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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

(Mark One)(X Box) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended March 31, 2002

(Box) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from  to

Commission file number 33-46104-FW

THERMOENERGY CORPORATION

(Exact name of small business issuer as specified in its charter)


|                                                                        |  |                                              
|----------------------------------------------------------------------- |  | ---------------------------------------------
|ARKANSAS
(State or other jurisdiction
of incorporation or organization) |  | 71-00659511
(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)



---

(Former name, former address and former fiscal year, if changed since last report)


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 (Box) No (Box)

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: 5,163,498 shares of common
stock as of April 15, 2002.

Transitional Small Business Disclosure Format (Check one): Yes (Box) No (X Box)



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TABLE OF CONTENTS



|                               |                                                                    |                                                         |  |  |  |  |  | 
|------------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------- |  |  |  |  |  | 
|PART 1  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements.                                     
|                               |                                                                    | BALANCE SHEETS                                         
|                               |                                                                    | STATEMENTS OF OPERATIONS                               
|                               |                                                                    | STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
|                               |                                                                    | NOTES TO FINANCIAL STATEMENTS (Unaudited)              
|                               | Item 2. Managements Discussion and Analysis or Plan of Operation.
|PART II- OTHER INFORMATION    
|                               | Item 1. Legal Proceedings.                                        
|                               | Item 2. Change in 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.                          
|SIGNATURES                    



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##### Table of Contents






PART 1  FINANCIAL INFORMATION




Item 1. Financial Statements.




THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS

|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |             |       |           | 
|------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | ----------- | ----------- | --------- | ------------ | ----------- | ----- | --------- | 
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             | March 31,   |           | December 31,
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             | 2002        |           | 2001        
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |             
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             | (Unaudited) |           | (Note 1)    
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |             
|ASSETS                                                  |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|Cash  Total Current Assets                             |                                                  | $                                                                                                                                                                                                                                                                  | 437,894                   |             |             | $         | 557,870      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Advances to officers (Note 3)                           |                                                  |                                                                                                                                                                                                                                                                    | 74,509                    |             |             |           | 101,018      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accrued interest receivable  officers (Note 3)         |                                                  |                                                                                                                                                                                                                                                                    | 1,142                     |             |             |           | 880          |            
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, at cost:                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Equipment, furniture and fixtures                |                                                                                                                                                                                                                                                                    |                           | 19,809      |             |           |              | 19,809      |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Less accumulated depreciation                    |                                                                                                                                                                                                                                                                    |                           | (19,809     | )           |           |              | (19,809     | )    
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                          |             |             |           |             |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  | $                                                                                                                                                                                                                                                                  | 513,545                   |             |             | $         | 659,768      |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)          |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accounts payable                                        |                                                  | $                                                                                                                                                                                                                                                                  | 152,351                   |             |             | $         | 242,248      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accrued interest payable  primarily to related parties |                                                  |                                                                                                                                                                                                                                                                    | 2,010,955                 |             |             |           | 1,777,858    |            
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred compensation (Note 3)                          |                                                  |                                                                                                                                                                                                                                                                    | 98,050                    |             |             |           | 117,010      |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    | Total Current Liabilities |             |             | 2,261,356 |              |             |       | 2,137,116 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Convertible Debentures (Notes 2 and 3)                  |                                                  |                                                                                                                                                                                                                                                                    | 5,445,611                 |             |             |           | 5,545,611    |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    | Total Liabilities         |             |             | 7,706,967 |              |             |       | 7,682,727 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity (deficit) (Notes 2 and 3):         |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, non-voting, $1 par value:       |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |             |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                  | Authorized - 10,000,000 shares; none issued
Common Stock, $.001 par value: authorized  75,000,000 shares;
March 31, 2002: issued  5,226,327 shares; outstanding -
5,142,498 shares; December 31, 2001: issued  5,041,519
shares; outstanding  4,957,690 shares |                           |             | 5,226       |           |              |             | 5,041 |          
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid-in capital                       |                                                                                                                                                                                                                                                                    |                           | 6,910,317   |             |           |              | 6,540,886   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deficit accumulated during the development stage |                                                                                                                                                                                                                                                                    |                           | (14,108,965 | )           |           |              | (13,568,886 | )    
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    | (7,193,422                | )           |             |           | (7,022,959   | )          
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            
|                                                        |                                                  | $                                                                                                                                                                                                                                                                  | 513,545                   |             |             | $         | 659,768      |            
|                                                        |                                                  |                                                                                                                                                                                                                                                                    |                           |             |             |           |              |            

See notes to financial statements.

