<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 September 30, 1997

                                      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)

                                 281-364-6100
             (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 November 4, 1997 there were outstanding 12,218,434 shares of Common
Stock, par value $.01 per share, of registrant.
<PAGE>

                        ENERGY BIOSYSTEMS CORPORATION

              FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
                                       
                                     INDEX


                                                                        PAGE
                                                                        ----

Statement Regarding Forward-Looking Statements                            3

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements                                           4
 
           Balance Sheets as of September 30, 1997 (unaudited)
           and December 31, 1996                                          5

           Statements of Operations for the Three Months and Nine
           Months Ended September 30, 1997 and 1996 (Unaudited)           6

           Statements of Cash Flows for the Nine Months Ended
           September 30, 1997 and 1996 (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 6.    Exhibits and Reports on Form 8-K                              15

SIGNATURES                                                               16

                                      2
<PAGE>
                      
                STATEMENT REGARDING 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 regulation, 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, 
1996.  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 Company's Annual Report on Form 10-K for
the year ended December 31, 1996.

     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>
                                                                September 30,    December 31,
                                                                    1997             1996
                                                                -------------    ------------
 ASSETS                                                         (Unaudited)
<S>                                                             <C>              <C>
Current Assets:
 Cash and cash equivalents                                     $ 12,533,246     $  3,106,004
 Short term investments                                                  --        5,891,584
 Prepaid expenses and other current assets                          889,680          767,893
                                                               ------------     ------------
   Total current assets                                          13,422,926        9,765,481

Notes receivable                                                         --            6,683
Furniture, equipment and leasehold improvements, net              2,660,191        3,136,635
Intangible and other assets, net                                    919,618          801,832
                                                               ------------     ------------
   Total assets                                                $ 17,002,735     $ 13,710,631
                                                               ------------     ------------
                                                               ------------     ------------
 LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable and accrued liabilities                      $    647,381     $    537,583
 Deferred revenue                                                   180,000          193,500
 Obligations under capital lease                                      5,658           11,632
 Note payable                                                       299,812          252,443
                                                               ------------     ------------
   Total current liabilities                                      1,132,851          995,158

Stockholders' equity:
 Series A Convertible Preferred Stock, $0.01 par value
  (liquidation value zero and $24,000,000;
  508,800 shares authorized, zero and  480,000
  shares issued and outstanding, respectively)                           --       23,295,585
 Series B Convertible Preferred Stock, $0.01 par value
  (liquidation value $35,105,000; 760,000 and zero shares
  authorized, 702,100 and zero shares issued and
  outstanding, respectively)                                     34,553,693               --
 Common Stock, $0.01 par value (30,000,000 shares
  authorized, 11,780,704 and 11,497,135 shares issued
  and outstanding, respectively)                                    117,807          114,972
 Additional paid-in capital                                      33,144,146       32,018,218
 Accumulated deficit                                            (51,945,768)     (42,713,302)
                                                               ------------     ------------
  Total stockholders' equity                                     15,869,884       12,715,473
                                                               ------------     ------------
  Total liabilities and stockholders' equity                   $ 17,002,735     $ 13,710,631
                                                               ------------     ------------
                                                               ------------     ------------
</TABLE>

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

                                         5
<PAGE>

                            ENERGY BIOSYSTEMS CORPORATION

                               STATEMENTS OF OPERATIONS
                                     (UNAUDITED)

<TABLE>
                                       
                                                         Three Months Ended             Nine Months Ended
                                                           September 30,                  September 30,
                                                         1997            1996           1997         1996 
                                                      -----------    -----------    -----------   -----------
<S>                                                   <C>            <C>            <C>           <C>
REVENUES:
 Sponsored research revenues                          $   152,147    $   437,273    $ 1,140,119   $ 1,318,780
 Interest and investment income                           200,505        178,194        480,735       654,236
                                                      -----------    -----------    -----------   -----------
  Total revenues                                          352,652        615,467      1,620,854     1,973,016

COSTS AND EXPENSES:
 Research and development                               2,352,404      2,108,329      6,870,866     5,963,391
 General and administrative                               570,152        600,796      1,820,414     1,927,267
                                                      -----------    -----------    -----------   -----------
  Total costs and expenses                              2,922,556      2,709,125      8,691,280     7,890,658
                                                      -----------    -----------    -----------   -----------
NET LOSS                                              $(2,569,904)   $(2,093,658)   $(7,070,426)  $(5,917,642)
                                                      -----------    -----------    -----------   -----------
                                                      -----------    -----------    -----------   -----------
NET LOSS PER COMMON SHARE                             $     (0.29)   $     (0.24)   $     (0.81)  $     (0.70)
                                                      -----------    -----------    -----------   -----------
                                                      -----------    -----------    -----------   -----------
SHARES USED IN COMPUTING
 NET LOSS PER COMMON SHARE                             11,767,017     11,319,087     11,658,264    11,185,015
                                                      -----------    -----------    -----------   -----------
                                                      -----------    -----------    -----------   -----------
</TABLE>

