SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10KSB


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

         For the Fiscal Year Ended DECEMBER 31, 1998

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

         For the transition period from __________ to ___________

                         Commission File Number 0-22434


                             AQUA CARE SYSTEMS, INC.
                 (Name of small business issuer in its charter)

         DELAWARE                                13-3615311    
(State or other jurisdiction of                (I.R.S. Employer
 incorporation or organization)               Identification No.)

                   11820 NW 37 STREET, CORAL SPRINGS, FL 33065
             (Address of principal executive offices)(Zip Code)

Issuers's telephone number: (954) 796-3338

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered under Section 12(g) of the Exchange Act:

                                TITLE OF CLASSES

                          Common Stock, $.001 par value


                Page 1 of 47, (including pages F-1 through F-21)
                            Index to Exhibits Page 25

<PAGE>

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

                  Yes  X                    No ___

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

         Issuer's revenues for its most recent fiscal year: $26,449,286

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant (computed by reference to the average bid and asked prices of
such stock) as of February 28, 1999 was approximately $2,473,979.

         There were 2,827,404 shares of Common Stock, $.001 par value,
outstanding at February 28, 1999.

         Transitional Small Business Disclosure Format (check one):

                  Yes _____ ;               No  X 

         DOCUMENTS INCORPORATED BY REFERENCE: See Item 13, Exhibits and Reports
on Form 8-K, for items incorporated by reference into this Annual Report on Form
10-KSB.

                                      - 2-

<PAGE>

                                     PART I


ITEM 1.           DESCRIPTION OF BUSINESS.

GENERAL

         Aqua Care Systems, Inc., (the "Company" or "ACSI"), is a Florida-based
Delaware corporation. ACSI is engaged in the design, engineering, manufacturing,
assembly, sales, marketing, distribution and service of filtration systems and
products, flow control systems and products, water filtration and purification
products, and car wash equipment sales and service.

         The Company has implemented a strategy to focus on the critical fluid
handling needs of the process industries. The Company believes there are
excellent opportunities for profitable growth in these markets. ACSI's ability
to successfully implement its strategy is supported by the acquisition of the
metering pump and filtration systems businesses from Durco International, Inc.
in June 1997. These businesses focus on providing added value to customers
through end user price and quality enhancement by providing specially designed
high end products to meet the technically demanding needs in their respective
markets. ACSI's plan is to substantially increase its presence in the fluid
handling and filtration markets. The Company intends to selectively invest in
internal growth and pursue additional acquisitions that may enhance its existing
competencies, market presence and overall profitability. Since the acquisition
of the metering pump and filtration systems businesses, the Company has
increased the emphasis on its respective sales and marketing organizations.

         In addition to the Company's focus on opportunities in the fluid
handling business, it continues to provide management services to its other
operating subsidiaries. The Company has organized its active, wholly owned
subsidiaries into three divisions; (a) industrial and municipal fluid handling
and filtration, (b) commercial and residential water filtration and purification
and (c) car wash equipment sales and service.

ACQUIRED SUBSIDIARIES

         Since inception, the Company acquired several businesses including
Filtration Systems Division of Aqua Care Systems, Inc., ("FSDA"), and Gravity
Flow Systems, Inc., ("GFSI"), both in the industrial and municipal fluid
handling and filtration markets; KISS International, Inc., ("KISS"), and Di-tech
Systems, Inc., ("DTSI"), both engaged in commercial and residential water
filtration and purification businesses and Car Wash Equipment & Supply, Ryko of
South Florida, Inc., ("CWES"), involved in car wash equipment sales and service.

         The Company will continue to engage in an acquisition program which may
result in a substantial change in ACSI's business operations and financial
condition. As consideration for any acquisition, in addition to the payment of
cash (if any), ACSI may issue notes, common stock, preferred stock or other
securities. It is intended that key employees of acquired companies generally
will become employees of the subsidiaries and, as such, will hold management
positions in such subsidiaries. ACSI does not intend to seek stockholder
approval for any acquisitions unless required by applicable laws or regulations.

                                      - 3 -

<PAGE>

DISPOSED SUBSIDIARIES

         During the fourth quarter of 1998, the Company sold substantially all
of the assets of wholly owned subsidiaries Midwest Water Technologies, Inc. and
EnviroSystems Supply, Inc. (See Part II, Item 6 and Note 13(b) and (c) of "Notes
to Consolidated Financial Statements" for further discussion.)

OPERATIONS

         INDUSTRIAL AND MUNICIPAL FLUID HANDLING AND FILTRATION.

         FSDA encompasses two operating businesses located in Angola, New York.
Other than a shared administrative building, each business has its own separate
facilities. The two entities are now managed as a) the Filtration Systems
Division, ("FSD"), and b) the Metering Pump Division, ("MPD"). Both divisions
primarily serve the industrial and municipal chemical, petrochemical, mining,
pulp and paper, oil and gas, food, beverage and water and waste water markets.

         MPD's products add a liquid or gas to another liquid or gas process in
precise and reproducible volumetric requirements. MPD's metering pumps are
primarily used in the chemical and petro-chemical markets. This entity has three
main pump models which are available in numerous configurations. MPD offers one
of the market's most recently designed product lines, the development of which
was supported by the financial resources of the previous owner. Based on that
design advantage, MPD focuses on special application market segments for
solutions requiring highly engineered products. Management believes that the
growth of its market is driven by general economic growth, as well as industry
cost efficiency mandates. MPD sells through regional sales managers primarily to
independent representatives, distributors and original equipment manufacturers.
The selling effort focuses on both engineering firms who typically purchase
large quantities as part of major systems installations and directly to end
users. MPD has not historically relied on marketing programs to sell its
products, but intends to implement both distributor marketing programs and
selective direct marketing.

         FSD manufactures a) filter presses, b) pressure leaf filters and c)
tubular filters. All three types of filters are large units used in industrial
applications. The demand for each filter is based on the solids concentration,
level of purification required and the flow rate of the liquid used in the
process. These manufactured products, along with the technical expertise of the
employee base, allow FSD to address the filtration and separation needs such as
those found in food and beverage processing, chemical manufacture, and oil and
gas refining. FSD has approximately 40 years of experience in supplying quality
systems and components to the process industries.

         Filter presses are large, steel-framed structures with pneumatically
driven square filter plates used to separate solids from liquids that contain
high solids concentration. They are used to dewater sludge, separate chemicals
such as dyes and pigments from liquid in industrial applications and in food
processing to separate chemicals from liquids. Typically, liquid slurry is
pumped into the filter press. The liquid passes through the filter and flows to
a discharge port to be captured or disposed of. Pressure from a feed pump forces
out more liquid. The solids are compacted into a dry "cake" which is dropped
into a handling system. In manufacturing and food processing applications, the
solid material captured in dry form can be disposed of at a lower cost or
reused.

                                      - 4 -

<PAGE>

         Pressure leaf filters are large vessel type filters used for liquids
containing medium level solids concentration and for use when a high level of
clarification is desirable. Pressure leaf filters are used in chemical,
pharmaceutical and beverage applications to remove sub-micronic solids from a
liquid. Generally, a liquid is pumped into a closed vessel, which contains a
filter septum and out through a discharge pipe leaving behind the trapped
solids. As compared to a filter press, the leaf filters separate smaller
particles, down to one-tenth micron removal, can handle high flow rate and can
discharge wet or dry cakes.

         Tubular filters are much smaller than filter presses or pressure leaf
filters and allow for the highest flow rate, although with the lowest solids
concentration. Tubular filters can be used for such applications as mineral
acids clarification and for the ultra pure water needs for applications such as
semiconductor manufacturing.

         The management of FSD believes that the market for its products is
driven by global production growth and the increasing need/benefit for
eliminating unwanted contaminants to ensure safe and/or constant quality
products. Specific factors creating new application requirements include
improved detection and monitoring levels, environmental consciousness and cost
savings to recycle certain elements. Management's goal is to seek market
opportunities where it believes it has a competitive advantage through value
added systems engineering and demonstrated competence through a large base of
successful installations. FSD sells through regional sales managers who work
with independent representatives selling to engineering firms and directly to
end-users. FSD intends to support its sales effort with print advertising in
trade journals, trade show attendance, direct marketing and public relations. As
a result of the systems project nature of the business, revenues and operating
income can vary significantly on a month to month basis.

         GFSI's operations were relocated to the FSDA location in Angola, New
York in August 1997. Its product line is comprised of Wedgewater(TM) filter bed
systems for sludge de-watering, lateral flow sludge thickener systems and
Wedgewater(TM) sieve systems. The patented Wedgewater(TM) filter bed system
generally is utilized by municipalities servicing populations of 30,000 or less
and utilizes one-sixth to one-tenth the space and requires significantly less
time to de-water sludge as compared with conventional sand/gravel filter beds.
Several other advantages to this technology include, but are not limited to,
lower operating and maintenance costs, exceptional reliability and improved
operating environments. GFSI has sold and installed over 300 systems through 26
domestic and international representatives.

         COMMERCIAL AND RESIDENTIAL WATER FILTRATION AND PURIFICATION.

         The Company owns two operating entities in the residential water
filtration and purification industries. KISS, which operates in southern
California, is a manufacturer and distributor of water filtration and
purification products primarily for residential applications. It owns molds for
various major components, such as filter housings, membrane housings and control
valves. KISS distributes its products through dealers, distributors and
wholesalers throughout the United States and internationally. DTSI, located in
the same facility as KISS, produces a line of water purification and ion
exchange cartridges that it markets under the Di-tech brand name through dealers
and distributors primarily to original equipment manufacturers.

                                      - 5 -

<PAGE>

         KISS and DTSI assemble the majority of their product lines. Their
products are installed by the Company's dealers or shipped as finished goods to
wholesalers and retailers. KISS manufactures and sells its products to dealers
who in turn re-sell the products to customers. In most cases KISS and DTSI
bundle their respective products into a package and sell such packages as whole
house water solutions. ACSI offers consumers financing of their purchases from
ACSI's dealers through a third party. In the years ended December 31, 1998 and
1997, ACSI recognized approximately $852,000 and $779,000, respectively, in
revenues from this financing activity. Because of the competitive nature of the
businesses, the profits from the financing contribute a significant amount to
the entities' profits. ACSI does not assume any credit risk in such financings.
However, changes in the market for such credit could have a material adverse
effect on the businesses. (See Note 12 of "Notes to Consolidated Financial
Statements".)

         The Company recorded a provision for probable losses related to a claim
against a former MWTI customer (dealer) in conjunction with the financing
program offered by the Company through an unrelated lending company for the
Company's dealers in the residential water filtration and purification business
as noted above. The Company has been notified by the lending company of a claim
it has made against such MWTI dealer in the amount of $270,000. Through the
financing arrangement, the Company guarantees its dealers' performance
associated with the bona fide and proper installation and performance of the
Company's subsidiaries' water filtration and purification units and indemnified
such lending company against any losses the lending company incurs as a result
of claims thereunder, other than those related to credit risk. No claim has yet
been asserted against the Company. Although the Company has engaged legal
counsel and is still undergoing a determination of all of the facts and
circumstances surrounding such claim, it has recorded a reserve for $270,000.
(See Note 15(d) of "Notes to Consolidated Financial Statements".)

         CAR WASH EQUIPMENT SALES AND SERVICE.

         CWES is the exclusive distributor in the seven southern counties of
Florida for the sale, installation and continuing service contracts of the
equipment and supplies of Ryko Manufacturing Company, the largest manufacturer
of car wash equipment in the United States. The management of CWES believes that
it has in excess of an 80% share of its market of rollover car washes in its
territory. CWES' customers include, but are not limited to, certain major
national oil companies, independently owned and operated gasoline
distributorships and car wash companies.

