10% CONVERTIBLE PROMISSORY NOTE DUE SEPTEMBER 30, 2013

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF, OR IN PAYMENT OF INTEREST ON, THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR SUCH SHARES OF COMMON STOCK MAY BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUING CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

FOR VALUE RECEIVED, ThermoEnergy Corporation, a Delaware corporation (the “Borrower”), hereby promise to pay to the order of The Quercus Trust (the “Holder”), the sum of Two Million Dollars ($2,000,000.00) on September 30, 2013 (the “Maturity Date”).

Interest on the outstanding principal balance shall be paid at the rate of ten percent (10.0%) per annum, payable in arrears on the last day of each December, March, June and September, commencing on December 31, 2008 and continuing through the Maturity Date (each, an “Interest Payment Date”). Interest shall be computed on the basis of a 365-day year, using the number of days actually elapsed.

At the election of the Borrower by written notice to the Holder, all or any portion of any payment of interest due under this Note on any particular Interest Payment Date may be paid by the issuance to the Holder, on such Interest Payment Date, of shares of the Borrower’s Common Stock, par value $0.001 per share (the “Common Stock”). The number of shares of Common Stock to be issued in payment of interest on any particular Interest Payment Date shall be determined by dividing (i) the amount of interest to be so paid by (ii) ninety percent (90%) of the volume weighted average trading price per share of Common Stock for the ten (10) trading days immediately preceding such Interest Payment Date on the New York Stock Exchange, the American Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or the OTC Bulletin Board, as reported by Bloomberg Financial Markets, or any successor performing similar functions.

The Holder shall have the right at any time and from time to time until the principal and interest on this Note shall have been paid in full, to convert the principal amount of this Note into shares of the Common Stock at the Conversion Price (as such term is hereinafter defined) in effect on the Conversion date (as such term is hereinafter defined). If the Holder exercises its right of conversion, the Holder shall give the Borrower a Notice of Conversion in the form annexed to this Note, setting forth the amount of principal which the Holder is converting into Common Stock (the “Conversion Amount”). The date of such notice is referred to as the “Conversion Date.” Upon delivery to the Borrower of a completed Notice of Conversion, the Borrower shall deliver, within five (5) business days after the Conversion Date (such fifth day being the “Delivery Date”), irrevocable instructions to the transfer agent for the Common Stock to issue and deliver to the Holder a certificate for that number of shares of Common Stock into which the Conversion Amount is being converted. Except to the extent that the entire unpaid principal balance of this Note is being presented for conversion, the Holder shall not be required to present this Note in order to effect conversion, and the Holder shall maintain a ledger setting forth each conversion of principal and interest on this Note and such ledger shall, absent manifest error, be deemed to be binding and conclusive on the Borrower.

This Note may not be prepaid, in whole or in part, without the prior written consent of the Holder. Partial prepayments, if any, shall be applied first to accrued and unpaid interest, and the balance to principal.

1.1.   Conversion Price . The Conversion Price shall be $0.75 per share of Common Stock; provided, however, that the Conversion Price is subject to adjustment as set forth in Section 1.2 of this Note. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount by the Conversion Price in effect on the Conversion Date.

1.2.   Adjustment to the Conversion Price . The Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

1.2.1.   Stock Dividends, Subdivisions and Combinations . If the Borrower shall at any time:

(a)   declare or pay to the holders of its Common Stock a dividend payable in, or other distribution of, shares of Common Stock or in securities convertible into shares of Common Stock (“Convertible Securities”); or

(b)   subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock; or

(c)   combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock;

then (i) the number of shares of Common Stock into which this Note is convertible immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock into which this Note is convertible immediately prior to the occurrence of such event would own or be entitled to receive after the occurrence of such event, and (ii) the then-current Conversion Price shall be adjusted to equal (A) the then-current Conversion Price multiplied by the number of shares of Common Stock into which this Note is convertible immediately prior to the adjustment divided by (B) the number of shares into which this Note is convertible immediately after such adjustment.

1.2.2.   Certain Other Distributions . If at any time the Borrowers shall declare or pay to the holders of its Common Stock any dividend or other distribution of:

( a)   cash;

(b)   any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock); or

(c)   any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock);

then, upon conversion of this Note, the Holder shall be entitled to receive such dividend or distribution as if the Holder had converted the Conversion Amount prior to the date of such dividend or distribution. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 1.2.1 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 1.2.1.

1.2.3   Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets . In case the Borrower shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another Person (where the Borrower is not the survivor or where there is a change in or distribution with respect to the Common Stock), or sell, convey, transfer or otherwise dispose of all or substantially all its property, assets or business to another Person, or effectuate a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of (each, a “Fundamental Corporate Change”) and, pursuant to the terms of such Fundamental Corporate Change, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Common Stock, then the Holder shall have the right thereafter to receive, upon conversion of this Note, such number of shares of common stock of the successor or acquiring corporation or of the Borrower, if it is the surviving corporation, and Other Property as is receivable upon or as a result of   such Fundamental Corporate Change by a holder of the number of shares of Common Stock into which this Note is convertible immediately prior to such Fundamental Corporate Change. In case of any such Fundamental Corporate Change, the successor or acquiring corporation (if other than the Borrower) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Note to be performed and observed by the Borrower and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Borrower) in order to provide for adjustments of shares of Common Stock into which this Note is convertible which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 1.2. For purposes of this Section 1.2.3, “common stock of the successor or acquiring corporation” shall include