<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
(Mark One)

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended June 30, 1999

                                       OR

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ________ to ___________

                         Commission file number: 0-21130


                          ENERGY BIOSYSTEMS CORPORATION
             (Exact name of registrant as specified in its charter)

       Delaware                                           04-3078857
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                            Identification No.)

4200 Research Forest Drive
The Woodlands, Texas                                      77381
(address of principal executive offices)                  (zip code)

                                  281-419-7000
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 August 11, 1999, there were outstanding 6,569,557 shares of
Common Stock, par value $.01 per share, of the registrant.


<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                  FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999

                                      INDEX

<TABLE>
<CAPTION>

                                                                    Page
                                                                    ----
<S>                                                                 <C>
Factors Affecting Forward-Looking Statements                          3

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements                                      4

            Balance Sheets as of June 30, 1999 (Unaudited)
            and December 31, 1998                                     5

            Statements of Operations for the Three and Six Months
            Ended June 30, 1999 and 1998 (Unaudited)                  6

            Statements of Cash Flows for the Six Months Ended
            June 30, 1999 and 1998 (Unaudited)                        7

            Notes to Financial Statements                             8

Item 2.     Management's Discussion and Analysis of Financial        11
            Condition and Results of Operations

PART II.    OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders      16

Item 6.     Exhibits and Reports on Form 8-K                         17

SIGNATURES                                                           18


</TABLE>

                                       2

<PAGE>

                  FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words "anticipate", "believe", "expect", "estimate", "project"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, believed, expected, estimated or projected. These
risks and uncertainties include technological uncertainty and risks
associated with the commercialization of the Company's technology, the
Company's history of operating losses and uncertainty of future
profitability, manufacturing risks and uncertainties, uncertainty of market
acceptance of the Company's technology, the Company's reliance on
environmental regulations, uncertainties as to the protection offered by the
Company's patents and proprietary technology, the Company's dependence on
collaborations, the Company's need for additional funds, limited marketing
experience and dependence on key personnel, government regulation,
competition and other risks and uncertainties described in the Company's
filings with the Securities and Exchange Commission. For additional
discussion of such risks, uncertainties and assumptions ("Cautionary
Statements"), see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"
included elsewhere in this report and "Item 1. Business - Risk Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K"). All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.




                                       3

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         The following unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made herein are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the 1998 Form 10-K.

         The information presented in the accompanying financial statements is
unaudited, but in the opinion of management, reflects all adjustments (which
include only normal recurring adjustments) necessary to present fairly such
information.






                                       4

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                          June 30,           December 31,
                                                                            1999                   1998
                                                                      -----------------    -----------------
                                                                        (Unaudited)
<S>                                                                   <C>                  <C>
     ASSETS
Current Assets:
     Cash and cash equivalents                                         $    7,441,888        $   2,795,429
     Prepaid expenses and other current assets                                616,118              512,487
                                                                        -------------        -------------
         Total current assets                                               8,058,006            3,307,916

Furniture, equipment and leasehold improvements, net                        1,315,660            1,675,992
Intangible and other assets, net                                            1,237,218            1,142,837
                                                                        -------------        -------------
         Total assets                                                   $  10,610,884        $   6,126,745
                                                                        =============        =============

     LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities                           $     153,322        $     513,673
     Deferred revenue                                                         180,000              180,000
     Note payable                                                              42,204              126,613
                                                                        -------------        -------------
         Total current liabilities                                            375,526              820,286

Stockholders' equity:
     Series B Convertible Preferred Stock, $0.01 par value
        (liquidation value $35,105,000; 760,000 shares
         authorized, 519,400 and 696,400 shares,
         respectively, issued and outstanding)                             26,762,065           33,955,166
     Common Stock, $0.01 par value (30,000,000 shares
        authorized, 6,569,557 and 2,179,142 shares,
        respectively, issued and outstanding)                                  65,696               21,791
     Additional paid-in capital                                            54,669,182           38,529,097
     Accumulated deficit                                                  (71,261,585)         (67,199,595)
                                                                        -------------        -------------
        Total stockholders' equity                                         10,235,358            5,306,459
                                                                        -------------        -------------
        Total liabilities and stockholders' equity                      $  10,610,884        $   6,126,745
                                                                        =============        =============

