Use these links to rapidly review the documentSOUTHWESTERN WATER EXPLORATION CO. FORM 10-QSB INDEX

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

(Mark One)

|ý                                                | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
|------------------------------------------------ | -----------------------------------------------------------------------------------
|For the quarterly period ended December 31, 2001
|o                                                | TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from            to    

Commission file number 33-16110-D

SOUTHWESTERN WATER EXPLORATION CO.(Formerly Star Acquisitions Corporation)
(Exact name of small business issuer as specified in its charter)

COLORADO(State or other jurisdiction of
incorporation or organization)

84-1062895(IRS Employer Identification No.)4391 S. PEARL STREET
LAS VEGAS, NEVADA(Address of principal executives offices)

89121(Zip Code)


(800) 661-9169(Issuer's telephone number including area code)

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 than the registrant required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
o No ý

As
of July 1, 2002, the Registrant had 19,353,131 shares of common stock outstanding.

Transitional
Small Business Disclosure Format: Yes o No ý

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SOUTHWESTERN WATER EXPLORATION CO.  FORM 10-QSB  INDEX



|        |  |                                                                   |  |                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I  |  | FINANCIAL INFORMATION                                            
|        |  | Item 1Financial Statements                                      
|        |  |                                                                   |  | Consolidated Balance SheetDecember 31, 2001 (unaudited) and March 31, 2001 (audited)                                                                                   
|        |  |                                                                   |  | Consolidated Statement of Loss and Deficit Three and Nine Months ended December 31, 2001 and 2000 and period April 1, 1992 (inception) to December 31, 2001 (unaudited)
|        |  |                                                                   |  | Consolidated Statement of Cash FlowsThree and Nine Months ended December 31, 2001 and 2000 and period April 1, 1992 (inception) to December 31, 2001 (unaudited)       
|        |  |                                                                   |  | Notes to Consolidated Unaudited Financial Statements                                                                                                                    
|        |  | Item 2Management's Discussion and Analysis or Plan of Operations
|PART II |  | OTHER INFORMATION                                                

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHWESTERN WATER EXPLORATION CO.  (A DEVELOPMENT STAGE COMPANY)    CONSOLIDATED BALANCE SHEET  (Expressed in U. S. Dollars)

|                                                      |                                              | December 31,
2001 |           | March 31,
2001 |  
|----------------------------------------------------- | -------------------------------------------- | ----------------- | --------- | -------------- | -
|
|Assets                                                |                                              |                   |           |                |  
|Current assets:                                       |                                              |                   |           |                |  
|                                                      | Cash and cash equivalents                    |                   | $         | 1,559,959      |  
|                                                      | Accounts receivable                          |                   |           | 10,018         |  
|                                                      | Due from shareholder                         |                   |           | 3,868          |  
|                                                      |                                              |                   |           |                |  
|                                                      |                                              |                   | 1,573,845 |                |  
|Capital assets, at cost less accumulated depreciation |                                              |                   | 20,042    |                |  
|License and other assets                              |                                              |                   | 201       |                |  
|                                                      |                                              |                   |           |                |  
|                                                      |                                              | $                 | 1,594,088 |                | $
|                                                      |                                              |                   |           |                |  
|Liabilities and Shareholders' Equity (Deficiency)     |                                              |                   |           |                |  
|Current liabilities:                                  |                                              |                   |           |                |  
|                                                      | Accounts payable and accrued liabilities     |                   | $         | 82,131         |  
|                                                      | Advances from shareholder                    |                   |           |               |  
|                                                      |                                              |                   |           |                |  
|                                                      |                                              |                   | 82,131    |                |  
|Advances from affiliated corporation                  |                                              |                   | 38,345    |                |  
|Minority interest (note 4)                            |                                              |                   | 14,975    |                |  
|Shares to be issued (note 5)                          |                                              |                   | 763,574   |                |  
|Shareholders' equity (deficiency):                    |                                              |                   |           |                |  
|                                                      | Share capital (note 5)                       |                   |           | 3,954,474      |  
|                                                      | Deficit accumulated during development stage |                   |           | (2,968,171     | )
|                                                      | Deficit accumulated prior to April 1, 1992   |                   |           | (291,240       | )
|                                                      |                                              |                   |           |                |  
|                                                      |                                              |                   | 695,063   |                |  
|                                                      |                                              |                   |           |                |  
|                                                      |                                              | $                 | 1,594,088 |                | $
|                                                      |                                              |                   |           |                |  

See
accompanying notes to consolidated unaudited financial statements.

