##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

|  |  |                                                                                  
|- |  | ---------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

|  |  |                                                                
|- |  | ---------------------------------------------------------------
|o |  | 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 o  No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 5,977,369 shares of common
stock as of August 11, 2003.

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





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TABLE OF CONTENTS



|                                                        |  |  |  |  |  |  |  | 
|------------------------------------------------------- |  |  |  |  |  |  |  | 
|BALANCE SHEETS                                         
|STATEMENTS OF OPERATIONS                               
|STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
|STATEMENTS OF CASH FLOWS                               
|NOTES TO FINANCIAL STATEMENTS (Unaudited)              
|SIGNATURES                                             
|EX-31.1 CEO SECTION 302 CERTIFICATION                  
|EX-31.2 PFO SECTION 302 CERTIFICATION                  
|EX-32.1 CEO SECTION 906 CERTIFICATION                  
|EX-32.2 PFO SECTION 906 CERTIFICATION                  
|EX-99.1 PROSPECT STREET VENTURES AGREEMENT             



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##### Table of Contents






THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS

|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |             |       |           | 
|---------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ----------- | ----------- | --------- | ------------ | ----------- | ----- | --------- | 
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             | June 30,    |           | December 31,
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             | 2003        |           | 2002        
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |             
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             | (Unaudited) |           | (Note 1)    
|ASSETS                                                           |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|Cash  Total Current Assets                                      |                                                  | $                                                                                                                                                                                                                     | 19,486                    |             |             | $         | 211,329      |            
|Property and equipment, at cost:                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 | Equipment, furniture and fixtures                |                                                                                                                                                                                                                       |                           | 19,809      |             |           |              | 19,809      |      
|                                                                 | Less accumulated depreciation                    |                                                                                                                                                                                                                       |                           | (19,809     | )           |           |              | (19,809     | )    
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                          |             |             |           |             |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  | $                                                                                                                                                                                                                     | 19,486                    |             |             | $         | 211,329      |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                    |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|Current maturities of Convertible Debentures (Notes 2, 3 and 6)  |                                                  | $                                                                                                                                                                                                                     | 4,469,345                 |             |             | $         | 225,623      |            
|Accounts payable                                                 |                                                  |                                                                                                                                                                                                                       | 346,426                   |             |             |           | 332,221      |            
|Accrued interest payable  primarily to related parties (Note 6) |                                                  |                                                                                                                                                                                                                       | 3,385,142                 |             |             |           | 2,807,637    |            
|Deferred compensation (Note 3)                                   |                                                  |                                                                                                                                                                                                                       | 88,614                    |             |             |           | 74,000       |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  |                                                                                                                                                                                                                       | Total Current Liabilities |             |             | 8,289,527 |              |             |       | 3,439,481 | 
|Convertible Debentures (Notes 2, 3 and 6)                        |                                                  |                                                                                                                                                                                                                       | 1,683,239                 |             |             |           | 5,519,988    |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  |                                                                                                                                                                                                                       | Total Liabilities         |             |             | 9,972,766 |              |             |       | 8,959,469 | 
|Stockholders equity (deficit) (Notes 2, 3, 4 and 6):             |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 | Preferred stock, non-voting, $1 par value:       |                                                                                                                                                                                                                       |                           |             |             |           |              |             |      
|                                                                 |                                                  | Authorized - 10,000,000 shares; none issued                                                                                                                                                                           |                           |             |             |           |              |             |       |          
|                                                                 |                                                  | Common Stock, $.001 par value: authorized  75,000,000 shares;
June 30, 2003: issued  6,061,198 shares; outstanding -
5,977,369 shares; December 31, 2002: issued  5,984,601
shares; outstanding  5,900,772 shares |                           |             | 6,061       |           |              |             | 5,985 |          
|                                                                 | Additional paid-in capital                       |                                                                                                                                                                                                                       |                           | 9,186,060   |             |           |              | 9,158,209   |      
|                                                                 | Deficit accumulated during the development stage |                                                                                                                                                                                                                       |                           | (19,145,401 | )           |           |              | (17,912,334 | )    
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  |                                                                                                                                                                                                                       | (9,953,280                | )           |             |           | (8,748,140   | )          
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            
|                                                                 |                                                  | $                                                                                                                                                                                                                     | 19,486                    |             |             | $         | 211,329      |            
|                                                                 |                                                  |                                                                                                                                                                                                                       |                           |             |             |           |              |            

See notes to financial statements.