SUPPLIERS

         There are several manufacturers and suppliers of the components used in
the manufacturing and assembly of the Company's products. ACSI purchases raw
materials and supplies on terms, usually net 30 days, and to a lesser extent, on
a cash on delivery basis. The Company believes that it generally is not
dependent on any one supplier for products or components utilized by the
subsidiaries. CWES, however, is dependent on a single supplier, Ryko
Manufacturing Company ("Ryko"). CWES is the exclusive distributor in South
Florida for the sale, installation and service of Ryko's rollover car wash
equipment. Such exclusive distributorship prohibits CWES from selling,
installing and/or servicing any car wash equipment from another manufacturer or
supplier. The distributor agreement provides that CWES sells directly or
receives a commission on all Ryko equipment sold within its region. The
agreement is scheduled to expire in July 1999, however, it provides for
automatic renewal upon the achievement of certain sales goals. CWES expects to
meet such goals.

                                      - 6 -

<PAGE>

INSURANCE

         The Company maintains limited product liability insurance. ACSI has not
had a successful significant product liability claim asserted against it since
inception. A substantial products liability claim, determined adverse to ACSI,
could have a material adverse effect on the Company's operations and financial
condition.

BUSINESS SEGMENT INFORMATION

         ACSI's operations consist of three business segments, other than
holding company expenses, for financial reporting purposes; a) industrial and
municipal fluid handling and filtration, b) commercial and residential water
filtration and purification and c) car wash equipment sales and service. (See
Note 11 of "Notes to Consolidated Financial Statements" for a summary of
selected consolidated information for such business segments for the years ended
December 31, 1998 and 1997.)

GOVERNMENTAL REGULATION

         The enactment and enforcement of Federal, state and local laws relating
to water and air quality standards may materially influence the level of sales
of some or all the Company's businesses. Some of the Company's customers utilize
ACSI's products and services in response to regulatory requirements affecting
their businesses. ACSI believes that, as a provider of such products and
services, the Federal or state environmental rules or regulations potentially
applicable to the Company's customers are not directly applicable to ACSI. While
the Company is not aware of any pending or proposed Federal legislation or
regulation that would adversely affect its products or components or limit the
methods in which those products are manufactured, installed or serviced, any
such legislation or regulation could have a material adverse impact on the
Company. Certain states have enacted legislation, which requires licensing,
testing and labeling of flow control, fluid handling, water filtration and
purification and waste water treatment products, including those offered by
ACSI.

COMPETITION

         In the filtration systems and metering pump markets, the Company's
management believes that there is a fragmented specialized approach to
satisfying customers' needs. The Company attempts to compete in market segments
characterized by demand for quality, technologically superior products and
service. However, the Company does compete against companies with substantially
greater resources including U.S. Filter and Milton Roy.

         In the residential filtration and purification markets, the Company
believes that there are thousands of companies involved in various aspects of
water filtration and purification and that the market is highly competitive. The
Company competes with a number of significantly larger companies including
Culligan, EcoWater and Hague in the residential filtration and purification
market. Such market is served by an array of products that are either
"off-the-shelf" or custom-designed. These products range from small carbon
filtration systems to de-ionization systems, reverse osmosis systems,
de-gasifiers, scrubbers, ozone systems, ultra-violet systems and bio-remediation
systems. Many of the residential systems generally are marketed by local
operators across the country.

                                      - 7 -

<PAGE>

EMPLOYEES

         As of February 28, 1999, ACSI and its subsidiaries had 133 full-time
employees, including one executive officer, 21 managerial and administrative
personnel, 12 design and engineering personnel, 67 manufacturing, assembly,
installation and service personnel, and 32 sales and telemarketing personnel.

         As a result of the acquisition of FSDA, the Company became a party to a
collective bargaining agreement with the International Union of Electronic,
Electrical, Salaried, Machine and Furniture Workers, A.F.L. - C.I.O. The Company
negotiated changes to the existing agreement and in July 1997, a collective
bargaining agreement was ratified for the period covering July 17, 1997 through
July 21, 2000. Such agreement applies solely to certain of the employees of
FSDA. Neither the Company nor any of its subsidiaries are subject to any other
collective bargaining agreements.

         ACSI believes its employee relations to be satisfactory.

ITEM 2.           DESCRIPTION OF PROPERTY.

         In connection with the acquisition of FSDA in June 1997, the Company
purchased approximately 60 acres of land and three buildings encompassing
approximately 110,000 square feet in Angola, New York. The buildings are
comprised of a) the manufacturing and assembly facility for the filtration
products group, (approximately 70,000 square feet), b) the manufacturing and
assembly, engineering and administrative facilities of the metering pump group
and the administrative and sales offices of GFSI, (approximately 30,000 square
feet), and c) the administrative office building which contains divisional
management and purchasing, sales and engineering for the filtration operations,
(approximately 10,000 square feet). The above noted properties are encumbered by
a mortgage covering the land and buildings securing a note bearing interest at
prime plus 2.5%, (10.25% at December 31, 1998). The note is payable, principal
and interest monthly, with an estimated balloon payment of approximately
$400,000 due June 2000. The note balance as of December 31, 1998 was $899,600.

         ACSI purchased land and a building in Coral Springs, Florida in July
1996. Such facility encompasses approximately 18,000 square feet of office and
warehouse area and houses ACSI's corporate office, as well as the entire
operations and administration of CWES. The property is encumbered by a first
mortgage lien covering the land and building. The secured note bears interest at
the fixed rate of 9.25% and is payable, principal and interest monthly, with an
estimated balloon payment of approximately $360,000 due June 2001. The mortgage
balance at December 31, 1998 was $412,642.

         The Company leases a facility encompassing 17,000 square feet in Vista,
California which contains the offices, warehouse and manufacturing/assembly
facilities of KISS and DTSI. Such property is leased through July 2002 from a
non-affiliated, third party. The Company's monthly lease expense for the above
noted property approximates $10,000.

         The Company believes that its premises are adequate to permit it and
its subsidiaries to conduct their businesses as they are currently conducted for
the reasonably foreseeable future.

                                      - 8 -

<PAGE>

ITEM 3.           LEGAL PROCEEDINGS.

         On April 9, 1997 Long Trail Brewing Company filed a complaint against
EnviroSystems Supply, Inc., a wholly owned subsidiary of the Company, in Windsor
Superior Court in the County of Windsor in the State of Vermont; Docket number
S216-5-97Wrcv. The complaint alleges, among other matters, breach of express
warranty and specific performance of certain of the parameters of the written
agreement for the purchase of a waste water treatment plant designed to treat
the industrial waste water generated at the Plaintiff's brewing facility.
Management believes, based on facts presently known, that if the outcome of such
legal proceedings is determined adverse to the Company, such determination could
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations. The Company has provided for the estimated
probable loss in connection with this matter.

         The Company is or may become involved in various lawsuits, claims and
proceedings in the normal course of its business including those pertaining to
product liability, environmental, safety and health, and employment matters. The
Company records liabilities when loss amounts are determined to be probable and
reasonably estimatable. Insurance recoveries are recorded only when claims for
recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims, other
than those previously disclosed, will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1998 to a vote of security holders of the Company, through
the solicitation of proxies, or otherwise.

                                      - 9 -

<PAGE>

                                     PART II


ITEM 5.           MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS.

         On September 12, 1997 at the Annual Meeting of Stockholders of Aqua
Care Systems, Inc., the Stockholders authorized the Company to effect a one for
four reverse stock split of all of the issued and outstanding Common Stock of
the Company. The reverse split was effected on February 10, 1998. As such, all
issued and outstanding Common Stock as of such date, 10,888,050, were reduced to
2,722,013 without a commensurate increase in the par value of the Common Stock.
The reverse stock split did not alter the number of authorized shares of the
Company's capital stock, which remains at 35,000,000, consisting of 30,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. Additionally,
all of the Company's issued and outstanding options and warrants to purchase
Common Stock have been reduced by the one for four reverse stock split and
exercise prices were proportionately adjusted upward. All share and per share
amounts contained in this Form 10- KSB have been retroactively adjusted for the
reverse stock split.

         The Company's Common Stock is traded and quoted under the symbol AQCR
on The Nasdaq SmallCap Market ("Nasdaq"). The Company's Class A Warrants and
Class B Warrants which were traded and quoted on Nasdaq under the symbols AQCRW
and AQCRZ, respectively, expired as of October 14, 1998. Accordingly, Units
including one Class A Warrant and one Class B Warrant previously traded and
quoted on Nasdaq under the symbol AQCRU ceased trading as of October 14, 1998.
The following table sets forth the high and low bid prices for the Common Stock,
as quoted on Nasdaq, for the periods indicated, as adjusted for the Company's
one for four reverse stock split which became effective February 10, 1998.
Quotations are interdealer prices without retail markup, markdown or commission,
and may not necessarily represent actual transactions.

                                                         Common Stock
                                                         High     Low
                                                         ----     ---
             Quarter ended
               March 31, 1997                            $3       $1-1/2
               June 30, 1997                             $3       $1-1/2
               September 30, 1997                        $3       $1-3/4
               December 31, 1997                         $2-5/8   $1-5/8
               March 31, 1998                            $3-5/16  $1-7/16
               June 30, 1998                             $3-21/32 $2-1/2
               September 30, 1998                        $2-9/16  $15/32
               December 31, 1998                         $1-5/8   $19/32

             Period ended
               February 28, 1999                         $1-3/8   $3/4

          The Company had 66 owners of record and, it believes, in excess of
1,500 beneficial owners of its Common Stock as of February 28, 1999.

                                     - 10 -

<PAGE>

DIVIDENDS

          Since its inception, the Company has not paid any cash dividends on
its Common Stock. The Company intends to retain future earnings, if any,
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan, for the reasonably
foreseeable future, to pay cash dividends to holders of the Common Stock. Any
decisions as to the future payment of dividends will depend on the earnings and
financial position of the Company and such other factors as the Company's Board
of Directors deems relevant.


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS.

          The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-KSB.

BUSINESS PLAN

          The Company was formed for the purpose of pursuing acquisitions,
primarily in the non- chemical waste water treatment and water filtration and
purification industries. It has since expanded its pursuit of acquisitions to
include the fluid handling and filtration and car wash equipment markets. The
Company is a holding company which, through its subsidiaries, operates
businesses that it has acquired with the intent to build an integrated fluid
handling, filtration and purification equipment manufacturing, distribution and
service entity. The Company desires to offer a variety of products and
technologies through its acquisitions of companies, assets or businesses, which
will provide added value to customers through end user price and quality
enhancement by providing specially designed high end products to meet the
technically demanding needs in their respective markets. The Company intends to
selectively invest in internal growth and pursue additional acquisitions that
may enhance its existing competencies, market presence and overall
profitability.

          As a result of acquisitions, the Company's revenues have gradually
increased. In achieving this growth, the Company has expended significant cash
in making the acquisitions and developing the operations of its wholly-owned
subsidiaries. In this connection, see "Financial Condition and Liquidity" below.

                                     - 11 -

<PAGE>

RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998 AND 1997

          Presented below are the condensed consolidated results of operations
for the Company for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                     Year ended                            Year ended
                                                     December 31, 1998                     December 31, 1997
                                                     -----------------                     -----------------
<S>                                                  <C>                                   <C>         
Revenues                                             $  26,449,286                         $ 23,901,102
Cost of revenues                                        16,362,350                           15,363,522
                                                        ----------                           ----------

Gross profit                                            10,086,936                            8,537,580
Operating expenses                                      12,076,625                            7,739,601
                                                        ----------                            ---------

(Loss) income from operations                           (1,989,689)                             797,979
Interest expense, net                                     (857,344)                            (561,342)
Other income                                               150,000                              130,163
                                                        ----------                           ----------

Net (loss) income                                    $  (2,697,033)                        $    366,800
                                                        ==========                           ==========

(Loss) earnings per common share - basic             $       (0.98)                        $       0.14
                                                        ==========                           ==========

(Loss) earnings per common share - diluted           $       (0.98)                        $       0.13
                                                        ==========                           ==========
</TABLE>

         Revenues increased by $2,548,184, or 10.7%, from $23,901,102 for the
year ended December 31, 1997, to $26,449,286 for the year ended December 31,
1998. Of this increase, $4,579,724 was due to additional sales of filtration
systems and metering pumps generated by the Filtration Systems Division acquired
from Durco International, Inc. in June 1997, along with a $1,174,013 increase in
sales of car wash machines and ancillary equipment of Car Wash Equipment and
Supply, Ryko of South Florida, Inc. and a $695,758 increase in sales of
commercial and residential water purification products and financing fees earned
by KISS International, Inc. Such increases were offset by a $2,080,851 decrease
in sales of municipal, industrial and commercial waste water treatment equipment
and waste water treatment plants of Gravity Flow Systems, Inc., ("GFSI"), and
EnviroSystems Supply, Inc., ("ESSI"), and a $1,820,460 decrease in sales of
commercial and residential water purification products and financing fees
generated by Midwest Water Technologies, Inc., ("MWTI"). ESSI and MWTI ceased
operations in the second and third quarters of 1998, respectively. On a
consolidated basis, revenues have continued to increase since inception in 1990.
Management regularly attempts to enhance revenues through acquisitions as well
as augmentation of its current businesses. Significant resources have been, and
will continue to be, utilized in order to further advance the Company's
subsidiaries' channels to, and overall presence in, their markets.

