<PAGE>

                     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             March 31,  2002
                                    ----------------------------------------

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

      For the transition period from _________________ to __________________

                         Commission File Number 0-22434

                          AQUA CARE SYSTEMS, INC.
           ----------------------------------------------------------------
          (Exact name of small business issuer as specified in its charter)

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

                        965 Park Center Drive, Vista, CA 92083
            ---------------------------------------------------------------
                       (Address of principal executive offices)

                                 (760) 599-0200
                             ------------------------
                           (Issuer's telephone number)

         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____
                                     ----

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
                                                  Number of Shares Outstanding
                                                         On April 30, 2002
                                                       ---------------------
             Class
             -----

Common Stock,   $  .001 Par Value                           3,274,618
                                                            ---------

        Transitional small business disclosure format:

                               Yes _____  No    X
                                              -----
<PAGE>

                             AQUA CARE SYSTEMS, INC.

                                 INDEX TO 10-QSB

PART I.   FINANCIAL INFORMATION

          ITEM 1.     Consolidated Balance Sheets as of March 31, 2002,
          ------      (unaudited), and December 31, 2001

                      Consolidated Statements of Operations for the three
                      months ended March 31, 2002, (unaudited), and March
                      31, 2001, (unaudited)

                      Consolidated Statements of Cash Flows for the three
                      months ended March 31, 2002, (unaudited), and March
                      31, 2001, (unaudited)

                      Notes to Consolidated Financial Statements

          ITEM 2.     Management's Discussion and Analysis of Financial
          -------     Condition and Results of Operations.

PART II.  OTHER INFORMATION

          ITEM 1.     Legal Proceedings
          -------

          ITEM 4.     Submission of Matters to a Vote of Security Holders
          -------

          ITEM 6.     Exhibits and Reports on Form 8-K
          -------

                                       -2-
<PAGE>

                         PART I - FINANCIAL INFORMATION
                         -------------------------------

Item 1.   Financial Statements
-------   --------------------

          The interim consolidated financial statements included in this
          Form 10-QSB are unaudited, and in the opinion of management,
          reflect all adjustments necessary for a fair presentation of such
          information. Results for interim periods should not be considered
          indicative of results for a full year.

          These interim consolidated financial statements should be read
          in conjunction with the consolidated financial statements and
          notes thereto included in the Form 10-KSB for the fiscal year
          ended December 31, 2001, filed with the Securities and Exchange
          Commission on April 22, 2002.

                                       -3-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       Unaudited with respect to March 31, 2002

<TABLE>
<CAPTION>
                                                                              March 31,    December 31,
                                                                                2002           2001
                                                                          ----------------------------

<S>                                                                       <C>            <C>
Assets
  Current assets:
    Cash and cash equivalents                                             $      99,942  $     234,243
    Accounts receivable, net of allowance for doubtful accounts of
      $188,903 as of March 31, 2002 and December 31, 2001, respectively       1,102,517      1,221,816
    Inventory, net                                                              713,020        692,508
    Prepaids and other                                                          232,946        205,365
    Notes receivable                                                            269,964        227,843
                                                                          ----------------------------

  Total current assets                                                        2,418,389      2,581,775

  Property, plant and equipment, net                                          3,496,837      3,545,032
  Other assets                                                                  100,498        106,918
                                                                          ----------------------------
Total assets                                                              $   6,015,724  $   6,233,725
                                                                          ============================
Liabilities
  Current liabilities:
    Accounts payable                                                      $   1,655,440  $   1,381,711
    Accrued expenses                                                            502,718        647,210
    Current maturities of long-term debt                                      2,595,686      2,462,807
    Other Liabilities                                                             4,604            -
    Liabilities of discontinued operations                                       58,456         58,456
    Deferred revenue                                                            251,650        303,990
                                                                          ----------------------------

  Total current liabilities                                                   5,068,554      4,854,174

  Long-term debt, less current maturities                                           -              -
                                                                          ----------------------------
  Total liabilities                                                           5,068,554      4,854,174
                                                                          ============================

Commitments, contingencies and subsequent events

Shareholders' equity
  Preferred stock, $.001 par; 5,000,000 shares authorized,
    none outstanding                                                                -              -
  Common stock, $.001 par; 30,000,000 shares authorized,
    3,274,618 and 3,256,814 shares issued and outstanding
    as of March 31, 2002 and December 31, 2001, respectively                      3,275          3,257
  Additional paid -in capital                                                17,624,868     17,604,411
  Accumulated Deficit                                                       (16,680,973)   (16,228,117)
                                                                          ----------------------------
  Total shareholders' equity                                                    947,170      1,379,551
                                                                          ----------------------------
Total liabilities and shareholders' equity                                $   6,015,724  $   6,233,725
                                                                          ============================
</TABLE>

                  See accompanying notes to consolidated financial statements.