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

                                       6
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                           STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
                                                                Nine Months Ended
                                                                  September 30,
                                                              1997             1996
                                                          -----------      -----------
<S>                                                       <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                 $(7,070,426)     $(5,917,642)
 Adjustments to reconcile net loss to net cash provided 
  by (used in) operating activities:
   Depreciation and amortization                            1,035,384          795,690
 Changes in assets and liabilities:
   Decrease in trading securities                                  --        2,946,555
   Decrease (increase) in prepaid expenses and other
    current assets                                           (121,787)         307,100
   Increase in intangible and other assets and notes
    receivable                                               (160,071)        (104,486)
   Increase (decrease) in accounts payable and accrued
    liabilities                                               109,798         (141,930)
   Decrease in deferred revenues                              (13,500)        (850,500)
                                                          -----------      -----------
 Net cash provided by (used in) operating activities       (6,220,602)      (2,965,213)
                                                          -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                        (509,972)        (637,736)
 Net sale (purchase) of investments                         5,891,584        1,078,934
                                                          -----------      -----------
  Net cash provided by (used in) investing activities       5,381,612          441,198
                                                          -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Payment on capital lease obligations                          (5,974)          (5,369)
 Payment on notes payable                                    (277,042)        (326,468)
 Issuance of notes payable                                    324,411           76,200
 Issuance of stock, net                                    10,224,837          364,932
                                                          -----------      -----------
  Net cash provided by financing activities                10,266,232          109,295
                                                          -----------      -----------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                9,427,242       (2,414,720)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
 PERIOD                                                     3,106,004        6,172,400
                                                          -----------      -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                $12,533,246      $ 3,757,680
                                                          -----------      -----------
                                                          -----------      -----------
</TABLE>

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

                                          7
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1997

NOTE 1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     Energy BioSystems Corporation (the "Company"), formerly Environmental 
BioScience Corporation, was incorporated in the State of Delaware on December 
20, 1989.  Since inception, the Company has devoted substantially all of its 
efforts to research and development.  The Company's revenues consist of 
sponsored research revenues and interest and investment income.  Management 
of the Company anticipates continued operating losses for at least the next 
several years.  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 
Annual Report on Form 10-K, as filed with the Securities and Exchange 
Commission, for the fiscal year ended December 31, 1996.

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 A
Convertible Preferred Stock issued in October 1994 and 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.  In all
applicable periods, common stock equivalents were antidilutive and,
accordingly, were not included in the computation.

Pending Accounting Change

     In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting No. 128, "Earnings Per Share."  Statement 128
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to
international earnings per share standards.  The Statement also retroactively
revises the presentation of earnings per share in the financial statements.
The Company will adopt this Standard for the year ended December 31, 1997 and
management believes that this statement will have no material impact on its
financial statements.

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.  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.  The

                                        8
<PAGE>

                           ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                                       
                                       
placement agents 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 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.  On May 1, 1997, the 
Company paid a dividend of $552,904 on the Series B Preferred Stock by 
issuing 107,076 shares of common stock.

     Shares of Series B Preferred Stock are convertible into shares of common 
stock at a conversion price equal to $7.25 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.

     Concurrently with the private placement, the Company conducted an exchange
offering and consent solicitation with respect to its outstanding Series A
Convertible Preferred Stock ("Series A Preferred Stock"), pursuant to which the
Company offered to exchange one share of Series B Preferred Stock for each of
its 480,000 outstanding shares of Series A Preferred Stock and requested the
holders of its Series A Preferred Stock consent to the ranking of the Series B
Preferred Stock on a parity with the Series A Preferred Stock with respect to
the payment of dividends and liquidation preference.  The Company did not
receive any cash proceeds from the exchange offering.  Of the 480,000 shares of
Series A Preferred Stock outstanding, 478,000 shares were exchanged for the
same number of shares of Series B Preferred 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.

NOTE 3.  SERIES A CONVERTIBLE PREFERRED STOCK

     In October 1994, the Company sold 480,000 shares of Series A Preferred
Stock at $50.00 per share in a private placement.  The net proceeds from the
offering were approximately $22.2 million.  The placement agents for the Series
A Preferred Stock received warrants to purchase an aggregate of 28,800 shares
of Series A Preferred Stock at an exercise price of $50.00 per share of Series
A Preferred Stock in addition to customary commissions.