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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF OPERATIONS

|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |          |   | 
|---------------------------------------------------------------- | ----------------------------- | - | ----------- | ------------- | - | ---------------- | ---------- | ------------------ | - | ---- | ---------- | -------- | - | - | -------- | -------- | - | - | -------- | -------- | - | 
|                                                                 |                               |   |             | Cumulative    |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 |                               |   |             | During        |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 |                               |   |             | Development   |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 |                               |   |             | Stage Through |   | Six Months Ended |            | Three Months Ended
|                                                                 |                               |   |             | June 30,      |   | June 30,         |            | June 30,          
|                                                                 |                               |   |             | 2003          |   | 2003             |            | 2002               |   | 2003 |            | 2002    
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |         
|                                                                 |                               |   |             | (Unaudited)   |   | (Unaudited)      |            | (Unaudited)       
|Operating Expenses:                                              |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 | General and administrative    |   | $           | 10,964,160    |   |                  | $          | 521,634            |   |      | $          | 605,377  |   |   | $        | 235,392  |   |   | $        | 397,915  |  
|                                                                 | Payments under licenses       |   |             | 1,137,266     |   |                  |            | 50,000             |   |      |            | 50,000   |   |   |          | 25,000   |   |   |          | 25,000   |  
|                                                                 | Travel and entertainment      |   |             | 2,062,243     |   |                  |            | 75,809             |   |      |            | 142,723  |   |   |          | 34,447   |   |   |          | 73,843   |  
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 |                               |   | 14,163,669  |               |   |                  | 647,443    |                    |   |      | 798,100    |          |   |   | 294,839  |          |   |   | 496,758  |         
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|Loss From Operations                                             |                               |   | (14,163,669 | )             |   |                  | (647,443   | )                  |   |      | (798,100   | )        |   |   | (294,839 | )        |   |   | (496,758 | )       
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|Other Income (Expense)
Interest income                           |                               |   | 237,094     |               |   |                  | 115        |                    |   |      | 7,411      |          |   |   | 33       |          |   |   | 3,051    |         
|                                                                 | Gain on settlement of lawsuit |   |             | 317,423       |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |          |  
|                                                                 | Other                         |   |             | 59,574        |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |          |  
|                                                                 | Interest expense              |   |             | (3,817,791    | ) |                  |            | (585,739           | ) |      |            | (495,146 | ) |   |          | (303,209 | ) |   |          | (252,049 | )
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|                                                                 |                               |   | (3,203,700  | )             |   |                  | (585,624   | )                  |   |      | (487,735   | )        |   |   | (303,176 | )        |   |   | (248,998 | )       
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|Net Loss                                                         |                               | $ | (17,367,369 | )             |   | $                | (1,233,067 | )                  |   | $    | (1,285,835 | )        |   | $ | (598,015 | )        |   | $ | (745,756 | )       
|                                                                 |                               |   |             |               |   |                  |            |                    |   |      |            |          |   |   |          |          |   |   |          |         
|Basic and Diluted
per
Common Share (Note 2)
Loss From Operations |                               | $ | (3.18       | )             |   | $                | (0.11      | )                  |   | $    | (0.14      | )        |   | $ | (0.05    | )        |   | $ | (0.09    | )       
|Net Loss                                                         |                               | $ | (3.90       | )             |   | $                | (0.21      | )                  |   | $    | (0.23      | )        |   | $ | (0.10    | )        |   | $ | (0.13    | )       

See notes to financial statements.





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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, 2002 and the Six Months Ended
June 30, 2003 (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 | )





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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, 2002 and the Six Months Ended
June 30, 2003 (Unaudited)

|                                                                                                                               |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                                               |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                               |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                               |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                               |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                               |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                               |  |        |       |         |  |             |           |           
|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      |  
|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
at $16.00 per share) |  |        | 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    | )





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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, 2002 and the Six Months Ended
June 30, 2003 (Unaudited)

|                                                                                                                            |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                                            |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                                            |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                                            |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                                            |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                            |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                            |  |        |       |         |  |             |           |           
|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   | )
|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 at $2.00 per share) |  |        | 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   | )
|                                                                                                                            |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  