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SOUTHWESTERN WATER EXPLORATION CO.  (A DEVELOPMENT STAGE COMPANY)    CONSOLIDATED STATEMENT OF LOSS AND DEFICIT  (Expressed in U. S. Dollars)

|                             |                                                   |   |            |        |   |            |         |   |            | Period from
commencement
of operations on
April 1, 1992 to
December 31,
2001 |  
|---------------------------- | ------------------------------------------------- | - | ---------- | ------ | - | ---------- | ------- | - | ---------- | ---------------------------------------------------------------------------- | -
|
|
|
|Interest income              |                                                   | $ | 8,342      |        | $ | 8,082      |         | $ | 10,397     |                                                                              | $
|Expenses:                    |                                                   |   |            |        |   |            |         |   |            |                                                                              |  
|                             | Consulting fees                                   |   |            | 56,301 |   |            | 32,538  |   |            | 143,993                                                                      |  
|                             | Financing fees                                    |   |            | 44,000 |   |            | 715     |   |            | 161,738                                                                      |  
|                             | Professional                                      |   |            | 33,783 |   |            | 21,418  |   |            | 48,331                                                                       |  
|                             | Office expense                                    |   |            | 19,005 |   |            | 22,601  |   |            | 91,379                                                                       |  
|                             | Investor relations                                |   |            | 15,000 |   |            |        |   |            | 45,000                                                                       |  
|                             | Travel                                            |   |            | 11,263 |   |            | 7,210   |   |            | 15,967                                                                       |  
|                             | Development                                       |   |            | 11,133 |   |            | 237,816 |   |            | 11,578                                                                       |  
|                             | Bank charges                                      |   |            | 408    |   |            | 92      |   |            | 836                                                                          |  
|                             | Compensation expense on granting of stock options |   |            | 4,897  |   |            |        |   |            | 4,897                                                                        |  
|                             | Commission                                        |   |            |       |   |            | 20,055  |   |            |                                                                             |  
|                             | Business taxes                                    |   |            |       |   |            | 1,273   |   |            |                                                                             |  
|                             | Salary                                            |   |            |       |   |            | 1,490   |   |            | 41,273                                                                       |  
|                             | Miscellaneous                                     |   |            | 201    |   |            |        |   |            | 598                                                                          |  
|                             | Depreciation                                      |   |            | 872    |   |            | 168     |   |            | 2,616                                                                        |  
|                             |                                                   |   |            |        |   |            |         |   |            |                                                                              |  
|                             |                                                   |   | 196,863    |        |   | 345,376    |         |   | 568,206    |                                                                              |  
|                             |                                                   |   |            |        |   |            |         |   |            |                                                                              |  
|Net loss                     |                                                   |   | (188,521   | )      |   | (337,294   | )       |   | (557,809   | )                                                                            |  
|Deficit, beginning of period |                                                   |   | (2,779,650 | )      |   | (2,094,587 | )       |   | (2,410,362 | )                                                                            |  
|                             |                                                   |   |            |        |   |            |         |   |            |                                                                              |  
|Deficit, end of period       |                                                   | $ | (2,968,171 | )      | $ | (2,431,881 | )       | $ | (2,968,171 | )                                                                            | $
|                             |                                                   |   |            |        |   |            |         |   |            |                                                                              |  
|Net loss per common share    |                                                   | $ | (0.01      | )      | $ | (0.03      | )       | $ | (0.03      | )                                                                            | $
|                             |                                                   |   |            |        |   |            |         |   |            |                                                                              |  

See
accompanying notes to consolidated unaudited financial statements.