</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       5

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                     Three Months Ended                   Six Months Ended
                                                          June 30,                            June 30,
                                                  1999              1998              1999               1998
                                             ----------------  ----------------  ----------------   ---------------
<S>                                         <C>               <C>               <C>                <C>
REVENUES:
    Sponsored research revenues              $       514,063   $        88,474   $     1,024,936    $       257,067
    Interest and investment income                    20,197            64,795            41,343            158,508
                                             ---------------   ---------------   ---------------    ---------------
          Total revenues                             534,260           153,269         1,066,279            415,575

COSTS AND EXPENSES:
    Research and development                       1,067,728         1,888,038         2,669,104          4,412,232
    General and administrative                       465,549           505,954         1,012,597          1,052,698
                                             ---------------   ---------------   ---------------    ---------------
          Total costs and expenses                 1,533,277         2,393,992         3,681,701          5,464,930
                                             ---------------   ---------------   ---------------    ---------------
NET LOSS                                     $      (999,017)  $    (2,240,723)  $    (2,615,422)   $    (5,049,355)
                                             ===============   ===============   ===============    ===============
NET LOSS PER COMMON SHARE -
    BASIC AND DILUTED                        $         (0.56)  $         (1.67)  $         (1.60)   $         (3.71)
                                             ===============   ===============   ===============    ===============
SHARES USED IN COMPUTING
    NET LOSS PER COMMON SHARE
                                                   3,153,783         1,819,898         2,669,523          1,785,244
                                             ===============   ===============   ===============    ===============

</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       6

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                      Six Months Ended
                                                                                          June 30,
                                                                           ---------------------------------------
                                                                                  1999                1998
                                                                           ------------------- -------------------
<S>                                                                        <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                $ (2,615,422)       $ (5,049,355)
      Adjustments to reconcile net loss to net cash provided by
         (used in) operating activities:
           Depreciation and amortization                                           405,623             704,111
           Issuance of warrants                                                         --             404,500
      Changes in assets and liabilities:
           Decrease (increase) in prepaid expenses and other
               current assets                                                     (103,631)            601,706
           Increase in intangible and other assets and notes
               receivable                                                         (112,380)           (144,179)
           Decrease in accounts payable and accrued
               liabilities                                                        (360,351)           (562,872)
           Increase in deferred revenues                                                --             200,000
                                                                           ---------------     ---------------
      Net cash used in operating activities                                     (2,786,161)         (3,846,089)
                                                                           ---------------     ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                                                         (27,292)           (160,542)
      Net sale of investments                                                           --             693,279
                                                                           ---------------     ---------------
         Net cash provided by (used in) investing activities                       (27,292)            532,737
                                                                           ---------------     ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Payment on capital lease obligations                                              --              (3,556)
      Payments on notes payable, net                                               (84,409)           (156,995)
      Issuance of stock, net                                                     7,544,321              35,463
                                                                           ---------------     ---------------
         Net cash provided by (used in) financing activities                     7,459,912            (125,088)
                                                                           ---------------     ---------------

NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS                                                                4,646,459          (3,438,440)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
      PERIOD                                                                     2,795,429           9,661,310
                                                                           ---------------     ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    $  7,441,888        $  6,222,870
                                                                           ===============     ===============

</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       7

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                                  JUNE 30, 1999

NOTE 1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

         Energy BioSystems Corporation (the "Company") was incorporated in the
State of Delaware on December 20, 1989. Since inception, the Company has devoted
substantially all of its resources to research and development. To date, all of
the Company's revenues resulted from sponsored research payments from
collaborative agreements and interest and investment income. The Company has
incurred cumulative losses since inception and expects to incur substantial
losses for at least the next several years, due primarily to its research and
development activities and the development of its biocatalyst, fermentation and
bioreactor programs. The Company expects that losses will fluctuate from quarter
to quarter and that such fluctuations may be substantial.