                                       -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 For the three months ended
                                                                         March 31,
                                                             2002                      2001
                                                      ---------------           -----------------
<S>                                                    <C>                       <C>
Revenues                                               $    1,905,125            $      3,377,963

Cost of revenues                                            1,021,602                   1,978,440
                                                      ---------------           -----------------

Gross Profit                                                  883,523                   1,399,523
                                                      ---------------           -----------------

Operating expenses
   Selling, general and administrative                      1,140,405                   1,433,994
   Severance expense                                          100,996                     450,000
   Depreciation and amortization                               60,000                     100,294
                                                      ---------------           -----------------
Total operating expenses                                    1,301,401                   1,984,288
                                                      ---------------           -----------------
Loss from operations                                         (417,878)                   (584,765)
Other income                                                   13,748                         -
Interest expense, net                                         (48,726)                    (43,059)
                                                      ---------------           -----------------
Loss before extraordinary item                               (452,856)                   (627,824)
Extraordinary item, gain of extinguisment of debt                 -                       243,335
                                                      ---------------           -----------------
Net loss                                               $     (452,856)           $       (384,489)
                                                      ===============           =================
Loss per share before extraordinary item,
   basic and diluted                                   $        (0.14)           $          (0.21)
Income per share from extraordinary item,
   basic and diluted                                   $          -              $           0.08
                                                      ---------------           -----------------
Net loss per share, basic and diluted                  $        (0.14)           $          (0.13)
                                                      ===============           =================
Weighted average number of outstanding shares
   of common stock, basic and diluted                       3,256,814                   2,973,278
                                                      ===============           =================
</TABLE>

                  See accompanying notes to consolidated financial statements.

                                       -5-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                           For the three months ended
                                                                                    March 31,
                                                                              2002             2001
                                                                        -----------------------------------
<S>                                                                      <C>               <C>
Operating Activities
Net loss                                                                 $     (452,856)   $       (384,489)
Adjustments to reconcile net loss to net cash
   used in operating activities:
       Depreciation and amortization                                             60,000             100,294
       Gain on extinguishment of debt                                               -              (243,335)
       Provision for doubtful accounts                                              -               (30,000)
       Pension contribution paid through issuance of
        common stock                                                             20,475              14,069
Changes in assets and liabilities:
       (Increase) decrease in accounts receivable                               119,299             (70,834)
       Increase in inventory                                                 (20,512.00)           (201,509)
       Increase in prepaids and other                                           (27,581)            (35,451)
       Decrease in other assets                                                   6,420               8,029
       Increase in accounts payable, accrued expenses and other
        liabilities                                                             133,841             364,213
       Decrease in deferred revenue                                             (52,340)                -
       Net effect of discontinued operations                                        -              (802,147)
                                                                        -----------------------------------

Net cash used in operating activities                                          (213,254)         (1,281,160)
                                                                        -----------------------------------

Investing Activities:
       Capital expenditures                                                     (11,805)            (28,037)
       Increase in notes receivable                                             (42,121)                -
                                                                        -----------------------------------

Net cash used in investing activities                                           (53,926)            (28,037)
                                                                        -----------------------------------

Financing Activities:
       Proceeds from issuance of notes payable and
        long-term debt                                                          165,640           2,607,352
       Repayment of notes payable and
        long-term debt                                                          (32,761)         (2,777,638)
       Proceeds from exercise of stock options                                      -                12,525
                                                                        -----------------------------------

Net cash provided by (used in) financing activities                             132,879            (157,761)
                                                                        -----------------------------------

Net decrease in cash and cash equivalents                                      (134,301)         (1,466,958)

Cash and cash equivalents, beginning of period                                  234,243           2,985,579
                                                                        -----------------------------------

Cash and cash equivalents, end of period                                 $       99,942    $      1,518,621
                                                                        ===================================
</TABLE>

                  See accompanying notes to consolidated financial statements.

                                       -6-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Business

         Aqua Care Systems, Inc.  and subsidiaries (the "Company" or "ACSI")
is engaged in the design, engineering, manufacturing, assembly, sales,
marketing, distribution and service of fluid handling and filtration systems
and products and products and water filtration and purification products.
Currently, it provides equipment sales and service for clients in the United
States and abroad.  Subsidiaries of Aqua Care Systems, Inc.  include the
Industrial Division (f/k/a the Filtration & Separation Dynamics) ("FSDA"), and
the Residential Division (f/k/a KISS International, Inc.) ("KISS").

