<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, 1998

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________to_____________.

Commission file number 0-24152

                         K.L.S. ENVIRO RESOURCES, INC.
                         -----------------------------
       (Exact name of small business issuer as specified in its charter)



            Nevada                                              75-2460365
            ------                                              ----------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)                


         5500 East Loop 820 South, Suite 100, Fort Worth, Texas  76119
         -------------------------------------------------------------
             (Address of principal executive offices and zip code)


                                 (817) 624-4844
                                 --------------
                (Issuer's telephone number, including area code)


                  3220 North Freeway, Fort Worth, Texas  76111
                  --------------------------------------------
                           (Issuer's former address)

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 May 8, 1998, the  Registrant had outstanding 18,382,722 shares of common
stock, par value $.0001.

Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]

                                       
<PAGE>
 
                         PART I - FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS.


                         K.L.S. ENVIRO RESOURCES, INC.
                         INDEX TO FINANCIAL INFORMATION
                                 MARCH 31, 1998


<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                       <C>
Consolidated Balance Sheets (unaudited) as of March 31, 1998
and September 30, 1997.................................................... 3

Consolidated Statements of Operations (unaudited)
for the Three and Six Months Ended March 31, 1998 and 1997................ 4

Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended March 31, 1998 and 1997.............................. 5

Notes To Consolidated Financial Statements................................ 6

Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 7

</TABLE>

                                       2
<PAGE>
                K.L.S. Enviro Resources, Inc. and Subsidiaries
                          Consolidated Balance Sheets
                     March 31, 1998 and September 30, 1997
                                  (Unaudited)

<TABLE> 
<CAPTION> 

ASSETS
------
                                                                                   March 31,           September 30,
                                                                                     1998                  1997
                                                                            --------------------  -------------------
<S>                                                                          <C>                   <C> 
Current Assets:
      Cash and cash equivalents                                                        $ 338,990            $ 351,961
      Accounts receivable-trade, net of allowance for doubtful
         accounts of $45,000                                                             819,034            1,233,487
      Other receivables                                                                    1,015                    -
      Inventory                                                                          778,939              721,197
      Prepaid expenses                                                                   103,933              120,609
                                                                            --------------------  -------------------

          Total current assets                                                         2,041,911            2,427,254

Property, plant and equipment, net                                                     5,794,312            6,236,402

Other assets
      Intangible assets, net of accumulated amortization of
         $82,463 and $79,960, respectively                                               256,195               39,118
      Deposits and other                                                                  25,573               25,837
                                                                            --------------------  -------------------

          Total other assets                                                             281,768               64,955
                                                                            --------------------  -------------------

                                                                                     $ 8,117,991          $ 8,728,611
                                                                            ====================  ===================

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Current liabilities:
      Notes payable                                                                    $ 508,387            $ 508,387
      Notes payable-related parties                                                      124,671               37,543
      Current maturities of long-term notes                                              183,042              182,802
      Accounts payable                                                                   620,125              647,624
      Accounts payable-related parties                                                   564,279              122,151
      Accrued expenses and other current liabilities                                     363,363              492,018
      Deferred revenues                                                                    8,060                8,838
                                                                            --------------------  -------------------

          Total current liabilities                                                    2,371,927            1,999,363

Long-term notes                                                                          479,198              581,700
Long-term notes-related party                                                          2,398,794            2,223,483
                                                                            --------------------  -------------------

              Total liabilities                                                        5,249,919            4,804,546
                                                                            --------------------  -------------------

Shareholders' equity:
      Cumulative convertible preferred stock,
         Series A, $.0001 par value;  1,000,000
         shares authorized;  100,000 shares issued
         and outstanding at March 31, 1998 and September 30, 1997;  
         Redeemable at $5.00 per share                                                        10                   10
      Common stock, $.0001 par value;  50,000,000 shares
         authorized; 18,120,222 and 17,170,997 shares issued at 3/31/98 
         and 9/30/97, respectively                                                         1,812                1,717
      Additional paid-in capital                                                      10,314,955            9,923,898
      Accumulated deficit                                                             (7,405,992)          (5,958,847)
      Foreign currency translation adjustments                                            (4,213)              (4,213)
                                                                            --------------------  -------------------

                                                                                       2,906,572            3,962,565

      Treasury stock-common shares held in the treasury, at cost                         (38,500)             (38,500)
                                                                            --------------------  -------------------

              Total shareholders' equity                                               2,868,072            3,924,065
                                                                            --------------------  -------------------

                                                                                     $ 8,117,991          $ 8,728,611
                                                                            ====================  ===================
</TABLE> 

 The notes to Consolidated Financial Statements are an integral part of these 
                                  statements.

