that unless the Company secures a
contract to commercialize the Technologies, it will be difficult to raise the
additional capital necessary to 15




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##### Table of Contents



fund its operations. See Item 5. Other Information for a discussion about
current commercialization opportunities. In the event that the Company cannot
raise, during the quarter, the necessary capital to fund the Companys current
operations and development activities, the Company will not be able to continue
its operations. Research and Development During the Next 12 Months The Company will continue to conduct computer modeling with respect to the
Technologies. Due to the current financial condition of the Company, however,
there are no plans to conduct any product research and development activities
in the next 12 months. Purchase of Plant or Significant Equipment The Company does not anticipate the purchase of any plant or equipment until it
has a contract to commercialize the Technologies. Expected Changes in the Number of Employees: Death of P.L. Montesi The Companys President, Treasurer and Principal Financial Officer P.L. Montesi
passed away in Little Rock, Arkansas on June 24, 2004. The Board of Directors
elected Dennis C. Cossey to replace Mr. Montesi as the Principal Financial
Officer of the Company in addition to his current roles as Chairman, Chief
Executive Officer and Secretary. While the Board has authorized a search for a
replacement for Mr. Montesi, in light of the current financial condition of the
Company, it is unlikely that a replacement will be engaged unless a commercial
contract is signed. Accordingly, the Company does not foresee any increase in
the number of employees beyond two in the next 12 months unless a commercial
contract is signed. Under Mr. Montesis
retirement plan, the Company is obligated to pay his estate for 20
years following Mr. Montesis death, an amount equal to 50% of his base salary at the
date of his death. Mr. Montesis salary was $264,500 per annum. Prior to his
death, Mr. Montesi had received, from time to time, unregistered shares of
Common Stock in lieu of cash in partial settlement of the Companys
compensation obligation to him. Since his death, the Company has made no
payments to his widow. The Companys Chief Executive Officer has had
discussions with Mrs. Montesi pursuing various possibilities to restructure the
Companys obligation to her. Payment of Current Obligations In light of the Companys limited cash to fund its working capital obligations,
over the past 12 months the Board of Directors has from time to time authorized
the issuance of unregistered shares of Common Stock to pay certain service
providers. Between September 2003 and June 30, 2004, an aggregate of
approximately 1,516,746 shares of Common Stock have been issued to settle
accounts payable and in partial satisfaction of deferred compensation balances
to management. Management has continued to make arrangements with certain service providers to
pay the Companys obligation to them, in whole or in part, in shares of Common
Stock. Under the current 16




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arrangements, as of the date hereof, the Company is committed to issue
approximately 1,800,000 shares of Common Stock to six providers, including
Robert Trump (who owns approximately 13.3% of the Companys Common Stock) in
compensation for additional cash investments he has made in the Company, PSV in
settlement of part of the Companys fee obligations to it, and to various
lobbyists representing the Companys interests at the federal, state and local
level. It is likely that the issuance of these shares will be authorized by
the Board of Directors during the current quarter. Unless the Company obtains significant cash financing, the Board of Directors
intends to continue to consider the use of issuing shares of unregistered
Common Stock in settlement of its current obligations. 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 its
Principal Financial Officer, established disclosure controls and procedures
that were 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 Securities and Exchange 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 and its Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosures. Since the death of Mr. Montesi in June, 2004, the Chief Executive Officer has
assumed the additional responsibilities of Principal Financial Officer. In
these roles, the Chief Executive Officer has 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 has concluded that the Companys
disclosure controls and procedures are effectively serving the stated purposes. In addition, 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. None. 
 Item 2. Change in Securities and Small Business Issuer Purchases of Equity Securities. 17




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During May 2004, the Company issued 125,000 shares at $.30 per share in partial
satisfaction of a deferred compensation balance with an officer. In addition,
during May 2004, the Company issued 7,813 shares at $1.28 per share as a
payment to a third party service provider for services rendered. 
 Item 3. Defaults Upon Senior Securities. None. 
 Item 4. Submission of Matters to a Vote of Securities Holders. The Companys 2004 annual meeting of shareholders was held on June 9, 2004 (the
Annual Meeting). A total of 13,547,955 shares of the Companys Common Stock,
constituting a quorum of those shares entitled to vote, were represented at the
meeting by shareholders either present in person or by proxy. At this meeting
the shareholders re-elected John F. Corcoran and Louis J. Ortmann to the
Companys Board of Directors to serve three-year terms until the 2007 annual
shareholders meeting. Mr. Corcoran received 13,062,569 votes or 96.4% of
shares voted while 485,386 of the shares voted were withheld from voting for
him, and Mr. Ortmann received 13,201,115 votes or 97.4% of shares voted while
346,840 of the shares voted were withheld from voting for him. The
shareholders also ratified the Board of Directors selection of Kemp & Company
as the Companys independent auditors for the 2004 fiscal year. Kemp & Company
received the affirmative vote of 13,531,847 votes or 99.9% of the shares voted. 
 Item 5. Other Information. The Company and New York City officials continue to negotiate for a 500,000
gallon per day ARP demonstration plant to be located at one of New York Citys
eight water pollution control plant de-watering facilities. The Company
believes that, based upon the current negotiations, it would be able to meet
the operational requirements of the contract by hiring subcontractors. No
contract has been executed with New York City. No assurance can be given that
any final agreement will be reached, or that the Company will have the
financial resources to implement any agreement that might be executed. 
 Item 6. Exhibits and Report on Form 8-K. (a) The following exhibits are filed as part of this report: ExhibitNumber
    
    Description of Exhibits31.1
    
    Certification of the Companys Chief Executive Officer and Principal
Financial Officer pursuant to Securities and Exchange Act Rules
13a-14 and 15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 18




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits32.1
    
    Certification of the Companys Chief Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) The following reports on Form 8-K were filed during the
quarterly period ended June 30, 2004: Dateof 8-K
    
    Description of 8-KApril 15, 2004
    
    Disclosing the commencement of the rescission offer to
purchasers of unregistered shares of Common Stock, and
attaching the Notice of Rescission Offer/Confirmation of
Purchase of Shares of Common Stock and a letter from
President P.L. Montesi.June 29, 2004
    
    Disclosing the death of President, Treasurer and Principal
Financial Officer P.L. Montesi and the election by the
Board of Directors of Dennis C. Cossey as the Principal
Financial Officer and attaching related press release.
 19




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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: August 16, 2004
    THERMOENERGY CORPORATION/s/ Dennis C. CosseyDennis C. Cossey, Chairman,Chief Executive Officer, Secretary and
Principal Executive Officer 20