         Basis of Presentation

         The accompanying unaudited consolidated financial statements as of
March 31, 2002 and for the three months ended March 31, 2002 and 2001 have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments, (consisting of normal recurring
accruals), considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 2002 and 2001,
are not necessarily indicative of the results that may be expected for the
years ending December 31, 2002 and 2001. The consolidated balance sheet
information as of December 31, 2001 was derived from the audited consolidated
financial statements included in the Company's Form 10-KSB. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001.

         Principles of Consolidation

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

         Liquidity

         The Company received a "going concern" opinion from its independent
auditors for the fiscal year ended December 31, 2001 on its consolidated
financial statements. There can be no assurance that the Company can be
successful in raising sufficient capital or returning to profitable operations.
Bookings for the first quarter of 2002 showed improvement over bookings in the
4th quarter of 2001. Management is focusing on reducing overhead costs and
increasing sales, and anticipates a return to profitability within the next
three months. The Company is also in the process of completing a private
placement to increase its available working capital. Management expects that
the funds generated from the private placement and improved operations,
combined with its available credit facilities, will provide enough working
capital to meet its debt service requirements and obligations during the
remainder of 2002.

                                       -7-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

         Use of Estimates

         The preparation of financial statements 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 currently amortized on a
straight-line basis over fifteen years. The Company continually evaluates the
carrying value of goodwill. Impairments are recognized when the expected future
undiscounted operating cash flows to be derived from such intangible assets are
less then their carrying values.

         New Accounting Standards

         In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets."  SFAS
No. 141 requires that all business combinations be accounted for under a single
method - the purchase method.  Use of the pooling-of-interest method is no
longer permitted and is effective for all business combinations initiated after
June 30.  2001.  SFAS No. 142 requires that goodwill no longer be amortized to
earnings, but instead reviewed for impairments.  SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001.  The Company did not have any
goodwill on its books as of January 1, 2002.  The adoption of these statements
did not have a material impact on the company's consolidated financial
position, results of operations or liquidity.

         The Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" in September 2001. SFAS No. 143
is effective for fiscal years beginning after June 15, 2001, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. Management does not believe application of this standard will have a
material effect on the Company's financial position, results of operations or
liquidity.

         The Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets" in October
2001.  SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived

                                       -8-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The adoption of this standard did not have a material effect on the
Company's financial position, results of operation or liquidity.

         Revenue Recognition

         Equipment and parts sales are recognized when products are shipped,
and service revenues are recognized as the services are performed.

         Income Taxes

         Income taxes are accounted for using the asset and liability approach
under the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".

         Fair Value of Financial Instruments

         The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are measured at cost which
approximates their fair value because of the short maturity of these
instruments. The carrying amount of the Company's borrowings under the line of
credit and long-term debt approximates their fair value because the interest
rate on the instruments fluctuate with market interest rates or represents
borrowing rates available with similar terms. Due to the short-term nature and
variable rate on a significant portion of the Company's debt, management
believes that the carrying amounts of such financial instruments as reflected
in the consolidated balance sheet approximate their estimated fair value as of
March 31, 2002. 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 employee and
director 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.

         Earnings (Loss) Per Share

         Basic earnings (loss) per share are computed on the basis of the
weighted average number of common shares outstanding during each period.
Diluted earnings (loss) 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 (loss) per share
are excluded from the calculation.

         Statements of Cash Flows

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

                                       -9-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

         Advertising Costs

         The Company expenses production costs of print advertisements as of
the first date the advertisements take place. Advertising expenses included in
selling, general and administrative expenses were $16,840 and $21,657, for the
three months ended March 31, 2002 and 2001, respectively.

2.       INVENTORY

                               March 31, 2002  December 31, 2001
                               --------------  -----------------
Materials and purchased parts  $      512,703  $         557,834
Work in process                       210,317            144,674
                               --------------  -----------------
Total                          $      723,020  $         702,508
Less inventory reserve                (10,000)           (10,000)
                               --------------  -----------------

Total inventory                $      713,020  $         692,508
                               ==============  =================

3.       PROPERTY, PLANT AND EQUIPMENT

                                    March 31, 2002  December 31, 2001
                                    --------------  -----------------

Land and buildings                 $    2,000,000   $    2,000,000
Machinery and equipment                 2,418,264        2,406,459
Furniture and fixtures                    577,086          577,086
Leasehold improvements                     34,125           34,125
                                    --------------  -----------------