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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, 2002 and the Six Months Ended
June 30, 2003 (Unaudited)

|                                                                                                                                                                |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ----------- | - |  | - | ---------- | -
|                                                                                                                                                                |  |        |       |         |  |             |           |            |  | Deficit     |             |   |  |  
|                                                                                                                                                                |  |        |       |         |  |             |           |            |  | Accumulated |             |   |  |  
|                                                                                                                                                                |  |        |       |         |  | Additional  |           | During the |  |             |             |  
|                                                                                                                                                                |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                                                                |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                                                                |  |        |       |         |  |             |           |           
|Balance (deficit), September 30, 1998                                                                                                                           |  | $      | 3,487 |         |  | $           | 4,334,864 |            |  | $           | (7,534,536  | ) |  | $ | (3,196,185 | )
|Net loss (three months)                                                                                                                                         |  |        |       |         |  |             |           |            |  |             | (243,660    | ) |  |   | (243,660   | )
|                                                                                                                                                                |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 1998                                                                                                                            |  |        | 3,487 |         |  |             | 4,334,864 |            |  |             | (7,778,196  | ) |  |   | (3,439,845 | )
|Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value)                                               |  |        | 67    |         |  |             |           |            |  |             | (67         | ) |  |   |            |  
|Conversion of $238,165 of notes payable to
stockholders and accrued interest, various months
during 1999 (147,602 shares at $2.00 per share)                    |  |        | 148   |         |  |             | 295,056   |            |  |             |             |   |  |   | 295,204    |  
|Issuance of stock for exercise of warrants by
stockholders, 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 during
2000 (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 during 2000 (110,206 shares at
$2.00 per share)                    |  |        | 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 during
2001 (496,250 shares at $2.00 per share
and 338,637 shares at $.16 per share) |  |        | 834   |         |  |             | 1,045,848 |            |  |             |             |   |  |   | 1,046,682  |  
|Conversion of $117,377 of Convertible
Debentures plus accrued interest, various
months during 2001 (82,808 shares at $2.00
per share)                           |  |        | 83    |         |  |             | 165,533   |            |  |             |             |   |  |   | 165,616    |  
|Net loss                                                                                                                                                        |  |        |       |         |  |             |           |            |  |             | (2,567,968  | ) |  |   | (2,567,968 | )
|                                                                                                                                                                |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2001                                                                                                                            |  |        | 5,041 |         |  |             | 6,540,886 |            |  |             | (13,568,886 | ) |  |   | (7,022,959 | )





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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, 2002 and the Six Months Ended
June 30, 2003 (Unaudited)

|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ----------- | - |  | - | ---------- | -
|                                                                                                                                           |  |        |       |         |  |             |           |            |  | Deficit     |             |   |  |  
|                                                                                                                                           |  |        |       |         |  |             |           |            |  | Accumulated |             |   |  |  
|                                                                                                                                           |  |        |       |         |  | Additional  |           | During the |  |             |             |  
|                                                                                                                                           |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                                           |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                                           |  |        |       |         |  |             |           |           
|Issuance of stock, various months 2002
(282,358 shares at $2.00 per share)                                                                 |  |        | 283   |         |  |             | 564,433   |            |  |             |             |   |  |   | 564,716    |  
|Conversion of $100,000 of Convertible
Debentures plus accrued interest, February
2002 (55,000 shares at $2.00 per share)                   |  |        | 55    |         |  |             | 109,945   |            |  |             |             |   |  |   | 110,000    |  
|Issuance of stock in satisfaction of deferred
compensation balances with officers, various
months 2002, (82,793 shares at $2.00 per share) |  |        | 83    |         |  |             | 165,503   |            |  |             |             |   |  |   | 165,586    |  
|Issuance of stock for 10% stock dividend,
June 2002, (522,931 shares at $3.40 per share)                                                   |  |        | 523   |         |  |             | 1,777,442 |            |  |             | (1,777,965  | ) |  |   |            |  
|Net loss                                                                                                                                   |  |        |       |         |  |             |           |            |  |             | (2,565,483  | ) |  |   | (2,565,483 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2002                                                                                                       |  |        | 5,985 |         |  |             | 9,158,209 |            |  |             | (17,912,334 | ) |  |   | (8,748,140 | )
|Issuance of stock in exchange for outstanding
warrants held by stockholder, January 2003
(50,000 shares at $2.00 per share)                |  |        | 50    |         |  |             | (50       | )          |  |             |             |   |  |   |            |  
|Conversion of $15,000 of Convertible
Debentures plus accrued interest, April 2003
(26,597 shares at $1.05 per share)                       |  |        | 26    |         |  |             | 27,901    |            |  |             |             |   |  |   | 27,927     |  
|Net loss                                                                                                                                   |  |        |       |         |  |             |           |            |  |             | (1,233,067  | ) |  |   | (1,233,067 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), June 30, 2003                                                                                                           |  | $      | 6,061 |         |  | $           | 9,186,060 |            |  | $           | (19,145,401 | ) |  | $ | (9,953,280 | )
|                                                                                                                                           |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  

See notes to financial statements.