1



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##### Table of Contents






THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS

|                                            |                               |          |             |               |       |                    |          |          |       |   |          |          |       |  
|------------------------------------------- | ----------------------------- | -------- | ----------- | ------------- | ----- | ------------------ | -------- | -------- | ----- | - | -------- | -------- | ----- | -
|                                            |                               |          |             | Cumulative    |       |                    |          |          |       |   |          |         
|                                            |                               |          |             | During        |       |                    |          |          |       |   |          |         
|                                            |                               |          |             | Development   |       |                    |          |          |       |   |          |         
|                                            |                               |          |             | Stage Through |       | Three Months Ended
|                                            |                               |          |             | March 31,     |       | March 31,         
|                                            |                               |          |             | 2002          |       | 2002               |          | 2001    
|                                            |                               |          |             |               |       |                    |          |         
|                                            |                               |          |             | (Unaudited)   |       | (Unaudited)       
|                                            |                               |          |             |               |       |                   
|Operating Expenses:                         |                               |          |             |               |       |                    |          |          |       |   |          |         
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative    |          | $           | 9,545,354     |       |                    | $        | 215,101  |       |   | $        | 250,426  |      
|                                           
|                                           
|                                           
|                                           
|                                            | Payments under licenses       |          |             | 1,012,266     |       |                    |          | 25,000   |       |   |          | 25,000   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Travel and entertainment      |          |             | 1,714,431     |       |                    |          | 61,241   |       |   |          | 64,952   |      
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|                                            |                               |          | 12,272,051  |               |       |                    | 301,342  |          |       |   | 340,378  |         
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|Loss From Operations                        |                               |          | (12,272,051 | )             |       |                    | (301,342 | )        |       |   | (340,378 | )       
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|Other Income (Expense)
Interest income      |                               |          | 231,550     |               |       |                    | 4,360    |          |       |   | 8,633    |         
|                                           
|                                           
|                                           
|                                           
|                                            | Gain on settlement of lawsuit |          |             | 317,423       |       |                    |          |          |       |   |          |          |      
|                                           
|                                           
|                                           
|                                           
|                                            | Other                         |          |             | 49,550        |       |                    |          |          |       |   |          |          |      
|                                           
|                                           
|                                           
|                                           
|                                            | Interest expense              |          |             | (2,435,370    | )     |                    |          | (243,097 | )     |   |          | (194,545 | )    
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|                                            |                               |          | (1,836,847  | )             |       |                    | (238,737 | )        |       |   | (185,912 | )       
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|Net Loss                                    |                               | $        | (14,108,898 | )             |       | $                  | (540,079 | )        |       | $ | (526,290 | )       
|                                            |                               |          |             |               |       |                    |          |          |       |   |          |         
|Basic and Diluted
per Common Share (Note 2) |                               |          |             |               |       |                    |          |          |       |   |          |         
|                                            | Loss From Operations          |          | $           | (3.13         | )     |                    | $        | (0.06    | )     |   | $        | (0.08    | )    
|                                           
|                                           
|                                           
|                                           
|                                            |                               | Net Loss |             | $             | (3.60 | )                  |          | $        | (0.10 | ) |          | $        | (0.12 | )

See notes to financial statements.

2



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##### Table of Contents






THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through December 31, 2001 and the Three Months Ended
March 31, 2002 (Unaudited)

|                                                                                                                 |  |        |       |         |  |             |           |            |  |             |            |   |  |   |          |  
|---------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | -------- | -
|                                                                                                                 |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                 |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                 |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                 |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                 |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                 |  |        |       |         |  |             |           |           
|Issuance of stock, January 1988,
(2,205,762 shares at $.08 per share                                             |  | $      | 2,206 |         |  | $           | 178,094   |            |  | $           |            |   |  | $ | 180,300  |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net 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   |            |  |             |            |   |  |   | 457,001  |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net loss                                                                                                         |  |        |       |         |  |             |           |            |  |             | (338,985   | ) |  |   | (338,985 | )
|                                                                                                                 |  |        |       |         |  |             |           |            |  |             |            |   |  |   |          |  
|Balance (deficit), September 30, 1989                                                                            |  |        | 2,512 |         |  |             | 634,789   |            |  |             | (629,468   | ) |  |   | 7,833    |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net 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    |            |  |             |            |   |  |   | 70,857   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance 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   |            |  |             |            |   |  |   | 603,607  |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of stock for interest, June 1991,
(1,375 shares at $1.60 per share)                                     |  |        | 1     |         |  |             | 2,199     |            |  |             |            |   |  |   | 2,200    |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of stock for expenses
incurred by stockholders, July 1991
(5,081 shares at $1.60 per share)             |  |        | 5     |         |  |             | 8,124     |            |  |             |            |   |  |   | 8,129    |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net loss                                                                                                         |  |        |       |         |  |             |           |            |  |             | (670,179   | ) |  |   | (670,179 | )
|                                                                                                                 |  |        |       |         |  |             |           |            |  |             |            |   |  |   |          |  
|Balance (deficit), September 30, 1991                                                                            |  |        | 2,950 |         |  |             | 1,319,144 |            |  |             | (1,554,683 | ) |  |   | (232,589 | )
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of stock, October  December
1991 (150,925 shares at $1.60 per
share)                                   |  |        | 151   |         |  |             | 241,329   |            |  |             |            |   |  |   | 241,480  |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Shares 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     |            |  |             |            |   |  |   | 5,500    |  