                                       3
<PAGE>
                K.L.S. Enviro Resources, Inc. and Subsidiaries
                     Consolidated Statements of Operations
          For the Three and Six Months Ended March 31, 1998 and 1997
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                              Three months ended                Six months ended
                                                                   March 31,                          March 31,
                                                        -------------------------------   --------------------------------
                                                              1998            1997              1998             1997
                                                        --------------- ---------------   ---------------- ---------------
<S>                                                     <C>             <C>               <C>              <C> 
Net sales and revenues:
     Drilling and repair service revenues                    $ 630,661     $ 1,175,493        $ 1,984,535     $ 2,748,811
     Cost of drilling and repair services                      480,214         565,854          1,365,235       1,292,980
                                                        --------------- ---------------   ---------------- ---------------

         Gross profit                                          150,447         609,639            619,300       1,455,831
                                                        --------------- ---------------   ---------------- ---------------

Operating expenses
     Salaries, wages and related costs                         182,261         157,838            380,846         293,712
     Legal and professional fees                                71,014         177,280            190,110         274,412
     Rents                                                      21,567          21,115             45,191          33,852
     Repairs and maintenance                                     4,971          10,726             21,343          25,727
     Taxes, licenses and permits                                 7,592          16,008             14,422          23,620
     Advertising                                                 4,915           2,434             19,582           4,250
     Travel and lodging                                         43,980          37,998             69,375          84,628
     Consulting                                                 11,000          40,889             42,155          74,778
     Development costs                                          27,788         119,800             63,824         160,540
     Other operating expenses                                  257,556         243,036            493,507         472,315
     Depreciation and amortization                             217,204         116,568            435,841         212,117
                                                        --------------- ---------------   ---------------- ---------------

         Total operating expenses                              849,848         943,692          1,776,196       1,659,951
                                                        --------------- ---------------   ---------------- ---------------

         Income (loss) from operations                        (699,401)       (334,053)        (1,156,896)       (204,120)

Other income (expenses):
     Interest expense                                         (119,103)        (19,265)          (252,759)        (97,218)
     Interest and other income, net                              1,056          36,370              1,335          38,904
     Gain on sale of assets                                          -               -                692               -
     Loss from foreign currency translation                    (10,892)         (8,476)           (24,517)        (12,539)
                                                        --------------- ---------------   ---------------- ---------------

         Net other income or (expense)                        (128,939)          8,629           (275,249)        (70,853)
                                                        --------------- ---------------   ---------------- ---------------

         Income (loss) before income taxes                    (828,340)       (325,424)        (1,432,145)       (274,973)

Income taxes                                                         -               -                  -               -
                                                        --------------- ---------------   ---------------- ---------------

         Net income (loss)                                    (828,340)       (325,424)        (1,432,145)       (274,973)

Dividend on preferred stock                                      7,500           7,500             15,000          15,000
                                                        --------------- ---------------   ---------------- ---------------

         Net income (loss) applicable to common stock       $ (835,840)     $ (332,924)      $ (1,447,145)     $ (289,973)
                                                        =============== ===============   ================ ===============

Earnings per share:
     Basic earnings (loss) per share                          $ (0.047)       $ (0.020)          $ (0.082)       $ (0.020)
     Diluted earnings (loss) per share                        $ (0.047)       $ (0.020)          $ (0.082)       $ (0.020)
                                                        =============== ===============   ================ ===============

Common stock outstanding:
     Basic                                                  17,678,555      16,550,608         17,496,890      13,710,959
     Diluted                                                17,678,555      16,550,608         17,496,890      13,710,959
                                                        =============== ===============   ================ ===============
</TABLE> 
 The Notes to Consolidated Financial Statements are an integral part of these 
                                  statements.