                                       9
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS - (Continued)

     Dividends on the Series A Preferred Stock are cumulative from October 
27, 1994 and payable semi-annually commencing May 1, 1995, 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.  
During the first nine months of 1997, the Company paid dividends of $691,575 
on the Series A Preferred Stock by issuing 98,519 shares of common stock.  
All but 2,000 shares of the 480,000 shares of Series A Preferred Stock 
outstanding were exchanged for shares of Series B Preferred Stock in the 
exchange offering.  See Note 2.

     Shares of Series A Preferred Stock are convertible into shares of the 
Company's common stock at the option of the holder at a conversion price 
equal to $8.25 per share of common stock, subject to certain adjustments.  
The Series A Preferred Stock may be redeemed by the Company under certain 
circumstances after November 7, 1996 and is required to be redeemed on 
November 7, 1999 at a redemption price of $50.00 per share, plus accrued and 
unpaid dividends.   In September 1997, the remaining 2,000 shares of Series A 
Preferred Stock not exchanged for Series B Preferred Stock were converted 
into 12,581 shares of common stock. 

                                   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 the 
increase in its research and development activities and acceleration of 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 September 30, 1997 the Company's 
accumulated deficit was $51,945,768.

RESULTS OF OPERATIONS

     The Company had total revenues for the nine months ended September 30, 
1997 and 1996 of $1,620,854 and $1,973,016, respectively.  The decrease in 
total revenues was attributable to decreases in sponsored research revenues 
and in interest and investment income.  The Company had sponsored research 
revenues of $1,140,119 during the first nine months of 1997 as compared to 
$1,318,780 during the first nine months of 1996.  The decrease of $178,661 in 
sponsored research revenues resulted from a decrease in revenues recognized 
under the Company's research collaboration agreement with Petrolite 
Corporation (now Baker Petrolite, a subsidiary of Baker-Hughes Corporation, 
"Petrolite") to $13,500 in the nine months ended September 30, 1997 from 
$850,500 during the corresponding period in 1996, offset in part by (i) an 
increase in sponsored research revenue from an agreement with The 
Carbide/Graphite Group, Inc. ("Carbide/Graphite") to $250,000 during the 
first nine months of 1997 compared to $150,000 during the first nine months 
of 1996 and (ii) an increase in the sponsored research revenues received from 
a National Institute of Standards and Technology ("NIST") grant to $876,619 
for the nine months ended September 30, 1997 from $318,280 for the nine 
months ended September 30, 

                                   11
<PAGE>

1996.  The sponsored research revenues recognized under the Petrolite 
agreement in 1996 and 1997 represent the recognition of the remaining 
deferred revenues attributable to the research and development payments made 
to the Company by Petrolite under the agreement.  Petrolite made research and 
development payments aggregating $5,400,000 under the agreement beginning on 
April 1, 1992 and ending with a final payment in March 1994.  The revenues 
associated with such payments were recognized ratably over the period in 
which the Company incurred research and development expenses under the 
agreement.

     The Company had interest and investment income of $480,735 in the first 
nine months of 1997 as compared to $654,236 in the first nine months of 1996. 
The decrease of $173,501 in interest and investment income resulted primarily 
because the Company's average balances of cash, cash equivalents and 
short-term investments during the first quarter of 1997, prior to the 
completion of its private placement of Series B Convertible Preferred Stock 
("Series B Preferred Stock"), were less than those during the corresponding 
period of 1996.

     The Company had total revenues for the three months ended September 30, 
1997 and 1996 of $352,652 and $615,467, respectively.  The Company had 
sponsored research revenues of $152,147 during the third quarter of 1997 as 
compared to $437,273 during the third quarter of 1997.  The decrease in 
sponsored research revenues of $285,126 for the third quarter of 1997 
compared to the third quarter of 1996 was attributable to the decrease in 
sponsored research revenues recognized under the Petrolite agreement.  
Interest and investment income increased by $22,311 for the three months 
ended September 30, 1997 compared to the third quarter of 1996 as a result of 
an increase in interest rates.