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##### Table of Contents






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

|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |            |         |          |         | 
|--------------------------- | ------------------------------------------------------ | ---------------------------------------- | ------------------------------------- | ----------------------------------------- | ---------- | ------------- | --------- | ------------------------- | ------- | ----------- | -------- | ---------- | ------- | -------- | ------- | 
|                            |                                                        |                                          |                                       |                                           |            | Cumulative    |           |                           |         |             |          |            |         |         
|                            |                                                        |                                          |                                       |                                           |            | During        |           |                           |         |             |          |            |         |         
|                            |                                                        |                                          |                                       |                                           |            | Development   |           |                           |         |             |          |            |         |         
|                            |                                                        |                                          |                                       |                                           |            | Stage Through |           | Six
Months Ended June 30,
|                            |                                                        |                                          |                                       |                                           |            | June 30, 2003 |           | 2003                      |         | 2002       
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |            
|                            |                                                        |                                          |                                       |                                           |            | (Unaudited)   |           | (Unaudited)               |         | (Unaudited)
|Operating activities:       |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|                            | Net loss                                               |                                          | $                                     | (17,367,369                               | )          |               | $         | (1,233,067                | )       |             | $        | (1,285,835 | )      
|                            | Items not requiring
(providing) cash:                  |                                          |                                       |                                           |            |               |           |                           |         |             |          |            |        
|                            |                                                        | Depreciation                             |                                       |                                           | 19,809     |               |           |                           |         |             |          |            |         |         
|                            |                                                        | Expenses funded by Common
Stock issuance |                                       |                                           | 708,338    |               |           |                           |         |             |          |            |         |         
|                            |                                                        | Other                                    |                                       |                                           | (117,054   | )             |           |                           | 6,492   |             |          |            |         |         
|                            | Changes in:                                            |                                          |                                       |                                           |            |               |           |                           |         |             |          |            |        
|                            |                                                        | Advances to officers                     |                                       |                                           | (1,437,516 | )             |           |                           |         |             |          |            | (86,500 | )       
|                            |                                                        | Other receivables                        |                                       |                                           | (142,468   | )             |           |                           |         |             |          |            | (2,578  | )       
|                            |                                                        | Accounts payable                         |                                       |                                           | 1,121,512  |               |           |                           | 14,205  |             |          |            | (53,697 | )       
|                            |                                                        | Accrued expenses                         |                                       |                                           | 3,706,696  |               |           |                           | 590,432 |             |          |            | 495,146 |         
|                            |                                                        | Deferred compensation                    |                                       |                                           | 3,256,894  |               |           |                           | 307,095 |             |          |            | 166,413 |         
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|                            |                                                        |                                          | Net cash used in
operating activities |                                           |            | (10,251,158   | )         |                           |         | (314,843    | )        |            |         | (767,051 | )      
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|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    |                                          |                                       | 4,508,960                                 |            |               |           |                           |         |             |          | 392,116    |        
|                            | Proceeds from notes payable and
advances from officers |                                          |                                       | 1,735,609                                 |            |               |           | 70,000                    |         |             |          |            |        
|                            | Proceeds from Convertible Debentures                   |                                          |                                       | 3,798,000                                 |            |               |           | 73,000                    |         |             |          |            |        
|                            | Payments on notes payable and
advances from officers   |                                          |                                       | (174,609                                  | )          |               |           | (20,000                   | )       |             |          |            |        
|                            | Other                                                  |                                          |                                       | 108,410                                   |            |               |           |                           |         |             |          |            |        
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|                            |                                                        |                                          |                                       | Net cash provided by
financing activities |            |               | 9,976,370 |                           |         |             | 123,000  |            |         |          | 392,116 | 
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|Increase (decrease) in cash |                                                        |                                          | 19,486                                |                                           |            |               | (191,843  | )                         |         |             | (374,935 | )         
|Cash, beginning of period   |                                                        |                                          | 0                                     |                                           |            |               | 211,329   |                           |         |             | 557,870  |           
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           
|Cash, end of period         |                                                        | $                                        | 19,486                                |                                           |            | $             | 19,486    |                           |         | $           | 182,935  |           
|                            |                                                        |                                          |                                       |                                           |            |               |           |                           |         |             |          |           

See notes to financial statements.





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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




NOTES TO FINANCIAL STATEMENTS (Unaudited)

June 30, 2003

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and 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 and six-month
periods ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2003.

The balance sheet at December 31, 2002 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, 2002.