          Cost of revenues increased by $998,828 or 6.5%, from $15,363,522 for
the year ended December 31, 1997, to $16,362,350 for the year ended December 31,
1998. As a percentage of revenues, these amounts represented 64.3% for 1997 as
compared to 61.9% for 1998. The decrease in cost of revenues as a percentage of
revenues primarily was due to the addition of the sales of the Filtration
Systems Division acquired in June 1997. The cost of revenues of such entity is
comprised of lower materials and components costs than the aggregate cost of
revenues of the Company's other subsidiaries.

                                     - 12 -

<PAGE>

          Gross profit increased $1,549,356 or 18.1% from $8,537,580 for the
year ended December 31, 1997 to $10,086,936 for the year ended December 31,
1998, which, as a percentage of revenues, represented an increase from 35.7% to
38.1%, respectively, for such periods.

          The Company's operating expenses increased $4,337,024, or 56.0%, from
$7,739,601 for the year ended December 31, 1997 to $12,076,625 for the year
ended December 31, 1998. As a percentage of revenues, these expenses increased
from 32.4% for 1997 to 45.7% for 1998. The $4,337,024 increase includes
non-recurring charges of $1,974,851, of which $1,052,039 was due to the
permanent impairment of certain of the Company's operating subsidiaries'
intangible assets related to GFSI, ESSI and MWTI and $922,812 consisted of
provisions for doubtful accounts and existing claims and litigation and costs
incurred relating to the termination of a proposed acquisition, as described
below. The balance of the above noted increase is comprised of $2,362,173 in
additional operating expenses mainly attributable to the Filtration Systems
Division, ("FSDA"), which was purchased in June 1997. Only seven months of
operations for FSDA were included in the year ended December 31, 1997, as
opposed to twelve months included in the year ended December 31, 1998.
Management evaluates operating expenses on a regular basis, and as such, adjusts
resources allocated to cover such expenses. Optimum levels of operating expenses
are targeted and adjusted according to business levels in order to provide
maximum efficiency and effectiveness.

          GFSI has sustained substantial decreases in revenues and backlog
mainly due to customer and independent sales representative attrition, employee
turnover and new competition from previous affiliates. Although the Company has
taken certain actions which it believes will enhance the future performance of
GFSI, there are increased risks and diminished expectations associated with
expected future operating performance. As such, based upon future cash flow
projections, the Company has recorded a provision for the impairment of
intangible assets recorded as part of the acquisition of GFSI in 1994,
($659,041).

          During the second quarter of 1998, pursuant to incurring substantial
losses due to increased competition, exhaustion of its entire backlog, the
entrance into the market of more efficient, effective products from other
entities, ESSI's inability to attract new business and therefore continue to
sustain its own operations and management's decision that additional investments
in ESSI would not be in the long-term best interest of the Company's
shareholders, the operations of ESSI were discontinued. Concurrent with such
cessation of ESSI's operations, the Company recorded a provision for the
impairment of intangible assets, ($81,207); and provisions for costs to be borne
in relation to the shut down, including those for doubtful accounts and existing
claims and litigation, ($280,000). ESSI's net assets were sold in December 1998,
(See Note 13(c) in "Notes to Consolidated Financial Statements").

          Pursuant to adverse business conditions, including the recent entrance
of a new competitor into the market and such competitor's engagement of former
employees of MWTI, significant employee turnover and customer loss through the
second quarter of 1998, MWTI has sustained continued losses and what the Company
believes to be a permanent impairment of the goodwill recorded as part of the
acquisition of MWTI in 1995. As a result of such conditions, management
restructured the remaining employee base, eliminated certain unprofitable
customers and reduced its product offerings, thus downsizing such entity to
compete as a smaller business in higher margin customer niches. In response to
the increased risk and diminished expectations associated with the expected
future operating performance and claims involving the previous owner of MWTI,
the Company recorded an impairment of intangible assets, ($311,791); and
provisions for costs to be borne in relation to the shut down, including those
for doubtful accounts, ($290,000). MWTI's net assets were sold in October 1998,
(See Note 13(b) in "Notes to Consolidated Financial Statements").

                                     - 13 -

<PAGE>

         Additionally, the Company recorded a provision for probable losses
related to a claim against a former MWTI customer (dealer) in conjunction with
the financing program offered by the Company through an unrelated lending
company for the Company's dealers in the residential water filtration and
purification business, (See Note 12 in "Notes to Consolidated Financial
Statements"). The Company has been notified by the lending company of a claim it
has made against such MWTI dealer in the amount of $270,000. Through the
financing arrangement, the Company guarantees its dealers' performance
associated with the bona fide and proper installation and performance of the
Company's water filtration and purification units and indemnifies such lending
company against any losses the lending company incurs as a result of claims
thereunder, other than those related to credit risk. No claim has yet been
asserted against the Company. Although the Company has engaged legal counsel and
is still undergoing a determination of all of the facts and circumstances
surrounding such claim, it has recorded a reserve of $270,000. Also, the Company
expensed previously capitalized amounts relating to the termination of the
proposed acquisition of Williams Instrument Company amounting to $82,814.

          Interest expense, net, increased $296,002 from $561,342 for the year
ended December 31, 1997 to $857,344 for the year ended December 31, 1998. This
increase was mainly attributable to interest expense on debt incurred as part of
the acquisition of FSDA in June 1997 and additional debt incurred primarily for
working capital needs in July 1998.

          Principally as a result of the factors described above, the Company
incurred a net loss of $(2,697,033) for the year ended December 31, 1998 as
compared to net income of $366,800 earned for the year ended December 31, 1997.

FINANCIAL CONDITION AND LIQUIDITY

          At December 31, 1998, the Company had $573,129 of cash and cash
equivalents, working capital of $628,295, assets of $14,567,448, long-term debt,
net of current maturities, of $3,575,964 and stockholders' equity of $5,268,357.
The Company's operating activities provided $278,870 of cash, as a result of
provisions for impairment of intangible assets and doubtful accounts and notes
($1,378,987); depreciation and amortization ($704,808); an increase in accounts
payable and accrued expenses ($485,888); decreases in accounts receivable and
cost and estimated earnings in excess of billings ($366,098); a decrease in
inventory ($205,000); pension contribution paid through the issuance of Common
Stock ($62,788); and a decrease in other assets ($19,685); offset by the net
loss ($2,697,033); gain on sale of net assets ($150,000); and an increase in
prepaids and other ($97,351). Investing activities used $56,593 due to capital
expenditures ($371,274); offset by payments received for sale of net assets
($210,275) and payments received on notes receivable ($104,406). Financing
activities used $304,080 of cash, due to repayments of notes payable and
long-term debt ($16,474,770); offset by the net proceeds from issuance of notes
payable and long-term debt ($16,170,690).

          During July 1998, the Company received net proceeds of $1,465,847 from
the issuance of $1,500,000 in secured subordinated debentures which bear
interest at the rate of 12% per year. The Debentures are due June 2003 with no
pre-payment penalty. Interest is payable quarterly. In conjunction with the
issuance of the Debentures, the Company issued 115,500 warrants to purchase the
Company's Common Stock at an exercise price of $2.60 per share. Such warrants
were valued at $53,000 in additional paid in capital and included in other
assets as deferred financing costs, amortized

                                     - 14 -

<PAGE>

over five years. The warrants contain certain call provisions based on the
repayment of the Debentures and certain market contingencies. Additionally,
beginning July 1999 and on each anniversary thereafter that the Debentures
remain outstanding, the Company has agreed to issue 30,000 warrants with an
exercise price equal to the average bid price for the 20 days prior to such
anniversary dates. During 1998, the Company, in conjunction with its sale of the
assets of MWTI and ESSI, paid $300,000 of the principal of the Debentures,
leaving a principal balance remaining of $1,200,000 at December 31, 1998.

          Management expects to continue to make acquisitions to expand the
Company's markets. As consideration for an acquisition, the Company may issue
Common Stock, Preferred Stock, or other securities, notes or cash. Since cash
may be required either to consummate acquisitions, or to fund the operations of
new or existing businesses, including approximately $2,600,000 of current
maturities of long-term debt, management may, from time to time, investigate and
pursue various types of financing that are available to the Company. These
include, but are not limited to, private placements, secondary offerings, bridge
financing, debentures, lines of credit and asset-based loans. While management
believes that financing will be available for the Company to not only fund its
current operations, but also to fund its acquisition program, there can be no
assurance such financing will be on terms reasonably acceptable to the Company.

          A portion of the revenues of the Company, particularly through FSDA,
have been, and are expected to continue to be, generated from foreign countries.
For the years ended December 31, 1998 and 1997, export sales, principally to
Asia and South America, aggregated approximately $1,900,000 and $3,600,00
respectively. Notwithstanding the fact that the Company expects its foreign
contracts to be denominated in U.S. dollars, the Company is subject to the risks
associated with fluctuations in the U.S. and foreign currencies and political
instability. In particular, if the U.S. dollar increases significantly as
compared to foreign currencies, this could adversely impact the ability of the
Company to secure orders and generate revenues in foreign countries.

CAPITAL EXPENDITURE REQUIREMENTS

          During the year ended December 31, 1998, the Company spent $371,274 on
capital expenditures mainly relating to the purchase of machinery and equipment
at FSDA. During 1999, the Company intends to utilize approximately $300,000 to
purchase additional machinery and equipment, most specifically at FSDA, and to
develop a new computer system to be implemented by all of the Company's
subsidiaries. The Company does not presently anticipate any significant
additional capital expenditures other than those noted above and those relating
to future acquisitions and the implementation of the Company's new computer
system as noted below.

NEW ACCOUNTING STANDARDS

          Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 did not impact the Company's
financial statements.

                                     - 15 -

<PAGE>

          Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information, supersedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company adopted SFAS No. 131 in 1998.

          Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Statement applies to all entities and is
effective for all fiscal quarters of the fiscal years beginning after June 15,
1999. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the consolidated financial statements.

YEAR 2000

          In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result, date
sensitive computer software may recognize a date using "00" as the year 1900
rather than the Year 2000. This is generally referred to as the Year 2000 issue.
If this situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could disrupt operations.

          During 1999, the Company will complete the implementation of its new
computer system to use 4-digit year fields and will therefore believe itself to
be "Year 2000" compliant. The cost of such implementation is anticipated to be
approximately $150,000, and the Company does not believe that it will experience
any material disruption in its operations with respect thereto.

          The Company is exposed to the risk that one or more of its vendors or
customers, including financial institutions, could experience Year 2000 problems
that impact their abilities to meet obligations to the Company. To date, the
Company is not aware of any vendor or customer Year 2000 issue that would have a
material adverse impact on the Company's operations. The Company has received an
interim status report from its primary vendors and customers. The Company has no
means of ensuring that its vendors and customers will be Year 2000 ready. The
inability of such vendors and customers to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company. The
effect of non-compliance by vendors and customers is not determinable at this
time. The Company's Year 2000 risks are considered minimal and no contingency
plans are believed to be necessary.