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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, 2001 and the Three Months Ended
March 31, 2002 (Unaudited)

|                                                                                                             |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                             |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                             |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                             |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                             |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                             |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                             |  |        |       |         |  |             |           |           
|Net 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 |            |  |             |            |   |  |   | 1,484,550  |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of stock for exercise of stock
options, May 1993 (2,500 shares at
$1.60 per share)                  |  |        | 3     |         |  |             | 3,997     |            |  |             |            |   |  |   | 4,000      |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of warrants to stockholder                                                                          |  |        |       |         |  |             | 6,333     |            |  |             |            |   |  |   | 6,333      |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Conversion of $103,000 of notes payable
to stockholders and accrued interest,
December 1992 (6,438 shares)   |  |        | 6     |         |  |             | 102,994   |            |  |             |            |   |  |   | 103,000    |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of stock for consulting
services, June 1993 (9,375 shares
at $16.00 per share)                      |  |        | 9     |         |  |             | 149,991   |            |  |             |            |   |  |   | 150,000    |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Net loss                                                                                                     |  |        |       |         |  |             |           |            |  |             | (1,207,921 | ) |  |   | (1,207,921 | )
|                                                                                                             |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|Balance (deficit), September 30, 1993                                                                        |  |        | 3,202 |         |  |             | 3,296,856 |            |  |             | (3,325,355 | ) |  |   | (25,297    | )
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of warrants to stockholders                                                                         |  |        |       |         |  |             | 226,000   |            |  |             |            |   |  |   | 226,000    |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of stock for exercise of stock options
March 1994 (3,750 shares at $1.60 per share)                 |  |        | 4     |         |  |             | 5,996     |            |  |             |            |   |  |   | 6,000      |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Issuance of stock for exercise of warrants by
stockholder, August 1994 (3,677 shares at
at $13.60 per share) |  |        | 4     |         |  |             | 49,997    |            |  |             |            |   |  |   | 50,001     |  
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Net loss                                                                                                     |  |        |       |         |  |             |           |            |  |             | (767,427   | ) |  |   | (767,427   | )
|                                                                                                             |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|Balance (deficit), September 30, 1994                                                                        |  |        | 3,210 |         |  |             | 3,578,849 |            |  |             | (4,092,782 | ) |  |   | (510,723   | )

4



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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, 2001 and the Three Months Ended
March 31, 2002 (Unaudited)

|                                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                                          |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                          |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                          |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                          |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                          |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                          |  |        |       |         |  |             |           |           
|Issuance of warrants to stockholders                                                                                      |  | $      |       |         |  | $           | 9,760     |            |  | $           |            |   |  | $ | 9,760      |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Issuance of stock, May 1995 (6,250
shares at $8.00 per share)                                                             |  |        | 6     |         |  |             | 49,994    |            |  |             |            |   |  |   | 50,000     |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Issuance of stock for exercise of
warrants by stockholder, June 1995
(6,250 shares at $8.00 per share)                    |  |        | 6     |         |  |             | 49,994    |            |  |             |            |   |  |   | 50,000     |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Issuance of stock for expenses, July
1995 (18,750 shares at $8.00 per share)                                              |  |        | 19    |         |  |             | 149,981   |            |  |             |            |   |  |   | 150,000    |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Net 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     |            |  |             |            |   |  |   | 5,340      |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Net 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    |            |  |             |            |   |  |   | 100,000    |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Conversion of $338,100 of notes payable
to stockholders and accrued interest,
July 1997 (195,596 shares)                  |  |        | 196   |         |  |             | 390,996   |            |  |             |            |   |  |   | 391,192    |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Net 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   | )
|                                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|Balance (deficit), September 30, 1998                                                                                     |  |        | 3,487 |         |  |             | 4,334,864 |            |  |             | (7,534,536 | ) |  |   | (3,196,185 | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Net loss                                                                                                                  |  |        |       |         |  |             |           |            |  |             | (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) |  |        | 148   |         |  |             | 295,056   |            |  |             |            |   |  |   | 295,204    |  