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SOUTHWESTERN WATER EXPLORATION CO.  (A DEVELOPMENT STAGE COMPANY)    CONSOLIDATED STATEMENT OF CASH FLOWS  (Expressed in U. S. Dollars)

|                                                |                                                         |                                                   |           |          |        |          |          |        |           | Period from
commencement
of operations on
April 1, 1992 to
December 31,
2001 |        
|----------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------- | --------- | -------- | ------ | -------- | -------- | ------ | --------- | ---------------------------------------------------------------------------- | -------
|
|
|
|Cash flows from (used in) operating activities: |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|Operations:                                     |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                | Net loss                                                |                                                   | $         | (188,521 | )      | $        | (337,294 | )      | $         | (557,809                                                                     | )      
|                                                | Items not involving cash:                               |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                |                                                         | Depreciation                                      |           |          | 704    |          |          | 168    |           |                                                                              | 2,280  
|                                                |                                                         | Stock issued for services                         |           |          | 44,000 |          |          |       |           |                                                                              | 164,000
|                                                |                                                         | Warrants issued for services                      |           |          |       |          |          |       |           |                                                                              | 45,070 
|                                                |                                                         | Compensation expense on granting of stock options |           |          | 4,897  |          |          |       |           |                                                                              | 4,897  
|                                                | Net change in non-cash operating working capital:       |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                |                                                         | Accounts receivable                               |           |          | (5,000 | )        |          | (5,892 | )         |                                                                              | (8,224 
|                                                |                                                         | Accounts payable and accrued liabilities          |           |          | 15,000 |          |          | (120   | )         |                                                                              | 30,097 
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                |                                                         |                                                   | (128,920  | )        |        | (343,138 | )        |        | (319,689  | )                                                                            |        
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|Financing:                                      |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                | Net advances from (repayment to) affiliated corporation |                                                   |           | (116,401 | )      |          | 72,284   |        |           | 4,300                                                                        |        
|                                                | Issuance of share capital                               |                                                   |           | 210,000  |        |          | 400,000  |        |           | 1,510,000                                                                    |        
|                                                | Net advances from (repayment) to shareholder            |                                                   |           | (2,195   | )      |          |         |        |           | (17,134                                                                      | )      
|                                                | Minority interest                                       |                                                   |           |         |        |          |         |        |           |                                                                             |        
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|                                                |                                                         |                                                   | 91,404    |          |        | 472,284  |          |        | 1,497,166 |                                                                              |        
|Investments:                                    |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|Purchase of capital assets                      |                                                         |                                                   | 168       |          |        | (7,512   | )        |        | (10,942   | )                                                                            |        
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|Increase in cash and cash equivalents           |                                                         |                                                   | (37,348   | )        |        | 121,634  |          |        | 1,156,535 |                                                                              |        
|Cash and cash equivalents, beginning of period  |                                                         |                                                   | 1,597,307 |          |        | 176,661  |          |        | 403,424   |                                                                              |        
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        
|Cash and cash equivalents, end of period        |                                                         | $                                                 | 1,559,959 |          | $      | 298,295  |          | $      | 1,559,959 |                                                                              | $      
|                                                |                                                         |                                                   |           |          |        |          |          |        |           |                                                                              |        

See
accompanying notes to consolidated unaudited financial statements.

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SOUTHWESTERN WATER EXPLORATION CO.  (A DEVELOPMENT STAGE COMPANY)    NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS  December 31, 2001  (Expressed in U. S. Dollars)

1. Incorporation and basis of presentation:

Southwestern Water Exploration Co. (the "Company") is incorporated under the laws of the State of Colorado and is planning to develop projects for the production
of water reservoirs in the United States.

These
financial statements are presented using U.S. dollars as the functional and reporting currency and have been prepared in accordance with generally accepted accounting principles in
the United States. The financial information included herein is unaudited. These interim financial statements follow the same accounting policies and methods of application as the most recent annual
audited financial statements dated March 31, 2001, and should be read in conjunction with those financial statements. The disclosures herein are incremental to those included within the annual
financial statements.

2. Organization and business:

These financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Company will continue in
operations for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations.

At
December 31, 2001 the Company is in the development stage and has no history of generating cash flow from its operations. The Company intends to develop and market potable
water throughout the southwest United States and has identified a number of sites, which it believes will provide potable water, including significant water reservoirs in Colorado. In order to develop
these sites, the Company needs to acquire access rights and raise financing in order to commence drilling. Once developed, it is the intent of the Company to market the water from these sites, or in
the event it is unsuccessful, to sell the water rights.

During
its development stage, the Company has funded its operating activities primarily by issuing equity. The Company anticipates that it will be necessary to issue additional equity to
fund future activities. During the nine months ended December 31, 2001, the Company raised $1,510,000 from private placements.