                                       4


<PAGE>
                K.L.S. Enviro Resources, Inc. and Subsidiaries
                     Consolidated Statements of Cash Flows
               For the Six Months Ended March 31, 1998 and 1997
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                                      Six months ended
                                                                                                         March 31,
                                                                                                   1998               1997
                                                                                             ------------------  ---------------
<S>                                                                                           <C>                <C> 
Cash flows from operating activities:
     Net income (loss)                                                                            $ (1,432,145)      $ (274,973)
     Adjustments to reconcile net income (loss) to cash
        used in operating activities:
         Common stock for services                                                                      15,412           80,487
         Depreciation and amortization                                                                 435,841          212,117
         Gain on disposal of equipment                                                                    (692)               -
         Translation loss                                                                               24,517           12,539
         Changes in:
             Accounts and other receivables                                                            413,207           79,478
             Inventory                                                                                 (59,476)        (183,930)
             Prepaid expenses                                                                            6,932          (25,178)
             Other assets                                                                             (219,388)        (106,664)
             Accounts payable                                                                          (24,462)          73,749
             Accounts payable-related parties                                                          442,128          577,998
             Accrued expenses                                                                         (152,466)          13,786
             Deferred revenue                                                                             (991)          16,676
                                                                                             ------------------  ---------------

                 Net cash provided by (used in) operating activities                                  (551,583)         476,085
                                                                                             ------------------  ---------------

Cash flows from investing activities:
     Purchases of property, plant and equipment                                                         (6,556)      (2,974,122)
     Proceeds from sale of equipment                                                                    16,000                -
                                                                                             ------------------  ---------------

                 Net cash (used in) provided by investing activities                                     9,444       (2,974,122)
                                                                                             ------------------  ---------------

Cash flows from financing activities:
     Net change in notes payable                                                                      (500,000)
     Net change in notes payable - related parties                                                      87,128         (555,078)
     Payments of long-term notes                                                                      (102,262)         (95,340)
     Proceeds from long-term notes - related parties                                                   683,061                -
     Payments of long-term notes - related parties                                                      (7,750)               -
     Sale of common stock, net of offering cost                                                        369,000        3,410,478
                                                                                             ------------------  ---------------

                 Net cash provided by financing activities                                             529,177        2,760,060
                                                                                             ------------------  ---------------

Effect of  exchange rate changes on cash                                                                    (9)             (16)
                                                                                             ------------------  ---------------

Increase (decrease) in cash                                                                            (12,971)         262,007

Cash at beginning of period                                                                            351,961          300,767
                                                                                             ------------------  ---------------

Cash at end of period                                                                                $ 338,990        $ 562,774
                                                                                             ==================  ===============
</TABLE> 
 The Notes to Consolidated Financial Statements are an integral part of these 
                                  statements.

                                       5
<PAGE>
 
                 K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


GENERAL - The accompanying unaudited consolidated financial statements of K.L.S.
Enviro Resources, Inc. ("KLS") and Subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
in accordance with Item 310 of Regulation S-B.  Accordingly, such unaudited
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  The Company  suggests that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended September 30, 1997.

In the opinion of management, all adjustments, consisting of normal recurring
adjustments and eliminations of material intercompany sales and purchases
necessary to present fairly the financial condition, results of operations  and
cash flows for the Company for the interim periods presented, have been
included. Operating results for the three and six months ended March 31, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1998.

PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include all the accounts of KLS and its wholly-owned subsidiaries.  All
significant intercompany transactions and balances have been eliminated in
consolidation.  The consolidated group is referred to as the "Company."

RECENTLY ENACTED ACCOUNTING STANDARDS - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128).  SFAS 128 became effective for financial
statements with interim and annual periods ending after December 15, 1997.
Accordingly, the Company has adopted SFAS 128.