5



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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, 2001 and the Three Months Ended
March 31, 2002 (Unaudited)

|                                                                                                                                                   |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ----------- | - |  | - | ---------- | -
|                                                                                                                                                   |  |        |       |         |  |             |           |            |  | Deficit     |             |   |  |  
|                                                                                                                                                   |  |        |       |         |  |             |           |            |  | Accumulated |             |   |  |  
|                                                                                                                                                   |  |        |       |         |  | Additional  |           | During the |  |             |             |  
|                                                                                                                                                   |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                                                   |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                                                   |  |        |       |         |  |             |           |           
|Issuance of stock for expenses, August
1999 (181,619 shares at $.16 per share)                                                                     |  | $      | 182   |         |  | $           | 28,877    |            |  | $           |             |   |  | $ | 29,059     |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Net 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
(130,000 shares at $2.00 per share)                                     |  |        | 130   |         |  |             | 259,870   |            |  |             |             |   |  |   | 260,000    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Conversion of $158,735 of notes payable to
stockholders and accrued interest, various
months (110,206 shares)                                      |  |        | 110   |         |  |             | 220,302   |            |  |             |             |   |  |   | 220,412    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Issuance of compensatory stock options                                                                                                             |  |        |       |         |  |             | 190,536   |            |  |             |             |   |  |   | 190,536    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Net 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 (496,250 shares at
$2.00 and 338,637 shares at $.16 per share)          |  |        | 834   |         |  |             | 1,045,848 |            |  |             |             |   |  |   | 1,046,682  |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Conversion of $117,377 of Convertible Debentures
plus interest (82,808 shares at $2.00 per share)                                                  |  |        | 83    |         |  |             | 165,533   |            |  |             |             |   |  |   | 165,616    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Net loss                                                                                                                                           |  |        |       |         |  |             |           |            |  |             | (2,567,968  | ) |  |   | (2,567,968 | )
|                                                                                                                                                   |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2001                                                                                                               |  |        | 5,041 |         |  |             | 6,540,886 |            |  |             | (13,568,886 | ) |  |   | (7,022,959 | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Issuance of stock, various months 2002
(114,558 shares at $2.00 per share)                                                                         |  |        | 115   |         |  |             | 229,001   |            |  |             |             |   |  |   | 229,116    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Conversion of $100,000 of Convertible
Debentures plus interest, February 2002
(55,000 shares at $2.00 per share)                                   |  |        | 55    |         |  |             | 109,945   |            |  |             |             |   |  |   | 110,000    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Issuance of stock in partial satisfaction of deferred
compensation balances with officers, various
months 2002, (15,250 shares at $2.00 per share) |  |        | 15    |         |  |             | 30,485    |            |  |             |             |   |  |   | 30,500     |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Net loss                                                                                                                                           |  |        |       |         |  |             |           |            |  |             | (540,079    | ) |  |   | (540,079   | )
|                                                                                                                                                   |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), March 31, 2002                                                                                                                  |  | $      | 5,226 |         |  | $           | 6,910,317 |            |  | $           | (14,108,965 | ) |  | $ | (7,193,422 | )
|                                                                                                                                                   |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  

See notes to financial statements.