There
can be no assurance that the Company will be successful in raising additional equity or of the Company's ability to continue as a going concern. The application of the going
concern concept is dependent upon the Company receiving the continued support of its shareholders, its ability to raise new capital and its ability to achieve a commercial level of production and
sales and profitable operations.

3. Related party transactions:

From time to time amounts are advanced by AIFE Canada to the Company as and when required for operating purposes. There is, however, no obligation for AIFE Canada
to make future advances. During the nine months ended December 31, 2001, the Company received $4,300, net of repayments, from AIFE Canada, (2000net repayment to AIFE Canada of
$165,532).

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The
advances from AIFE Canada of $38,345 (March 31, 2001$34,045) are non-interest bearing with no fixed terms of repayment and are classed as
long-term as the affiliate has agreed not to demand repayment within the next year.

4. Minority interest:

The minority interest consists of preferred shares issued by the Company's operating subsidiary. During the year ended March 31, 1999 all except 25,000
preferred shares with a value of $24,975 were converted into common shares of the Company (note 5). The outstanding preferred shares are redeemable at the discretion of the subsidiary at the
issued value of $1.00 per share and dividends are
payable at the discretion of the subsidiary. During the nine months ended December 31, 2001, the Company's subsidiary redeemed 10,000 preferred shares, reducing minority interest to $14,978.

5. Share capital:



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|                                                                         |                         | Number of
shares |            | Subscriptions
Amount |           | receivable |  
|------------------------------------------------------------------------ | ----------------------- | ---------------- | ---------- | -------------------- | --------- | ---------- | -
|Issued and outstanding, April 1, 1992                                    |                         | 12,300,000       |            | $                    | 492       |            | $
|Effect of reverse spilt, October 23, 1993                                |                         | (11,808,000      | )          |                      |          |            |  
|Elimination of deficit                                                   |                         |                 |            |                      | (492      | )          |  
|Share issued in reverse takeover                                         |                         | 4,500,000        |            |                      | 325       |            |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 1994 |                  | 4,992,000  |                      |           | 325        |  
|Issued for cash                                                          |                         | 30,000           |            |                      | 30        |            |  
|Amounts receivable collected                                             |                         |                 |            |                      | 15        |            |  
|                                                                         | Balance, March 31, 1995 |                  | 5,022,000  |                      |           | 370        |  
|Issued for cash and subscriptions receivable                             |                         | 235,000          |            |                      | 220       |            |  
|                                                                         | Balance, March 31, 1996 |                  | 5,257,000  |                      |           | 590        |  
|Issued for cash and subscriptions receivable                             |                         | 265,000          |            |                      | 245       |            |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 1997 |                  | 5,522,000  |                      |           | 835        |  
|Issued for cash and subscriptions receivable                             |                         | 151,000          |            |                      | 126       |            |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 1998 |                  | 5,673,000  |                      |           | 961        |  
|Issued on conversion of preferred shares                                 |                         | 1,172,000        |            |                      | 835,971   |            |  
|Issued on conversion of warrants                                         |                         | 1,008,120        |            |                      |          |            |  
|Issued for cash                                                          |                         | 326,000          |            |                      | 119,078   |            |  
|Issued in exchange for reduction of amount due to affiliated corporation |                         | 80,000           |            |                      | 35,500    |            |  
|Issued for consulting services rendered                                  |                         | 300,000          |            |                      |          |            |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 1999 |                  | 8,559,120  |                      |           | 991,510    |  
|Issued for cash                                                          |                         | 1,200,000        |            |                      | 1,200     |            |  
|Value attributed to compensation expense on granting of stock options    |                         |                 |            |                      | 100,000   |            |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 2000 |                  | 9,759,120  |                      |           | 1,092,710  |  
|Issued for cash                                                          |                         | 1,500,000        |            |                      | 299,000   |            |  
|Issued for services rendered                                             |                         | 820,000          |            |                      | 215,000   |            |  
|Issued to correct prior period error                                     |                         | 55,200           |            |                      |          |            |  
|Value attributed to warrants issued for services rendered                |                         |                 |            |                      | 102,791   |            |  
|Stock issuance costs                                                     |                         |                 |            |                      | (132,979  | )          |  
|                                                                         |                         |                  |            |                      |           |            |  
|                                                                         | Balance, March 31, 2001 |                  | 12,134,320 |                      |           | 1,576,522  |  
|Issued for cash                                                          |                         | 4,314,287        |            |                      | 1,510,000 |            |  
|Issued for cash and services received in prior year                      |                         | 1,550,000        |            |                      | 669,985   |            |  
|Issued for services rendered                                             |                         | 410,000          |            |                      | 164,000   |            |  
|Value attributed to warrants issued for services rendered                |                         |                 |            |                      | 49,060    |            |  
|Stock issuance costs                                                     |                         |                 |            |                      | (19,990   | )          |  
|Issued for cash received subsequent to quarter end                       |                         | 250,000          |            |                      |          |            |  
|Correction of prior year overstatement                                   |                         | (15,000          | )          |                      |          |            |  
|Value attributed to compensation expense on granting of stock options    |                         |                 |            |                      | 79,800    |            |  
|Deferred compensation expense related to granting of stock options       |                         |                 |            |                      | (74,903   | )          |  
|                                                                         |                         |                  |            |                      |           |            |  
|Balance, December 31, 2001                                               |                         | 18,643,607       |            | $                    | 3,954,474 |            | $
|                                                                         |                         |                  |            |                      |           |            |  