          Widespread disruptions in the national or international economy,
including disruption affecting the financial markets, resulting from Year 2000
issues, or in certain industries, such as commercial or investment banks, could
also have an adverse impact on the Company. The likelihood and effect of such
disruptions is not determinable at this time.

                                     - 16 -

<PAGE>

          This Form 10-KSB contains certain forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations and business of the Company
and its subsidiaries, including statements made under Management's Discussion
and Analysis of Financial Condition and Results of Operations. These forward
looking statements involve certain risks and uncertainties. No assurance can be
given that any of such matters will be realized. Factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, among others, the following: competitive pressures in the
industries noted; general economic and business conditions; the ability to
implement and the effectiveness of business strategy and development plans;
quality of management; business abilities and judgment of personnel;
availability of qualified personnel; and labor and employee benefit costs.

INFLATION

          The Company has not been materially affected by the impact of
inflation.

ITEM 7.    FINANCIAL STATEMENTS.

          See the consolidated financial statements and notes related thereto,
beginning on page F-1, included prior to the signature page of this Annual
Report on Form 10-KSB.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE.

          Not applicable.

                                     - 17 -

<PAGE>

                                    PART III


ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

         The names and ages, along with certain biographical information (based
solely on information supplied by them), of the directors and executive officers
of the Company are as follows:
<TABLE>
<CAPTION>

         Name                               Age                           Position
         ----                               ---                           --------
<S>                                         <C>      <C>
William K. Mackey(1)(4)                     48       Chairman of the Board of Directors, President, Chief
                                                     Executive Officer and Treasurer

Norman J. Hoskin(1)(2)(3)(4)                64       Secretary, Director

James P. Cefaratti(2)(3)                    56       Director

David K. Lucas(2)(3)                        58       Director
</TABLE>
----------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.

         Directors of the Company are elected to serve for a term of one year or
until their successors are elected and qualify, or until their earlier death,
resignation or removal. The Company's officers are appointed annually by, and
serve at the pleasure of, the Board of Directors, subject to the terms of any
employment agreements. Mr. Mackey has entered into an employment agreement with
the Company (See Item 10, "Executive Compensation").

         William K. Mackey has served as a director of the Company since July
1993 and as Chairman of the Board, President, Chief Executive Officer and
Treasurer of the Company since May 1995. From 1993 to May 1995, he was an
entrepreneur and investor in and a consultant to several public and private
companies. From August 1989 to May 1993, Mr. Mackey served as a director of
Infonow Corporation, a publicly-held software distribution company. From March
1991 to November 1992, Mr. Mackey served as President and a director of Docucon,
Incorporated, a publicly-held company engaged in the document conversion
business. From December 1988 to March 1991, Mr. Mackey served as President of
Avondale Specialty Products, an ink manufacturer.

         Norman J. Hoskin currently serves as the Secretary and has served as a
director of the Company since June 1995. He has acted as Chairman of Atlantic
Capital Group, a venture capital company based in Boca Raton, Florida, since
1989. Mr. Hoskin previously served as Senior Vice President of Rentar
Industries, a large transportation, warehousing and banking conglomerate and
currently sits on the boards of directors of Consolidated Technologies,
Trinitech Systems, JHS Group, Expandez Canada International Ltd./Shanghai,
P.R.C. and JF Hotels of Florida.

                                     - 18 -

<PAGE>

         James P. Cefaratti has been a director of the Company since January
1992. Since November 1998, Mr. Cefaratti has been a private investor. From
November 1997 to November 1998, he served as President and Chief Operating
Officer of Amedisys, Inc., a home health care provider. From June 1995 to
December 1996, Mr. Cefaratti was President of Globalvision, Inc., a provider of
laser radial keratotomy. From July 1993 until June 1995, he was a private
investor. He served as President, CEO and director of Home Intensive Care, Inc.,
a home infusion and dialysis company, from December 1989 to June 1993. From May
1989 to December 1989, he served as Senior Executive Vice President of Home
Intensive Care, Inc.

         David K. Lucas has performed sales and marketing consulting for various
entities within the fluid filtration and treatment industries since 1988. From
1982 to 1988, Mr. Lucas served as the Vice President of Sales and Marketing of
JWI, Inc. a filter press equipment manufacturing company. He was employed in the
capacity of Corporate Marketing Manager of Parkson Corporation, a manufacturer
of water pollution control capital equipment products from 1973 to 1981. Mr.
Lucas has been a director of the Company since September 1997.

         Each Director of the Company is currently remunerated at the rate of
$1,250 per month which covers all meetings attended in person and
telephonically. In addition, each Director is granted options under the terms of
the 1994 Outside Directors' Stock Option Plan to purchase 2,500 shares of Common
Stock on the last business day of the year preceding the first Board of
Directors meeting of each new calendar year at the then current bid price,
subsequent to serving one full calendar year as a Director. Such options are
exercisable over the subsequent ten years and fully vest over a one-year period
from the date of grant. Pursuant to this program, the Company has granted
options under the aforementioned Plan as follows:
<TABLE>
<CAPTION>

                                                          Number of Shares              Option Price Range
                                                          ----------------              ------------------
<S>                                                              <C>                    <C>           
Outstanding at January 1, 1997                                   86,250                 $1.76 - $20.00
Granted                                                          35,000                 $1.76 - $2.60
Cancelled                                                       (38,750)                $1.76 - $15.00
                                                                --------

Outstanding at December 31, 1997                                 82,500                 $1.76 - $20.00
Granted                                                          70,000                 $1.19 - $1.64
Cancelled                                                       (12,500)                $8.00
                                                                --------

Outstanding at December 31, 1998
  and February 28, 1999                                         140,000                 $1.19 - $20.00
                                                                =======
</TABLE>

ITEM 10.          EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

         The following table sets forth information for the years ended December
31, 1998, 1997 and 1996, representing compensation earned by the Chief Executive
Officer of the Company as of the end of the fiscal year 1998 (the "Named
Executive Officer"), in all capacities in which he served.

                                     - 19 -

<PAGE>
<TABLE>
<CAPTION>

                                                                                                                  Long-Term
Annual Compensation                                                                                             Compensation
-------------------                                                                    Other Annual               Number of
Name and Principal Positions                Year       Salary           Bonus          Compensation            Options Granted
----------------------------                ----       ------           -----          ------------            ---------------
<S>                                         <C>       <C>              <C>                 <C>                     <C>       
William K. Mackey                           1998      $155,000         $86,800(1)          $7,200(2)               100,000(3)
  Chairman of the Board, President and      1997      $160,962              --             $7,200(2)               150,000(3)
  Chief Executive Officer and Treasurer     1996      $147,250              --             $4,200(2)                12,500(3)
</TABLE>

STOCK OPTION GRANTS IN 1998

         The following table contains information concerning the grant of stock
options to the Named Executive Officer in 1998:
<TABLE>
<CAPTION>

                                                          Individual Grants                                                      
                        ----------------------------------------------------------------------------------------------
                                                         % of Total Options
                           Number of Securities         Granted to Employees     Exercise Price          Expiration
    Name                Underlying Options Granted          in Fiscal Year         Per Share                Date        
    ----                --------------------------     ------------------------  --------------       ----------------
<S>                              <C>                          <C>                   <C>               <C> 
William K. Mackey                100,000(3)                   49.9%                 $1.75(3)          January 23, 2008
</TABLE>

STOCK OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998

         The following table provides information with respect to options
exercised by the Named Executive Officer during 1998 and the number and value of
securities underlying unexercised options held by the Named Executive Officer at
December 31, 1998:
<TABLE>
<CAPTION>

                                                                 Number of Securities               Value of Unexercised
                                                            Underlying Unexercised Options          In-the-money Options
                              Shares                          At December 31, 1998                  At December 31, 1998   
                             Acquired     Value       ---------------------------------------------------------------------
   Name                    On Exercise   Realized     Exercisable          Unexercisable        Exercisable   Unexercisable
   ----                    -----------   --------     -----------          -------------        -----------   -------------
<S>                             <C>           <C>      <C>                   <C>                     <C>            <C>
William K. Mackey               --            --       173,333(3)            179,167(3)              --             --
-----------------------------
</TABLE>
(1) Represents a bonus earned based upon parameters set forth in the Named
    Executive's Employment Agreement.
(2) Represents a monthly auto expense allowance of $600 for all of 1998 and
    1997 and for the period from June 1996 through December 1996.
(3) Adjusted for the one for four reverse stock split effected on February 10,
    1998.


EMPLOYMENT AGREEMENT

         On August 7, 1997, the Company entered into a five-year employment
agreement with William K. Mackey, Chairman of the Board, President, Chief
Executive Officer and Treasurer. The Agreement provides that Mr. Mackey will
receive an annual base salary of $155,000, plus a bonus, if any, as determined
by the Board of Directors. The employment agreement entitles Mr. Mackey to
terminate the agreement in the event of a change of control of the Company and
receive severance payments equal to the greater of the base salary due for the
remaining term of the employment agreement or an amount equal to three times his
base salary then in effect, plus bonus. If Mr. Mackey is terminated

                                     - 20 -

<PAGE>

without cause, he is entitled to receive a severance payment equal to the
greater of the remaining base salary payments due for the remaining term of the
employment agreement or one year's base salary. If Mr. Mackey terminates the
employment agreement because of a material default by the Company, he is
entitled to receive a severance payment equal to the greater of the base salary
payments due under the remaining term of the employment agreement or three times
the sum of the base salary then in effect and his last bonus.

         The above-described employment agreement contains certain
non-disclosure and non-compete provisions.

OUTSIDE DIRECTORS' PLAN AND PERFORMANCE EQUITY PLAN

         At December 31, 1998 the Company has two stock option plans, which are
described below.

         OUTSIDE DIRECTORS' PLAN. The Company's shareholders have adopted the
1994 Outside Directors' Stock Option Plan (the "Outside Directors' Plan") for
the Company's Directors who are not employees or officers of the Company or its
subsidiaries ("Eligible Directors") rendering advisory service to the Board of
Directors. The Outside Directors' Plan has reserved an aggregate of 400,000
shares of Common Stock and provides for the grant of non-qualified stock options
("NQSOs") which have an exercise period extending for ten years from the date of
the grant. The purchase price of the shares of Common Stock covered by each
option granted under the Outside Directors' Plan is the fair market value of the
shares as of the date of grant. Each Eligible Director who is newly-elected is
granted an option to purchase not less than 2,500 and not more than 12,500
shares of the Common Stock of the Company on the date such Director is initially
elected or otherwise selected to the Board of Directors. The exact amount is
determined by the Directors serving prior to the effective date of the Outside
Directors' Plan. All Eligible Directors (including those serving on the Board of
Directors prior to the effective date of the Outside Directors' Plan) are
granted options to purchase 2,500 shares of the Common Stock of the Company on
each December 31, if such Eligible Director has completed a full year of service
as a member of the Board of Directors of the Company.

         PERFORMANCE EQUITY PLAN. On May 13, 1991, the Company's stockholders
adopted the 1991 Performance Equity Plan (the "Performance Equity Plan"). There
are 2,000,000 shares of Common Stock reserved pursuant to the Performance Equity
Plan. The Performance Equity Plan provides for the grant of a variety of
incentive awards to officers, key employees, consultants and independent
contractors of the Company.

         The Performance Equity Plan authorizes the grant of incentive awards
which may consist of stock options, restricted stock awards, deferred stock
awards, stock appreciation rights and other stock-based awards. The Performance
Equity Plan expires at the close of business on May 13, 2001, unless sooner
terminated; provided however that all awards previously granted shall remain
outstanding for the respective terms of such awards. Officers, directors, and
other key employees and prospective employees and consultants and independent
contractors who perform services for the Company or any of its subsidiaries,
(but excluding members of the stock option committee and any person who serves
as a director only), ("Eligible Persons"), are eligible to receive awards under
the Plan. The Performance Equity Plan is administered by the Board of Directors
or the Compensation and Stock Option

                                     - 21 -

<PAGE>

Committee (the "Committee") appointed by the Board of Directors, which
determines the persons to whom awards will be granted, the number of awards to
be granted and the specific terms of each grant, subject to the provisions of
the Performance Equity Plan.