                                   $    5,029,475   $    5,017,670
Less accumulated depreciation          (1,532,638)      (1,472,638)
                                    --------------  -----------------

Net property, plant and equipment  $    3,496,837   $    3,545,032
                                   ===============  =================

                                       -10-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

4.       DEBT

<TABLE>
<CAPTION>

                                                                           March 31, 2002  December 31, 2001
                                                                           --------------  -----------------

<S>                                                                         <C>            <C>
Prime plus 1.25%, (6% at March 31, 2002), revolving credit
lines, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $3,900,000 through
June 2005, principally collaterialized by accounts receivable
and inventory of Industrial Division, (see (a) and (c) below)               $    448,898   $         706,257

Prime plus 1.25%, (6% at March 31, 2002), note payable,
principal and interest payable monthly with an estimated
balloon payment of approximately $721,000 due June 2005,
principally collateralized by property and plant of Industrial Division,
(see (a), (b) and (c) below)                                                     914,334             931,917

Prime plus 1.25%, (6% at March 31, 2002), note payable,
principal and interest payable monthly with an estimated balloon
payment of approximately $105,000 due June 2005, principally
collaterialized by machinery and equipment of Industrial Division,
(see (a), (b) and (c) below)                                                     271,611             286,790

Prime plus 2%, (6.75% at March 31, 2002), revolving credit
line, providing for borrowings, subject to certain collateral
requirements and loan covenants, of up to $400,000 through
October 2002, principally collaterialized by accounts receivable
of The Residential Division, (see (c) below)                                     133,000             210,000

10% unsecured notes payable to a former affiliated entity                        125,000             125,000

8% to 10% unsecured notes due 2002.                                              202,843             202,843

Prime plus 1.25%, (6.25% at March 31, 2002), note payable,
interest payable monthly, with balloon payment of $500,000 due
June 2002, guaranteed by a director of the Company.                              500,000                 -
                                                                           --------------  -----------------
                                                                               2,595,686           2,462,807
Less current maturities                                                       (2,595,686)         (2,462,807)
                                                                           --------------  -----------------

Total long-term debt                                                        $        -     $             -
                                                                           ==============  =================
</TABLE>

         (a)  On January 1, 2001, the Company signed an amendment to the above
notes, which adjusted the advance guidelines to account for the business
discontinued in 2000.

         (b)  As of March 31, 2002, principal payments were $10,876 per month.

                                       -11-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

         (c)  The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum tangible net
worth, maintain certain financial ratios and restrict dividend payments from
subsidiaries. The loans also provide that the lender may, at its option,
accelerate such loans as a result of, among other things, a material adverse
change in the Company's financial position or results of operations. At March
31, 2002, 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 its primary lender. The secondary lender, the Residential
Division credit line, balance of $133,000 at March 31, 2002, did not grant a
waiver for violations of financial covenants for the first quarter of 2002.
Management anticipates that a waiver will be granted by May 31, 2002. The
Company's primary lender has accelerated its outstanding loans to August 2002;
as such the Company has classified all debt as current in the accompanying
consolidated balance sheet.

5.       INCOME TAXES

         At March 31, 2002 and December 31, 2001, the Company had approximately
$12,669,000 and $12,219,000, respectively, of net operating loss carryforwards
expiring through 2020, for both financial reporting and income tax purposes.
Changes in ownership in 1995 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
$5,368,000 of the Company's net operating losses for tax purposes. At December
31, 2001, the Company has a deferred tax liability of approximately $258,000
resulting from the difference in depreciation between book and tax. Realization
of the approximate $4,099,000 deferred tax assets at December 31, 2001,
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.

6.       EQUITY TRANSACTIONS

         (a)  At March 31, 2002, the Company has two stock option plans, which
are described below.  The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in accounting for
options granted to employees.  Under APB Opinion No. 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.

         (b)  Under the 2001 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 2001 Outside Directors' Plan, the Company may grant
options to its directors for up to 500,000 shares of Common Stock. Under both
plans, the exercise price of each option equals the market price of the Common
Stock on the date of grant and an option's maximum term is 10 years from the
date of grant.

         (c)  As of March 31, 2002 and December 31, 2001, respectively, the
Company has reserved an aggregate 1,225,670 shares of Common Stock for issuance
upon exercise of options and warrants. 860,700 options, which expire at various
times through 2011, and 364,970 warrants, which expire at various times through
2005, remain outstanding as of March 31, 2002. No options and warrants are
included in the calculation of earning (loss) per share for the three months
ended March 31, 2002 and 2001, as the effect would be anti-dilutive.

