FORM 10-Q

               SECURITIES AND EXCHANGE COMMISSION

                     Washington, D.C.  20549
(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934
        FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM       TO
               COMMISSION FILE NUMBER 33-46104-FW
                                      -----------

                    THERMOENERGY CORPORATION
                    ------------------------
    (EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)

               Arkansas                       71-00659511
  ---------------------------------      ----------------------
   (State or other jurisdiction of          (I.R.S.Employer
  of incorporation or organization)      Identification Number)


   323 Center Street, Suite 1300, Little Rock, Arkansas  72201
   -----------------------------------------------------------
            (Address of principal executive offices)
                           (Zip Code)

                         (501) 376-6477
      ----------------------------------------------------
      (Registrant's telephone number, including area code)

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file


<PAGE>



such reports), and (2) has been subject to such filing requirements for the past
90 days.

YES    X     NO
    -------     -------
              APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

3,402,968 shares of Common Stock, par value $.001 per share



<PAGE>


                           THERMOENERGY CORPORATION
                          (A Development Stage Company)

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                     March 31,       September 30,  
                                                                                        1998               1997
                                                                                        ----               ----
                                                                                    (Unaudited)
                                     ASSETS
<S>                                                                                <C>                 <C>   

Cash - Total Current Assets                                                       $    248,778        $      65,046

Advances to officers                                                                   303,365              258,365
Accrued interest receivable - officers                                                  35,356               23,669
Property and equipment, at cost:
  Equipment                                                                             14,818               14,818
  Furniture and fixtures                                                                 4,991                4,991
  Less accumulated depreciation                                                        (18,394)             (16,978)
                                                                                 -------------       --------------
                                                                                         1,415                2,831
                                                                                --------------      ---------------

                                                                                   $   588,914         $    349,911
                                                                                   ===========         ============
</TABLE>

<TABLE>
<CAPTION>


                                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S>                                                                                 <C>                <C>    

Accounts payable                                                                   $   769,010         $    778,712
Accrued expenses:
   Salaries                                                                            712,740              590,976
   Interest - stockholders                                                             135,251               92,893
Deferred compensation                                                                  243,519              233,516
Notes payable to stockholders (Note 2)                                                 932,900            1,052,900
                                                                                  ------------          -----------
      Total Current Liabilities                                                      2,793,420            2,748,997
Convertible Debentures (Note 2)                                                        456,000
                                                                                   -----------          -----------
      Total Liabilities                                                              3,249,420            2,748,997

Stockholders'  equity (deficit) (Note 3): Preferred  stock,  non-voting,  $1 par
  value:
    Authorized - 10,000,000 shares; none issued Common Stock, $.001 par value:
    Series A Common Stock;  Authorized - 10,000,000 shares; no shares issued and
    outstanding Series B Common Stock;  Authorized - 65,000,000 shares; issued -
    3,486,797 shares; outstanding -
    3,402,968 shares                                                                     3,487                3,487
  Additional paid-in capital                                                         4,334,864            4,334,864
  Deficit accumulated during the development stage                                  (6,998,857)          (6,737,437)
                                                                                   -----------          -----------
                                                                                    (2,660,506)          (2,399,086)
                                                                                   -----------          -----------

                                                                                   $   588,914         $    349,911
                                                                                   ===========         ============

</TABLE>



See notes to financial statements.



<PAGE>





                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                        Cumulative
                                                         During
                                                       Development
                                                      Stage Through       Six Months Ended           Three Months Ended
                                                         March 31,            March 31,                   March 31,
                                                           1998           1998         1997           1998          1997
                                                           ----           ----         ----           ----          ----
                                                        (Unaudited)            (Unaudited)                       (Unaudited)
<S>                                                    <C>             <C>            <C>           <C>         <C>   
Operating Expenses:
  General and administrative ........................   $ 5,176,545    $   161,847    $ 394,157    $  41,321    $ 217,949
  Payments under licenses ...........................       652,266
  Travel and entertainment ..........................       973,234         54,627       99,883       25,603       65,081
                                                          ----------     ----------    ----------   ----------   ----------
                                                          6,802,045        216,474      494,040       66,924      283,030
                                                          ----------     ----------    ----------   ----------   ----------
Loss From Operations ................................    (6,802,045)      (216,474)    (494,040)     (66,924)    (283,030)
                                                          ----------     ----------    ----------   ----------   ---------- 