         OUTSTANDING AWARDS. Options to purchase an aggregate of 647,500 shares
have been granted and are outstanding as of February 28, 1999, under the Outside
Directors' Plan and Performance Equity Plan as follows:
<TABLE>
<CAPTION>

                                                           Number of Shares          Option Price Range
                                                           ----------------          ------------------
<S>                                                             <C>                     <C>           
OUTSTANDING AT JANUARY 1, 1997                                  319,521                 $1.76 - $20.00
Granted                                                         270,125                 $1.64 - $2.60
Cancelled                                                       (95,688)                $1.64 - $15.00
                                                                --------

OUTSTANDING AT DECEMBER 31, 1997                                493,958                 $1.64 - $20.00
Granted                                                         200,450                 $1.19 - $1.75
Cancelled                                                       (81,808)                $1.64 - $8.00
                                                                --------

OUTSTANDING AT DECEMBER 31, 1998                                612,600                 $1.19 - $20.00
Granted                                                          34,900                 $1.00
                                                                 ------

OUTSTANDING AT FEBRUARY 28, 1999                                647,500                 $1.00 - $20.00
                                                                =======
</TABLE>

         At December 31, 1998 and 1997, respectively, 315,259 and 200,169
options with an average option price of $4.86 and $6.71 were exercisable.

         In January 1999, certain employees of the Company were granted options
to purchase a total of 34,900 shares of Common Stock at $1.00 per share (market
value at the date of grant). The above options expire ten years from the date of
grant, and are exercisable one-third each year beginning one year from the date
of grant.

401(K) PLAN

         In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two-year
period on a quarterly basis. During 1998 and 1997, the Company contributed
96,592 and 18,393 shares of restricted Common Stock valued at $62,788 and
$18,165, respectively.

                                     - 22 -

<PAGE>

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         The following table sets forth information as to the number of shares
of Common Stock beneficially owned as of February 28, 1999, by (i) each person
who is believed by the Company to be a beneficial owner of more than 5% of the
outstanding Common Stock of the Company; (ii) each Director of the Company;
(iii) the Named Executive Officer; and (iv) all Directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>

==================================================================================================================================
                                                                        Number of                  Percentage of
Name and Address of Beneficial Owner                                    Shares Owned               Common Stock(3)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                       <C> 
William K. Mackey(1)(4)                                                   292,917                   9.4%
----------------------------------------------------------------------------------------------------------------------------------
Norman J. Hoskin(1)(5)                                                     27,250                   1.0%
----------------------------------------------------------------------------------------------------------------------------------
James P. Cefaratti(1)(6)                                                   31,250                   1.1%
----------------------------------------------------------------------------------------------------------------------------------
David K. Lucas(1)(7)                                                       10,000                    *
----------------------------------------------------------------------------------------------------------------------------------
Aqua Care Systems, Inc. 401(k)
Savings Plan and Trust(1)                                                 165,045                   5.8%
----------------------------------------------------------------------------------------------------------------------------------
Peter C. Rossi(2)(8)                                                      335,150                  11.9%
----------------------------------------------------------------------------------------------------------------------------------
Directors and executive officers as a group,                             
(four persons)                                                            361,417(9)               11.4%
==================================================================================================================================
</TABLE>

         Except as set forth below, all shares of Common Stock are directly
owned and the sole investment and voting power are held by the entities noted.

(1)      The address for all of these entities is 11820 NW 37 Street, Coral
         Springs, FL 33065.
(2)      The address for this person is 641 Lexington Avenue, 29th Floor,
         New York, NY 10022.
(3)      Based upon 512,445 shares of Common Stock outstanding and shares of
         Common Stock which such entities have the right to acquire within
         sixty days of February 28, 1999.
(4)      Includes options to purchase 269,167 shares of Common Stock granted by
         the Company and additional options to purchase an aggregate of 12,500
         shares of Common Stock granted by Kinder Investments, L.P. and Peter
         N. Christos.
(5)      Includes options to purchase 26,250 shares of Common Stock.
(6)      Includes options to purchase 31,250 shares of Common Stock.
(7)      Includes options to purchase 10,000 shares of Common Stock.
(8)      Includes 335,150 shares of Common Stock of which the named person has
         shared dispositive power.
(9)      Includes options to purchase 349,167 shares of Common Stock.
(*)      Less than 1%.

                                     - 23 -

<PAGE>

ESCROW SHARES AND ESCROW OPTIONS

         In connection with the Company's initial public offering, substantially
all of the common stockholders and option holders of the Company at the date of
the offering, agreed to place into escrow 50% of their shares of Common Stock
and 50% of their options to purchase Common Stock equalling 243,750 shares of
Common Stock (the "Escrow Shares") and options to purchase 29,063 shares of
Common Stock (the "Escrow Options"). Such Escrow Shares and Options were
contributed to the Company on December 31, 1997, based upon the terms of the
escrow agreement. Additionally, the Company's Class A Warrants and Class B
Warrants expired as of October 14, 1998.


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Not applicable.

                                     - 24 -

<PAGE>

                                     PART IV


ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K


        2.1       Asset Purchase Agreement between Durco International, Inc.
                  and ACS Acquisition Corp. as previously filed with the
                  Company's Statement on Form 8-K filed during 1997, is
                  hereby incorporated herein by reference.
        3.1       Certificate of Incorporation of the Registrant filed as
                  Exhibit (3)-1 to the Company's Registration Statement on Form
                  SB-2 (Registration No. 33-67252) is hereby incorporated herein
                  by reference.
        3.2       By-laws of the Registrant filed as Exhibit 3.2 to the
                  Company's Registration Statement on Form SB-2 (Registration
                  No. 33-67252) is hereby incorporated by reference.
        4.1       Form of Warrant Agreement (with Warrant Certificates) filed as
                  Exhibit 4.2 to the Company's Registration Statement on Form
                  SB-2 (Registration No. 33-67252) is hereby incorporated by
                  reference.
       10.1       Distribution Agreement between the Company and Ryko
                  Manufacturing Company dated July 1, 1997 is hereby
                  incorporated herein by reference.
       10.2       Employment Agreement dated August 7, 1997 by and between the
                  Company and William K. Mackey is hereby incorporated herein by
                  reference.
       10.3       Loans and Security Agreements, (Term Loan, Inventory and Term
                  Loans, A/R Loan), dated June 4, 1997, between ACS Acquisition
                  Corp. and Fidelity Funding of California, Inc. are hereby
                  incorporated herein by reference.
       10.4       Debenture Purchase Agreement between the Company and Sirrom
                  Capital Corporation, d/b/a Tandem Capital, dated June 30,
                  1998 (exhibits omitted).
       27.1       Financial Data Schedule.

                                     - 25 -

<PAGE>

                                   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, in the City of Coral Springs, State of
Florida, on March 26, 1999.

                                      AQUA CARE SYSTEMS, INC.


                                      /S/ WILLIAM K. MACKEY 
                                      -------------------------------------
                                      William K. Mackey
                                      Chairman of the Board, President,
                                      Chief Executive Officer and Treasurer

         KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William K. Mackey and George J.
Overmeyer, and each of them, his attorney-in-fact with power of substitution for
him in any and all capacities, to sign any amendments and supplements relating
to this Annual Report on Form 10-KSB, or other instructions he deems necessary
or appropriate, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute may do
or cause to be done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>

Signature                           Title                                               Date
---------                           -----                                               ----
<S>                                 <C>                                                 <C>

/S/ WILLIAM K. MACKEY               Chairman of the Board, President                    March 26, 1999
-----------------------             Chief Executive Officer, Treasurer
William K. Mackey                   and Principal Accounting Officer

/S/ GEORGE J. OVERMEYER             Corporate Controller                                March 26, 1999
-----------------------
George J. Overmeyer

/S/ NORMAN J. HOSKIN                Secretary, Director                                 March 26, 1999
----------------------
Norman J. Hoskin

/S/ JAMES P. CEFARATTI              Director                                            March 26, 1999
--------------------------
James P. Cefaratti

/S/ DAVID K. LUCAS                  Director                                            March 26, 1999
-----------------------
David K. Lucas
</TABLE>

                                     - 26 -

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                      Page
                                                                     Number
                                                                     ------

Report of Independent Certified Public Accountants                     F-2


Consolidated Balance Sheets
     as of December 31, 1998 and 1997                                  F-3


Consolidated Statements of Operations
     for the years ended December 31, 1998 and 1997                    F-4


Consolidated Statements of Stockholders' Equity
     for the years ended December 31, 1998 and 1997                    F-5


Consolidated Statements of Cash Flows
     for the years ended December 31, 1998 and 1997                    F-6


Notes to Consolidated Financial Statements                             F-7


                                       F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors of
Aqua Care Systems, Inc.



         We have audited the accompanying consolidated balance sheets of Aqua
Care Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aqua Care
Systems, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.






Miami, Florida                                    BDO Seidman, LLP
March 5, 1999

                                       F-2

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                   1998                 1997     
                                                                           ------------------   -----------------
<S>                                                                           <C>                  <C>
ASSETS
Current assets
     Cash and cash equivalents................................................$       573,129      $      654,932
     Accounts receivable, net of allowance
         for doubtful accounts of $260,000 and $135,000.......................      2,858,990           3,398,593
     Costs and estimated earnings in excess of billings.......................             --             153,443
     Inventory................................................................      2,609,472           3,007,468
     Current maturities of notes receivable...................................         72,744              77,175
     Prepaids and other.......................................................        237,087             109,736
                                                                              ---------------      --------------

Total current assets..........................................................      6,351,422           7,401,347

Property, plant and equipment, net............................................      4,837,671           4,939,202
Intangible assets, net........................................................      2,996,871           4,452,916
Notes receivable, less current maturities.....................................         80,000              51,975
Other assets..................................................................        301,484             243,169
                                                                              ---------------      --------------

Total assets..................................................................$    14,567,448      $   17,088,609
                                                                              ===============      ==============

LIABILITIES
Current liabilities
     Accounts payable.........................................................$     1,751,847      $    1,788,140
     Accrued expenses.........................................................      1,285,841             843,486
     Current maturities of long-term debt.....................................      2,560,439           2,773,716
     Indebtedness to related party............................................        125,000             125,000
                                                                              ---------------      --------------

Total current liabilities.....................................................      5,723,127           5,530,342

Long-term debt, less current maturities.......................................      3,575,964           3,733,665
                                                                              ---------------      --------------

Total liabilities.............................................................      9,299,091           9,264,007
                                                                              ---------------      --------------

COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS

STOCKHOLDERS' EQUITY
     Preferred stock, $.001 par; 5,000,000 shares
         authorized, none outstanding.........................................             --                  --
     Common stock, $.001 par; 30,000,000 shares
         authorized, 2,800,313 and 2,703,782 shares
         issued and outstanding...............................................          2,800               2,704
     Additional paid-in capital...............................................     16,928,486          16,787,794
     Deficit..................................................................    (11,662,929)         (8,965,896)
                                                                              ---------------      --------------

Total stockholders' equity....................................................      5,268,357           7,824,602
                                                                              ---------------      --------------

Total liabilities and stockholders' equity....................................$    14,567,448      $   17,088,609
                                                                              ===============      ==============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                              For the year ended
                                                                                  December 31,
                                                                           1998                  1997     
                                                                     ---------------       ---------------

         <S>                                                         <C>                   <C>            
         Revenues....................................................$    26,449,286       $    23,901,102

         Cost of revenues............................................     16,362,350            15,363,522
                                                                     ---------------       ---------------

         Gross profit................................................     10,086,936             8,537,580
                                                                     ---------------       ---------------

         Operating expenses:
              Selling, general and administrative....................      9,992,830             7,022,380
              Depreciation and amortization..........................        704,808               681,221
              Provision for doubtful accounts and notes..............        326,948                36,000
              Provision for the impairment of intangible assets......      1,052,039                    --
                                                                     ---------------       ---------------

