<PAGE>   1

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

                For the quarterly period ended 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 33-16110-D

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


                 COLORADO                                 84-1062895
     (State or other jurisdiction of           (IRS Employer Identification No.)
     incorporation or organization)

                   615 MACLEOD TRAIL S.E., SUITE 1100, ROCKY
                    MOUNTAIN PLAZA, CALGARY, ALBERTA T2G 4T8
                    (Address of principal executive offices)

                                 (403) 531-2630
                (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 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
                                                                       ---   ---

         As of January 31, 1998, the Registrant had 8,042,120 shares of common
stock outstanding.

         Documents Incorporated by Reference: Exhibits in the Registration
Statement on Form 10-KSB dated May 4, 1998.

         Transitional Small Business Disclosure Format: Yes     No  X 
                                                            ---    ---


<PAGE>   2

                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

         The following financial statements are filed as a part of this Form
10-QSB:

<TABLE>
<CAPTION>
         Financial Statements                                 Page
         --------------------                                 ----
<S>                                                           <C>
         Consolidated Balance Sheets

         Consolidated Statements of Loss and Deficit
</TABLE>


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

General

         Southwestern Water Exploration Co. (the "Company"), was incorporated in
the State of Colorado on June 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 1995
and all expenses incurred were solely related to maintaining the entity and
reviewing potential business opportunities.

         The Company intends to develop and market potable water throughout the
American Southwest. During its development stage, the Company acquired the
Database which it believes will provide surface drilling locations to mine deep
(below 2,000 ft) subsurface aquifers.

         The Company has identified a number of sites which it believes will
provide potable water, including a significant water reservoir in Nevada, by
utilizing the Database. Once developed, it is the intent of the Company to
market the water from these sites. If the marketing effort is unsuccessful, the
Company intends to sell the water rights to these sites. The Database provides
specific information including surface location, depth(s) of aquifers,
temperature, production capability, and mineral properties from wells previously
drilled for hydrocarbons and subsequently abandoned.

         Management believes that the Company can satisfy its cash requirements
from existing funds for another three months. The Company intends to meet its
future capital needs by raising additional funds through a private placement of
its securities. The Company anticipates that funding of future operations will
be provided by the completion of this private placement for a minimum of $1.5
million. There can be no assurances, however, that the Company will be
successful in the completion of the private placement. In the event the private
placement is not successful, or fails to raise sufficient funds, the Company may
seek alternative financing in the form of short-term or long-term debt or
securities convertible into common stock of the Company.

         In the event the private financing is successful, the Company intends
to engage Messrs. Misner and Webb as full-time employees and pay them monthly
salaries of approximately $5,000 per month, respectively. Even if the amount
raised in the private placement meets the Company's expectations, the Company
does not plan to hire additional employees or purchase or acquire plant or
significant equipment. The Company will meet its personnel, drilling and
pipeline requirements by contracting for these services with third parties.



<PAGE>   3






                               [KPMG LETTERHEAD]













                  Consolidated Financial Statements of


                  SOUTHWESTERN WATER
                  EXPLORATION CO.


                  Quarter ended December 31, 1998

                  (Unaudited - See Notice to Reader)

                  (Expressed in U.S. dollars)

<PAGE>   4






                               [KPMG LETTERHEAD]






NOTICE TO READER


We have compiled the consolidated balance sheet of Southwestern Water
Exploration Co. as at December 31, 1998 and the consolidated statement of loss
and deficit for the quarter then ended from information provided by management.
We have not audited, reviewed or otherwise attempted to verify the accuracy or
completeness of such information. Readers are cautioned that these statements
may not be appropriate for their purposes.





KPMG LLP

Chartered Accountants

Calgary, Canada
February 10, 1999





<PAGE>   5

SOUTHWESTERN WATER EXPLORATION CO.
Consolidated Balance Sheet

December 31, 1998, with comparative figures for 1997 
(Unaudited - See Notice to Reader)
(Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
==========================================================================================
                                                                     1998             1997
------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>       
Assets

Current assets:
    Cash                                                      $      -          $      768
    Prepaid expenses                                                  698             -
------------------------------------------------------------------------------------------
                                                                      698              768

Property, plant and equipment, at cost less accumulated
  depreciation                                                      4,501            4,968

License and other assets                                              201              201

------------------------------------------------------------------------------------------
                                                              $     5,400       $    5,937
==========================================================================================

Liabilities and Shareholders' Deficiency

Current liabilities:
    Bank overdraft                                            $       564       $     -
    Accounts payable and accrued liabilities                       54,962           23,446
------------------------------------------------------------------------------------------
                                                                   55,526           23,446

Due to shareholder                                                  7,931             -

Due to related company                                            758,702          574,253

Minority interest                                                  24,975          850,956

Shareholders' deficiency:
    Share capital                                                 883,454              951
    Deficit accumulated during development stage               (1,725,188)      (1,443,669)
------------------------------------------------------------------------------------------
                                                                 (841,734)      (1,442,718)

------------------------------------------------------------------------------------------
                                                              $     5,400       $    5,937
==========================================================================================
</TABLE>


