##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2001

[   ] 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                          |  | 71-00659511        
|                                 
|                                 
|                                 
|                                 
|(State or other jurisdiction      |  | (IRS Employer      
|                                 
|                                 
|                                 
|                                 
|of incorporation or organization) |  | 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 [     ]       No [     ]

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: 4,957,690 shares of
common stock as of October 19, 2001.

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





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TABLE OF CONTENTS



|                               |                                                         |  |  |  |  |  |  | 
|------------------------------ | ------------------------------------------------------- |  |  |  |  |  |  | 
|PART 1  FINANCIAL INFORMATION
|                               | BALANCE SHEETS                                         
|                               | STATEMENTS OF OPERATIONS                               
|                               | STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
|                               | STATEMENTS OF CASH FLOWS                               
|                               | NOTES TO FINANCIAL STATEMENTS (Unaudited)              
|PART II  OTHER INFORMATION   
|SIGNATURES                    



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##### Table of Contents






PART 1  FINANCIAL INFORMATION

Item 1. Financial Statements.

THERMOENERGY CORPORATION
(A Development Stage Company)




BALANCE SHEETS


|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |             |       |           | 
|------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | ----------- | ------------- | --------- | ------------ | ----------- | ----- | --------- | 
|                                                        |                                                  |                                                                                                                                                                                            |                           |             | September 30, |           | December 31,
|                                                        |                                                  |                                                                                                                                                                                            |                           |             | 2001          |           | 2000        
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |             
|                                                        |                                                  |                                                                                                                                                                                            |                           |             | (Unaudited)   |           | (Note 1)    
|ASSETS                                                  |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|Cash  Total Current Assets                             |                                                  | $                                                                                                                                                                                          | 1,072,216                 |             |               | $         | 495,959      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Advances to officers (Note 4)                           |                                                  |                                                                                                                                                                                            | 17,018                    |             |               |           | 138,000      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accrued interest receivable  officers (Note 4)         |                                                  |                                                                                                                                                                                            | 49                        |             |               |           | 3,899        |            
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, at cost:                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Equipment                                        |                                                                                                                                                                                            |                           | 14,818      |               |           |              | 14,818      |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Furniture and fixtures                           |                                                                                                                                                                                            |                           | 4,991       |               |           |              | 4,991       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Less accumulated depreciation                    |                                                                                                                                                                                            |                           | (19,809     | )             |           |              | (19,809     | )    
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  |                                                                                                                                                                                            |                          |             |               |           |             |            
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  | $                                                                                                                                                                                          | 1,089,283                 |             |               | $         | 637,858      |            
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)          |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accounts payable (Note 3)                               |                                                  | $                                                                                                                                                                                          | 208,711                   |             |               | $         | 382,750      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Accrued interest payable  primarily to related parties |                                                  |                                                                                                                                                                                            | 1,534,031                 |             |               |           | 954,734      |            
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred compensation (Notes 3 and 4)                   |                                                  |                                                                                                                                                                                            | 43,770                    |             |               |           | 265,941      |            
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  |                                                                                                                                                                                            | Total Current Liabilities |             |               | 1,786,512 |              |             |       | 1,603,425 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Convertible Debentures (Notes 3 and 4)                  |                                                  |                                                                                                                                                                                            | 5,545,611                 |             |               |           | 4,701,722    |            
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  |                                                                                                                                                                                            | Total Liabilities         |             |               | 7,332,123 |              |             |       | 6,305,147 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity (deficit) (Note 3):                |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, non-voting, $1 par value:       |                                                                                                                                                                                            |                           |             |               |           |              |             |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                  | Authorized - 10,000,000 shares; none issued                                                                                                                                                |                           |             |               |           |              |             |       |          
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common Stock, $.001 par value:                   |                                                                                                                                                                                            |                           |             |               |           |              |             |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                                                  | Authorized - 75,000,000 shares
September 30, 2001: issued  5,035,019 shares; outstanding -
4,951,190 shares; December 31, 2000: issued  4,123,824
shares; outstanding  4,039,995 shares |                           |             | 5,035         |           |              |             | 4,124 |          
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid-in capital                       |                                                                                                                                                                                            |                           | 6,527,892   |               |           |              | 5,329,505   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deficit accumulated during the development stage |                                                                                                                                                                                            |                           | (12,775,767 | )             |           |              | (11,000,918 | )    
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  |                                                                                                                                                                                            | (6,242,840                | )           |               |           | (5,667,289   | )          
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            
|                                                        |                                                  | $                                                                                                                                                                                          | 1,089,283                 |             |               | $         | 637,858      |            
|                                                        |                                                  |                                                                                                                                                                                            |                           |             |               |           |              |            

See notes to financial statements.