         Total operating expenses....................................     12,076,625             7,739,601
                                                                     ---------------       ---------------

         (Loss) income from operations...............................     (1,989,689)              797,979

         Interest expense, net.......................................       (857,344)             (561,342)

         Other income................................................        150,000               130,163
                                                                     ---------------       ---------------

         Net (loss) income...........................................$    (2,697,033)      $       366,800
                                                                     ----------------      ---------------

         (Loss) earnings per common share - basic                    $         (0.98)      $          0.14
                                                                     ===============       ===============

         (Loss) earnings per common share - diluted                  $         (0.98)      $          0.13
                                                                     ===============       ===============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                  Common Stock                  Additional
                                             ------------------------             paid-in
                                             Shares            Amount             capital            Deficit            Total
                                             ------            ------           ----------           -------            ----- 
<S>                                          <C>               <C>          <C>                 <C>                 <C>           
         Amounts at January 1, 1997:         2,924,389         $  2,924     $    16,645,579     $   (9,332,696)     $    7,315,807

   Common Stock issued in connection
             with the acquisition of
   Midwest Water Technologies, Inc.:             4,750                5               3,825                 --               3,830

       Warrants issued in connection
             with the acquisition of
  The Filtration Systems Division of
          Durco International, Inc.:                --               --             120,000                 --             120,000

Contribution to Employee Benefit Plan:          18,393               18              18,147                 --              18,165

 Reversion of shares to the Company:          (243,750)            (243)                243                 --                  --

                         Net income:                --               --                  --            366,800             366,800
                                          ------------         --------     ---------------     --------------      --------------


        Amounts at December 31, 1997:        2,703,782            2,704          16,787,794         (8,965,896)          7,824,602

       Warrants issued in connection
           with the issuance of debt
           and consulting agreement:                --               --              78,000                 --              78,000

Contribution to Employee Benefit Plan:          96,592               96              62,692                 --              62,788

 Reversion of shares to the Company:               (61)              --                  --                 --                  --

                           Net loss:                --               --                  --         (2,697,033)         (2,697,033)
                                          ------------         --------     ---------------     ---------------     ---------------


        Amounts at December 31, 1998:        2,800,313         $  2,800     $    16,928,486     $  (11,662,929)     $    5,268,357
                                          ============         ========     ===============     ==============      ==============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       F-5

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               For the year ended
                                                                                  December 31,
                                                                           1998                  1997     
                                                                     ---------------       ---------------
        <S>                                                          <C>                   <C> 
         OPERATING ACTIVITIES:
         Net (loss) income...........................................$    (2,697,033)      $       366,800
         Adjustments to reconcile net (loss) income to net cash
         provided by operating activities:
              Gain on disposal of property and plant.................             --              (123,518)
              Gain on sale of net assets.............................       (150,000)                   --
              Provision for doubtful accounts and notes..............        326,948                36,000
              Depreciation and amortization..........................        704,808               681,221
              Provision for impairment of goodwill...................      1,052,039                    --
              Purchase price adjustments for acquisitions expensed...             --                 3,830
              Pension contribution paid through issuance of
                 Common Stock........................................         62,788                18,165
         Changes in assets and liabilities net of effects
         of businesses acquired and sold:
              Decrease (increase) in accounts receivable.............        212,655            (2,004,536)
              Decrease in costs and estimated earnings
                 in excess of billings...............................        153,443               271,310
              Decrease in inventory..................................        205,000             1,207,056
              (Increase) decrease in prepaids and other..............        (97,351)               69,922
              Decrease in other assets...............................         19,685                48,836
              Increase (decrease) in accounts payable and accrued
                 expenses............................................        485,888              (468,488)
                                                                     ---------------       ---------------

         Net cash provided by operating activities...................        278,870               106,598
                                                                     ---------------       ---------------

         INVESTING ACTIVITIES:
              Payments received on notes receivable..................        104,406                94,800
              Property and plant disposed of in conjunction with
                 Settlement Agreement................................             --               150,000
              Capital expenditures...................................       (371,274)             (136,449)
              Payments received for sale of net assets...............         210,275                   --
              Payments for acquisition of business, net of cash
                 acquired............................................             --              (204,031)
                                                                     ---------------       ---------------

         Net cash used in investing activities.......................        (56,593)              (95,680)
                                                                     ---------------       ----------------

         FINANCING ACTIVITIES:
              Proceeds from issuance of notes payable and
                 long-term debt......................................     16,170,690             8,967,522
              Repayment of notes payable and
                 long-term debt......................................    (16,474,770)           (8,722,952)
              Payments of deferred loan costs........................             --              (161,775)
                                                                     ---------------       ---------------

         Net cash (used in) provided by financing activities.........       (304,080)               82,795
                                                                     ---------------       ---------------

         Net (decrease) increase in cash and cash equivalents........        (81,803)               93,713
         Cash and cash equivalents, beginning of year................        654,932               561,219
                                                                     ---------------       ---------------

         Cash and cash equivalents, end of year......................$       573,129       $       654,932
                                                                     ===============       ===============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-6

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


         BUSINESS

         Aqua Care Systems, Inc. and subsidiaries (the "Company") is engaged in
the design, engineering, manufacturing, assembly, sales, marketing, distribution
and service of filtration systems and products, flow control systems and
products, water filtration and purification products, waste water treatment
systems and car wash equipment sales and service. Currently, it provides
services and equipment sales and construction and installation of waste water
treatment plants for clients in the United States and abroad. For the years
ended December 31, 1998 and 1997, export sales, principally to Asia and South
America, aggregated approximately $1,900,000 and $3,600,000, respectively. At
December 31, 1998, substantially all accounts receivable were due from customers
within the United States.

         PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
of all subsidiaries. All material intercompany transactions and accounts have
been eliminated in consolidation.

         PREPARATION OF FINANCIAL STATEMENTS

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         INVENTORY

         Inventory consists principally of materials, purchased parts and work
in process. Inventory is valued at the lower of cost (first-in, first-out
method) or market.

         PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets, ranging from five to thirty years.

         INTANGIBLE ASSETS

         The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill and is amortized on a straight-line basis
over 15 years. The cost of other intangibles is amortized on a straight-line
basis over their estimated useful lives, ranging from seven to fifteen years.
The Company continually evaluates the carrying value of goodwill and other
intangible assets. Impairments are recognized when the expected future
undiscounted operating cash flows to be derived from such intangible assets are
less than their carrying values.

                                       F-7

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         REVENUE RECOGNITION

         The Company recognizes revenue on waste water treatment system
construction and certain filtration systems contracts on the percentage of
completion method, based generally on the ratio of costs incurred to date on the
contract to the total estimated contract cost. Costs incurred and revenues
recognized in excess of amounts billed are classified under current assets as
costs and estimated earnings in excess of billings. Amounts billed in excess of
revenues recognized are classified under current liabilities as billings in
excess of costs and estimated earnings. Losses on construction contracts are
recognized at the time they become estimatable. Equipment and parts sales and
rental and service revenues are accounted for on the accrual method.

         INCOME TAXES

         Income taxes are accounted for using the liability approach under the
provisions of Financial Accounting Standards No. 109.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company's financial instruments consist principally of cash and
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued expenses and long-term debt. The carrying amounts of such financial
instruments as reflected in the consolidated balance sheets approximate their
estimated fair value as of December 31, 1998 and 1997. The estimated fair value
is not necessarily indicative of the amounts the Company could realize in a
current market exchange or of future earnings or cash flows.

         STOCK BASED COMPENSATION

         The Company recognizes compensation expense for its stock option
incentive plans using the intrinsic value method of accounting. Under the terms
of the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date, or other measurement date,
over the amount an employee must pay to acquire the stock.

         (LOSS) EARNINGS PER SHARE

         Effective December 31, 1997, the Company adopted Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which simplifies the computation
of earnings per share and requires the restatement of all prior periods
presented.

         Basic earnings per share are computed on the basis of the weighted
average number of common shares outstanding during each year.

         Diluted earnings per share are computed on the basis of the weighted
average number of common shares and dilutive securities outstanding. Dilutive
securities having an anti-dilutive effect on diluted earnings per share are
excluded from the calculation.

                                       F-8

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The weighted average number of common shares outstanding for all
periods presented retroactively reflects the effects of the Company's
one-for-four reverse stock split which was effected as of February 10, 1998.

         STATEMENTS OF CASH FLOWS

         For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.

         NEW ACCOUNTING STANDARDS

         Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 did not impact the Company's
financial statements.

         Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. The Company
adopted SFAS No. 131 in 1998.

         Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement applies to all entities and is effective for all
fiscal quarters of the fiscal years beginning after June 15, 1999. The Company
did not engage in derivative instruments or hedging activities in any periods
presented in the consolidated financial statements.

2.       ACQUISITION

         In June 1997, the Company, pursuant to an Asset Purchase Agreement,
acquired certain assets and assumed certain liabilities of the Filtration
Systems Division, ("FSDA"), of Durco International, Inc., formerly known as the
Duriron Company, Inc., ("DURCO"). The purchase price for the acquisition of FSDA
consisted of the sum of (i) approximately $4,800,000 in cash and notes payable
(ii) approximately $1,200,000 in assumed obligations, and (iii) 100,000 warrants
to purchase Common Stock, (62,500 warrants having an exercise price of $4.00
each and 37,500 having an exercise price approximating fair market value of the
Company's Common Stock as of the closing date, $2.00, valued at fair value of
$61,000). In conjunction with this acquisition, the Company issued 50,000
warrants to purchase Common Stock to Fidelity Funding Financial Group having an
exercise price of $2.00 each, valued at fair value of $40,000. The Company
incurred

                                      F-9

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


approximately $204,000 in acquisition costs and issued 37,500 additional
warrants having an exercise price of $2.36, valued at fair value of $19,000. The
Company assumed operational control of FSDA on June 1, 1997. FSDA operations
include manufacturing and systems integration of fluid filtration and treatment
systems and components.

         The transaction was recorded as follows:

Fair value of net assets acquired                                 $  6,060,941
Costs in excess of net assets acquired                                 730,196
Debt and obligations under acquisition agreement                    (5,333,300)
Acquisition costs                                                     (204,031)
Warrants issued in connection with acquisition                         (80,000)
                                                                  ------------

Liabilities assumed                                               $  1,173,806
                                                                  ============

         The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisition had occurred on
January 1, 1997:

Year ended December 31,                                         1997
--------------------------------------------------------------------

Revenue                                          $        29,842,313
                                                  ==================

Net income                                       $           203,231
                                                  ==================

Net income per common share - basic              $              0.08
                                                  ==================

Net income per common share - diluted            $              0.07
                                                  ==================

         The above transaction was accounted for by the purchase method, and
accordingly, the results of operations of the acquired business have been
included in the accompanying consolidated financial statements from the date the
Company assumed operational control of the acquired entity.


3.       CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>

Costs and estimated earnings in excess of billings                  December 31, 1998         December 31, 1997
--------------------------------------------------                  -----------------         -----------------
<S>                                                                  <C>                        <C>          
Costs and estimated earnings.........................................$          --              $   1,580,176
Less billings........................................................           --                 (1,426,733)
                                                                     -------------              --------------

Total................................................................$          --              $     153,443
                                                                     =============              =============
</TABLE>

         All receivables on contracts in progress are considered to be
collectible within twelve months. Retainages receivable totalling $126,558 and
$194,676 are included in accounts receivable at December 31, 1998 and 1997,
respectively.