                                       -12-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

7.       DISCONTINUED OPERATIONS

         During December 2000, the Company sold the assets of DuraMeter Pump
Company, Inc., ("DMPC"), for $3,750,000 in cash and prospective earn out
payments aggregating $1,000,000, based upon the achievement of certain net
sales levels of DMPC products by the Purchaser over the next two years. The
Purchaser also assumed certain of the liabilities of DMPC. The Company
recognized a gain on the above noted sale of net assets of $1,357,643 in 2000.

         Consolidated balance sheet and consolidated statement of operations
highlights of such discontinued operations are as follows:

                                           March 31,  December 31,
                                             2002        2001
                                          ---------   ------------
Accounts payable and accrued liabilities  $  58,456   $     58,456
                                          ---------   ------------
Liabilities of discontinued operations    $  58,456   $     58,456
                                          ---------   ------------

8.       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 Industrial
Division manufactures and distributes equipment in the industrial and municipal
fluid handling and filtration segment including, but not limited to, filter
presses, pressure leaf filters and tubular filters. The Residential Division
manufactures and distributes commercial and residential water filtration and
purification equipment including, but not limited to, water softeners, reverse
osmosis systems and water filters. The Company primarily evaluates the
operating performance of its segments based on the categories noted in the
table below.  During the first three months of 2002 and 2001, the Company had
no intercompany sales. Financial information for the Company's business
segments is as follows:

<TABLE>
<CAPTION>

                                                              For the three months ended   For the three months ended
                                                                   March 31, 2002                March 31, 2001
                                                              --------------------------   --------------------------

<S>                                                            <C>                           <C>
Revenues
--------
Industrial and municipal fluid handling and filtration         $              1,634,887      $              2,459,783
Commercial and residential water filtration and purification                    270,238                       918,180
                                                              --------------------------   --------------------------

Total revenues                                                 $              1,905,125      $              3,377,963
                                                              ==========================   ==========================

Operating (loss) income
-----------------------
Industrial and municipal fluid handling and filtration         $                (42,506)     $                 76,195
Commercial and residential water filtration and purification                   (132,526)                      124,165
Corporate                                                                      (242,846)                     (785,125)
                                                              --------------------------   --------------------------

Total operating loss                                           $               (417,878)     $               (584,765)
                                                              ==========================   ==========================

</TABLE>

                                       -13-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

<TABLE>
<CAPTION>
                                                                 For the three months ended  For the three months ended
                                                                      March 31, 2002                March 31, 2001
                                                                 --------------------------  ---------------------------
<S>                                                               <C>                          <C>
Depreciation and amortization
-----------------------------
Industrial and municipal fluid handling and filtration            $                45,000      $                50,404
Commercial and residential water filtration and purification                       15,000                       49,890
Corporate                                                                               -                            -
                                                                 --------------------------   --------------------------

Total depreciation and amortization                               $                60,000      $               100,294
                                                                 ==========================   ==========================

Interest expense, net
---------------------
Industrial and municipal fluid handling and filtration            $               (42,621)     $               (63,823)
Commercial and residential water filtration and purification      $                (1,832)     $                     -
Corporate                                                                          (4,273)     $                20,764
                                                                 --------------------------   --------------------------
Total interest expense, net                                       $               (48,726)     $               (43,059)
                                                                 ==========================   ==========================

Capital expenditures
--------------------
Industrial and municipal fluid handling and filtration                             12,111      $                22,726
Commercial and residential water filtration and purification                         (306)                       5,311
                                                                 --------------------------   --------------------------

Total capital expenditures                                        $                11,805      $                28,037
                                                                 ==========================   ==========================

                                                                        March 31, 2002              December 31, 2001
                                                                 --------------------------   --------------------------
Total assets
------------
Industrial and municipal fluid handling and filtration            $             4,866,578      $             4,875,574
Commercial and residential water filtration and purification                      574,269                      701,265
Corporate                                                                         574,878                      656,886
                                                                 --------------------------   --------------------------
Total assets                                                      $             6,015,724      $             6,233,725
                                                                 ==========================   ==========================
</TABLE>

9.       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. The Company bears no credit risk, but could share in the risk
associated with dealer fraud. Net fees for the three months ended March 31,
2002 and 2001 aggregated approximately $1,931 and $158,431, respectively, and
are included in revenues. In 2000, the Company was formally notified that the
lending company would exit the residential water equipment financing business
effective October 2001. As such, the Company reached an agreement with a new
financing entity with similar terms. The financial impact of the transition to
the new financing agreement was a negative impact due to a reduction in the
number of agreements financed and the reduced revenue to the Residential
Division.