1



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF OPERATIONS

|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |          |       |  
|------------------------------------------- | ----------------------------- | -------------------- | ----------- | ------------- | ----- | ----------------- | ---------- | ------------------ | ----- | ---- | ---------- | -------- | ----- | - | -------- | -------- | ----- | - | -------- | -------- | ----- | -
|                                            |                               |                      |             | Cumulative    |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | During        |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | Development   |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      |             | Stage Through |       | Nine Months Ended |            | Three Months Ended
|                                            |                               |                      |             | September 30, |       | September 30,     |            | September 30,     
|                                            |                               |                      |             | 2001          |       | 2001              |            | 2000               |       | 2001 |            | 2000    
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |         
|                                            |                               |                      |             | (Unaudited)   |       | (Unaudited)       |            | (Unaudited)       
|Operating Expenses:                         |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative    |                      | $           | 8,906,067     |       |                   | $          | 944,472            |       |      | $          | 735,942  |       |   | $        | 245,327  |       |   | $        | 287,547  |      
|                                           
|                                           
|                                           
|                                           
|                                            | Payments under licenses       |                      |             | 917,266       |       |                   |            | 30,000             |       |      |            | 67,500   |       |   |          | 10,000   |       |   |          | 22,500   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Travel and entertainment      |                      |             | 1,591,181     |       |                   |            | 217,167            |       |      |            | 155,746  |       |   |          | 73,849   |       |   |          | 61,437   |      
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      | 11,414,514  |               |       |                   | 1,191,639  |                    |       |      | 959,188    |          |       |   | 329,176  |          |       |   | 371,484  |         
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Loss From Operations                        |                               |                      | (11,414,514 | )             |       |                   | (1,191,639 | )                  |       |      | (959,188   | )        |       |   | (329,176 | )        |       |   | (371,484 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Other Income (Expense)                      |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                           
|                                           
|                                           
|                                           
|                                            | Interest income               |                      |             | 220,287       |       |                   |            | 25,379             |       |      |            | 24,983   |       |   |          | 7,841    |       |   |          | 2,106    |      
|                                           
|                                           
|                                           
|                                           
|                                            | Gain on settlement of lawsuit |                      |             | 317,423       |       |                   |            |                    |       |      |            | 23,644   |       |   |          |          |       |   |          |          |      
|                                           
|                                           
|                                           
|                                           
|                                            | Other                         |                      |             | 49,550        |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |          |      
|                                           
|                                           
|                                           
|                                           
|                                            | Interest expense              |                      |             | (1,948,446    | )     |                   |            | (608,589           | )     |      |            | (396,583 | )     |   |          | (209,629 | )     |   |          | (190,120 | )    
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                            |                               |                      | (1,361,186  | )             |       |                   | (583,210   | )                  |       |      | (347,956   | )        |       |   | (201,788 | )        |       |   | (188,014 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Net Loss                                    |                               | $                    | (12,775,700 | )             |       | $                 | (1,774,849 | )                  |       | $    | (1,307,144 | )        |       | $ | (530,964 | )        |       | $ | (559,498 | )       
|                                            |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|Basic and Diluted
per Common Share (Note 2) |                               |                      |             |               |       |                   |            |                    |       |      |            |          |       |   |          |          |       |   |          |         
|                                           
|                                           
|                                           
|                                           
|                                            |                               | Loss From Operations |             | $             | (2.94 | )                 |            | $                  | (0.25 | )    |            | $        | (0.21 | ) |          | $        | (0.06 | ) |          | $        | (0.08 | )
|                                           
|                                           
|                                           
|                                           
|                                            |                               | Net Loss             |             | $             | (3.29 | )                 |            | $                  | (0.37 | )    |            | $        | (0.29 | ) |          | $        | (0.10 | ) |          | $        | (0.12 | )

See notes to financial statements.