         Effective March 30, 1999, EBC implemented a restructuring, including a
substantial employee reduction, in order to reduce expenses and focus its
limited resources on the critical elements leading to commercialization of its
patented BDS process. EBC retained certain key technical and administrative
personnel.

         EBC's BDS process will require substantial research, development and
testing in order to determine its commercial viability. EBC has proven its BDS
technology only to a limited extent in laboratory, bench-scale and pilot plant
trials, which is not yet sufficient for full commercialization. If EBC
successfully field tests its BDS technology, the commercialization of the BDS
technology will depend on, among other things, EBC's success in achieving
improvement of its biocataylst and success in developing fermentation processes,
as well as EBC's ability to manufacture or contract for the manufacture of
sufficient biocatalyst for use in commercial BDS units; to apply process
engineering to design bioreactor systems capable of accomplishing the BDS
process on a commercial scale; and to market its BDS systems effectively. The
accomplishment of some or all of these objectives may be delayed or may never
occur. EBC will require additional capital to continue the development and
commercialization of its BDS technology, and there can be no assurance that such
capital will be available or that EBC will be able to successfully commercialize
its BDS technology.

          The accompanying unaudited interim financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. These financial
statements should be read in conjunction with the Company's 1998 Form 10-K.

Net Loss Per Common Share

         Net loss per share has been computed by dividing the net loss, which
has been increased for periodic accretion and accrued dividends on the Series B
Convertible Preferred Stock issued in February and March 1997, by the weighted
average number of shares of common stock outstanding during the period.

                                       8

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

         In December 1998, the Company declared a one-for-seven reverse stock
split which was effective December 18, 1998. All references to earnings per
share, number of shares and share amounts prior to December 18, 1998 have
been retroactively restated to reflect the reverse stock split.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.

NOTE 2.  COMMON STOCK OFFERING

         The Company completed a private placement of its common stock during
June 1999. The Company offered and sold 2,600,223 and 1,614,597 shares at
$1.80 and $2.00 per share, respectively. Those shares sold at $2.00 per share
included one warrant to purchase one share of the Company's common stock for
five shares purchased in the private placement. Those shares sold at $1.80
per share included no such warrants. Net proceeds from the offering were
approximately $7.5 million. In connection with the closing, warrants to
purchase 646,623 shares of the Company's common stock were issued at an
exercise price of $2.40. Such number of warrants includes both those warrants
issued to investors, as described above, and warrants issued to the placement
agent, SAMCO Capital Markets, Inc., in partial payment of its fee. The
warrants have been recorded at an estimated fair value of $1,201,389, which
was computed using the Black-Scholes option pricing model and the following
assumptions: risk free interest rate of 6.01 percent; expected dividend yield
of zero; expected life of three years and with respect to the warrants issued
to the placement agent five years; and an expected volatility at an average
weight of 118 percent.

NOTE 3.  SERIES B CONVERTIBLE PREFERRED STOCK

         In February and March 1997, the Company sold an aggregate of 224,100
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock")
at $50.00 per share in a private placement. The net proceeds from the
offering were approximately $10.2 million. Concurrently with the private
placement, the Company conducted an exchange offering and consent
solicitation pursuant to which 478,000 shares of its Series A Convertible
Preferred Stock were exchanged for the same number of shares of Series B
Preferred Stock. The placement agent for the Series B Preferred Stock
received warrants to purchase an aggregate of 20,319 shares of Series B
Preferred Stock at an exercise price of $50.00 per share of Series B
Preferred Stock, in addition to customary commissions. The warrants have been
recorded at an estimated fair value of $466,000, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk free
interest rate of 6.51 percent; expected dividend yield of zero; expected life
of three years, and an expected volatility of 68 percent.

         Dividends on the Series B Preferred Stock are cumulative from
February 27, 1997 and payable semi-annually commencing May 1, 1997, at an
annual rate equal to (i) $4.00 per share of

                                       9

<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Series B Preferred Stock to the extent the dividend is paid in cash and (ii)
$4.50 per share of Series B Preferred Stock to the extent the dividend is
paid in common stock. Dividends on shares of Series B Preferred Stock are
payable in cash or common stock of the Company, or a combination thereof, at
the Company's option. The Company elected to defer payment of the May 1, 1999
dividend in accordance with the Series B Preferred Stock Agreement.