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The
Company authorized for issuance 40,000 shares for services rendered during the nine months ended December 31, 2001 and 230,000 shares for services rendered during fiscal 2001
which were not yet issued at December 31, 2001. The fair market value of these shares was $108,000 of which $16,000 has been included in stock issuance costs in fiscal 2002 and $92,000 had been
included in stock issuance costs in fiscal 2001.

On
August 21, 2000, the Board of Directors resolved to issue 2,979,880 common shares to AIFE Canada as repayment of $655,574 of amounts owing to AIFE Canada. The value of $0.22
per share issued was determined by the Board to be the fair value of the common shares at that date. The shares were not yet issued at December 31, 2001.

During
the nine months ended December 31, 2001, the Company issued 9,795,524 warrants, each warrant entitling the holder to acquire one share of the Company's common stock.

The
warrants issued and outstanding at December 31, 2001 were as follows:

Number of
warrants

Exercise
price

Expiration
date200,000

$
0.25

July 1, 200250,000


0.25

July 8, 2002500,000


0.25

July 11, 20031,200,000


0.50

September 15, 2002200,000


0.50

November 15, 2002100,000


0.50

April 14, 2003230,000


0.50

February 23, 2004250,000


1.00

April 14, 2003500,000


1.00

February 21, 20031,000,000


1.00

October 1, 200340,000


1.00

February 26, 2003250,000


1.50

April 14, 20031,000,000


1.50

October 1, 20034,627,762


1.50

November 1, 2004540,000


2.00

November 19, 20034,285,175


3.00

November 1, 2004342,587


3.50

November 1, 200475,000


0.50

Conditional75,000


0.75

Conditional50,000


1.00

Conditional15,515,524


Expiration:

200,000
warrants have conditional expiration dates and all relate to the drilling and testing of the Company's first well in the Hygiene formation in Colorado. 75,000 warrants (the
"$0.50 warrants") with an exercise price of $0.50 per warrant, expire six months following the completion of the drilling and testing of the Hygiene test well. An additional 75,000 warrants (the
"$0.75 warrants") with an exercise price of $0.75 per warrant expire six months following the exercise of the $0.50 warrants. The

---

remaining 50,000 warrants with an exercise price of $1.00 per warrant expire six months following the exercise of the $0.75 warrants.

790,000
of the warrants were issued for services rendered during the nine months ended December 31, 2001. The fair market value of the warrants was determined to be $49,060,
calculated using the Black Scholes pricing model with the following weighted average assumptions:

Risk free interest rate

3.7%Volatility

100%Life of the warrant

2.5 yearsDividend yield

0%


The
Company has an incentive stock plan, which provides for the granting by the Board of Directors of up to 3,000,000 stock options to directors, officers and employees for the purchase
of authorized but unissued common shares. Stock option vesting privileges are established by the Board.