2



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)


Periods Ended September 30, 1988 Through December 31, 2000 and the Nine Months Ended
September 30, 2001 (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 | )

3



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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, 2000 and the Nine Months Ended
September 30, 2001 (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) |  |        | 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   |  

4



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2000 and the Nine Months Ended
September 30, 2001 (Unaudited)

|                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                          |  |        |       |         |  |             |           |            |  | Deficit     |            |   |  |  
|                                                                                                          |  |        |       |         |  |             |           |            |  | Accumulated |            |   |  |  
|                                                                                                          |  |        |       |         |  | Additional  |           | During the |  |             |            |  
|                                                                                                          |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                          |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                          |  |        |       |         |  |             |           |           
|Net loss                                                                                                  |  | $      |       |         |  | $           |           |            |  | $           | (1,207,921 | ) |  | $ | (1,207,921 | )
|                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|Balance (deficit), September 30, 1993                                                                     |  |        | 3,202 |         |  |             | 3,296,856 |            |  |             | (3,325,355 | ) |  |   | (25,297    | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Issuance of warrants to stockholders                                                                      |  |        |       |         |  |             | 226,000   |            |  |             |            |   |  |   | 226,000    |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Issuance of stock for exercise of stock options
March 1994 (3,750 shares at $1.60 per share)              |  |        | 4     |         |  |             | 5,996     |            |  |             |            |   |  |   | 6,000      |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Issuance of stock for exercise of warrants by
stockholder, August 1994 (3,677 shares at $13.60 per share) |  |        | 4     |         |  |             | 49,997    |            |  |             |            |   |  |   | 50,001     |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Net loss                                                                                                  |  |        |       |         |  |             |           |            |  |             | (767,427   | ) |  |   | (767,427   | )
|                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  
|Balance (deficit), September 30, 1994                                                                     |  |        | 3,210 |         |  |             | 3,578,849 |            |  |             | (4,092,782 | ) |  |   | (510,723   | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|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   | )
|                                                                                                          |  |        |       |         |  |             |           |            |  |             |            |   |  |   |            |  

5



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2000
and the Nine Months Ended
September 30, 2001 (Unaudited)

|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------- |  | ----------- | --------- | ---------- |  | ----------- | ----------- | - |  | - | ---------- | -
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  | Deficit     |             |   |  |  
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  | Accumulated |             |   |  |  
|                                                                                                                                                    |  |        |       |         |  | Additional  |           | During the |  |             |             |  
|                                                                                                                                                    |  | Common |       | Paid-in |  | Development |           |            |  |            
|                                                                                                                                                    |  | Stock  |       | Capital |  | Stage       |           | Total     
|                                                                                                                                                    |  |        |       |         |  |             |           |           
|Balance (deficit), September 30, 1996                                                                                                               |  | $      | 3,241 |         |  | $           | 3,843,918 |            |  | $           | (5,541,401  | ) |  | $ | (1,694,242 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of stock, July 1997 (50,000
shares at $2.00 per share                                                                                      |  |        | 50    |         |  |             | 99,950    |            |  |             |             |   |  |   | 100,000    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Conversion of $338,100 of notes payable
to stockholders and accrued interest,
July 1997 (195,596 shares)                                            |  |        | 196   |         |  |             | 390,996   |            |  |             |             |   |  |   | 391,192    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (1,196,036  | ) |  |   | (1,196,036 | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), September 30, 1997                                                                                                               |  |        | 3,487 |         |  |             | 4,334,864 |            |  |             | (6,737,437  | ) |  |   | (2,399,086 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (797,099    | ) |  |   | (797,099   | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), September 30, 1998                                                                                                               |  |        | 3,487 |         |  |             | 4,334,864 |            |  |             | (7,534,536  | ) |  |   | (3,196,185 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (243,660    | ) |  |   | (243,660   | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 1998                                                                                                                |  |        | 3,487 |         |  |             | 4,334,864 |            |  |             | (7,778,196  | ) |  |   | (3,439,845 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value)                                   |  |        | 67    |         |  |             |           |            |  |             | (67         | ) |  |   |            |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Conversion of $238,165 of notes payable to
stockholders and accrued interest, various
months during 1999 (147,602 shares)                           |  |        | 148   |         |  |             | 295,056   |            |  |             |             |   |  |   | 295,204    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of stock for expenses, August
1999 (181,619 shares at $.16 per share)                                                                      |  |        | 182   |         |  |             | 28,877    |            |  |             |             |   |  |   | 29,059     |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (1,200,792  | ) |  |   | (1,200,792 | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 1999                                                                                                                |  |        | 3,884 |         |  |             | 4,658,797 |            |  |             | (8,979,055  | ) |  |   | (4,316,374 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of stock for exercise of warrants
by stockholders, various months
(130,000 shares at $2.00 per share)                                      |  |        | 130   |         |  |             | 259,870   |            |  |             |             |   |  |   | 260,000    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Conversion of $158,735 of notes payable to
stockholders and accrued interest, various
months (110,206 shares)                                       |  |        | 110   |         |  |             | 220,302   |            |  |             |             |   |  |   | 220,412    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of compensatory stock options                                                                                                              |  |        |       |         |  |             | 190,536   |            |  |             |             |   |  |   | 190,536    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (2,021,863  | ) |  |   | (2,021,863 | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), December 31, 2000                                                                                                                |  |        | 4,124 |         |  |             | 5,329,505 |            |  |             | (11,000,918 | ) |  |   | (5,667,289 | )
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Issuance of stock for exercise of warrants by
stockholders, various months (489,750 shares
at $2.00 per share and 338,637 shares at $.16
per share) |  |        | 828   |         |  |             | 1,032,854 |            |  |             |             |   |  |   | 1,033,682  |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Conversion of $117,377 of Convertible Debentures
plus interest, various months, (82,808 shares at
$2.00 per share)                                  |  |        | 83    |         |  |             | 165,533   |            |  |             |             |   |  |   | 165,616    |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Net loss                                                                                                                                            |  |        |       |         |  |             |           |            |  |             | (1,774,849  | ) |  |   | (1,774,849 | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  
|Balance (deficit), September 30, 2001                                                                                                               |  | $      | 5,035 |         |  | $           | 6,527,892 |            |  | $           | (12,775,767 | ) |  | $ | (6,242,840 | )
|                                                                                                                                                    |  |        |       |         |  |             |           |            |  |             |             |   |  |   |            |  