SFAS 128 established a different method of computing earnings (loss) per share
than was required under the provisions of Accounting Principles Board Opinion
No. 15.  Under SFAS 128, entities with publicly held common stock are required
to present basic earnings (loss) per share and diluted earnings (loss) per
share.  Basic earnings per share is the amount of earnings (loss) for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings (loss) for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares consisting of options,
warrants and convertible preferred stock outstanding during the period.  At
March 31, 1998 and 1997 there were outstanding common stock equivalents to
purchase 9,202,097 and 8,660,000 shares of common stock, respectively, that were
not included in the computation of diluted net loss per common share as their
effect would have been anti-dilutive, thereby decreasing the net loss per common
share.   Net loss per common share amounts and share data have been restated for
all periods presented to reflect basic and diluted per share presentations.

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", effective January 1, 1998.  This Statement
establishes standards for reporting and display of comprehensive income and its
components in financial statements.  The adoption of this statement had no
affect on the Company's comprehensive income.

NOTE 2.  OTHER ASSETS

At March 31, 1998, $219,580 in direct costs associated with a potential
acquisition are included in intangible assets. These direct costs will be
included in the purchase price if and when the acquisition is consummated.  If
the acquisition is not completed, all of these expenses will be charged to
expense.

                                       6
<PAGE>
 
NOTE 3.  NOTES PAYABLE - RELATED PARTY

At March 31, 1998, the Company had an unsecured note payable to a director of
the Company in the amount of $90,000, bearing interest at 12 percent per annum,
and due March 1, 1998.  The due date of the note was extended to June 1, 1998
for an extension fee of $225.

At March 31, 1998, the Company had an unsecured note payable to a corporation
related through common directors and significant shareholders, bearing interest
at 12 percent per annum, due July 15, 1999, in the amount of $850,000.

At March 31, 1998, the Company had a note payable to an entity related through
common directors and significant shareholders, bearing interest at 12 percent,
due July 15, 1999, collateralized by all assets of the Company, except real
estate, in the amount of $1,548,794 with interest accrued thereon in the amount
of $159,324.

NOTE 4.  STOCKHOLDERS' EQUITY

ISSUANCE OF STOCK - During the six months ended March 31, 1998, the Company
received net cash proceeds of $369,000 from the issuance of 922,500 shares of
restricted Common Stock as the result of the exercise of warrants.  The Company
also issued 21,333 shares of restricted Common Stock for services and issued
5,392 restricted shares in exchange for debt.

STOCK OPTIONS - During the six months ended March 31, 1998, the Company granted
options for the purchase of 1,275,000 shares of Common Stock to three
individuals who are executive officers and directors of the Company and who each
beneficially own more than 10 percent of the Company's Common Stock at an
exercise price of $0.91 per share.  These options have a ten-year life.

NOTE 5.  COMMITMENTS AND CONTINGENCIES

KLS and two of its subsidiaries, Dateline Drilling, Inc. ("Dateline") and
Dateline Internacional S.A. de C.V. ("DIMSA"), were engaged in a dispute with a
former customer over a contract entered into between Dateline and the former
customer.  The matter was settled, in connection with which Dateline and DIMSA
have agreed to pay $325,000, of which $140,000 has been paid.  $90,000 was due
on May 1, 1998.  In April 1998, the parties agreed to extend the due date for
the May 1, 1998 payment to June 15, 1998 in exchange for an increase in the
amount of the payment from $90,000 to $95,000.  The final payment of $95,000 is
due on November 1, 1998.  KLS has guaranteed the settlement payments.  The
Company  accrued the $325,000 settlement costs and expensed all other costs
associated with this lawsuit during fiscal 1997.  Payment of the settlement
amount is secured by a drill rig of the Company.

The Company is involved in various claims and actions arising in the ordinary
course of business.  In the opinion of management, the ultimate disposition of
these matters will not materially affect the consolidated financial position or
results of operations of the Company.

NOTE 5.  SUBSEQUENT EVENTS

On May 6, 1998, a corporation owned by a director and significant shareholder of
the Company loaned the Company $45,000.  This unsecured note payable is due on
demand and bears interest at 12 percent.