      The Company had research and development expenses for the three months 
ended September 30, 1997 and 1996 of $2,352,404 and $2,108,329, respectively, 
and for the nine months ended September 30, 1997 and 1996 of $6,870,866 and 
$5,963,391, respectively.  The increase in research and development expenses 
of $244,075 and $907,475, respectively for the three and nine months ended 
September 30, 1997 as compared to the corresponding prior year periods 
resulted primarily from the addition of seven research and development 
personnel, reimbursement of the direct out-of-pocket costs incurred by 
Petrolite for their employees at the pilot plant and the hiring of additional 
consultants.  The Company expects its research and development expenses to 
increase during the remainder of 1997, reflecting increased expenditures 
related to hiring additional personnel.  The Company's research and 
development expenses will increase substantially if the Company elects to 
make the $9,000,000 payment to exercise its option to reduce the percentage 
of site license fees and adjusted gross profit payable under its agreement 
with Petrolite because the entire amount of such payment would be recorded as 
a research and development expense.  The Company does not presently intend to 
exercise the Petrolite option, however, until it has raised additional funds 
or received additional capital.

     The Company had general and administrative expenses for the three months
ended September 30, 1997 and 1996 of $570,152 and $600,796, respectively, and
for the nine months ended September 30, 1997 and 1996 of $1,820,414 and
$1,927,267, respectively. The decrease of $30,644 for the three months ended
September 30, 1997 as compared to the third quarter of 1996 resulted from a
decrease of two personnel.  The decrease of $106,853 for the nine months ended
September 30, 1997 as compared to the corresponding prior year period resulted
primarily from a decrease in consulting fees for marketing in Asia, travel
expenses, fewer personnel and a decrease in insurance expense.  The Company
expects a slight increase in its general and 

                                     12
<PAGE>

administrative expenses during the remainder of 1997 in support of its 
expanded research activities and corporate development activities.

LIQUIDITY AND CAPITAL RESOURCES

     In February and March 1997, the Company sold an aggregate of 224,100 
shares of Series B Convertible 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 ("Series A Preferred Stock") were exchanged for 
the same number of shares of Series B Preferred 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.  On May 1, 1997, the Company paid a 
dividend of $552,904 on the Series B Preferred Stock by issuing 107,076 
shares of common stock.

     In October 1994, the Company sold 480,000 shares of Series A Preferred 
Stock in a private placement, resulting in net cash proceeds of approximately 
$22.2 million.  During the first nine months of 1997, the Company paid 
dividends of $691,575 on the Series A Preferred Stock by issuing 98,519 shares 
of common stock.
     
     For the nine months ended September 30, 1997, the Company used
$6,220,602 of net cash in operating activities, incurred $509,972 in capital 
expenditures and received $10,266,232 from financing activities.  At 
September 30, 1997, the Company had cash, cash equivalents and short term 
investments totaling $12,533,246 and working capital of $12,290,075.

     The Company intends to spend approximately $320,000 during the remainder
of 1997 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.  The Company has funding commitments through 1997
requiring the Company to spend approximately $21,000 under research and
development agreements.  In addition, the Company is subject to cost sharing
arrangements under various collaboration agreements.  The Company also expects
its general and administrative expenses to increase slightly during the
remainder of 1997 in support of its research and corporate development
activities.

     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 Petrolite, the Exploration and Production 
Technology Division of Texaco, Inc., Total Raffinage Distribution S.A. 
("Total"), The M. W. Kellogg Company, Koch Refining Company and 
Carbide/Graphite, among others, as more fully described in the Company's 
Annual Report on Form 10-K for the year ended December 31, 1996.

     Based upon the progress of its research and development efforts in 1997
and its current expectations regarding the continued development of its
biocatalytic desulfurization ("BDS") technology, the Company expects to
commence contract negotiations with Petro Star Inc. ("Petro Star") during the
first half of 1998 regarding an initial commercial application of its BDS

                                      13
<PAGE>

technology at Petro Star's Valdez, Alaska refinery.  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.  The Company's 
objective is to commence contract negotiations with Total regarding the
installation of a pilot BDS unit at Total's European Center for Research and
Technology and the concurrent installation of a commercial BDS unit at one of
Total's refineries, following the achievement of results satisfactory to Total
from pilot plant process simulations.  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 agreements with respect to the commercial
application of its technology within the time anticipated or at all.  See
"Statement Regarding Forward-Looking Statements".

     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 
satisfy its funding operations through year-end 1998. 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.

                                      14

<PAGE>

PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      a.  Exhibits

          11.1  Statement regarding Computation of Per Share Earnings.
                                       
          27.1  Financial Data Schedule.

      b.  Reports on Form 8-K

          None.


                                      15
<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/ Ramon Lopez
     ------------------------------------
     Ramon Lopez,
     Chairman of the Board

Date: November 12, 1997

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

Date: November 12, 1997

                                           16