See notes to financial statements.

6



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##### Table of Contents



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

|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |          |          |         | 
|--------------------------- | --------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ----------------------------------------- | ---------- | ------------------ | --------- | ------------------------------- | -------- | ----------- | --------- | ---------- | -------- | -------- | ------- | 
|                            |                                                     |                                          |                                       |                                           |            | Cumulative         |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | During             |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | Development        |           |                                 |          |             |           |            |          |         
|                            |                                                     |                                          |                                       |                                           |            | Stage Through      |           | Nine Months Ended September 30,
|                            |                                                     |                                          |                                       |                                           |            | September 30, 2001 |           | 2001                            |          | 2000       
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |            
|                            |                                                     |                                          |                                       |                                           |            | (Unaudited)        |           | (Unaudited)                     |          | (Unaudited)
|Operating activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                           
|                           
|                           
|                           
|                            | Net loss                                            |                                          | $                                     | (12,775,700                               | )          |                    | $         | (1,774,849                      | )        |             | $         | (1,307,144 | )       
|                           
|                           
|                           
|                           
|                            | Items not requiring
(providing) cash:               |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |         
|                           
|                           
|                           
|                           
|                            |                                                     | Depreciation                             |                                       |                                           | 19,809     |                    |           |                                 |          |             |           |            |          |         
|                           
|                           
|                           
|                           
|                            |                                                     | Expenses funded by Common
Stock issuance |                                       |                                           | 700,338    |                    |           |                                 | 75,000   |             |           |            |          |         
|                           
|                           
|                           
|                           
|                            |                                                     | Other                                    |                                       |                                           | (123,546   | )                  |           |                                 |          |             |           |            | (23,644  | )       
|                           
|                           
|                           
|                           
|                            | Changes in:                                         |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |            |         
|                           
|                           
|                           
|                           
|                            |                                                     | Advances to officers                     |                                       |                                           | (1,243,016 | )                  |           |                                 | (245,018 | )           |           |            | (139,000 | )       
|                           
|                           
|                           
|                           
|                            |                                                     | Other receivables                        |                                       |                                           | (137,455   | )                  |           |                                 | (12,604  | )           |           |            | (23,112  | )       
|                           
|                           
|                           
|                           
|                            |                                                     | Accounts payable                         |                                       |                                           | 983,797    |                    |           |                                 | 43,997   |             |           |            | 53,892   |         
|                           
|                           
|                           
|                           
|                            |                                                     | Accrued expenses                         |                                       |                                           | 1,832,658  |                    |           |                                 | 627,536  |             |           |            | 396,583  |         
|                           
|                           
|                           
|                           
|                            |                                                     | Deferred compensation                    |                                       |                                           | 2,537,403  |                    |           |                                 | 290,513  |             |           |            | 308,245  |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          | Net cash used in
operating activities |                                           |            | (8,205,712         | )         |                                 |          | (995,425    | )         |            |          | (734,180 | )      
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Investing activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                           
|                           
|                           
|                           