The Companys filing with the Securities and Exchange Commission, including its
reports under the Securities and Exchange Act of 1934, as amended, can be found
through the Companys website at http://www.thermoenergy.com/financial.htm.
The information contained in the Companys website is not deemed to be a part
of this filing.

NOTE 2: LOSS PER COMMON SHARE

Loss per common share is computed by dividing the net loss for the period by
the weighted average number of shares outstanding during the period after
giving effect, where appropriate, to stock dividends, stock splits and nominal
issuances of common stock, warrants and stock options which occurred within
twelve months of the initial public offering filing date (February 27, 1992).
Stock options and warrants issued after the one year period referred to above,
and the dilutive effect of the Companys Debentures (as such term is defined in
Note 3 below) were not included in the computation of diluted loss per share
since the effect would be antidilutive. The adjusted weighted average number of
common shares used in the basic and diluted loss per share computations were
4,449,435 shares for the period cumulative since inception through June 30,
2003, 5,958,220, and 5,636,033 shares for the six-month periods ended June 30,
2003 and 2002, respectively, and 5,973,277, and 5,712,077 shares for the
three-month periods ended June 30, 2003 and 2002, and, respectively.





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##### Table of Contents



THERMOENERGY CORPORATION

(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 2003

NOTE 3: CONVERTIBLE DEBENTURES AND ADVANCES FROM OFFICERS

On April 29, 2003, the Companys Board of Directors approved the Companys sale
of its Series 03 Convertible Debentures (the Series 03 Debentures). The
Series 03 Debentures were offered at a discount of 20% from par value and were
convertible according to the terms set forth by the Board of Directors into
shares of the Companys common stock, $.001 par value per share (the Common
Stock), at $1.05 per share.

During the second quarter of 2003, the Company sold $91,250 (par amount) of the
Series 03 Debentures for $73,000 in cash. The Company also issued during the
second quarter of 2003 an aggregate of $428,101 (par amount) of the Series 03
Debentures in satisfaction of $50,000 of advances to the Company from officers
and of $292,481 of deferred compensation owed by the Company to its officers.

During the six months ended June 30, 2003, the Company received $70,000 in
advances from officers. These advances were repaid as of June 30, 2003
($20,000 in cash and the remaining balance in Series 03 Debentures as described
above). As discussed further in Note 6 hereof, the Company announced on August
8, 2003 that it had received commitments from the holders of 100% of the Series 03
Debentures as well as commitments from holders of 100% of the Companys
outstanding Series 98 Convertible Debentures (the Series 98 Debentures),
Series 01 Convertible Debentures (the Series 01 Debentures) and Series 02
Convertible Debentures (the Series 02 Debentures, and collectively with the
Series 98 Debentures, the Series 01 Debentures and the Series 03 Debentures,
the Debentures) to convert the outstanding principal amount (plus all accrued
interest) of the Debentures into shares of the Companys Common Stock at $1.05
per share (the Conversion). The Debentures were scheduled to mature
beginning in January 2004.

NOTE 4: COMMON STOCK

During January 2003, the Companys Board of Directors approved the Companys
issuance of 50,000 shares of Common Stock to a shareholder of the Company in
exchange for warrants previously purchased by the shareholder.

During April 2003, the Company issued 26,597 shares of Common Stock at $1.05
per share for the conversion of $15,000 of the Series 98 Debentures and accrued
interest thereon.

NOTE 5: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTERS

The Company has incurred net losses since inception and will likely require
substantial capital to continue commercialization of the Companys Technologies
(as such term is defined herein under Managements Discussion and Analysis -
Business Plan  Development and Commercialization of





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##### Table of Contents



THERMOENERGY CORPORATION

(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 2003

NOTE 5: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTERS (continued)

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 during the next year. The Company is currently seeking both
short-term and longer-term financing and considering various strategic
alternatives to fund the Companys present and future operations and
development activities and to otherwise satisfy the Companys liquidity needs.
Management is seeking the necessary funds to meet the Companys immediate or
near-term liquidity needs through various alternatives, including through the
issuance of Common Stock or other equity or debt securities. No assurances can
be given that such short-term financing will be available to the Company on
favorable terms or otherwise or in a timely manner (see Note 6).

The Company has to secure additional financing in the
immediate or near-term to provide the necessary liquidity to enable the Company
to raise additional capital through the sale of equity or debt securities or
through other alternatives. In the event the Company is unable to obtain
necessary financing and obtain necessary capital in the near term to
fund its continued operations and development activities, the Company will
consider various alternatives, including, but not limited to, the sale or
sublicensing of its Technologies and/or filing a petition under federal
bankruptcy laws. If the Company does not raise the necessary capital in the
immediate or near-term to fund the Companys present and future operations and
development activities and to otherwise satisfy the Companys liquidity needs,
the Company will be unable to remain in operation. At June 30, 2003, the
Company did not have sufficient cash on hand or access to capital to fund its
outstanding accounts payable.