<PAGE>   6

SOUTHWESTERN WATER EXPLORATION CO.
Consolidated Statement of Loss and Deficit

(Unaudited - See Notice to Reader)
(Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
==========================================================================================
                                   Three months ended                Nine months ended
                                       December 31,                     December 31,      
                              --------------------------       ---------------------------
                                   1998             1997             1998             1997
------------------------------------------------------------------------------------------
<S>                         <C>              <C>               <C>              <C>       
Interest revenue            $        17      $        39       $       39       $       69

Expenses:
    Development                  53,400           53,400          160,200          160,200
    Professional                 29,174            7,806           44,113           12,806
    Office expense                5,032            3,000           11,095            9,981
    Bank charges                     35               64              117              159
    Miscellaneous                  -               1,245             -               1,720
    Depreciation                    237              292              748              876
------------------------------------------------------------------------------------------
                                 87,878           65,807          216,273          185,742

------------------------------------------------------------------------------------------
Net loss                         87,861           65,768          216,234          185,673

Deficit, beginning of period  1,637,327        1,377,901        1,508,954        1,257,996

------------------------------------------------------------------------------------------
Deficit, end of period      $ 1,725,188      $ 1,443,669       $1,725,188       $1,443,669
==========================================================================================
</TABLE>


NOTE:

    These financial statements do not contain certain disclosures required by
    generally accepted accounting principles.
<PAGE>   7

                                     PART II
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

         The Company is not a party to any legal proceedings which in the
opinion of Company's management are individually or collectively, material to
its business.

ITEM 2. CHANGES IN SECURITIES.

(c)  Recent Sales of Unregistered Securities

         From March to June 1998, the Company offered its stockholder the
opportunity to convert shares of Preferred Stock of AIFE into shares of Common
Stock of the Company and to convert their warrants of the Company into shares of
Common Stock of the Company. Shares of Preferred Stock of AIFE were converted
into shares of Common Stock of the Company on a one for one basis. Warrants of
the Company were converted into shares of Common Stock of the Company on a 1:.76
basis. No general form of advertising was used in connection with the exchange
of such securities. No underwriters were used in connection with the exchange of
these securities and no commissions were paid to any person. The Company relied
on the exemptions from registration contained in Sections 3(a)(9) of the
Securities Act of 1933 (the "1933 Act") and Regulation D promulgated under the
1933 Act. As a result of the conversion and exchange, 1,744,160 shares of Common
Stock of the Company were issued to existing stockholders.

         From December 31, 1995 to December 31, 1998, the Company issued
approximately 507,000 Units to certain sophisticated individuals at a price per
Unit of $1.00 for a total offering of $507,000. Each Unit consisted of one share
of its $.001 par value common stock; a warrant to purchase one share of common
stock of the Company at an exercise price of $2.00 which expired on April 30,
1998; and a redeemable preferred share in the Company's subsidiary, AIFE. The
preferred share is redeemable at the option of the Company at any time or from
time to time at the discretion of AIFE's Board of Directors at a price of $1.00
per share. An overwhelming majority of investors were residents of Canada. The
securities comprising the Units were issued with a Rule 144 restrictive legend.
Each purchaser of a Unit was informed and advised about certain matters
concerning the Company including its business and financial affairs. No general
form of advertising was used in connection with the placement of such
securities. No underwriters were used in connection with the issuance of these
securities and no commissions were paid to any person. The Company relied on the
exemptions from registration contained in Sections 4(2) and 3(b) of the 1933 Act
and Regulation S and Regulation D promulgated under the 1933 Act.



<PAGE>   8

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number   Title of Exhibit
------   ----------------
<S>      <C>
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 dated May 4, 1998.

3.1      Amended and Restated Articles of Incorporation, incorporated by
         reference to Exhibit 3.1 of registrant's Annual Report on Form 10-KSB
         dated May 4, 1998.

3.2      By-laws, incorporated by reference to Exhibit 3.2 of registrant's
         Annual Report on Form 10- KSB dated 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 dated May 4, 1998.

27.1     Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K.

         The Company did not file any reports on Form 8-K during the third
quarter of the 1998-1999 fiscal year.



<PAGE>   9

                                   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: February 12, 1999                 By: /s/ Steven B. Misner
                                           -------------------------------------
                                           Steven B. Misner
                                           President



         In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                   Title                                  Date
---------                                   -----                                  ----
<S>                                  <C>                                     <C>
/s/  Steven B. Misner                President and Director                  February 12, 1999
---------------------
Steven B. Misner

/s/ Barbara J. McAllister            Chief Financial Officer (Principal      February 12, 1999
-------------------------            Accounting Officer), Secretary
Barbara J. McAllister                and Director
</TABLE>



<PAGE>   10

                                  Exhibit Index

<TABLE>
<CAPTION>
Exhibit
Number   Title of Exhibit
------   ----------------
<S>      <C>
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 dated May 4, 1998.

3.1      Amended and Restated Articles of Incorporation, incorporated by
         reference to Exhibit 3.1 of registrant's Annual Report on Form 10-KSB
         dated May 4, 1998.

3.2      By-laws, incorporated by reference to Exhibit 3.2 of registrant's
         Annual Report on Form 10-KSB dated 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 dated May 4, 1998.

27.1     Financial Data Schedule.
</TABLE>