|                            | Purchase of fixed assets                            |                                          |                                       | (19,808                                   | )          |                    |           |                                 |          |             |           |            |         
|                           
|                           
|                           
|                           
|                            | Other                                               |                                          |                                       | 314,082                                   |            |                    |           |                                 |          |             |           | 23,644     |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          |                                       | Net cash provided by
investing activities |            |                    | 294,274   |                                 |          |             |           |            |          |          | 23,644  | 
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Financing activities:       |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                           
|                           
|                           
|                           
|                            | Proceeds from issuance of
Common Stock and warrants |                                          |                                       | 3,939,244                                 |            |                    |           | 958,682                         |          |             |           | 5,000      |         
|                           
|                           
|                           
|                           
|                            | Proceeds from notes payable                         |                                          |                                       | 1,665,609                                 |            |                    |           |                                 |          |             |           |            |         
|                           
|                           
|                           
|                           
|                            | Proceeds from convertible debentures                |                                          |                                       | 3,425,000                                 |            |                    |           | 613,000                         |          |             |           | 677,000    |         
|                           
|                           
|                           
|                           
|                            | Payments on notes payable                           |                                          |                                       | (154,609                                  | )          |                    |           |                                 |          |             |           |            |         
|                           
|                           
|                           
|                           
|                            | Other                                               |                                          |                                       | 108,410                                   |            |                    |           |                                 |          |             |           |            |         
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|                            |                                                     |                                          |                                       | Net cash provided by
financing activities |            |                    | 8,983,654 |                                 |          |             | 1,571,682 |            |          |          | 682,000 | 
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Increase (decrease) in cash |                                                     |                                          | 1,072,216                             |                                           |            |                    | 576,257   |                                 |          |             | (28,536   | )         
|                           
|                           
|                           
|                           
|Cash, beginning of period   |                                                     |                                          | 0                                     |                                           |            |                    | 495,959   |                                 |          |             | 101,091   |           
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           
|Cash, end of period         |                                                     | $                                        | 1,072,216                             |                                           |            | $                  | 1,072,216 |                                 |          | $           | 72,555    |           
|                            |                                                     |                                          |                                       |                                           |            |                    |           |                                 |          |             |           |           

See notes to financial statements.

7



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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)




NOTES TO FINANCIAL STATEMENTS (Unaudited)


September 30, 2001


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-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-months periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001.

The balance sheet at December 31, 2000 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-K/A for the year
ended December 31, 2000.

NOTE 2: Loss Per Common Share

Loss per common share is computed by dividing the net loss for the period by
the weighted average number of shares outstanding during the period, adjusted
for warrants issued within twelve months of the Companys initial public
offering filing date (February 27, 1992) which are treated as outstanding for
all periods presented. The adjusted weighted average number of common shares
used in the basic and diluted loss per share computations were 3,877,648 shares
for the period cumulative since inception through September 30, 2001, 4,739,438
and 4,466,434 shares for the nine-month periods ended September 30, 2001 and
2000, respectively, and 5,301,290 and 4,500,924 shares for the three-month
periods ended September 30, 2001 and 2000, respectively.

Warrants to purchase approximately 1,030,000 shares of the Companys common
stock (Common Stock) and stock options awarded to officers and others for
1,500,000 shares of Common Stock were not included in the computation of
diluted loss per share since the effect would be antidilutive. See Note 3 for
a discussion of the Companys Convertible Debentures.

NOTE 3: Convertible Debentures

At September 30, 2001, the Company had issued $4,584,345 of 15% Convertible
Debentures, Series 98 due January 15, 2003. The holders of the 15%
Convertible Debentures can convert the principal amount and accrued interest
($1,518,965 at September 30, 2001) into shares of Common Stock at the
conversion price of $2.00 per share at any time prior to the maturity date.