In
2002, the Company granted to a senior officer 200,000 options to purchase common shares at an option price of $.001 per share. These options vest over a four-year period
from the date of grant. The Company has calculated the intrinsic value of these options to be $79,800 of which $4,897 has been
charged as compensation expense in the nine months ended December 31, 2001 and the remainder has been deferred.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis should be read in conjunction with the financial statements and accompanying notes appearing elsewhere in this quarterly
report for period ended December 31, 2001.

FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or the Company's future financial performance. The Company intends the forward-looking statements throughout this quarterly report and
the information incorporated by reference to be covered by the safe harbor provisions for forward-looking statements. All projections and statements regarding the Company's expected financial position
and operating results, its business strategy, its financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by the use of
forward-looking words such as "may," "believe," "plan," "will," "anticipate," "estimate," "expect," "intend," and other words and phrases of similar meaning. Known and unknown risks, uncertainties and
other factors could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on information available as of the date of this
report on Form 10-QSB and on numerous assumptions and developments that are not within our control. Although the Company believes these forward-looking statements are reasonable,
the Company cannot assure you they will turn out to be correct. Actual results could be materially different from our expectations due to a variety of factors, including the following:



This
list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included
elsewhere in this report.

General

Southwestern Water Exploration Co. (the "Company"), formerly Star Acquisitions Company, was incorporated in the State of Colorado on July 10, 1987. The
Company's activities from inception

---

consisted primarily of reviewing possible business opportunities and acquisitions and maintaining the business entity. The Company had only nominal net assets and no operational activities from the
fiscal years 1987 through 1993, and all expenses incurred were solely related to maintaining the entity and reviewing potential business opportunities.

As
of December 31, 2001, the Company is in the development stage and has no history of generating cash flow from its operations. The Company intends to develop and market potable
water throughout the southwest United States and has identified a number of sites that it believes will provide potable water, including a significant water reservoir in Colorado and other western
states. In order to develop these sites and commence drilling the Company needs to acquire access rights and raise financing.
Once developed, it is the intent of the Company to market the water from these sites, or in the event it is unsuccessful, to sell the water rights.

Results of Operation

The Company has a limited operating history that makes an evaluation of its business operations and future prospects difficult. The Company had no revenues from
operations for the three fiscal years ended March 31, 2001 and nine months ended December 31, 2001. However, the Company received $10,397 in interest income for the nine months ended
December 31, 2001, as compared to $8,082 during the same period in 2000. The Company incurred expenses of $568,206 in the nine months ended December 31, 2001, as compared to $524,361 in
the same period in 2000. Moreover, the Company has incurred operating losses and negative cash flow each quarter and each year since 1993. The Company's accumulated deficit was $2,410,362 and
$2,968,171 at March 31, 2001 and December 31, 2001, respectively. The Company believes it will continue to experience net losses on a quarterly and annual basis until and unless the
Company is able to generate or develop business revenues for which there is no future assurance.

Liquidity and Capital Resources

During its development stage, the Company has funded its operating activities primarily by issuing equity as well as loans from shareholders and from AIFE,
American Institute of Formation Evaluation, Ltd ("AIFE Canada"), a Canadian corporation controlled by Steven Misner and Barbara McAllister, each of whom are officers and directors of the
Company.

From
March 31, 2000 through March 31, 2002, the Company has raised an aggregate of $2.5 million in additional funds from a series of private placements to certain
accredited investors, which the Company is currently using to pursue its leasing, drilling and marketing activities for the sites identified in Colorado. The Company anticipates that funding of future
activities will continue to be provided by the completion of private placements of its common stock.

On
August 2000, the Board of Directors resolved to issue 2,979,880 shares of common stock to AIFE Canada as repayment of $655,574 of amounts owed to AIFE Canada. The value of
$0.22 per share issued was determined by the Board to be the fair value of the common stock at that date. The shares of common stock were issued to AIFE Canada in August 2002, and subsequently
distributed by AIFE Canada to its shareholders. See Note 3 to Consolidated Financial Statements"Related party transactions."

As
of March 31, 2001, the Company owed AIFE Canada $34,045 for advances during the fiscal year ended 2001. During the nine months ended December 31, 2001, the Company
received $299,459 in additional advances from AIFE Canada and made total payments to AIFE Canada in the amount of
$295,159. As of December 31, 2001, the Company owed $38,345 to AIFE Canada. See Note 3 to Consolidated Financial Statements"Related party transactions."

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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings that management believes to be material, and there are no such proceedings that are known to be contemplated.