                                       7
<PAGE>
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

Results of Operations
---------------------

Three Months Ended March 31, 1998 Compared With three Months Ended March 31,
1997

     The Company had a net loss for the three months ended March 31, 1998 of
$828,340 compared to a net loss of $325,424 for the three months ended March 31,
1997.  Revenues decreased significantly during the three months ended March 31,
1998, resulting in an increase in net loss of $502,916, as compared to the three
months ended March 31, 1997.

     Total revenues for the three months ended March 31, 1998 were $630,661, a
decrease of $544,832 or approximately 46 percent, from the three months ended
March 31, 1997.  The decrease in revenues is primarily attributable to a
decrease in drilling services revenues from operations in Mexico due to the
effect on mining companies of depressed market prices of base metals including
gold.  Drilling services revenues from operations in Mexico decreased $532,111
from $835,169 for the three months ended March 31, 1997 to $303,058 for the
three months ended March 31, 1998.  Drilling services revenues from operations
in the United States increased from $150,767 for the three months ended March
31, 1997 to $160,288 for the three months ended March 31, 1998.  Revenues from
hydraulic services were $167,315 and $189,557 for the three months ended March
31, 1998 and 1997, respectively.

     During the three months ended March 31, 1998, and 1997 direct costs of
drilling and repair services were $480,214 and $565,854, or 76 percent and 48
percent of revenues, respectively.  This represents an increase in costs of
drilling and repair services of approximately 28 percent over the three months
ended March 31, 1997.  This increase in direct costs as a percentage of revenue
is primarily attributable to increased rig transportation costs and subsistence
pay as a result of substantial down time of the drill rigs due to the lack of
drilling opportunities in the currently depressed base metals market.

     Total operating expenses for the three months ended March 31, 1998 were
$849,848 a decrease of $93,844 over the three months ended March 31, 1997.  The
decrease in operating expenses is primarily attributable to decreases in
development costs of $92,012 and legal and professional fees of $106,266.
Additionally, depreciation increased $100,636 over the prior period.  Total
operating expenses were approximately 135 and 80 percent of total revenues,
respectively, for the three months ended March 31, 1998 and 1997.

     The Company recorded a net loss from operations of $699,401 and $334,053
for the three months ended March 31, 1998 and 1997, respectively. This increase
in net loss is attributable to decreases in revenues, and increases in rig
transportation costs and subsistence pay as described above.

     Net other expense increased $137,568 for the three months ended March 31,
1998 over the three months ended March 31, 1997.  This is primarily attributable
to an increase in interest expense of $99,838 over the comparable reporting
period.

Financial Condition
-------------------

     At March 31, 1998, the Company's current liabilities exceeded its current
assets by $330,016 as compared with current assets exceeding current liabilities
by $427,891 at September 30, 1997.  The current ratio of assets to liabilities
was .86 at March 31, 1998 as compared with 1.21 at September 30, 1997.  Current
assets decreased by $385,343 to $2,041,911 from September 30, 1997 to March 31,
1998.  Current liabilities increased by $372,564 during the same period.  The
decrease in working capital over this period is primarily attributable to a
decrease in accounts receivable of $414,453 due to the lack of revenues and to
substantial increases in related party accounts payable.

                                       8
<PAGE>
 
     Total assets were $8,117,991 at March 31, 1998 as compared to $8,728,611 at
September 30, 1997.  The decrease of $610,620 is attributable to a decrease in
accounts receivable and the depreciation of property, plant and equipment.