8



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##### Table of Contents



The Company halted the sale of the Series 98 Convertible Debentures during
June 2001 and the Board of Directors authorized a new series of Convertible
Debentures in the principal amount of $3,000,000. The Series 01 Convertible
Debentures bear interest at the rate of 10% per annum, and mature
July 15, 2006. The holders of the 10% Convertible Debentures can convert the principal amount
and accrued interest ($15,066 at September 30, 2001) into shares of Common
Stock at a price of $6.00 per share at any time prior to the maturity date. At
September 30, 2001, the Company had issued $961,266 of the 10% Convertible
Debentures ($613,000 for cash, $218,036 in satisfaction of accounts payable
balances and $130,230 in satisfaction of net deferred compensation balances due
to officers of the Company (see Note 4)).

NOTE 4: Deferred Compensation

The Companys employment agreements with its officers provide that any amounts,
earned as salary and incentive compensation which have not been paid by the
Company, be classified as deferred compensation and accrue interest (which is
added to the deferred compensation balance) based on the prime rate of a local
bank until payment. A resolution adopted by the Companys Board of Directors
provides that amounts due from officers may be offset against deferred
compensation amounts.

On August 31, 2001, the Company issued $130,230 of Series 01, 10% Convertible
Debentures to its officers in partial satisfaction of the outstanding net
deferred compensation balance (deferred compensation amount of $532,098 less
$382,454 of advances to officers and related accrued interest in accordance
with the Board resolution) as of that date.

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 Technologies (as
defined herein). 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 Series 01 Convertible Debentures
will be sold to raise working capital as needed (See Note 3). As more fully
described in Note 7 of Notes to Financial Statements in the Companys Annual
Report on Form 10-K/A for the year ended December 31, 2000, the Company has
entered into a warrant agreement with an individual, which can provide $250,000
of working capital on a quarterly basis through September of 2002. Management
is actively pursuing commercial contracts to produce fees from projects
involving the Technologies. The sale of stock pursuant to private placement or
public offerings is another alternative under consideration by management.

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

9



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

Forward-Looking Statements

This material includes statements that may constitute forward-looking
statements, usually containing the word believe, estimate, project,
expect or similar expressions. Forward-looking statements inherently involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. Factors that would cause or contribute to
such difference include, but are not limited to, continued acceptance of the
Companys product and services in the market place, competitive factors,
changes in regulatory environments and other risks as disclosed in the
Companys periodic report filings with the U.S. Securities and Exchange
Commission (the Commission).

Business Plan

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

Cash Requirements. The Company has incurred net losses since inception and
will require substantial additional capital to continue commercialization of
the previously demonstrated clean water and clean energy technologies (the
Technologies) and a clean energy technology known as the ThermoEnergy
Integrated Power System (TIPS), which converts any biomass into electricity
without producing air emissions, and is aimed at competing with conventional
energy (fossil fuel) conversion technologies. The exact cash requirements of
the Company for the next 12 months are not currently known and will depend on
the level of activity required in pursuing commercialization of its
Technologies. Reference is made to the Financial Statements in the Companys
Annual Report on Form 10-K/A for the year ended December 31, 2000, for past
cash requirements. It is unlikely that cash requirements will decrease, and if
there is a substantial increase in business activity the cash requirements will
likely increase. The Company entered into a warrant agreement with Dan Cowart,
Atlanta, Georgia, which has provided $250,000 of working capital for each of
the last four quarters and can provide $250,000 each quarter through September
of 2002. The arrangement with Mr. Cowart is more fully explained in Note 7 to
the Financial Statements in the Companys Annual Report on Form 10-K/A for
the year ended December 31, 2000. The Company halted the sale of its Series
98 15% Convertible Debentures, which are convertible into shares of the
Companys Common Stock at a price of $2.00 per share, as of June 20, 2001. As
of that date the Board of Directors authorized a new series of convertible
debentures in the principal amount of $3,000,000, designated Series 01. The
Series 01 Convertible Debentures bear interest at the rate of 10% per annum,
mature July 15, 2006 and are convertible into shares of Common Stock at a price
of $6.00 per share. During the quarter ended September 30, 2001 the Company
issued $613,000 of the Series 01 Convertible Debentures for cash. The Company
will attempt to sell the Series 01 Convertible Debentures as necessary to
raise working capital to support an increased level of sales and marketing
activity. Selling additional stock in a private placement or public offering
are other possible alternatives.