         Shares of Series B Preferred Stock are convertible into shares of
common stock at a conversion price equal to $20.06 per share, subject to
certain adjustments. The Series B Preferred Stock may be redeemed by the
Company under certain circumstances after February 26, 1999 and is required
to be redeemed, subject to certain limitations, on February 26, 2002 at a
redemption price of $50.00 per share, plus accrued and unpaid dividends. It
is the Company's intent, however, to redeem the Series B Preferred Stock for
common stock. Accordingly, the Series B Preferred Stock is included in
stockholders' equity. In April and July 1998, 4,000 and 1,700 shares of the
Series B Preferred Stock were converted to 3,940 and 1,674 shares of common
stock, respectively. In May 1999, 177,000 shares of the Series B Preferred
Stock were converted to 174,379 shares of common stock.

         The carrying amount of the Series B Preferred Stock is increased for
accrued and unpaid dividends plus periodic accretion, using the effective
interest method, such that the carrying amount will equal the redemption
amount on the Series B Preferred Stock on February 26, 2002.



                                       10

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

         Since its inception in December 1989, the Company has devoted
substantially all resources to its research and development. To date, all of
the Company's revenues have resulted from interest and investment income and
sponsored research payments from collaborative agreements. The Company has
incurred cumulative net losses since inception and expects to incur
substantial losses for at least the next several years, due primarily to its
research and development activities and the development of its biocatalyst,
fermentation and bioreactor programs. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be
substantial. As of June 30, 1999, the Company's accumulated deficit was
$71,261,585.

RESULTS OF OPERATIONS

         The Company had total revenues for the three months ended June 30,
1999 and 1998 of $534,260 and $153,269, respectively. The increase in total
revenues was attributable to increases in sponsored research revenues offset
in part by decreases in interest and investment income. The Company had
sponsored research revenues of $514,063 during the second quarter of 1999 as
compared to $88,474 during the second quarter of 1998. The increase of
$425,589 in sponsored research revenues resulted from increased sponsored
research revenue received under a DOE grant.

         The Company had total revenues for the six months ended June 30,
1999 and 1998 of $1,066,279 and $415,575, respectively. The increase in total
revenues was attributable to increases in sponsored research revenues offset
in part by decreases in interest and investment income. The Company had
sponsored research revenues of $1,024,936 during the first six months of 1999
as compared to $257,067 during the first six months of 1998. The increase of
$767,869 in sponsored research revenues resulted primarily from the increase
in sponsored research revenues from a Department of Energy ("DOE") grant of
$1,024,936 in the first six months of 1999 compared to $225,331 in the first
six months of 1998.

         The Company had interest and investment income of $20,197 in the
second quarter of 1999 as compared to 64,795 in the second quarter of 1998.
The decrease of $44,598 in interest and investment income resulted primarily
because the Company's average balances of cash, cash equivalents and
short-term investments during the second quarter of 1999 were less than those
during the corresponding period of 1998.

         The Company had interest and investment income of $41,343 for the
first six months of 1999 compared to $158,508 for the first six months of
1998. The decrease of $117,165 in interest and investment income resulted
primarily from a decrease in the available cash from which interest and other
investment income are generated.

          The Company had research and development expenses for the three
months ended June 30, 1999 and 1998 of $1,067,728 and $1,888,038,
respectively, and for the six months ended June 30, 1999 and 1998 of
$2,669,104 and $4,412,232, respectively. The decrease in research and
development expenses of $820,310 and $1,743,128, respectively, for the three
and six

                                       11

<PAGE>

months ended June 30, 1999 as compared to the corresponding prior year
periods resulted primarily from a reduction in research and development
personnel, offset in part by a charge to research and development expense in
the first quarter of 1998 for warrants issued to Petro Star in the amount of
$404,500. See "-Liquidity and Capital Resources" below. The Company expects
its research and development expenses to remain below 1998 levels for the
remainder of 1999, reflecting a reduction in the workforce at the end of the
first quarter of 1999.