     For the six months ended March 31, 1998, the Company had a negative cash
flow from operations.  The Company anticipates increases in revenues and cash
flow from operations due to its recently expanded fleet of drill rigs and
contracts signed but not yet in production.  Three drill rigs with support
equipment were purchased and an additional two rigs were constructed in-house
and placed into service during the year ended September 30, 1997.  The expansion
increases the Company's fleet of drill rigs to fourteen.  There were no new
drill rigs purchased or constructed by the Company in the three month period
ended March 31, 1998.  As the Company continues to expand, it endeavors to
achieve a positive cash flow from operations, although there can be no assurance
that the Company will  be successful in achieving that objective.  The Company
has sustained ongoing losses during the six months  ended March 31, 1998 as well
as the fiscal years ended September 30, 1996 and September 30, 1997.  While the
Company anticipates that its recently expanded fleet of drill rigs and increased
marketing efforts will result in increased revenues, there can be no assurance
that losses of the magnitude suffered in prior periods will not continue.  The
Company must secure additional financing to fund losses from operations.
However, should precious metal prices continue to be depressed, the Company's
mining customers may not require the Company's drilling services at current or
expected levels and may reduce such requirements.  Thus, there can be no
assurance that drilling revenues will increase.  Additional funding may come
from debt or the sale of the Company's equity securities, but there can be no
assurance that the Company will obtain the funds needed to supplement any
shortfall in its cash flow as and when needed or on terms that will be
satisfactory to the Company.

     During the six months ended March 31, 1998, the Company received net cash
proceeds of $369,000 from the issuance of 922,500 shares of the Company's
restricted Common Stock as the result of the exercise of warrants.  The Company
also issued 21,333 shares  of its restricted Common Stock for services and
issued 5,392 restricted shares in exchange for debt.

     In January 1998, the Company announced that it had entered into an
agreement to purchase all of the capital stock of Britton Bros. Diamond
Drilling, Ltd. of British Columbia, Canada.  The transaction is valued at $16.5
million and is to be paid for by the Company with a combination of cash and
Common Stock.  The transaction is contingent upon the Company's obtaining
adequate financing to fund the its obligations under the purchase agreement.
The Company intends to finance the purchase primarily through a New York-based
bank.  The Company also anticipates that it may be required to obtain part of
the financing through a private placement of its debt or equity securities.  It
is anticipated that the transaction will close during the third quarter of the
Company's fiscal year 1998.  There is no assurance, however, that the Company
will obtain the necessary funding or that the transaction will close as
presently anticipated.

Forward-looking Statements and Certain Risk Factors
---------------------------------------------------

     Statements which are not historical facts contained in this report are
forward-looking statements.  Section 27A of the Securities Act of 1933, as
amended, provides a safe harbor for forward-looking statements.  In order to
comply with the terms of the safe harbor, the Company cautions that a variety of
factors could cause the Company's actual results to differ materially from
anticipated results or other expectations expressed in this report.  The
forward-looking statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations involve a number of
risks and uncertainties that could cause actual results to differ from projected
or anticipated results. Some of the risks and uncertainties are set forth below.
In addition, the risk factors discussed in Part I, Item 1 ("Business") and in
the "Management's Discussion and Analysis of Operations" (Item 6) of the
Company's annual report on Form 10-KSB for the fiscal year ended September 30,
1997 may also affect actual operating results, as could the following:

                                       9
<PAGE>
 
General Operations Risks

     The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations.  Factors that affect the
Company's results of operations or that could cause actual results to differ
materially include, among others, the Company's ability to successfully bid on
new contracts, its ability to perform under the terms of drilling contracts on a
timely basis, its access to suitable used or new equipment to fulfill contract
obligations, the ability to hire and retain skilled and properly trained
employees, industry conditions and world demand for base and industrial metals,
as well as prices for such metals, the results of financing efforts and
financial market conditions and other factors discussed in the Form 10-KSB
mentioned above and the additional factors discussed below.  Such factors are
beyond the control of the Company and there can be no assurance that the
Company's results and financial condition will not be adversely affected by such
factors.

Foreign Operations Risks

     The Company  recently has expanded much of its operations to meet increased
demand for its services both in the United States and abroad.  There are
numerous risks associated with conducting business in foreign countries. The
distance from corporate headquarters and the often remote locations of drilling
and mining sites in these foreign countries exacerbate the difficulties
referred to above.  In addition, problems associated with possible political
risks, instability of local governments, safety of personnel and equipment, the
lack of spare parts or adequate service assistance, the need for skilled labor
and supervision, lack of infrastructure and accessability to sources of power
and other supplies necessary for operations, high inflation and currency
fluctuations which may erode profitability levels, and the difficulty of
obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the United States all add to the risk of
foreign operations.