Other Income (Expense)
  Interest income ...................................        88,950         12,316        5,325        6,461        3,012
  Interest expense ..................................      (285,762)       (57,262)     (32,349)     (33,891)     (19,262)
                                                           ----------     ----------    ----------   ----------   ---------- 
                                                           (196,812)       (44,946)     (27,024)     (27,430)     (16,250)
                                                           ----------     ----------    ----------   ----------   ---------- 

Net Loss ............................................   $(6,998,857)   $  (261,420)   $(521,064)   $ (94,354)  $ (299,280)
                                                          ==========     ==========    ==========   ==========   ========== 

Basic and Diluted
  Per Common Share (Note 4)
    Loss From Operations ............................   $     (1.82)   $     (0.05)   $   (0.13)    $  (0.02)   $   (0.07)

    Net Loss ........................................   $     (1.88)   $     (0.06)   $   (0.14)    $  (0.02)   $   (0.08)


</TABLE>


See notes to financial statements.


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

             STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                   Six Months Ended March 31, 1998 (Unaudited)


<TABLE>
<CAPTION>

                                                                                          Deficit
                                                                                       Accumulated
                                                                    Additional          During the
                                                       Common        Paid-in          Development
                                                        Stock        Capital               Stage           Total

<S>                                                     <C>         <C>                <C>                 <C>    

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

</TABLE>




<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                   Six Months Ended March 31, 1998 (Unaudited)

<TABLE>
<CAPTION>


                                                                                       Deficit
                                                                                     Accumulated
                                                                   Additional         During the
                                                       Common       Paid-in          Development
                                                        Stock       Capital               Stage           Total

<S>                                                    <C>            <C>             <C>                 <C>    

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

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


</TABLE>



<PAGE>



                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                   Six Months Ended March 31, 1998 (Unaudited)

<TABLE>
<CAPTION>


                                                                                          Deficit
                                                                                      Accumulated
                                                                   Additional          During the
                                                      Common         Paid-in          Development
                                                       Stock         Capital               Stage           Total

<S>                                                <C>               <C>               <C>                <C>    

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
  $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)

</TABLE>

<PAGE>




                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED

       Periods Ended September 30, 1988 Through September 30, 1997 and the
                   Six Months ended March 31, 1998 (Unaudited)

 

<TABLE>
<CAPTION>
                                                                                         Deficit
                                                                                      Accumulated
                                                                   Additional          During the
                                                  Common             Paid-in          Development
                                                    Stock            Capital               Stage           Total
<S>                                                 <C>              <C>                  <C>               <C>    

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                                                                               (261,420)           (261,420)
                                                      ---------     ---------        ------------       ------------

Balance (deficit), March 31, 1998
  (Unaudited)                                           $ 3,487    $4,334,864        $(6,998,857)       $(2,660,506)
                                                        =======    ==========        ============        ===========
</TABLE>

See notes to financial statements



<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS


                                          Cumulative
                                           During
                                         Development   Six Months Ended March 31
                                        Stage Through  -------------------------
                                         March 31, 1998      1998        1997
                                        --------------       ----        ----
                                          (Unaudited)   (Unaudited)  (Unaudited)
Operating activities:
  Net loss ...........................   $(6,998,857)   $(261,420)   $(521,064)
  Items not requiring
  (providing) cash:
    Depreciation .....................        18,394        1,416          797
    Expenses funded by Common
      Stock issuance .................       596,279
    Other ............................         3,341
  Changes in:
    Advances to officers .............      (502,348)     (45,000)     (71,500)
    Other assets .....................       (35,356)     (11,687)      (5,325)
    Accounts payable .................       769,010       (9,702)     (19,546)
    Accrued expenses .................       847,991      164,122      158,147
    Deferred compensation ............       442,501       10,003        8,954
                                         -----------    ---------    ---------
        Net cash used in
         operating activities ........    (4,859,045)    (152,268)    (449,537)
                                         -----------    ---------    ---------

Investing activities:
  Purchase of fixed assets ...........       (19,808)
  Other ..............................        (3,341)   ----------   ---------
         Net cash used in                    --------
          investing activities .......       (23,149)   ----------   ---------
                                             --------
Financing activities:
  Proceeds from issuance of
    Common Stock and warrants ........     2,720,562
  Proceeds from notes payable ........     1,665,609       20,000      500,000
  Proceeds from convertible debentures       791,000      316,000
  Payments on notes payable ..........      (154,609)
  Other ..............................       108,410     ---------     --------
         Net cash provided by
           financing activities ......     5,130,972      336,000      500,000
                                         -----------    ---------    ---------

Increase (decrease) in cash ..........       248,778      183,732       50,463

Cash, beginning of period ............             0       65,046       62,333
                                         -----------    ---------    ---------

Cash, end of period ..................   $   248,778    $ 248,778    $ 112,796
                                         ===========    =========    =========





See notes to financial statements.