                                      F-10

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



4.       INVENTORY
<TABLE>
<CAPTION>
                                                                    December 31, 1998          December 31, 1997
                                                                    -----------------          -----------------

<S>                                                                  <C>                        <C>          
Materials and purchased parts........................................$   1,798,051              $   2,601,265
Work in process......................................................      811,421                    406,203
                                                                     -------------              -------------

Total inventory......................................................$   2,609,472              $   3,007,468
                                                                      ============               ============
</TABLE>


5.       PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                    December 31, 1998          December 31, 1997
                                                                    -----------------          -----------------

<S>                                                                  <C>                        <C>          
Land and buildings...................................................$   2,745,427              $   2,745,427
Machinery and equipment..............................................    2,323,455                  2,267,638
Furniture and fixtures...............................................      652,726                    785,428
Leasehold improvements...............................................       27,450                     51,314
Autos and trucks.....................................................           --                     17,906
                                                                     -------------              -------------

                                                                         5,749,058                  5,867,713
Less accumulated depreciation........................................     (911,387)                  (928,511)
                                                                     -------------              -------------

Net property, plant and equipment....................................$   4,837,671              $   4,939,202
                                                                     =============              =============
</TABLE>



6.       INTANGIBLE ASSETS
<TABLE>
<CAPTION>
                                                                    December 31, 1998          December 31, 1997
                                                                    -----------------          -----------------

<S>                                                                  <C>                        <C>          
Goodwill.............................................................$   4,134,266              $   5,506,601
License agreement, customer list and other...........................           --                    149,169
                                                                     -------------              -------------

                                                                         4,134,266                  5,655,770
Less accumulated amortization........................................   (1,137,395)                (1,202,854)
                                                                     -------------              -------------

Net intangible assets................................................$   2,996,871              $   4,452,916
                                                                     =============              =============
</TABLE>

         During 1998, certain of the Company's subsidiaries, Gravity Flow
Systems, Inc., Midwest Water Technologies, Inc. and EnviroSystems Supply, Inc.,
recognized impairments of net intangible assets previously recorded aggregating
$1,052,039. Such impairments were recognized as the Company did not expect
positive future operating cash flows to be derived from such intangible assets.

                                      F-11

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.       LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                    December 31, 1998          December 31, 1997
                                                                    -----------------          -----------------

<S>                                                                     <C>                     <C>   
12% note payable, interest only payable quarterly with a
balloon payment of $1,200,000 due June 2003, collateralized
by substantially all of the assets of the Company....................$   1,200,000                         --

Prime plus 2%, (9.75% at December 31, 1998), revolving credit
lines, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $3,500,000 through
June 2000, principally collateralized by accounts receivable
and inventory of FSDA, (See (d) below)...............................    1,486,876              $   1,370,620

Prime plus 2.5%, (10.25% at December 31, 1998), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $400,000 due June 2000,
principally collateralized by property and plant of FSDA,
(See (d) below)......................................................      899,600                  1,162,400

Prime plus 2.5%, (10.25% at December 31, 1998), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $130,000 due June 2000,
principally collateralized by machinery and equipment of FSDA,
(See (d) below)......................................................      320,400                    417,600

18% note payable, principal and interest payable monthly through
May 1998, paid May 1998..............................................           --                    250,000

11% note payable, principal and interest payable monthly with an
estimated balloon payment of approximately $1,000,000 due June
2000, collateralized by all the assets of FSDA, (See (d) below)......    1,674,499                  2,321,397

10% note payable, principal and interest payable monthly through
November 1998, paid November 1998....................................           --                    239,476

9.25% mortgage note payable, principal and interest payable monthly
with an estimated balloon payment of approximately $360,000 due
June 2001, collateralized by land and building.......................      412,642                    429,174

Prime plus 1%, (8.75% at December 31, 1998), notes payable, issued
in connection with the acquisition of CWES, payable in equal
quarterly principal payments of $40,000, plus interest, through
April 1999, principally collateralized by the accounts receivable,
inventory and property and equipment of CWES.........................       80,000                    240,000
</TABLE>

                                      F-12

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                      December 31, 1998          December 31, 1997
                                                                      -----------------          -----------------

<S>                                                                      <C>                        <C>
9.50% note payable, principal and interest payable monthly through
June 2002, collateralized by substantially all of the assets of GFSI.       62,386                     76,714
                                                                     -------------              -------------

                                                                         6,136,403                  6,507,381

Less current maturities..............................................   (2,560,439)                (2,773,716)
                                                                     -------------              -------------

Total long-term debt.................................................$   3,575,964              $   3,733,665
                                                                     =============              =============
</TABLE>


At December 31, 1998, maturities of long-term debt, are:

                               1999                           $   2,560,439
                               2000                               1,971,344
                               2001                                 394,388
                               2002                                  10,232
                               2003                               1,200,000
                                                              -------------

                                                              $   6,136,403
                                                              =============

         (a) The weighted average interest rate of the Company's long-term debt
was 10.6% and 11.2% at December 31, 1998 and 1997, respectively.

         (b) During July 1998, the Company received net proceeds of $1,465,847
from the issuance of $1,500,000 in secured subordinated debentures which bear
interest at the rate of 12% per year. Such debentures are due June 2003 with no
pre-payment penalty. Interest is due and payable on a quarterly basis beginning
August 1998. In conjunction with the above noted financing, the Company issued
115,500 warrants to purchase the Company's Common Stock at an exercise price of
$2.60 per share. The warrants contain certain call provisions based on the
repayment of the debentures and certain market contingencies. Additionally,
beginning July 1999 and on each anniversary thereafter that such debentures
remain outstanding, the Company has agreed to issue 30,000 warrants with an
exercise price equal to the average bid price for the 20 days prior to such
anniversary dates.

         (c) The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum tangible net
worth and maintain certain financial ratios. Certain of such loans also provide
that the lenders may, at their options, accelerate such loans as a result of,
among other things, a material adverse change in the Company's financial
position or results of operations. The lenders have not notified the Company
that such event has occurred and the Company does not expect that such notice
will be received.

         (d) At December 31, 1998, the Company was not in compliance with
certain covenants relating to the above noted debt. However, the Company
obtained waivers of such non-compliance from the lenders.

                                      F-13

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.       RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>

Indebtedness to Related Party                                       December 31, 1998          December 31, 1997
-----------------------------                                       -----------------          -----------------
<S>                                                                  <C>                        <C>

10% unsecured notes payable to a former affiliated
entity, matured October 1994.........................................$     125,000              $     125,000
                                                                     =============              =============
</TABLE>

         Interest expense on related party indebtedness aggregated $12,500 for
each of the years ended December 31, 1998 and 1997.

9.       INCOME TAXES

         At December 31, 1998 and 1997, the Company has approximately $7,550,000
and $6,575,000, respectively, of net operating loss carryforwards expiring
through 2011, for both financial reporting and income tax purposes. Changes in
ownership of greater than 50% occurred as a result of the Company's issuances of
Common Stock which resulted in an approximate $760,000 annual limitation being
imposed upon the future utilization of approximately $6,300,000 of the Company's
net operating losses for tax purposes. Realization of the approximate $2,840,000
and $2,474,000 deferred tax assets at December 31, 1998 and 1997, respectively,
resulting mainly from the available net operating loss carryforwards, is not
considered more likely than not and accordingly, a valuation allowance has been
recorded for the full amount of such assets.

         The reconciliation of the effective income tax rate to the Federal and
State statutory rate is as follows:
<TABLE>
<CAPTION>

                                                                            1998                      1997
-------------------------------------------------------------------------------------------------------------

<S>                                                                        <C>                        <C>   
Federal and State income tax rate                                          (37.63%)                   37.63%
Effect of net operating loss carryfoward and valuation allowance            37.63%                   (37.63%)
                                                                           --------                 ---------

Effective income tax rate                                                     0.0%                      0.0%
                                                                           ========                 =========
</TABLE>

10.      EQUITY TRANSACTIONS

         (a) On September 12, 1997, the stockholders authorized the Board of
Directors to effectuate a one-for-four reverse stock split. The one-for-four
reverse split was effected as of February 10, 1998. All share and per share data
in the accompanying financial statements reflect the effects of the reverse
stock split for all periods presented.

         (b) In connection with the Company's initial public offering, all then
holders of shares of the Company's Common Stock and substantially all holders of
options to acquire such shares agreed to place into escrow 50% of their Common
Stock (243,750 shares) and options to purchase Common Stock (29,063 options).
The escrow shares and options were to be released from escrow upon the
attainment of specified net income or Common Stock price levels through 1997.
Such levels were not attained through December 31, 1997, and as such, the shares
reverted to the Company and the options were cancelled. Additionally, the
Company's Class A Warrants and Class B Warrants expired as of October 14, 1998.

                                      F-14

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         (c) At December 31, 1998, the Company has two stock option plans, which
are described below. The Company applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations in accounting for options
granted to employees. Under APB Opinion 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost is recognized.

         Under the 1991 Performance Equity Plan, the Company may grant options
to its employees and certain consultants for up to 2,000,000 shares of Common
Stock. Under the 1994 Outside Directors' Plan, the Company may grant options to
its directors for up to 400,000 shares of Common Stock. For both plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant and an option's maximum term is 10 years.

         FASB Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans has been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997; no dividend yield
for all years; expected volatility of 75 and 50 percent, respectively; risk-free
interest rates of 5.6 and 6.1 percent, respectively and expected lives of 7.8
and 9 years, respectively.

         Under the accounting provisions of FASB Statement 123, the Company's
net (loss) income and net (loss) income per common share would have been as
follows:
<TABLE>
<CAPTION>
                                                                        1998                     1997
                                                                        ----                     ----

<S>                                         <C>                      <C>                       <C>     
         Net (loss) income                  As reported              $(2,697,033)              $366,800
                                            Proforma                 $(3,053,501)              $186,413

         Net (loss) income per              As reported                   $(0.98)                 $0.14
         common share - basic               Proforma                      $(1.11)                 $0.07

         Net (loss) income per              As reported                   $(0.98)                 $0.13
         common share - diluted             Proforma                      $(1.11)                 $0.07
</TABLE>

         A summary of the status of the Company's two fixed stock option plans
as of December 31, 1998 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>

                                    December 31, 1998                                     December 31, 1997
                                    -----------------                                     -----------------
                                                              Weighted-Average                                     Weighted-Average
                                    Shares                    Exercise Price              Shares                    Exercise Price
                                    ----------------------------------------------------------------------------------------------
<S>                                    <C>                     <C>                         <C>                    <C>      
Outstanding at beginning of year       493,958                 $    4.00                   319,521                $    9.96
Granted                                200,450                 $    1.69                   270,125                $    2.16
Forfeited                              (81,808)                $    2.77                   (95,688)               $    8.07
                                      ---------                                          ---------

Outstanding at end of year             612,600                 $    3.40                   493,958                $    4.00
                                      =========                                          =========

Options exercisable at year-end        315,259                 $    4.86                   200,169                $    6.71
                                      =========                                           ========
Weighted-average fair value of options
 granted during the year             $    1.30                                           $    1.48
                                      ========                                            ========
</TABLE>

                                      F-15

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>

                  Options Outstanding                                            Options Exercisable                                
                  ----------------------------------------------------------     ----------------------------------
                  Number             Weighted-Average                                Number
Range of          Outstanding        Remaining              Weighted-Average     Exercisable       Weighted-Average
Exercise Prices   at 12/31/98        Contractual Life       Exercise Price       at 12/31/98        Exercise Price
---------------   -----------        ----------------       --------------       -----------        --------------
<S>                   <C>            <C>                    <C>                    <C>             <C>      
$ 1.19-2.99           545,100        8.2 years              $    1.90              247,759         $    1.96
$ 3.00-15.99           21,250        4.1 years              $   12.77               21,250         $   12.77
$16.00-20.00           46,250        2.9 years              $   16.76               46,250         $   16.76
                    ---------                                                    ---------

$ 1.19-20.00          612,600        7.4 years              $    3.40              315,259         $    4.86
                    =========                                                    =========
</TABLE>

         On January 24, 1997, the Board of Directors authorized the repricing of
all granted and outstanding options to purchase Common Stock issued pursuant to
the 1991 Performance Equity Plan at $1.64 per share, the market price per share
of the Company's Common Stock on such date.

         (d) As of December 31, 1998 and 1997, respectively, the Company has
reserved an aggregate 933,100 and 2,600,318 shares of Common Stock for issuance
upon exercise of options and warrants.