                                       -14-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

10.      SUPPLEMENTAL CASH FLOW INFORMATION

         For the three months ended March 31, 2002 and 2001, the Company paid
$48,728 and $56,757, respectively, for interest.

11.      COMMITMENTS AND CONTINGENCIES

         (a)  The Company leases vehicles and office/warehouse space under
operating leases, which expire through 2004. Total rent expense aggregated
$34,738 and $42,000, for the three months ended March 31, 2002 and 2001,
respectively.

         (b)  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 Common
Stock. Any Common Stock granted is restricted stock and vests over a two year
period on a quarterly basis. During the three months ended March 31, 2002 and
2001, the Company contributed 17,804 and 13,641 shares of restricted Common
Stock valued at $20,475 and $14,069, respectively.

         (c)  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 estimable. 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 will not
have a material adverse effect on the Company's financial position, liquidity,
or future results of operations.

12.      SUBSEQUENT EVENTS

         (a)  On April 1, 2002, Mr. Mark Lambert, Vice President of the
Residential Division, resigned. Mr. Geoff Poole, Vice President of Municipal
Projects will assume, control of the Residential Division. The Company agreed to
pay severance of $35,274.

         (b)  On April 11, 2002, the Company signed a settlement agreement with
Alenco International (Alenco) related to Alenco's purchase of ACS Environmental
Solutions, Inc from the Company. Under the terms of the settlement agreement,
Alenco will pay Aqua Care $25,000 and return all related intellectual property
relating to ACS Environmental Solutions, Inc. to the Company, including the
name "EnviroSystems Supply, Inc.". The first payment of $5,000 is due in early
May.  The balance, $20,000, will accrue interest at 6% per year. Payments of
$2,000 plus accrued interest are due on the first of each month for ten
consecutive months, starting June 1, 2002.

                                       -15-
<PAGE>

                    AQUA CARE SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (Unaudited with respect to March 31, 2002 and 2001)

         (c)  Effective May 14, 2002, H. Martin Jessen resigned as Chairman of
the Board, Chief Executive Officer, and President of the Company. In accordance
with such resignation, the Board of Directors agreed to pay Mr. Jessen a total
of $57,000.

         (d)  Effective May 14, 2002 Mr. Scott Heffner, Vice President and
General Manager of the Industrial Division was named as the President of Aqua
Care Systems, Inc.

         (e)  The NASDAQ listing qualifications group notified the Company that
its tangible net assets and shareholders equity were below the listing
requirements as of December 31, 2001, and that one of the Company's Directors
did not appear to meet the test to qualify as an independent director to serve
on the Company's Audit Committee. Although there can be no assurance, the
Company will be presenting information to the NASDAQ listing qualifications
group on both of these issues. The Company anticipates that the NASDAQ listing
qualification group will be satisfied with proposed changes, and the Company
will remain listed on NASDAQ.

                                       -16-
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 2.       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 Quarterly Report on Form 10-QSB, as well as, the
Company's "Management's Discussion and Analysis or Plan of Operation" contained
in Item 6 of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2001.

Results of Operations - Three months ended March 31, 2002 and 2001

         Presented below are the consolidated results of operations for the
Company for the three months ended March 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                              For the three months ended  For the three months ended
                                                                   March 31, 2002              March 31, 2001
                                                              --------------------------  --------------------------
<S>                                                            <C>                          <C>

Revenues                                                       $             1,905,125      $             3,377,963
Cost of revenues                                                             1,021,602                    1,978,440
                                                              --------------------------  --------------------------
Gross Profit                                                                   883,523                    1,399,523
Operating expenses                                                           1,301,401                    1,984,288
                                                              --------------------------  --------------------------
Loss from operations                                                          (417,878)                    (584,765)
Other Income                                                                    13,748                          -
Interest expense, net                                                          (48,726)                     (43,059)
                                                              --------------------------  --------------------------
Loss before extraordinary item                                                (452,856)                    (627,824)
Extraordinary item, gain on extinguishment of debt                                 -                        243,335
                                                              --------------------------  --------------------------
Net loss                                                       $              (452,856)     $              (384,489)
                                                              ==========================  ==========================
Loss per share before extraordinary item, basic and diluted    $                 (0.14)     $                 (0.21)
Income per share from extraordinary item, basic and diluted    $                   -                           0.08
                                                              --------------------------  --------------------------
Net loss per share, basic and diluted                          $                 (0.14)     $                 (0.13)
                                                              ==========================  ==========================
</TABLE>

         Revenues decreased by $1,472,838 or 43.6%, from $3,377,963 for the
three months ended March 31, 2001, to $1,905,125 for the three months ended
March 31, 2002. There was a reduction of $824,896 in revenues recognized by the
Industrial Division due to a decrease in project volume during the first three
months of 2002. This reduction was related to the general economic slowdown.
There was a reduction in sales of water filtration and purification equipment
and related financing fees in the Residential Division, of $647,942 due to a
decrease in dealers' sales to end users primarily related to a significant slow
down in consumer spending and in the related financing program during the first
quarter.