<PAGE>

                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1998
                                    UNAUDITED


NOTE 1:  FINANCIAL STATEMENTS

     The balance sheet as of March 31, 1998,  the  statements of operations  and
cash flows  cumulative  during  development  stage through  March 31, 1998,  the
statements  of  operations  for the six months and three  months ended March 31,
1998 and 1997 and the statements of changes in  stockholders'  equity  (deficit)
and cash flows for the six months  ended March 31, 1998,  have been  prepared by
ThermoEnergy Corporation (the "Company"), formerly Innotek Corporation,  without
audit. In the opinion of management,  all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position,  results of
operations  and cash flows at March 31, 1998 and for all periods  presented have
been made.  Operating  results  for the six months  ended March 31, 1998 are not
necessarily  indicative  of the results that may be expected for the entire year
ending September 30, 1998.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  omitted in  accordance  with  Article  10 of  Regulation  S-X.  These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's September 30, 1997 Form 10-K.

NOTE 2:  NOTES PAYABLE TO STOCKHOLDERS AND CONVERTIBLE DEBENTURES

     During  November  1997,  the  Company  executed  a 10%  note  payable  to a
stockholder for $20,000.  As more fully described  below,  during February 1998,
the Company  issued  convertible  debentures in exchange for $140,000 of the 10%
notes and related accrued interest. At March 31, 1998, the Company was committed
to issue 53,600 shares of Series B Common Stock to the holders of the notes.

     During January 1998, the Company's Board of Directors approved the issuance
of up to $1,000,000 of Series 98, 15%  Convertible  Debentures,  due January 15,
2003.  Debentures with an aggregate  principal balance of $300,000 were sold for
cash in January 1998 to related parties.  Debentures with an aggregate principal
balance of $156,000 were issued to certain  stockholders during February 1998 in
exchange  for the 10%  notes and  related  accrued  interest  due to them by the
Company.  The holders of the  Debentures  can convert the  principal  amount and
accrued interest into shares of Series B Common Stock at the conversion price of
$2.00 per share at any time prior to the maturity date.


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1998
                                    UNAUDITED


NOTE 3:  COMMON STOCK

     During  1994 and 1996,  the  Company's  stockholders  approved  four-to-one
reverse stock splits of the Company's  Common Stock.  These reverse stock splits
were  implemented  on March 5, 1997.  All numbers of Common Stock shares and per
share data have been restated to reflect the reverse stock splits.

     During  October  1996,  the Board of Directors of the Company  approved the
execution of a nonbinding  letter of intent with a NASD member  broker-dealer to
act as managing  underwriter in connection with a proposed public  offering.  In
order to comply with the  pre-conditions  set forth in the letter of intent, the
Board of Directors  approved a resolution for a four-to-one  reverse stock split
of the Company's Common Stock in addition to the four-to-one reverse stock split
approved  by  stockholders  in  1994.  The  Board  of  Directors  also  approved
amendments  to the  Company's  Articles  of  Incorporation  as  follows:  (1) To
authorize  the  designation  of  10,000,000  shares as Series A Common Stock and
65,000,000  shares as Series B Common Stock,  which are  convertible to Series A
Common Stock  commencing  12 months after the effective  date of a  registration
statement  for the proposed  offering  subject to certain  conditions,  from the
75,000,000  shares of $0.001 par value Common Stock authorized  originally under
the Company's Articles of Incorporation; (2) To authorize the designation of and
reclassification  of all shares of Common  Stock issued prior to the adoption of
the  proposed  amendments  to the Articles of  Incorporation  to Series B Common
Stock;  and (3) To change the name of the Company  from Innotek  Corporation  to
ThermoEnergy  Corporation.  Stockholders' approval of these matters was obtained
on December 12, 1996 during a special stockholders' meeting.

     During October 1997, the  broker-dealer  informed the Company that it would
be unable to complete the proposed public offering.  The Company  terminated its
relationship with the broker -dealer and filed a complaint with the NASD against
the firm.