6



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS

|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |          |         |          |         | 
|--------------------------- | --------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ----------------------------------------- | ---------- | -------------- | --------- | ---------------------------- | ------- | ----------- | ------- | -------- | ------- | -------- | ------- | 
|                            |                                                     |                                          |                                       |                                           |            | Cumulative     |           |                              |         |             |         |          |         |         
|                            |                                                     |                                          |                                       |                                           |            | During         |           |                              |         |             |         |          |         |         
|                            |                                                     |                                          |                                       |                                           |            | Development    |           | Three Months Ended March 31,
|                            |                                                     |                                          |                                       |                                           |            | Stage Through  |           |                             
|                            |                                                     |                                          |                                       |                                           |            | March 31, 2002 |           | 2002                         |         | 2001       
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |            
|                            |                                                     |                                          |                                       |                                           |            | (Unaudited)    |           | (Unaudited)                  |         | (Unaudited)
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |            
|Operating activities:       |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                           
|                           
|                           
|                           
|                            | Net loss                                            |                                          | $                                     | (14,108,898                               | )          |                | $         | (540,079                     | )       |             | $       | (526,290 | )      
|                           
|                           
|                           
|                           
|                            | Items not requiring
(providing) cash:               |                                          |                                       |                                           |            |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            |                                                     | Depreciation                             |                                       |                                           | 19,809     |                |           |                              |         |             |         |          |         |         
|                           
|                           
|                           
|                           
|                            |                                                     | Expenses funded by Common
Stock issuance |                                       |                                           | 708,338    |                |           |                              |         |             |         |          |         |         
|                           
|                           
|                           
|                           
|                            |                                                     | Other                                    |                                       |                                           | (123,546   | )              |           |                              |         |             |         |          |         |         
|                           
|                           
|                           
|                           
|                            | Changes in:                                         |                                          |                                       |                                           |            |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            |                                                     | Advances to officers                     |                                       |                                           | (1,371,016 | )              |           |                              | (44,000 | )           |         |          | (92,000 | )       
|                           
|                           
|                           
|                           
|                            |                                                     | Other receivables                        |                                       |                                           | (139,691   | )              |           |                              | (1,405  | )           |         |          | (3,924  | )       
|                           
|                           
|                           
|                           
|                            |                                                     | Accounts payable                         |                                       |                                           | 927,437    |                |           |                              | (89,897 | )           |         |          | 462     |         
|                           
|                           
|                           
|                           
|                            |                                                     | Accrued expenses                         |                                       |                                           | 2,319,582  |                |           |                              | 243,097 |             |         |          | 195,511 |         
|                           
|                           
|                           
|                           
|                            |                                                     | Deferred compensation                    |                                       |                                           | 2,693,835  |                |           |                              | 83,192  |             |         |          | 90,541  |         
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                            |                                                     |                                          | Net cash used in
operating activities |                                           |            | (9,074,150     | )         |                              |         | (349,092    | )       |          |         | (335,700 | )      
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|Investing activities:       |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                           
|                           
|                           
|                           
|                            | Purchase of fixed assets                            |                                          |                                       | (19,808                                   | )          |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            | Other                                               |                                          |                                       | 314,082                                   |            |                |           |                              |         |             |         |          |        
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                            |                                                     |                                          |                                       | Net cash provided by
investing activities |            |                | 294,274   |                              |         |             |         |          |         |          |         | 
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|Financing activities:       |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                           
|                           
|                           
|                           
|                            | Proceeds from issuance of
Common Stock and warrants |                                          |                                       | 4,173,360                                 |            |                |           | 229,116                      |         |             |         | 286,500  |        
|                           
|                           
|                           
|                           
|                            | Proceeds from notes payable                         |                                          |                                       | 1,665,609                                 |            |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            | Proceeds from Convertible Debentures                |                                          |                                       | 3,425,000                                 |            |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            | Payments on notes payable                           |                                          |                                       | (154,609                                  | )          |                |           |                              |         |             |         |          |        
|                           
|                           
|                           
|                           
|                            | Other                                               |                                          |                                       | 108,410                                   |            |                |           |                              |         |             |         |          |        
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|                            |                                                     |                                          |                                       | Net cash provided by
financing activities |            |                | 9,217,770 |                              |         |             | 229,116 |          |         |          | 286,500 | 
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|Increase (decrease) in cash |                                                     |                                          | 437,894                               |                                           |            |                | (119,976  | )                            |         |             | (49,200 | )       
|                           
|                           
|                           
|                           
|Cash, beginning of period   |                                                     |                                          | 0                                     |                                           |            |                | 557,870   |                              |         |             | 495,959 |         
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         
|Cash, end of period         |                                                     | $                                        | 437,894                               |                                           |            | $              | 437,894   |                              |         | $           | 446,759 |         
|                            |                                                     |                                          |                                       |                                           |            |                |           |                              |         |             |         |         

See notes to financial statements.
7Table of Contents




THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 2002

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited financial statements of ThermoEnergy Corporation, an
Arkansas corporation (the Company), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002.

The balance sheet at December 31, 2001 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, 2001 as filed with the Securities and Exchange Commission
(the Commission) on March 29, 2002.

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, adjusted
for warrants issued within 12 months of the Companys initial public offering
filing date (February 27, 1992) which are treated as outstanding for all
periods presented. The adjusted weighted average number of common shares used
in the basic and diluted loss per share computations were 3,921,327 shares for
the period cumulative since inception through March 31, 2002, 5,502,665 and
4,550,798 shares for the three-month periods ended March 31, 2002 and 2001,
respectively.

Warrants to purchase approximately 966,000 shares of common stock, $0.001 par
value per share, of the Company (the Common Stock) and stock options awarded
to officers and others for 2,051,000 shares of Common Stock were not included
in the computation of diluted loss per share since the effect would be
antidilutive. At March 31, 2002, the Company had issued $4,484,345 of its 15%
Convertible Debentures, due January 15, 2003, and $961,266 of its 10%
Convertible Debentures, due July 15, 2006. The holders of the debentures can
convert the principal amount and accrued interest (15% Debentures  $1,947,957
and 10% Debentures  $62,998 at March 31, 2002) into shares of Common Stock at
the conversion price of $2.00 per share for the 15% Debentures and $6.00 per
share for the 10% Debentures at any time prior to the maturity date.

8



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 2002

NOTE 3: ISSUANCES OF COMMON STOCK

Pursuant to the approval of the Companys Board of Directors, the Company
issued 129,808 shares of Common Stock during the quarter ended March 31, 2002
(114,558 shares to current stockholders for cash at a price of $2.00 per share
and 15,250 shares at a price of $2.00 per share in partial satisfaction of
deferred compensation balances, net of advances and related accrued interest,
to officers). The Company also issued 55,000 shares of Common Stock at a price
of $2.00 per share upon conversion during the first quarter of 2002 of $100,000
of the Companys 15% Convertible Debentures plus accrued interest.