         The Company had general and administrative expenses for the three
months ended June 30, 1999 and 1998 of $465,549 and $505,954, respectively,
and for the six months ended June 30, 1999 and 1998 of $1,012,597 and
$1,052,698, respectively. The decrease of $40,405 and $40,101 for the three
and six months ended June 30, 1999, respectively, as compared to the
corresponding periods of 1998 resulted from the reduction of the general and
administrative personnel at the end of the first quarter of 1999. The Company
expects a slight decrease from 1998 levels in its general and administrative
expenses during the remainder of 1999, reflecting a reduction in
administrative personnel at the end of the first quarter of 1999.

LIQUIDITY AND CAPITAL RESOURCES

         The Company completed a private placement of its common stock during
June 1999. The Company offered and sold 2,600,223 and 1,614,597 shares at
$1.80 and $2.00 per share, respectively. Those shares sold at $2.00 per share
included one warrant to purchase one share of the Company's common stock for
five shares purchased in the private placement. Those shares sold at $1.80
per share included no such warrants. Net proceeds from the offering were
approximately $7.5 million. In connection with the closing, warrants to
purchase 646,623 shares of the Company's common stock were issued at an
exercise price of $2.40. Such number of warrants includes both those warrants
issued to investors, as described above, and warrants issued to the placement
agent, SAMCO Capital Markets, Inc., in partial payment of its fee. The
warrants have been recorded at an estimated fair value of $1,201,389, which
was computed using the Black-Scholes option pricing model and the following
assumptions: risk free interest rate of 6.01 percent; expected dividend yield
of zero; expected life of three years and with respect to the warrants issued
to the placement agent five years; and an expected volatility at an average
weight of 118 percent.

         In February and March 1997, the Company sold an aggregate of 224,100
shares of Series B Preferred Stock in a private placement, resulting in net
cash proceeds of approximately $10.2 million. Concurrently with the private
placement, the Company conducted an exchange offering and consent
solicitation pursuant to which 478,000 shares of its Series A Convertible
Preferred Stock were exchanged for the same number of shares of Series B
Preferred Stock. In April and July 1998, 4,000 and 1,700 shares of the Series
B Preferred Stock were converted to 3,940 and 1,674 shares of common stock,
respectively. In May 1999, 177,000 shares of the Series B Preferred Stock
were converted to 174,379 shares of common stock. Dividends on the Series B
Preferred Stock are cumulative from the date of the initial closing, February
27, 1997, and are payable in cash or common stock of the Company, or a
combination thereof, at an annual rate equal to (i) $4.00 per share to the
extent the dividend is paid in cash and (ii) $4.50 per share to the extent
the dividend is paid in common stock. The Company elected to defer payment of
the May 1, 1999 dividend in accordance with the Series B Preferred Stock
Agreement.

         For the six months ended June 30, 1999, the Company used $2,786,161
of net cash in operating activities, incurred $27,292 in capital expenditures
and provided $7,459,912 in

                                       12

<PAGE>

financing activities. At June 30, 1999, the Company had cash and cash
equivalents totaling $7,441,888 and working capital of $7,682,480.

         The Company intends to spend approximately $400,000 during the
remainder of 1999 for the purchase of laboratory and analytical
instrumentation. The Company also expects to incur substantial additional
research and development expenses, including expenses associated with
biocatalyst, fermentation and bioreactor development. In addition, the
Company is subject to cost sharing arrangements under various collaboration
agreements.

         To supplement its research and development budgets, the Company
intends to seek additional collaborative research and development agreements
with corporate partners. In this regard, the Company has entered into
collaborative agreements with, the Exploration and Production Technology
Division of Texaco, Inc., Total Raffinage Distribution S.A. ("Total"), The M.
W. Kellogg Company and Koch Refining Company, among others, as more fully
described in the 1998 Form 10-K.