NOTE 6: SUBSEQUENT EVENTS

During July 2003, the Company received a $10,000 advance from an officer. This
advance was repaid with proceeds from a $50,000 note payable to a bank which is
due in November 2003. The note payable is guaranteed by the Chief Executive
Officer and Principal Financial Officer of the Company.

During July 2003, the Company announced its intention of seeking the conversion
of all outstanding Debentures and related accrued interest ($9,537,726 in the
aggregate as of June 30, 2003) into shares of Common Stock at a conversion
price of $1.05 per share. On August 8, 2003, the Company announced the
holders consent to the Conversion. As of the date of this filing, the Company
is in the process of effecting the Conversion. The Conversion will result in
the issuance by the Company of approximately 9,500,000 shares of Common Stock
which will increase the outstanding shares of Common Stock from





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##### Table of Contents



THERMOENERGY CORPORATION

(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 2003

NOTE 6: SUBSEQUENT EVENTS (continued)

5,977,369 as of the date of this filing to approximately 15,500,000 shares.
The Company expects the Conversion to be completed during the third quarter of
2003.

Pursuant to the terms of a letter
agreement dated June 26, 2003, the Company has
engaged Prospect Street Ventures to serve as its exclusive financial advisor in
connection with the raising of capital and the Companys consideration of
various strategic alternatives. As compensation for its services to the
Company, Prospect Street will receive shares of Common Stock as a
retainer fee and additional shares of Common Stock on a monthly basis
during the course of the engagement. Prospect Street Ventures will also be entitled to a
success fee upon the completion of any transaction. In addition,
Prospect Street Ventures will be also entitled to compensation if certain
transactions are completed within two years of the termination of the
agreement.

The Company has previously engaged
other financial
advisors to assist it in the raising of capital and its consideration of
various strategic alternatives. The Company has not completed any
transactions as a result of these engagements, and is no
longer using the services of those advisors. However, pursuant to the terms of
the Companys agreements with those advisors, any capital or strategic
transactions completed by the Company in the future may result in cash and/or
equity compensation being due to such advisors under the tail provisions of the
agreements.

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

Forward-Looking Statements

The following discussion should be read in conjunction with the financial
statements and the notes to the financial statements appearing elsewhere in
this quarterly report on Form 10-QSB. The following discussion and the
information contained elsewhere in this quarterly report contains statements
that are forward-looking statements as defined within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
give the Companys current expectations of forecasts of future events. All
statements other than statements of current or historical fact contained in
this quarterly report, including statements regarding the Companys future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
The words anticipate, believe, continue, estimate, expect, intend,
may, plan, will, and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. These statements are based
on the Companys current plans, and actual future activities and the Companys
results of operations may be materially different from those set forth in the
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from the statements made. These include, but are not limited to, the risks and
uncertainties associated with statements relating to: (i) the ability of the
Company to fund its continued operations and development activities, primarily
through





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the availability of debt and equity financing on terms that are acceptable or
otherwise to the Company; (ii) the Companys ability to commercialize its
Technologies; (iii) changes in government policy and in legislation and
regulation of the waste treatment industry that adversely affect the Companys
business prospects; and (iv) general economic and market conditions.

Any or all of the forward-looking statements in this quarterly report may turn
out to be inaccurate. The Company has based these forward-looking statements
largely on its current expectations and projections about future events and
financial trends that it believes may affect its financial condition, results
of operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions.

The Company undertakes no obligation to publicly revise these forward-looking
statements after the date of this quarterly report. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by the cautionary
statements contained in this report and in the Companys 2002 Form 10-KSB for
the year ended December 31, 2002 as filed with the Securities and Exchange
Commission on April 25, 2003 (the Form 10-KSB).

The Companys filing with the Securities and Exchange Commission, including its
reports under the Securities and Exchange Act of 1934, as amended, can be found
through the Companys website at http://www.thermoenergy.com/financial.htm.
The information contained in the Companys website is not deemed to be a part
of this filing.

Business Plan

The Company has historically lacked the financial and other resources necessary
to market the Technologies or to build demonstration projects. The following
summary sets forth the Companys plan of operations for the next twelve months.