         Cost of revenues decreased $956,838, or 48.4%, from $1,978,440 for the
three months ended March 31, 2001, to $1,021,602 for the three months ended
March 31, 2002. As a percentage of revenues, these amounts represented 58.6%
for 2001 as compared to 53.6% for 2002. Cost of revenues as a percentage of
revenues for the Industrial Division and Residential Division were 57.2% and
62.2%,

                                       -17-
<PAGE>

respectively, for the three months ended March 31, 2001. Cost of revenues as a
percentage of revenues of the divisions for the three months ended March 31,
2002 were 50.6% and 72.0%, respectively. The cost of revenues as a percentage
of sales for the Residential Division increased as the percentage of revenue
from financing decreased. The decrease in the cost of revenue as a percentage
of revenue was a result of the product manufacturing mix for the quarter ended
March 31, 2002.

         Gross profit decreased $516,000, or 36.9%, from $1,399,523 for the
three months ended March 31, 2001 to $883,523 for the three months ended March
31, 2002, which, as a percentage of revenues, represented a increase from 41.4%
to 46.4%, respectively, for such periods. Gross profit as a percentage of
revenues for the Industrial Division and Residential Division were 42.8% and
37.8%, respectively, for the three months ended March 31, 2001. Gross profit as
a percentage of revenues of such segments for the three months ended March 31,
2002 were 49.4% and 28.0%, respectively.

         The Company's operating expenses decreased by $682,887, or 34.4%, from
$1,984,288 for the three months ended March 31, 2001, to $1,301,401 for the
three months ended March 31, 2002. As a percentage of revenues, these expenses
increased from 58.7% for 2001 to 68.3% for 2002. The $682,887 decrease in
operating expenses consists of several items. Severance expenses decreased
$349,004, from $450,000 for the three months ended March 2001, to $100,996 for
the three months ended March 2002. Travel expenses decreased $147,013, of which
$100,000 was related to the reduction of a relocation accrual booked in April
2001. This relocation will not occur. Investor relations expenditures decreased
$105,695, from $112,944 for the three months ended March 2001, to $7,249 for
the three months ended March 2002. Consulting services decreased $47,930, from
$48,640 for the three months ended March 2001, to $710 for the three months
ended March 2002. Amortization expenses decreased $40,294 related to the write
off of impaired goodwill during 2001. 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.

         Interest expense, net, increased $5,667 or 13.2%, from $43,059 for the
three months ended March 31, 2001 to $48,726 for the three months ended March
31, 2002. This increase was attributable to the increase in debt.

         Including the gain on extinguishment of debt of $243,335 for the three
months ended March 31, 2001, the Company incurred a net loss of $384,489, and
$452,856 for the three months ended March 31, 2001 and 2002, respectively.

CRITICAL ACCOUNTING POLICES

The Company's critical accounting policies are as follows:
..        Revenue recognition.
..        Estimating the allowances for doubtful account.
..        Valuation of goodwill and other intangible assets.

          The Company recognizes revenue for equipment and parts when they are
shipped.

         Management estimates the collectability of accounts receivables by
specifically analyzing current accounts receivable balances, historical bad
debts, customer concentration customer credit-worthiness reports, current
economic trends, and changes in our customer's purchasing and payment trends.
The adequacy of the allowance for doubtful accounts is evaluated quarterly.

          Management assesses the impairment of goodwill and identifiable
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.

                                       -18-
<PAGE>

Factors which could trigger an impairment include the following:
..        significant under-performance relative to expected historical or
         projected future operating results;
..        significant changes in the manner of our use of the acquired assets or
         the strategy for our overall business;
..        significant negative industry or economic trends; significant decline
         in our stick price for a sustained period; and
..        market capitalization relative to net book value

          If it is determined that the carrying value of goodwill or other
intangible assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, possible impairment is measured by
management commensurate with the risk inherent in the current business model.