         In March 1998, the Company entered into a site license agreement
with Petro Star regarding the design and installation of a biocatalytic
desulfurization ("BDS") unit at Petro Star's refinery in Valdez, Alaska. The
agreement involves several stages of work, the first of which, involving the
completion of scoping economics, is currently underway. In addition, the
agreement provides the Company with certain rights to conduct development
work and demonstrations of its BDS technology at Petro Star's refinery. The
agreement calls for the payment of staged site license fees and royalties to
the Company, including a $200,000 initial site license fee which was paid
upon execution of the agreement and has been recorded as deferred revenue.
The revenue will be recognized ratably over the completion of the initial
phase of the agreement. As is customary in such agreements in the petroleum
refining industry, the agreement provides certain approval and termination
rights to Petro Star at the completion of each stage prior to
commercialization. In connection with the execution of the agreement, the
Company issued a four-year warrant entitling Petro Star to purchase 28,571
shares of its common stock at an exercise price of $21.77 per share. The
warrants have been recorded at an estimated fair value of $404,500, which was
computed using the Black-Scholes option pricing model and the following
assumptions: risk free interest rate of 5.37 percent; expected dividend yield
of zero; expected life of four years, and expected volatility of 75.43
percent.

         In addition, the Company is continuing to develop its BDS technology
in collaboration with Total, and is continuing to conduct process simulations
at the Company's pilot plant using deeply desulfurized diesel fuel provided
by Total. Accordingly, the Company and Total have extended the term of their
collaboration agreement and are evaluating the conditions under which the
technology can be implemented.

         The Company's ability to reach agreements with Petro Star, Total or
other parties with respect to commercial applications of its BDS technology,
and its ability to commercialize such technology generally, will depend upon
its ability to achieve additional improvements in the productivity of the
biocatalyst (e.g., specific activity, production and longevity) and process
engineering (e.g., bioreactor design, separations technology and byproduct
disposition), and is subject to numerous risks and uncertainties. Although
the Company has made substantial progress to date in improving the
productivity of the biocatalyst and the process engineering used in its pilot
BDS unit, no assurance can be made that the Company will be able to achieve
the improvements necessary for its BDS technology to become commercially
viable or to reach

                                       13

<PAGE>

agreements with respect to the commercial application of its technology
within the time anticipated or at all. See "Factors Affecting Forward-Looking
Statements".

         In August 1997, the Company was awarded funding by the DOE for a
$2.4 million, three year program dedicated to the development of a BDS
application for gasoline. Through June 30, 1999 the Company had recognized
approximately $1.6 million in sponsored research revenue from the grant, of
which $514,063 was receivable at June 30, 1999.

         The Company has experienced negative cash flow from operations since
its inception and has funded its activities to date primarily from equity
financings and sponsored research revenues. The Company will continue to
require substantial funds to continue its research and development activities
and to market, sell and commercialize its technology. The Company believes
that its available cash, investments and interest income will be adequate to
fund its operations through early 2001. The Company will need to raise
substantial additional capital to fund its operations thereafter. The
Company's capital requirements will depend on many factors, including the
problems, delays, expenses and complications frequently encountered by
companies developing and commercializing new technologies; the progress of
the Company's research and development activities; timing of environmental
regulations; the rate of technological advances; determinations as to the
commercial potential of the Company's technology under development; the
status of competitive technology; the establishment of biocatalyst
manufacturing capacity or third-party manufacturing arrangements; the
establishment of collaborative relationships; the success of the Company's
sales and marketing programs; the cost of filing, prosecuting and defending
and enforcing patents and intellectual property rights; and other changes in
economic, regulatory or competitive conditions in the Company's planned
business. Estimates about the adequacy of funding for the Company's
activities are based upon certain assumptions, including assumptions that the
research and development programs relating to the Company's technology can be
conducted at projected costs and that progress towards the commercialization
of its technology will be timely and successful. There can be no assurance
that changes in the Company's research and development plans, acquisitions or
other events will not result in accelerated or unexpected expenditures. To
satisfy its capital requirements, the Company may seek additional funding
through public or private financings, including equity financings, and
through collaborative arrangements. There can be no assurance that any such
funding will be available to the Company on favorable terms or at all. If
adequate funds are not available when needed, the Company may be required to
delay, scale back or eliminate some or all of its research and product
development programs. If the Company is successful in obtaining additional
financing, the terms of such financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.