During April 2002, the Company sold an additional 21,000 shares of Common Stock
to current stockholders for cash at a price of $2.00 per share.

NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTTERS

The Company has incurred net losses since its inception and will likely require
substantial capital to continue commercialization of the Companys Technologies
(as hereinafter defined). 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 during the next year. The Company is authorized to issue
approximately $5,000,000 more of convertible debentures if necessary to raise
working capital. As more fully described in Note 7 of the notes to financial
statements in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2001, the Company has an agreement with an individual which could
provide $250,000 of working capital on a quarterly basis through September
2002. That individual did not exercise a total of 250,000 warrants for Common
Stock at a price of $2.00 per share as of the last two expiration dates
specified in the agreement (December 1, 2001 and March 1, 2002). The Board of
Directors approved the sale of 250,000 shares of Common Stock at a price of
$2.00 per share to current stockholders (see Note 3) in order to provide the
Company with the funds it would have received if these warrants had been
exercised. Management is also actively pursuing commercial contracts to
produce fees from projects involving the Technologies and from its Energy
Resources Division activities. No revenues were generated by the Energy
Resources Division during the three months ended March 31, 2002. The sale of
equity securities pursuant to private placement or public offerings is another
alternative under consideration by management.

Management has determined that the financial success of the Company may be
largely dependent upon the ability and financial resources of established third
parties collaborating with the Company with respect to projects involving the
Companys Technologies. The Company has entered into agreements with third
parties in order to pursue this business strategy.

9



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##### Table of Contents






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 notes thereto 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 Companys current
expectations of forecasts of future events. All statements other than
statements of current or historical fact contained herein, 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. In
particular, these include, among other things, statements relating to: (i) the
Companys ability to commercialize its Technologies (as
hereinafter defined); (ii) the Companys ability
to establish itself as a broker of energy; (iii) changes in government policy
and in legislation and regulation of the waste treatment or energy production
industries that adversely affect the Companys business; (iv) the availability
of debt and equity financing on terms that are favorable to the Company; 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. They can be affected by
inaccurate assumptions or by known or unknown risks, uncertainties and
assumptions. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this quarterly report may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.

Business Plan

A description of the business plan of the Company over the next 12 months is
described as follows:

Cash Requirements. The Company has incurred net losses since inception and will
require substantial additional capital to continue commercialization of its
Technologies. The exact cash requirements of the Company for the next 12 months
are not currently known and will depend on the level of activity required in
pursuing commercialization of its Technologies. Reference is made to the
financial statements in the Companys Annual Report on Form 10-KSB for the year
ended December 31, 2001, for past cash requirements. It is unlikely that cash
requirements will decrease, and if there is a substantial increase in business
activity the cash requirements will likely increase. As disclosed in prior
filings, the Company entered into a warrant agreement with Dan Cowart, Atlanta,
Georgia, which provided $250,000 of working capital for each of the

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quarters during the period October 1, 2000 through September 30, 2001 and could
have provided $250,000 each quarter during the period October 1, 2001 through
September 30, 2002. Mr. Cowart did not exercise his warrants to purchase an
aggregate of 250,000 shares of the Companys Common Stock, $0.001 par value per
share (the Common Stock), at a price of $2.00 per share during the fourth
quarter of 2001 and the first quarter of 2002. As more fully discussed in Note
4 of the notes to the financial statements, the Board of Directors approved the
sale of 250,000 shares of Common Stock at $2.00 per share to current
stockholders in order to provide the Company with the funds it would have
received if the warrants discussed above had been exercised.

The Company halted the sale of its Series 98 15% Convertible Debentures, which
are convertible into shares of the Companys Common Stock at a price of $2.00
per share, as of June 20, 2001. As of that date the Board of Directors
authorized a new series of convertible debentures in the principal amount of
$3,000,000, designated Series 01. The Series 01
Convertible Debentures bear
interest at the rate of 10% per annum, mature July 15, 2006 and are convertible
into shares of Common Stock at a price of $6.00 per share. The Company will
attempt to sell the convertible debentures as necessary to raise working
capital to support an increased level of sales and marketing activity. Selling
additional stock in a private placement or public offering are other possible
alternatives.