Product Research and Development. The Company is the exclusive worldwide
licensee (except for STORS, as hereinafter defined, in Japan) for three clean
water process technologies

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and one process equipment technology developed by Battelle Memorial Institute
(BMI). The four BMI licensed technologies address wastewater problems for
municipal and broad-based industrial markets. These technologies include three
chemical process technologies known as the Sludge-To-Oil Reactor System
(STORS) , Nitrogen Removal (NitRem) and
Ammonia Recovery Process(ARP) . The fourth technology, a Dual-Shell Pressure Balanced vessel
reactor system, (the DSR) , is the unique reactor equipment in which the
STORS and NitRem chemistries are conducted (STORS, NitRem, ARP and DSR are
collectively referred to as the Water Technologies). The Water Technologies
have all been successfully demonstrated, and management is actively pursuing
commercial contracts to produce profits and/or royalties from projects
involving these Water Technologies.

The Company is heavily reliant on the ability and financial resources of
established third parties, such as Foster Wheeler Environmental Corporation
(Foster Wheeler) collaborating with the Company in pursuing clean water
projects worldwide. Product research and development in the Water Technologies
at the Company level will not be great in the next 12 months, because the work
that is now required for development of each of them is the design and field
engineering of any actual commercial projects that can be obtained, which will
be done primarily by Foster Wheeler.

The Company was recently granted a patent for its new clean energy technology
known as the TIPS process. TIPS is a new thermodynamic process that produces
syngas, electricity and liquid carbon dioxide from a diverse mix of energy
resources with zero air emissions. TIPS removes nitrous oxide, sulfur dioxide,
mercury and particulates (soot). In addition, TIPS captures carbon dioxide in
liquid form for sequestration or beneficial reuse. TIPS feedstocks include
coal, natural gas, oil, biomass, and refuse-derived fuels. TIPS can be used
for new power plant production or used to retrofit existing power plants that
are struggling to meet Clean Air Act regulations.

TIPS is currently in the concept stage of development although most of the unit
operations are proven in existing industrial applications. The Company plans
to direct an international team of engineers and scientists to conduct the
development effort. The Company hopes to obtain a U.S. government grant to
pay the costs of demonstrating the TIPS process, but there is no assurance
that its efforts will be successful.

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

New Employees. On September 3, 2001, the Company formed a new division, Energy
Resources, which will market energy resources, including natural gas, coal, and
oil, to wholesale and retail clients in North America. The Companys new
Energy Marketing Center, located in Denver, Colorado, is part of the Companys
long-term strategy to establish itself as a leader in global emission credit
trading.

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Mr. William D. McCabe, Vice President for Energy Marketing, was hired to head the new
division. Mr. McCabe is a petroleum engineer and a member of the National Petroleum
Council.

Results of Operations

For the nine months ended September 30, 2001, the Company incurred a net loss
of $1,774,849, as compared to $1,307,144 for the nine months ended September
30, 2000. The principal factors for the increase in the net loss between the
nine-month periods were increases in operating expenses and interest expense.
For the three months ended September 30, 2001, the Company incurred a net loss
of $530,964 as compared to $559,498 for the three months ended September 30,
2000.

General and administrative expenses and travel and entertainment expenses
increased during the nine-month periods ended September 30, 2001, compared to
September 30, 2000, due to the Companys efforts to obtain commercial contracts
and promote the TIPS process. Interest expense increased significantly between
the same two periods primarily due to the effect of the 15% Convertible
Debentures.

Liquidity and Capital Resources

During the nine-month period ended September 30, 2001, the Company used
$995,425 of cash in operations compared to $734,180 in the comparable period of
2000.

During 2000 and 2001, the Company met its liquidity needs primarily from
borrowings from stockholders. The Company converted all of its outstanding 10%
notes payable to stockholders to Series 98, 15% Convertible Debentures and
converted the remaining 6.63% notes to shares of Company Common Stock.
Management plans to meet the Companys liquidity needs during the year ending
December 31, 2001, through additional borrowings principally from the issuance
of the Companys Series 01 10% Convertible Debentures. As more fully described
in Note 7 of Notes to Financial Statements in the Companys annual report on
Form 10-K/A for the year ended December 31, 2000, the Company entered into an
agreement with an individual on October 4, 2000 for the issuance of warrants to
purchase 1,000,000 shares of the Companys Common Stock at $2.00 per share.
That individual, who is an officer of the Georgia corporation with which the
Company has a marketing agreement, has exercised the right to purchase 125,000
shares on four occasions within the required three month periods that he must
do so, since a portion of his warrants expire every three months if they are
not exercised.