     The Company's 1997 Stock Option Plan contains  automatic  grant  provisions
for  non-employee  Directors of the Company.  At March 31, 1998, the Company was
committed to issue options under the automatic grant provisions for 5,000 shares
of Series B Common Stock.

NOTE 4:  LOSS PER COMMON SHARE

     During 1997, the Financial  Accounting Standards Board issued Statement No.
128,  "Earnings per Share".  Statement No. 128  simplifies  the  calculation  of
earnings per share and requires that all prior period earnings per share data be
restated to conform with the provisions of the Statement. Since the Company must
use the computational  guidance contained in SAB 83 Topic 4D as described below,
adoption of this  Statement  had no effect on prior  period loss per share data.

<PAGE>



             THERMOENERGY CORPORATION (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1998
                                    UNAUDITED




NOTE 4:  LOSS PER COMMON SHARE (CONTINUED)

     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 stock  options and warrants  issued  within  twelve  months of the Company's
initial  public  offering  filing date  (February 27, 1992) which are treated as
outstanding for all periods  presented in accordance with SAB 83 Topic 4D, after
giving effect to the reverse stock splits described in Note 3.

     The adjusted weighted average number of common shares used in the basic and
diluted  loss per  share  computations  were  3,730,053  shares  for the  period
cumulative  since inception  through March 31, 1998, and 4,045,558 and 3,799,554
shares for the six month and three month  periods ended March 31, 1998 and 1997,
respectively.

     Warrants to purchase approximately 736,000 shares of Series B Common Stock,
and stock  options  under the 1997 Stock  Option  Plan,  which  provides for the
issuance of up to 750,000 shares of Series B Common Stock,  were not included in
the   computation   of  diluted  loss  per  share  since  the  effect  would  be
antidilutive. See Note 2 for information regarding convertible debentures issued
during 1998.

NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS

The Company has incurred net losses since inception.  Additionally,  substantial
capital will likely be required to commercialize the Company's technologies. The
financial  statements have been prepared assuming the Company will continue as a
going  concern,  realizing  assets and  liquidating  liabilities in the ordinary
course of business and do not reflect any adjustments that might result from the
outcome of the aforementioned  uncertainties.  Management is considering several
alternatives  for  mitigating  these  conditions,  including  the  sale of stock
pursuant  to a public  or  private  placement  offering,  sales  of  convertible
debentures  and warrants for Common Stock and fees from  projects  involving the
Company's  technologies.  Additional  funds  may be  necessary  in the event the
Company takes on other projects or makes an  acquisition  of another  company to
facilitate the Company's  commercial  demonstration of the Technologies.  If the
Company is unable to enter into commercially  attractive  collaborative  working
arrangements for one or more commercial or industrial projects,  the Company may
sub-license the Technologies to third parties.


<PAGE>


                            THERMOENERGY CORPORATION
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS
                                 March 31, 1998
                                    UNAUDITED




NOTE 5:  MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS (CONTINUED)


     The overall goal of the Company is to successfully complete a demonstration
project for STORS and/or NitRem.  Management plans to utilize any  demonstration
facilities to expand the  visibility  of the Company in  municipal,  industrial,
Department  of  Defense  and   Department  of  Energy   markets.   A  successful
demonstration   project  is  the  single  most  important   business  factor  in
implementation of the Company's plan of operations.

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

NOTE 6:  SUBSEQUENT EVENTS

During January 1998, the Company's  Board of Directors  approved the issuance of
up to $1,000,000 of Series 98, 15% Convertible Debentures, due January 15, 2003.
Debentures with an aggregate principal balance of $300,000 were sold for cash in
January 1998.  Debentures with an aggregate  principal  balance of $156,000 were
issued to  stockholders  during  February 1998 in exchange for the 10% notes and
related accrued interest due to them by the Company (see Note 2). The holders of
the Debentures can convert the principal amount and accrued interest into shares
of Series B Common Stock at the conversion  price of $2.00 per share at any time
prior to the maturity date.

ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL 
CONDITION AND RESULTS OF OPERATIONS

General

     ThermoEnergy   Corporation  ("Company")  is  a  development  stage  company
involved in the marketing and development of certain environmental  technologies
primarily  used for solving waste water  problems.  These  technologies  include
three chemical  processes  known as the  Sludge-To-Oil  Reactor System  (STORS),
Nitrogen Removal  (NitRem) and the Ammonia Recovery Process ("ARP").  The fourth
technology,  a  dual-shell  pressure  balance  vessel,  known as the  Dual-Shell
Reactor ("DSR"),  is the unique reactor  equipment in which the STORS and NitRem
chemistries  are  conducted  (STORS,   NitRem,  ARP  and  DSR  are  referred  to
collectively  as the  "Technologies").  The Company's  application  of STORS and
NitRem  through the use of a STORS-DSR,  NitRem-DSR,  or a  combination  of both
types of equipment,  are designed to eliminate  damaging organic and nitrogenous
contaminants,  respectively,  from municipal and industrial  waste streams.  The
Company's  ARP process is designed to recover  ammonia from fluid waste  streams
resulting in the  manufacture of various  by-products  such as ammonium  sulfate
fertilizer,  when  sulfuric  acid is added to the  highly  concentrated  ammonia
stream that is recovered.

     The  Company  is the  exclusive  worldwide  licensee  for the  Technologies
(except for STORS in Japan) which were developed by Battelle Memorial  Institute
("Battelle"), an independent research and development organization.  The Company
intends to sell equipment (i.e. STORS-DSR,  NitRem-DSR,  or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties,  or build, own and operate  municipal and/or  industrial waste
water  treatment  facilities.  The  Company's  business  strategy  is based upon
entering into collaborative working  relationships with established  engineering
and environmental  companies, or formal joint venture agreements relative to the
application of the technologies for specified industries or markets. The Company
is  currently  negotiating  project-specific  working  arrangements  with Foster
Wheeler  Environmental  Corporation.   The  Company  also  has  joint  marketing
arrangements  with Roy F.  Weston,  Inc.,  Dan  Cowart,  Inc.,  and Mitsui & Co.
(U.S.A.),  Inc. and plans to enter project  specific working  arrangements  when
such  projects  are  identified  and  funding is  obtained.  The Company has not

<PAGE>

     generated any operating  revenues or any profits.  The Company has recently
completed  demonstration of its NitRem-DSR technology at the TRIES, Radford Army
Ammunition Plant project in Radford,  Virginia.  This NitRem-DSR  project took a
wastewater stream containing  dinitrotoluene  (DNT) and successfully reduced the
concentration  of  DNT  from  120,000  ppb to  less  than  5  ppb,  acheiving  a
destruction  efficiency  of 99.996%,  well below  National  Pollution  Discharge
Elimination  System (NPDES) discharge limits.  Based on these test results,  the
Company, individually and jointly with Foster Wheeler Environmental Corporation,
is actively  marketing the NitRem-DSR units to potential  industrial clients and
to various  divisions  within the DOD. The Company has a project to  demonstrate
its ARP  technology  at New  York  City's  Staten  Island  wastewater  treatment
facility. The demonstration project is scheduled to begin mid summer of 1998 and
will run for 150  consecutive  days.  On March  17,  1998,  the city of  Colton,
California agreed to host a STORS demonstration  project beginning mid-summer of
1998. This demonstration project will be funded by a $3,000,000 EPA grant to the
San Bernardino Water District.  The Company will not be required to make capital
contributions to any such projects and the Company will not receive any revenues
or earnings from these  demonstration  projects.  The Company will be reimbursed
for administrative and operating costs from the two demonstration projects.


     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.   After  a
demonstration unit has been successfully operated and the Technologies have been
proven commercially viable, the Company may still require additional  investment
capital and/or debt financing to continue its operations.

Plan of Operations

     The  Company  had  planned to use the net  proceeds  of a  proposed  public
offering to fund the  operations  of the Company and  complete  the Radford Army
Ammunition Plant and the New York City demonstration  projects.  As discussed in
Note 3 of  Notes  to  Financial  Statements,  the  managing  underwriter  of the
proposed  offering  notified the Company in October 1997 that it would be unable
to complete the  offering.  The Company now plans to use the  proceeds  from the
sale of its Series 98 Convertible  Debentures  (see Note 2 of Notes to Financial
Statements) to satisfy the cash  requirements  for its basic  operations for the
next year ending  September 30, 1998.  Additional  funds may be necessary in the
event the Company  takes on other  projects or makes an  acquisition  of another
company  to  facilitate   the   Company's   commercial   demonstration   of  its
technologies.

     The overall goal of the Company is to successfully complete a demonstration
project for STORS  and/or  NitRem  through  all of the  projects  and  strategic
working  arrangements  discussed  above.   Management  plans  to  utilize  these
demonstration  facilities  to  expand  the  visibility  of  the  Company  in the
municipal, industrial, Department of Defense and Department of Energy markets. A
successful demonstration project is the single most important business factor in
the implementation of the Company's plan of operation. The Company believes that
such projects, if successful,  will allow the Company to generate income through
the commercialization of the Technologies.