Development and Commercialization of Technologies.The Company is the
exclusive worldwide licensee (except for STORS in Japan) for three clean water
process technologies and one process equipment technology developed by Battelle
Memorial Institute (BMI). The four BMI licensed technologies address
wastewater problems for municipal and broad-based industrial markets. These
technologies include two chemical process technologies known as the
Sludge-To-Oil Reactor System (STORS), and the Nitrogen Removal process known
as NitRem. The Company has a hardware technology known as the Dual-Shell
Reactor system (DSR), in which the STORS and NitRem chemistries are
conducted. The fourth BMI licensed technology is the Ammonia Recovery Process
(ARP), an adsorption process that captures and removes ammonia from
concentrated and/or diluted wastewater streams and converts it to ammonia
sulfate  a commercial grade fertilizer. STORS, NitRem, ARP and DSR are
collectively referred to as the Water Technologies. The Company is also the
exclusive owner of a newly patented clean energy technology known as the
ThermoEnergy Integrated Power System (TIPS), which converts fossil fuels
(including coal, oil and natural gas) into electricity without producing air
emissions, and is aimed at competing with conventional energy conversion
technologies. In addition, TIPS removes and captures carbon dioxide (CO2) in
liquid form for sequestration or beneficial reuse. TIPS and the Water
Technologies are collectively referred to herein as the Technologies.

In October 2001, the Company formed its Energy Resources Division, located in
Denver, Colorado, primarily to work with Tribal Nations to develop a
comprehensive energy strategy that will yield high resource value while
remaining consistent with Tribal values and community. Through active Tribal
partnerships the Company seeks to maximize economic return as the Tribes pursue
their energy potential through self-determination and energy sovereignty. The
Company represents a diverse resource capacity for the Tribes, including energy
policy development, assessing resource valuation, establishing energy partner
alliances, and marketing energy resources. In addition, the Companys overall
business strategy includes working with

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large established public and private energy trading firms as a broker of energy
from the Tribes and other sources.

The Company began brokering energy through its Energy Resources Division in
February 2002 and is, as of March 15, 2002, trading approximately 6,000 million
British Thermal Units (MNBTUs) per day. To date, these brokerage transactions
have not had an effect on the Companys financial statements. The divisions ability to
generate positive economic returns relies in large part on its ability to
foster and develop relationships with the Tribal Nations as well as certain
corporate energy entities, including The Williams Companies, Inc. At present,
management believes that the operations of the Energy Resources Division will
constitute the Companys sole source of income from operations during 2002.
There can be no assurance that the Company will successfully integrate its
Energy Resources Division with its core competencies in the Technologies or
that this division will be able to maintain its niche position in brokering
energy transactions involving Tribal Nations.

Because the Company does not currently possess the technical, operational or
financial resources necessary to construct or operate STORS, NitRem, ARP or
TIPS facilities or a commercial facility without external project funding and
the ability to source engineering skills, the Company continues to pursue
strategic partners with the ability to assist in the marketing and
commercialization of the Technologies. There can be no assurance that the
Company will be successful in acquiring such strategic partners or that any
such strategic relationship will ultimately succeed in marketing and/or
commercializing the Technologies.

Since its formation in 1988, the Company has devoted substantially all of its
resources to funding the payments due under license agreements, searching for
opportunities to employ its Technologies in demonstration facilities and
seeking capital necessary to sustain the Companys efforts. Even though
demonstration units have been successfully operated and the Water Technologies
have been proven commercially viable, none of the Technologies have been
implemented on a permanent basis by a municipal or industrial customer. As
such, the Company still requires additional investment capital and/or debt
financing to continue its operations. The Company has historically lacked the
financial and other resources necessary to market the Technologies or to build
demonstration projects. Management believes that its collaborative working
arrangement with Foster Wheeler Environmental Corporation (Foster Wheeler)
has been beneficial to the Company, even though it has not produced sales, and
that establishing such relationships is the most efficient and effective way to
commercialize the Technologies. A key stated goal of the Company has been to
successfully complete a full-scale demonstration of the Water Technologies and
to form strategic corporate alliances to market the technologies discussed
above. The Company has successfully completed demonstrations of the NitRem,
STORS, DSR and ARP technologies. The TIPS technology has recently been
developed, and the Company is actively pursuing a demonstration of its
capabilities. Management plans to utilize these demonstration projects to
expand the visibility of the Company in the municipal, industrial, Department
of Defense and Department of Energy markets. These successful demonstration
projects are the single most important business factor in implementing the
Companys plan of operations as the Company attempts to commercialize its
Technologies.

The Company cannot predict its share of the required capital expenditures for
improvements by the wastewater and sludge treatment markets and the energy
market, or the acceptability of its Technologies in such markets. The Companys
ability to penetrate these markets depends on 1)

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successfully commercializing one or more of its Technologies, 2) fully
developing and demonstrating the TIPS technology and 3) fully executing its
marketing plan.

Sales or Purchases of Plant and Equipment. The Company currently owns no plants
and equipment. Purchases or sales of equipment, if any, will be based on a firm
contract from a governmental entity or corporation acquiring equipment for use
with one of the Water Technologies. That equipment would be financed in
reliance on the credit of the prospective customer.