Management currently expects its Energy Resources Division (Energy Marketing
Center) to recover office start-up costs and meet or exceed on-going operation
overhead by the first quarter of 2002.

Management plans to meet long-term liquidity needs primarily from revenues
derived from commercial contracts the Company hopes to obtain based on its
successful demonstrations of its Technologies.

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Net Operating Losses

The Company had net operating loss carryforwards as of December 31, 2000 of
approximately $7,800,000, which expire in the years 2003 through 2020. 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
$2,994,000 has been established to offset any benefit from the net operating
loss carryforwards, as it cannot be determined when or if the Company will be
able to utilize the net operating losses.

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




PART II  OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Change in Securities.

See the Notes to the Financial Statements and Managements Discussion and
Analysis or Plan of Operation for information concerning the issuance and/or
sale of securities by the registrant during the quarterly period ended
September 30, 2001.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

(a)  STORS Process.

The Company and Foster Wheeler Environmental Corporation (Foster Wheeler),
the lead sub-contractor for the successful demonstration of the Companys
Sludge-To-Oil reactor system (STORS) at the Colton Water Reclamation Facility
(CWRF) in Colton, California, believe

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that the Colton demonstration successfully showed that the STORS process is an
economically viable and effective technology for the treatment and volume
reduction of municipal sludges. The Company and Foster Wheeler have continued
to market STORS to municipalities. Working with Foster Wheeler, the Company
has also proposed utilizing STORS in its response to a competitive bid, Request
For Proposal (RFP) from the City of Atlanta, Georgia as discussed below.

(b)  TIPS Technology.

Management believes that the ThermoEnergy Integrated Power System (TIPS)
technology can be used to economically retrofit existing fossil fuel power
plants, so that the polluting emissions from those plants can be significantly
reduced. Without outside funding the Company does not have sufficient
resources with which to demonstrate this technology. One source of funding
would be to apply to the U.S. Department of Energy for a grant to demonstrate
the effectiveness of this technology, as it did for STORS. The Company has
formed a TIPS development Team, including Sandia National Laboratory and
CANMET (Canadian Government), which has submitted a proposal to the U.S.
Department of Energy for a grant to further develop the TIPS process. At this
time, the Company does not have the ability to evaluate whether it will receive
such a grant.

(c)  Atlanta Bid.

Foster Wheeler and the Company were aware that the City of Atlanta was
preparing the RFP for treatment of its sewer sludge before it was published and
had planned to respond to the RFP in the name of the ThermoEnergy Environmental
Corporation (TENC), a joint venture formed by the Company (49.9% owner) and
Foster Wheeler (50.1% owner). The Company reported this in its prior filings
with the Commission. However, when the RFP was published, Phase I  Statement
of Qualifications contained criteria regarding financial strength and operating
history that TENC could not meet. By bidding directly as the Foster Wheeler
and not through TENC, Foster Wheeler could meet these thresholds for responding
to the RFP. Subsequently, on June 13, 2001, an affiliated entity of Foster
Wheeler submitted a proposal under Phase I Statement of Qualifications
(SOQ) to the City of Atlanta. The SOQ was subsequently approved by the City
of Atlanta.

Phase II of the RFP required all bidders passing the SOQ to submit a 20-year,
fixed-cost bid to privatize the City of Atlantas biosolids handling
operations, including a detailed description of the technology proposed. In
addition, the City distributed a Terms of Agreement document representing the
conditions under which the City would contract with the winning bidder. These
terms were prohibitive and repeated discussions with City of Atlanta officials
to alter the terms proved unsuccessful. Subsequently, the affiliated entity of
Foster Wheeler withdrew from further participation in bidding on the Atlanta
biosolids RFP.

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

(a)  None.

(b)  No reports on Form 8-K were filed during the quarterly period ended
September 30, 2001. Notwithstanding the foregoing, the Company provided
certain information under Item 5 of its Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 2001 concerning, among other things, the status
of the Companys STORS process and TIPS technology and the status of the
Companys efforts to obtain a sewer sludge treatment contract with the City of
Atlanta, Georgia through its relationship with Foster Wheeler.




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: November 13, 2001 |  | THERMOENERGY CORPORATION                                                          
|                       
|                        |  |                                                                                   
|                       
|                        |  | /s/ P.L. MontesiP.L. Montesi, President, Treasurer
and Principal Financial Officer

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