Results of Operations

     For the six months ended  March 31, 1998,  the Company  incurred a net
loss of $261,420 as compared to $521,064 for the six months ended March 31,
1997.

     General and  administrative  expenses and travel expenses  decreased during
the six and three month  periods ended March 31, 1998 compared to March 31, 1997
due to the Company's efforts to conserve cash due to the failure of the proposed
public offering.  Interest expense increased  significantly between the same two
periods due to the increase in notes payable to stockholders and the issuance of
the 15% Convertible Debentures.

Liquidity and Capital Resources

     During the period ended March 31, 1998,  the Company used  $152,268 of cash
in operations compared to $449,537 in 1997. During 1992, the Company initiated a
public  offering of 125,000 shares of Series B Common Stock at a price of $16.00
per share.  The offering was conducted on a "best efforts"  basis,  primarily by
directors and officers of the Company.  Effective  January 5, 1994, the offering
was  terminated.  A total of 93,129  shares  were sold at a price of $16.00  per
share  and an  additional  6,438  shares  were  issued  at  $16.00  per share in
satisfaction of notes payable and related accrued interest.  Currently, there is
no public market for the Series B Common Stock.  As  previously  discussed,  the
Company's proposed 1997 public offering did not occur.

     During 1998,  1997 and 1996, the Company met its liquidity  needs primarily
from borrowings from stockholders (see Note 2 of Notes to Financial Statements).
Management  plans to meet the Company's  liquidity  needs during the year ending
September  30, 1998 with proceeds from the sale of  convertible  debentures  and
public or private placement offerings of Common Stock.  Management plans to meet
long-term  liquidity  needs  primarily  from  revenues  derived from  commercial
contracts the Company hopes to obtain subsequent to successful demonstrations of
its  Technologies,  such as the  Radford  NitRem,  New York City  NitRem and San
Bernardino STORS demonstration projects.

Recent Pronouncements of the Financial Accounting Standards Board.

     During 1997, the Financial  Accounting Standards Board issued Statement No.
128, "Earnings per Share",  Statement No. 130, "Reporting Comprehensive Income",
and Statement No. 131,  "Disclosures about Segments of an Enterprise and Related
Information".  See Note 4 of  Notes  to  Financial  Statements  for  information
regarding  Statement No. 128.  Statement No. 130, which is effective  during the
year ending  September  30, 1999,  establishes  new rules for the  reporting and
display of comprehensive income and its components. Application of Statement No.
130 will not impact  amounts  previously  reported  for net income or affect the
comparability  of previously  issued  financial  statements.  Statement No. 131,
which is  effective  during the year  ending  September  30,  1999,  changes the
requirements for reporting  segment  information in annual and interim financial
statements.  The  industry  segment  approach  under  Statement  No.  14 will be
replaced  with a management  approach of  reporting  financial  and  descriptive
information about operating segments.

Net Operating Losses

     The Company had net operating loss carry forwards as of September 30, 1997,
of  approximately  $5,500,000  which expire in the years 2003 through 2012.  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
carry forward can be utilized. A valuation allowance of approximately $2,125,000
has been  established  to offset any benefit from the net  operating  loss carry
forwards  as it  cannot be  determined  when or if the  Company  will be able to
utilize the net operating losses.



<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     Neither the Company nor any of its  subsidiaries  is a party to any pending
legal  proceedings,  nor are any legal  proceedings  pending of which any of the
Company's property is the subject.

Item 2.  Change in Securities

     None

Item 3.  Defaults Upon Senior Securities

     None

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

     None

Item 5.  Other Information

     None

Item 6.  Exhibits and Report on Form 8-K

     (a)  10.1 License Agreement by and between the Company and Battelle 
               Memorial Institute dated December 30, 1997.
          27.1 Financial Data Schedule

     (b) No other reports on Form 8-K have been filed during the quarter ending 
         March 31, 1998.
<PAGE>



                          SIGNATURES

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

     Date: May 15, 1998

                              THERMOENERGY CORPORATION


                              BY:  /s/ P. L. Montesi
                                 --------------------------------
                                 P. L. MONTESI
                                 President, Treasurer and
                                 Principal Financial Officer



<PAGE>