         (e) The following reconciles the components of the earnings per share
(EPS) computation:
<TABLE>
<CAPTION>

For the years ended December 31,                         1998                                         1997 
-----------------------------------------------------------------------------------------------------------------------------------

                                 (Loss)              Shares         Per-Share     Income            Share             Per-share
                               (Numerator)         (Denominator)    Amount        (Numerator)       (Denominator)       Amount    
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>               <C>          <C>               <C>                  <C>
(Loss) earnings per common share
Net (loss) income                $(2,697,033)      2,749,432         $(0.98)      $ 366,800         2,692,737            $0.14
                                                                      =====                                               ====

Effect of Dilutive Securities
Options                                   --              --                             --            53,017
Warrants                                  --              --                             --             4,640
                                    --------       ---------                       --------         ---------

(Loss) earnings per common share -
assuming dilution
Net (loss) income                $(2,697,033)      2,749,432         $(0.98)      $ 366,800         2,750,394            $0.13
                                  ==========       =========          =====        ========         =========             ====
</TABLE>

         Options to purchase 327,438 shares of common stock at exercise prices
ranging from $2.36 to $20.00 per share were not included in the computation of
earnings per share assuming dilution for 1997 because the options exercise
prices were greater than the average market price of the common shares for that
year. 612,600 options which expire through 2008, are still outstanding at
December 31, 1998. Warrants to purchase 1,938,698 shares of common stock at
exercise prices ranging from $2.36 to $43.04 per share were not included in the
computation of earnings per share assuming dilution for 1997 because the
warrants exercise prices were greater than the average market price of the
common shares for that year. 320,500 warrants, which expire at various times
through 2003, are still outstanding at December 31, 1998. No options and
warrants are included in the calculation of diluted earnings per share for 1998
as the effect would be anti-dilutive.

                                      F-16

<PAGE>
                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.      SEGMENT INFORMATION

         The Company's reportable segments are strategic businesses that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company
primarily evaluates the operating performance of its segments based on the
categories noted in the table below. During 1998 and 1997, the Company had no
intercompany sales.

         For the years ended December 31, 1998 and 1997, export sales,
principally to Asia and South America, aggregated approximately $1,900,000 and
$3,600,000, respectively, and no single customer provided more than 10% of the
Company's revenues.

         Financial information for the Company's business segments is as
follows:
<TABLE>
<CAPTION>

                                                                   For the year ended         For the year ended
                                                                    December 31, 1998          December 31, 1997
                                                                    -----------------          -----------------

<S>                                                                  <C>                         <C>
REVENUES

Industrial and municipal fluid handling and filtration...............$  15,310,078               $ 12,811,205
Commercial and residential water filtration and purification.........    6,395,257                  7,519,959
Car wash equipment sales and service.................................    4,743,951                  3,569,938
Corporate............................................................           --                         --              
                                                                     -------------              -------------

Total revenues.......................................................$  26,449,286              $  23,901,102
                                                                     =============              =============

OPERATING (LOSS) INCOME

Industrial and municipal fluid handling and filtration...............$    (920,423)             $   1,193,894
Commercial and residential water filtration and purification.........     (329,324)                   260,603
Car wash equipment sales and service.................................      505,902                    266,634
Corporate............................................................   (1,245,844)                  (923,152)             
                                                                     --------------             --------------

Total operating (loss) income........................................$  (1,989,689)             $     797,979
                                                                     =============              =============

DEPRECIATION AND AMORTIZATION

Industrial and municipal fluid handling and filtration.............. $     291,156              $     249,667
Commercial and residential water filtration and purification........       235,632                    258,245
Car wash equipment sales and service.................................      128,820                    124,059
Corporate............................................................       49,200                     49,250              
                                                                     -------------              -------------

Total depreciation and amortization..................................$     704,808              $     681,221
                                                                     =============              =============
</TABLE>

                                      F-17

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                      For the year ended         For the year ended
                                                                       December 31, 1998          December 31, 1997
                                                                       -----------------          -----------------
<S>                                                                  <C>                          <C>
INTEREST EXPENSE, NET

Industrial and municipal fluid handling and filtration...............$     664,249                $   477,053
Commercial and residential water filtration and purification.........           --                         --
Car wash equipment sales and service.................................       13,250                     28,276
Corporate............................................................      179,845                     56,013              
                                                                     -------------              -------------

Total interest expense, net..........................................$     857,344              $     561,342
                                                                     =============              =============

TOTAL ASSETS

Industrial and municipal fluid handling and filtration...............$   8,286,697              $   9,633,879
Commercial and residential water filtration and purification.........    2,857,433                  4,289,162
Car wash equipment sales and service.................................    2,032,714                  1,901,199
Corporate............................................................    1,390,604                  1,264,369              
                                                                     -------------              -------------

Total assets.........................................................$  14,567,448              $  17,088,609
                                                                     =============              =============

CAPITAL EXPENDITURES

Industrial and municipal fluid handling and filtration...............$     287,320              $      76,501
Commercial and residential water filtration and purification.........       35,626                     33,430
Car wash equipment sales and service.................................       33,614                     10,486
Corporate............................................................       14,714                     16,032              
                                                                     -------------              -------------

Total capital expenditures...........................................$     371,274              $     136,449
                                                                     =============              =============
</TABLE>


12.      FINANCING FEES

         The Company offers a retail financing program for the purpose of
assisting its subsidiaries' water purification customers (dealers) in obtaining
financing through an arrangement with an unrelated lending company. As
compensation for its services, the Company receives fees based on amounts
financed. Net fees for the years ended December 31, 1998 and 1997 aggregated
approximately $852,000 and $779,000, respectively, and are included in revenues.

13.      OTHER INCOME

         (a) On July 22, 1996, the Company filed a complaint against Vincent
Spaulding, Robert Langman and Robert Farry, former employees of one of the
Company's subsidiaries, in the United States District Court for the Southern
District of Florida. The complaint alleged, among other matters, breach of
express warranty and specific performance of certain

                                      F-18

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


of the parameters of the Stock Purchase Agreement effective July 1994 entered
into by the Company for the purchase of Gravity Flow Systems, Inc., FLS
Specialty Manufacturing, Inc. and the name and certain assets of TOPCO
International, Inc. During January 1997, the Company agreed to a Settlement
Agreement which, among other things, provided for the payment of $150,000 in
cash to the Company along with the transfer of land and building and a mortgage
note payable to the Defendants having carrying values of $150,000 and $124,714,
respectively, as of December 31, 1996. The result of the above transaction was a
net gain of approximately $124,000 recognized in March 1997.

         (b) On October 2, 1998, the Company sold substantially all of the net
assets of Midwest Water Technologies, Inc., ("MWTI"), retaining only the
accounts receivable. In connection with this sale, the Company realized $188,275
in cash which it in turn used to pay down certain outstanding debt. There was no
gain nor loss recognized on the sale of these assets.

         (c) On December 14, 1998, the Company sold substantially all of the net
assets of EnviroSystems Supply, Inc. In connection with this sale, the Company
realized $22,000 in cash, which it in turn used to pay down certain outstanding
debt, and a note, principal and interest receivable quarterly, in the amount of
$128,000 which bears interest at the rate of 11%. The Company realized a net
gain on this sale of net assets of $150,000.

14.      SUPPLEMENTAL CASH FLOW INFORMATION

         For the years ended December 31, 1998 and 1997, the Company paid
$741,581 and $451,932, respectively, for interest. Non-cash investing and
financing activities are as follows:

         The Company acquired certain assets and assumed certain liabilities of
FSDA during the year ended December 31, 1997. In conjunction with this
acquisition, liabilities were assumed as follows:


Fair value of net assets acquired                     $        6,060,941
Costs in excess of net assets acquired                           730,196
Debt and obligations under acquisition agreement              (5,333,300)
Acquisition costs                                               (204,031)
Warrants issued in connection with acquisition                   (80,000)
                                                      ------------------

Liabilities assumed                                   $        1,173,806
                                                       =================

         During 1998, in connection with a consulting agreement and the issuance
of debt, the Company issued 170,500 warrants valued at $78,000. During 1997, in
connection with the acquisition of FSDA, the Company issued 187,500 warrants
valued at $120,000.

15.      COMMITMENTS AND CONTINGENCIES

         (a) The Company leases vehicles and office/warehouse space under
operating leases which expire through 2002. Total rent expense aggregated
approximately $220,000 and $237,000, for the years ended December 31, 1998 and
1997, respectively.

                                      F-19

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Approximate future annual minimum lease payments under operating leases
at December 31, 1998 are as follows:


                               1999                           $     223,583
                               2000                                 175,048
                               2001                                 157,170
                               2002                                  70,260
                                                              -------------
                                                              $     626,061
                                                              =============

         (b) The Company has entered into a distribution agreement with Ryko
Manufacturing Company ("Ryko"). Under the terms of the agreement, the Company is
the exclusive distributor of Ryko car wash equipment in the South Florida
region. The distribution agreement provides that the Company sells directly or
receives a commission on all Ryko equipment sold within its region. The
distribution agreement is due to expire in 1999. However, it provides for
automatic renewal upon the achievement of certain sales goals which aggregate
approximately $1,800,000 per year for 1998 and 1999. The Company expects to meet
such goals.

         (c) In January 1994, the Company adopted a 401(k) employee savings and
retirement plan. Under the provisions of the Plan, the Company may elect to
match each employee's contribution to the Plan at the rate of 50% in Company
Common Stock. The Common Stock is restricted stock and vests over a two year
period on a quarterly basis. During 1998 and 1997, the Company contributed
96,592 and 18,393 shares of restricted Common Stock valued at $62,788 and
$18,165, respectively.

         (d) The Company recorded a provision for probable losses related to a
claim against a former MWTI customer (dealer) in conjunction with the financing
program offered by the Company through an unrelated lending company for the
Company's dealers in the residential water filtration and purification business,
(See Note 12). The Company has been notified by the lending company of a claim
it has made against such MWTI dealer in the amount of $270,000. Through the
financing arrangement, the Company guarantees its dealers' performance
associated with the bona fide and proper installation and performance of the
Company's subsidiaries' water filtration and purification units and indemnified
such lending company against any losses the lending company incurs as a result
of claims thereunder, other than those related to credit risk. No claim has yet
been asserted against the Company. Although the Company has engaged legal
counsel and is still undergoing a determination of all of the facts and
circumstances surrounding such claim, it has recorded a reserve for $270,000.

         (e) On April 9, 1997 Long Trail Brewing Company filed a complaint
against EnviroSystems Supply, Inc., a wholly owned subsidiary of the Company, in
Windsor Superior Court in the County of Windsor in the State of Vermont; Docket
number S216-5-97Wrcv. The complaint alleges, among other matters, breach of
express warranty and specific performance of certain of the parameters of the
written agreement for the purchase of a waste water treatment plant designed to
treat the industrial waste water generated at the Plaintiff's brewing facility.
Management believes, based on facts presently known, that if the outcome of such
legal proceedings is determined adverse to the Company, such determination could
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations. The Company has provided for the estimated
probable loss in connection with this matter.

                                      F-20

<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         (f) The Company is or may become involved in various lawsuits, claims
and proceedings in the normal course of its business including those pertaining
to product liability, environmental, safety and health, and employment matters.
The Company records liabilities when loss amounts are determined to be probable
and reasonably estimatable. Insurance recoveries are recorded only when claims
for recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims, other
than those previously disclosed, will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.


16.      SUBSEQUENT EVENTS

         (a) In January 1999, the Company, pursuant to the 401(k) employee
savings and retirement plan, contributed 27,091 shares of restricted Common
Stock valued at $16,085.

         (b) In January 1999, certain employees of the Company were granted
options to purchase a total of 34,900 shares of Common Stock at $1.00 per share
(market value at the date of grant). The above options expire ten years from the
date of grant, and are exercisable one-third each year beginning one year from
the date of grant.

                                      F-21

<PAGE>

                                 EXHIBIT INDEX


EXHIBIT                   DESCRIPTION
-------                   -----------

10.4         Debenture Purchase Agreement between the Company and Sirrom
             Capital Corporaiton, d/b/a Tandem Capital, dated June 30, 1998
             (exhibits omitted).

27.1         Financial Data Schedule.