FINANCIAL CONDITION AND LIQUIDITY

         At March 31, 2002, the Company had $99,942 of cash and cash
equivalents, working capital of negative $2,650,165, total assets of
$6,015,724, total liabilities of $5,068,554 and stockholders' equity of
$947,170. During the three months ended March 31, 2002, the Company's operating
activities used $213,254 of cash, as a result of the net loss $452,856, a
increase in inventory $20,512, an increase in prepaids and other $27,581, a
decrease in deferred revenue of $52,340; offset by a decrease in accounts
receivable $119,299, an increase in accounts payable and accrued expenses
$133,841, the pension contribution paid through the issuance of Common Stock
$20,475, depreciation and amortization $60,000, and a decrease in other assets
$6,420. Investing activities used $53,926 of cash, due to capital expenditures
of $11,805 and an increase in trade notes receivable of $42,121. Financing
activities provided $132,879 of cash, due to repayments of notes payable and
long-term debt $32,761; offset by the net proceeds from issuance of debt
$165,640.

         Depending on market conditions and the availability of financing, the
Company expects 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 required principal payments related to approximately
$2,595,686 of current maturities of long-term debt, management may, from time to
time, investigate and pursue various types of financing alternatives that are
available to the Company. These may 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. No acquisitions have occurred
since 1997, and there can be no assurance that any acquisitions will be
consummated during 2002.

         A portion of the revenues of the Company, particularly through FSDA,
have been, and are expected to continue to be, generated from foreign
countries.  The Company invoices and receives substantially all remittances in
U.S. dollars.  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 with
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.

                                       -19-
<PAGE>

OPERATING LEASE COMMITMENTS

         Approximate future annual minimum lease payments under operating
         leases at March 31, 2002 are as follows:

2002    $117,636
2003    $154,544
2004    $146,735
2005    $ 70,362
2006    $    329
        --------

        $489,606

CAPITAL EXPENDITURE REQUIREMENTS

         During the three months ended March 31, 2002, the Company spent
$11,805 on capital expenditures mainly relating to the upgrade of existing
computer systems implemented by FSDA. During 2002, the Company intends to
utilize approximately $50,000 to purchase additional machinery and equipment.
The Company does not presently anticipate any significant additional capital
expenditures other than those noted above and those relating to future
acquisitions.

TENDER OFFER

         On February 22, 2001, AV, Inc., a Delaware corporation, ("AV"),
commenced a tender offer to purchase up to 900,000 shares of the outstanding
Common Stock for $2.25 per share in cash. On March 8, 2001, the Company's Board
of Directors voted to recommend that Aqua Care's shareholders accept a modified
offer by AV to purchase up to 1,050,000 shares of Common Stock for $2.25 per
share in cash. On March 28, 2001, the tender offer expired with shareholders
tendering 1,614,923 shares of Common Stock, of which, AV purchased 1,050,000
shares, on a pro-rata basis, for $2.25 per share in cash. As a result of the
tender offer and in accordance with the Company's 1991 Performance Equity Plan,
all of the Plan's outstanding options to purchase Common Stock became
immediately vested. Immediately subsequent to the consummation of the tender
offer, AV owned approximately 40% of the issued and outstanding Common Stock.

FORWARD LOOKING STATEMENTS

         This Form 10-QSB 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. Forward-looking statements can be identified by
terms such as "expects", "believes" and "intends" or the negative of these
terms or other comparable terms and include, without limitation, statements
above regarding: the Company's expectations regarding acquisitions; its belief
as to the availability of additional financing; its belief as to the
sufficiency of available funds; its expectations regarding foreign sources of
income and its intentions regarding capital expenditures. 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.

                                       -20-
<PAGE>

                           PART II - OTHER INFORMATION
                           ---------------------------

Item 1.           Legal Proceedings
-------           -----------------
                  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 estimable. 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 will not have a
                  material effect on the Company's financial position, liquidity
                  or future results of operations.

Item 4.           Submission of Matters to a Vote of Security Holders
-------           ---------------------------------------------------

                  None

Item 6.           Exhibits and Reports on Form 8-K

                  (a)      Exhibits

                           None

                  (b)      Reports on Form 8-K

                           None

                                       -21-
<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 authorized.

                                                       AQUA CARE SYSTEMS, INC.
                                                       Registrant

Dated:  May 15, 2002                                   /s/ Scott Heffner
                                                       -----------------
                                                       Scott Heffner
                                                       President

Dated:  May 15, 2002                                   /s/ Harry Rector
                                                       ----------------
                                                       Harry Rector
                                                       Chief Financial Officer

                                       -22-