Dependence on Base Metals Mining Industry

     The Company's operations are largely dependent upon the levels of activity
in exploration and development drilling for the precious, base and industrial
metals industries. Such activity levels are affected by trends in the base
metals industry and base metals prices.  Historically, prices for base metals
have been volatile and are subject to wide fluctuations in response to changes
in the supply of and demand for base metals, market uncertainty, the performance
of certain major mining companies and a variety of political, economic and other
factors beyond the control of the Company.  The Company cannot predict future
price movements with any certainty.  Any prolonged reduction in base metals
prices, however, will depress the level of exploration, development and
production activity and result in a corresponding decline in the demand for the
Company's services and, therefore, have a material adverse effect on the
Company's revenues and profitability.

Competition

     The contract drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs.  Although
conditions in recent years in the base metals mining industry have precipitated
consolidation of drilling industry participants, the Company believes the
competition for drilling contracts will continue to be intense for the
foreseeable future because of contractors' ability to move rigs from areas of
low activity and day rates to areas of greater activity and relatively higher
rates.  In addition, there are a number of inactive rigs that are being
reactivated and upgraded, and additional rigs that could be reactivated and
upgraded, and new rigs that could be constructed, to meet an increase in demand
for drilling rigs in any given market.  Such movement, reactivation, new
construction or a decrease in drilling activity in any major market could
depress rates and could adversely affect utilization of the Company's rigs even
in an environment of stronger base metals prices.   Many of the Company's
principal competitors are substantially larger, have substantially greater
resources and have spent considerably larger sums of capital than the Company
for equipment, including drill rigs, development and operations.  These factors
may enable those competitors to better withstand industry downturns, compete on
the basis of price, build new rigs or acquire existing rigs that become
available for purchase.

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<PAGE>
 
Risk of Potential Conflicts of Interest

     Three of the nine members of the Company's board of directors are also
indirect owners of and control a significant shareholder of the Company and a
corporation providing management and strategic planning services to the Company.
In addition, these three persons and two other members of the board of directors
sit together on the board of directors of another public company in an unrelated
industry.  The CFO of the Company is also the CFO of the other public company.
Such associations and relationships may give rise to conflicts of interest from
time to time.  If any such conflict does arise, the policy of the Company,
consistent with Section 78.140 of the Nevada Revised Statutes, requires that the
director who has a conflict will disclose the same to a meeting of the directors
of the Company and will abstain from voting for or against approval of any
matter in which such director may have a conflict.   Notwithstanding the
adoption of such a policy, there can be no assurance that all possible conflicts
of interest will be identified and appropriately resolved.

     As a result of the foregoing and other factors, there can be no assurance
that the Company will not experience material fluctuations in future operating
results on a quarterly or annual basis which would materially and adversely
affect the Company's business, financial condition and results of operation.

                          PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

     In January, March and May 1998, seven separate individuals not affiliated
with the Company exercised warrants to purchase 712,500 shares of the Company's
restricted Common Stock.  The warrants had an exercise price of $.40 per share.
As a result of the exercise, the Company received proceeds of $285,000.  These
persons acquired the warrants from SMD.  SMD received no consideration
whatsoever from the transaction and conveyed the warrants to these individuals
to assist the Company in obtaining the proceeds from the exercise of the
warrants to fund operating losses.

     In April 1998, a director of the Company exercised 25,000 options to
receive restricted shares of the Company's Common Stock.  The options had an
exercise price of $.40 per share.  As a result of the exercise, the Company
received proceeds of $10,000.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits

         Exhibit 27--Financial Data Schedule

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<PAGE>
 
                                   SIGNATURES



     In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                    K.L.S. ENVIRO RESOURCES, INC.



Date:   May 15, 1998                By: /s/ Raymond H. Kurzon
                                    ------------------------------------------ 
                                    Raymond H. Kurzon, President/CEO



Date:   May 15, 1998                By: /s/ Douglas L. Rex
                                    ------------------------------------------
                                    Douglas L. Rex, Chief Financial Officer

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