Cash Requirements; Need for Additional Funds. The Company will require
substantially more cash to satisfy its anticipated operating expenses for the
next 12 months than it has available. As of June 30, 2003, the Company had
available cash of $19,486 compared to $182,935 available cash as of June 30,
2002. As discussed in the Form 10-KSB, management anticipates that its cash
requirements during the next 12 months to implement the Companys marketing and
development strategies will range from $600,000 to $1,200,000, including
license-related payments of approximately $75,000 during the third
quarter of 2003 to BMI (as defined below in Business Plan  Development and
Commercialization of Technologies). At June 30, 2003, and as of the date of
this filing, the Company did not and does not have sufficient cash on hand or
access to capital to pay its outstanding accounts payable or to fund
its future activities.

On August 8, 2003, the Company announced the Conversion, which eliminates the
risk of default on the terms of the Debentures. The Company believes that the
Conversion, by eliminating a substantial amount of current debt, will assist the Company in raising necessary capital in the short
term to fund its immediate cash needs and in the next 12 months to enable it to
implement its marketing and development strategy and continue its operations.





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The Company is currently seeking both short-term and longer-term financing and
considering various strategic alternatives to fund the Companys present and
future operations and development activities. These alternatives include the
issuance of Common Stock, the issuance of other equity or debt securities,
bridge financing arrangements with commercial lenders or various combinations
of the above alternatives. In the event that the Company cannot raise the
necessary capital in the immediate or near-term to fund the Companys present
and future operations and development activities, the Company will not be able
to continue its operations.

In order to assist it with the foregoing, as discussed in Note 6 of the Notes
To Financial Statements herein, the Company has engaged Prospect
Street Ventures to
serve as its exclusive financial advisor in connection with the raising of
capital and the Companys consideration of various strategic alternatives.

In addition to these financing alternatives, in an effort to raise capital to
meet the Companys obligations during the next 12 months, management continues
to review the possible ramifications of sublicensing or selling one or more of
its Technologies. However, as of the date of this filing, the Company has not
entered into any agreements or negotiations with any third parties in
connection with the sublicensing or purchasing any of the Technologies. In the
event the Company is unable to obtain funds necessary to continue operations,
it will consider other alternatives, including, but not limited to, filing a
petition under federal bankruptcy laws.

Development and Commercialization of Technologies.The Company is the
exclusive worldwide licensee (except for STORS, as defined below, in Japan) for
three clean water process technologies and one process equipment technology
developed by Battelle Memorial Institute (BMI). The Company also owns the
rights to the ThermoFuel Process (ThermoFuel), a patent-pending renewable
energy process that represents an advance of the Sludge-To-Oil Reactor System
(STORS). The five technologies are primarily aimed at solving wastewater
problems for broad-based municipal and industrial markets. These technologies
include four chemical process technologies: STORS, ThermoFuel, the Ammonia
Recovery Process (ARP), and the Nitrogen Removal Process (NitRem). The
Company has a hardware technology known as the Dual-Shell Reactor System
(DSR), in which STORS and NitRem chemical processes are conducted. These
five technologies are collectively referred to as the Water Technologies.

The Company is also the exclusive owner of a patented clean energy technology
known as the ThermoEnergy Integrated Power System (TIPS), which converts
fossil fuels (including coal, oil and natural gas) and biomass into electricity
without producing air emissions, and is aimed at competing with conventional
energy conversion technologies. In addition, TIPS removes and captures carbon
dioxide (CO2) in liquid form for sequestration or beneficial reuse. TIPS and
the Water Technologies are collectively referred to as the Technologies.

Because the Company does not currently possess the technical, operational or
financial resources necessary to construct or operate STORS, ThermoFuel,
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.





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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 viable in demonstrations (STORS  Colton Demonstration
Project; NitRem  Radford Army Ammunition Plant; and ARP  New York City
Demonstration and Colton Demonstration Project), none of the Technologies have
been implemented on a permanent basis by a municipal or industrial customer.
The Company has historically lacked the financial and other resources necessary
to market the Technologies or to build demonstration projects.

The Company requires significant capital expenditures for the Companys
participation into the wastewater and sludge treatment markets or the
acceptability of its Technologies in such markets. The Companys ability to
penetrate these markets depends on (1) successfully commercializing one or more
of its Technologies and (2) fully developing and demonstrating TIPS.

Purchase of Plant or Significant Equipment. The Company currently owns no
plants and equipment. The Company is currently searching for possible
acquisition targets with complementary products and services to the Companys
Technologies and an established recurring stream of revenue from operations.
As of the date of this filing, the Company does not have a transaction to
report, and there can be no assurance that the Company will be able to
consummate any such transaction in the next 12 months or otherwise.