Results of Operations

For the three months ended March 31, 2002, the Company incurred a net loss of
$540,079 compared to $526,290 for the three months ended March 31, 2001. The
principal factor for the increase in the net loss between the three-month
periods was an increase of approximately 25% in interest expense due to the
issuance of $961,261 of the Companys 10% Convertible Debentures subsequent to
March 31, 2001.

General and administrative expenses decreased during the three-month periods
ended March 31, 2002, compared to March 31, 2001, due to primarily to
advertising costs incurred during the 2001 quarter which were not present in
the 2002 quarter.

Liquidity and Capital Resources

During the three-month period ended March 31, 2002, the Company used $349,092
of cash in operations compared to $335,700 in the comparable period of 2001.

During the quarters ended March 31, 2002 and 2001, the Company met its
liquidity needs primarily from the issuance of Common Stock for cash. See
Business Plan  Cash Requirements herein for a discussion of cash
requirements for the year ending December 31, 2002.

Management plans to meet the Companys near-term liquidity needs through
additional borrowings principally from shareholders via the issuance of the
Companys Series 01, 10% Convertible Debentures, from public or private
placement offerings of Common Stock or other equity securities and from
contracts for the sale of natural gas production by the Companys Energy
Resources Division. Management plans to meet long-term liquidity needs
primarily from revenues derived from commercial contracts the Company hopes to
obtain subsequent to the successful demonstrations of its Technologies. There
can be no assurance that the Company will be successful in commercializing the
Technologies. The Companys Energy Resource Division, which was formed during
2001, had not produced any revenues as of March 31, 2002.

Net Operating Losses

The Company had net operating loss carryforwards as of December 31, 2001 of
approximately $10,000,000, which expire in the years 2003 through 2021. The
amount of net operating loss carried forward that can be used in any one year
will be limited by the applicable tax laws which are in effect at the time such
carryforward can be utilized. A valuation allowance of

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approximately $3,814,000 has been established to offset any benefit from the
net operating loss carryforwards, as it cannot be determined when or if the
Company will be able to utilize the net operating losses.

The Company has historically lacked the financial and other resources necessary
to respond to requests for proposals and market the Technologies. Since its
formation in 1988, the Company has devoted substantially all of its resources
to funding the payments due under license agreements, searching for
opportunities to employ its technologies in demonstration facilities and
seeking capital necessary to sustain the Companys efforts. For these reasons
the Company has entered into agreements with third parties to pursue marketing,
development and testing of the Companys Technologies. The Company believes
that establishing such relationships is the most efficient and effective way to
commercialize the Technologies. See Business Plan  Development and
Commercialization of Technologies herein.




PART II- OTHER INFORMATION




Item 1. Legal Proceedings.

None.




Item 2. Change in Securities.

See Notes to the Financial Statements and Managements Discussion and
Analysis or Plan of Operation for information concerning the issuance and/or
sale of securities by the Company during the quarterly period ended March
31, 2002.




Item 3. Defaults Upon Senior Securities.

None.




Item 4. Submission of Matters to a Vote of Securities Holders.

On April 30, 2002, the Company filed a definitive proxy statement with the
Securities and Exchange Commission (the Commission) in connection with the
Companys 2002 annual meeting of stockholders scheduled to be held on Friday,
June 14, 2002, at 10:00 a.m., local time, at the Holiday Inn Select, 5795
Poplar Avenue, Memphis, Tennessee 38119. At the meeting, the Companys
stockholders will be asked to: (i) elect two (2) members to serve on the
Companys Board of Directors until the 2005 annual meeting of the Companys
shareholders and until their respective successors are duly elected and
qualified; (ii) ratify the appointment of Kemp & Company as independent
auditors of the Company for the fiscal year ending December 31, 2002; and (iii)
consider and act upon such other business as may be properly presented to the
meeting or any postponement or adjournment thereof. The record date for the
determination of the shareholders entitled to notice of, and to vote at, the
meeting or any postponement or adjournment thereof, was April 15, 2002.

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Item 5. Other Information.

Information concerning the status of certain matters, including the status
of the Technologies and the Companys strategic relationships, including its
relationship with Foster Wheeler, and the establishment of the Companys Energy
Resources Division is included elsewhere in this quarterly report and in the
Companys annual report on Form 10-KSB for the year ended December 31, 2002 as
filed with the Commission on March 29, 2002.

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Item 6. Exhibits and Report on Form 8-K.

(a)  None.

(b)  No reports on Form 8-K were filed during the quarterly period ended
March 31, 2002.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                   |  |                                                                   
|------------------ |  | ------------------------------------------------------------------
|Date: May 13, 2002 |  | THERMOENERGY CORPORATION                                          
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|                   |  | /s/ P. L. Montesi                                                 
|                   |  |                                                                   
|                   |  | P.L. Montesi, President, Treasurer
and Principal Financial Officer

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