YEAR 2000 ISSUES

         Certain computer programs or computerized equipment are unable to
accurately calculate, store or use dates subsequent to December 31, 1999. The
erroneous date can be interpreted in a number of different ways; typically
the year 2000 is represented as the year 1900. Year 2000 problems may result
in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business transactions.

         The Company is in the process of assessing all financial and
operational systems and equipment to ensure year 2000 compliance, and plans
to complete the assessment by December

                                       14

<PAGE>

1999. Based on reviews to date and preliminary information, the Company does
not anticipate that it will incur any significant costs relating to the
assessment and remediation of year 2000 issues. The Company believes that the
potential impact, if any, of its systems not being year 2000 compliant should
not impact the Company's ability to continue its research and development
activities. However, there can be no assurance that the Company, its business
partners, vendors or customers will successfully be able to identify and
remedy all potential year 2000 problems or that a system failure resulting
from a failure to identify any such problems would not have a material
adverse effect on the Company.







                                       15

<PAGE>

PART II.  OTHER INFORMATION

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

         Proposal 1:  The Election of Directors

     At the Company's 1999 Annual Meeting of Stockholders held on May 26, 1999,
the following individuals were elected as directors to hold office until the
next annual meeting of the stockholders of the Company or until their successors
have been duly elected and qualified.

<TABLE>
<CAPTION>

                                          FOR                     WITHHELD
<S>                                   <C>                        <C>
Ramon Lopez                            1,676,634                   22,873
R. James Comeaux                       1,676,634                   22,873
Edward B. Lurier                       1,676,648                   22,859
Thomas E. Messmore                     1,675,364                   24,143
Daniel J. Monticello, Ph.D.            1,676,648                   22,859
William E. Nasser                      1,676,648                   22,859
John S. Patton                         1,676,648                   22,859
William D. Young                       1,676,648                   22,859

</TABLE>

                  Proposal 2:  The approval of an amendment to the Company's
1997 Stock Option Plan to increase the number of shares available for grant
to 1,200,000 shares, and to eliminate the maximum number of shares that may
be issued to any one individual thereunder.

For   658,793    Against   316,816    Abstain  29,084   Non-Vote      694,814

                  Proposal 3:  The approval of an amendment to the Company's
Non-Employee Director Option Plan to (i) increase the number of shares
available for grant to 200,000 shares, (ii) increase the number of shares to
be granted to directors on their election to the Board to 4,000 shares and
(iii) eliminate the provision which prohibits a grant under such plan to any
director who has received stock options to purchase such amount in the prior
twelve month period.

For   841,968    Against   158,553    Abstain   4,072   Non-Vote      694,914

                  Proposal 4:  The approval of the issuance in a private
placement of Common Stock of the Company (and securities exercisable for such
Common Stock) representing 20% or more of the number of issued and
outstanding shares of such Common Stock.

For   958,106    Against   39,225     Abstain   7,362    Non-Vote      694,814

         Proposal 5:  The approval of the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the1999 fiscal year.

For   1,694,487      Against   2,941         Abstain    2,079

                                       16

<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a.    Exhibits

<TABLE>

               <S>   <C>
                10.1  Subscription Agreement dated June 11 and June 22, 1999
                      among the Company and certain investors parties thereto.

                11.1  Statement regarding Computation of Per Share Earnings.

                27.1  Financial Data Schedule.

</TABLE>

         b.     Reports on Form 8-K

                None.






                                       17

<PAGE>

                                   SIGNATURES

           Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Energy BioSystems Corporation

By:      /s/ Peter P. Policastro
         ---------------------------------------
         Peter P. Policastro
         Chief Executive Officer and President

Date: August 13, 1999

By:      /s/ Paul G. Brown III
         ---------------------------------------
         Paul G. Brown III
         Vice President, Finance and Administration

Date: August 13, 1999








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