Results of Operations

For the six months ended June 30, 2003, the Company incurred a net loss of
$1,233,067 compared to $1,285,835 for the six months ended June 30, 2002. For
the three months ended June 30, 2003, the Company incurred a net loss of
$598,015 compared to $745,756 for the three months ended June 30, 2002. General
and administrative expenses decreased during the six-month and the three-month
periods ended June 30, 2003, compared to June 30, 2002 due primarily to the
closing of the Energy Resources Division during February 2003 and due to the
Companys efforts to conserve cash. Travel and entertainment expenses decreased
during the same periods due to the significant decrease in funds received by
the Company from financing activities during the 2003 periods compared to the
2002 periods. Interest expense for the six months and three months ended June
30, 2003 increased compared to the same periods for 2002 due to the issuance of
Series 02 Debentures ($300,000 during December 2002) and of Series 03
Debentures ($519,351 during the second quarter of 2003) and due to the effect
of interest compounding.

Liquidity and Capital Resources

During the six-month period ended June 30, 2003, the Company used $314,843 of
cash in operations compared to $767,051 in the comparable period of 2002. This
decrease is consistent with the Companys efforts to conserve cash due to the
decline in funds from the Companys financing activities.

Due to, among other things, the existing trading price of the Companys Common
Stock and the Companys financial condition, the Companys source of funds for
the six months ended June 30, 2003





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was limited to borrowings from officers and the sale of $91,250 of Series 03
Debentures for $73,000 in cash. During the six months ended June 30, 2002 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 next 12 months.

If the Company is able to meet its immediate liquidity needs through the sale
of equity and/or debt securities, and thereafter to successfully demonstrate
its Technologies, management hopes to be able to meet the longer-term liquidity
needs of the Company primarily from revenues derived from commercial contracts
the Company hopes to obtain.

Net Operating Losses

The Company had net operating loss carryforwards as of December 31, 2002 of
approximately $12,100,000, which expire in the years 2003 through 2022. 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 approximately $4,603,000
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.

Item 3. Controls and Procedures.

The Company, under the direction of its Chief Executive Officer and its
Principal Financial Officer, has established disclosure controls and procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized, and reported
within the time periods specified in the SECs rules and forms. The disclosure
controls and procedures are also intended to ensure that such information is
accumulated and communicated to the Companys management, including the Chief
Executive Officer and the Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.

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

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

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

None.





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Item 2. Change in Securities.

Please see Note 3 and Note 6 in Part I hereof for information concerning the
Companys conversion of its convertible debentures.

Item 3. Defaults Upon Senior Securities.

None.

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

The Companys 2003 annual meeting of shareholders was held on June 19, 2003
(the Annual Meeting). A total of 3,748,239 shares of the Companys Common
Stock, constituting a quorum of those shares entitled to vote, were represented
at the meeting by shareholders either present in person or by proxy. At such
meeting the shareholders elected Paul A. Loeffler (Loeffler) and Andrew T.
Melton (Melton), to the Companys board of directors to serve three-year
terms until the 2006 annual shareholders meeting. Loeffler and Melton both
received 3,695,002 votes or 98.6% of shares voted while 53,237 of the shares
voted were withheld from voting for both nominees. Also at the Annual Meeting,
the shareholders ratified the board of directors selection of Kemp & Company
as the Companys independent auditors for the 2003 fiscal year. Kemp & Company
received the affirmative vote of 3,698,209 of the shares voted.

Item 5. Other Information.

None.

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



| | (a) |  | The following exhibits are filed as part of this report:
| | --- |  | --------------------------------------------------------

|        |  |                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                  
|Number  |  | Description of Exhibits                                                                                                                                                                          
|        |  |                                                                                                                                                                                                  
|31.1    |  | Certification of the Companys Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.    
|31.2    |  | Certification of the Companys Principal Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1    |  | Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                 
|32.2    |  | Certification of the Companys Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                             
|99.1    |  | Engagement Agreement between Prospect Street Ventures and the Company.                                                                                                                           



| | (b) |  | No reports on Form 8-K were filed during the quarterly period
ended June 30, 2003.
| | --- |  | ----------------------------------------------------------------------------------





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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: August 19, 2003 |  | THERMOENERGY CORPORATION                                          
|                     
|                      |  | /s/ P.L. Montesi                                                  
|                      |  |                                                                   
|                      |  | P.L. Montesi, President, Treasurer
and Principal Financial Officer