ITEM 2. CHANGES IN SECURITIES

During the three months ended December 31, 2001, the Company issued, or authorized for issuance, the following securities in exchange for the services set
forth below that were performed on behalf of the Company:

Name of Shareholder

Number of Shares &
Warrants Issued

Services RenderedRadcliffe Latimer

40,000 shares

Financial ConsultingAcadian Energy Ltd.

60,000 shares

Financial ConsultingPat Toth

10,000 shares

Financial Consulting


The
Company also authorized the issuance to Mid-Ocean Investments, a Bermuda corporation, 40,000 shares of common stock and warrants to purchase an additional 40,000 shares
of common stock at $2.00 per share, for services rendered in connection with the Company's equity financing efforts. Although the Company granted the warrants during this period, the shares have not
been issued as of the date of the filing hereof

The
issuances of the foregoing securities were made in reliance upon the exemption from registration provided by Section 4(2) of the 1933 Act. No broker/dealers were involved in
the sale and no commissions were paid. Moreover, each of the individuals and entities represented to the Company that they acquired the securities for investment and not with a view to distribution.

During
this same quarter, the Company granted to Thomas Lenney, the Company's president, options to purchase 200,000 of common shares at an exercise price of $.001 per share, pursuant to
his employment agreement. These options vest over a four-year period from the date of grant.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None during this reporting period.

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

None during this reporting period.

ITEM 5. OTHER INFORMATION

None during this reporting period.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|Exhibit
Number |  | Title of Exhibit                                                                                                                                                                                                                                                                         
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Agreement and Plan of Reorganization between Star Acquisitions Corporation and Southwestern Water Exploration Co., dated October 23, 1993, incorporated by reference to Exhibit 2.1 of registrant's Annual Report on Form 10-KSB for fiscal year ended
March 31, 1997, filed May 4, 1998.
|               |  |                                                                                                                                                                                                                                                                                          

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|3.1    |   | Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of registrant's Annual Report on Form 10-KSB for fiscal year ended March 31, 1997, filed May 4, 1998.                                                                                                        
|------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2    |   | By-laws, incorporated by reference to Exhibit 3.2 of registrant's Annual Report on Form 10-KSB for fiscal year ended March 31, 1997, filed May 4, 1998.                                                                                                                                               
|10.1   |   | License Agreement between American Institute of Formation Evaluation Ltd. and American Institute of Formation Evaluation Co., dated September 1, 1993, incorporated by reference to Exhibit 10.1 of registrant's Annual Report on Form 10-KSB for fiscal
year ended March 31, 1997, filed May 4, 1998.
|10.2   |   | 1999 Performance Stock Option Plan, incorporated by reference to Exhibit 10.2 of registrant's Annual Report of Form 10-KSB for fiscal year ended March 31, 2001, filed August 8, 2002.                                                                                                                
|10.2(a | ) | Amendment No. 1 to 1999 Performance Stock Option Plan, incorporated by reference to Exhibit 10.2(a) of registrant's Annual Report of Form 10-KSB for fiscal year ended March 31, 2001, filed August 8, 2002.                                                                                          
|10.3   |   | Employment Agreement dated October 10, 2001, by and between the registrant and Thomas Lenney incorporated by reference to Exhibit 10.3 of registrant's Annual Report of Form 10-KSB for fiscal year ended March 31, 2001, filed August 8,
2002.                                                       
|10.3(a | ) | Amendment to the Employment Agreement by and between the registrant and Thomas Lenney, effective June 29, 2002, incorporated by reference to Exhibit 10.3(a) of registrant's Annual Report of Form 10-KSB for fiscal year ended March 31, 2001, filed
August 8, 2002.                                 
|99.1   |   | Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              
|99.2   |   | Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              

The
Company did not file any reports on Form 8-K during the third quarter ended December 31, 2001.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|      |  |                 |  | Southwestern Water Exploration Co.                                                                               
|----- |  | --------------- |  | -----------------------------------------------------------------------------------------------------------------
|Date: |  | August 17, 2002 |  | /s/STEVEN B. MISNERSteven B. Misner
Chief Executive Officer                                                      
|      |  |                 |  | /s/BARBARA J. MCALLISTERBarbara J. McAllister
Chief Financial Officer (Principal
Accounting Officer) and Director

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