<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, 1998

                                      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 12, 1998, there were outstanding 15,241,169 shares of 
Common Stock, par value $.01 per share, of the registrant.

<PAGE>
                                       
                          ENERGY BIOSYSTEMS CORPORATION
                                       
              FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
                                       
                                     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 September 30, 1998 (Unaudited)
          and December 31, 1997                                               5

          Statements of Operations for the Three and Nine Months
          Ended September 30, 1998 and 1997 (Unaudited)                       6

          Statements of Cash Flows for the Nine Months Ended
          September 30, 1998 and 1997 (Unaudited)                             7

          Notes to Financial Statements                                       8

Item 2.   Management's Discussion and Analysis of Financial                    
          Condition and Results of Operations                                10

PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K                                   14

SIGNATURES                                                                   15
</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 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, 
1997.  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, 1997.

     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>
                                                           September 30,   December 31,
                                                               1998           1997
                                                           ------------    ------------
                                                            (Unaudited)
<S>                                                        <C>             <C>
    ASSETS
Current assets:
  Cash and cash equivalents                                $  4,544,464    $  9,661,310
  Short term investments                                             --         693,279
  Prepaid expenses and other current assets                     327,985       1,013,872
                                                           ------------    ------------
    Total current assets                                      4,872,449      11,368,461

Furniture, equipment and leasehold improvements, net          1,783,575       2,624,332
Intangible and other assets, net                              1,124,382         972,266
                                                           ------------    ------------
    Total assets                                           $  7,780,406    $ 14,965,059
                                                           ------------    ------------
                                                           ------------    ------------

    LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities                 $    225,120    $    864,674
  Deferred revenue                                              180,000         180,000
  Obligations under capital lease                                    --           3,556
  Note payable                                                       --         218,606
                                                           ------------    ------------
    Total current liabilities                                   405,120       1,266,836

Stockholders' equity:
  Series B Convertible Preferred Stock, $0.01 par value
    (liquidation value $35,105,000; 760,000 shares
    authorized, 696,400 and 702,100 shares
    issued and outstanding, respectively)                    34,636,934      33,853,380
  Common Stock, $0.01 par value (30,000,000 shares
    authorized, 13,011,833 and 12,251,434 shares issued
    and outstanding, respectively)                              130,118         122,514
  Additional paid-in capital                                 36,949,010      34,926,594
  Accumulated deficit                                       (64,340,776)    (55,204,265)
                                                           ------------    ------------
    Total stockholders' equity                                7,375,286      13,698,223
                                                           ------------    ------------
    Total liabilities and stockholders' equity             $  7,780,406    $ 14,965,059
                                                           ------------    ------------
                                                           ------------    ------------
</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            Nine Months Ended
                                                    September 30,                September 30,
                                                1998           1997           1998           1997
                                            -----------    -----------    -----------    -----------
<S>                                         <C>            <C>            <C>            <C>
REVENUES:
  Sponsored research revenues               $   304,592    $   152,147    $   561,659    $ 1,140,119
  Interest and investment income                180,649        200,505        339,157        480,735
                                            -----------    -----------    -----------    -----------

    Total revenues                              485,241        352,652        900,816      1,620,854

COSTS AND EXPENSES:
  Research and development                    1,741,727      2,352,404      6,153,959      6,870,866
  General and administrative                    464,158        570,152      1,516,856      1,820,414
                                            -----------    -----------    -----------    -----------

    Total costs and expenses                  2,205,885      2,922,556      7,670,815      8,691,280
                                            -----------    -----------    -----------    -----------

NET LOSS                                    $(1,720,644)   $(2,569,904)   $(6,769,999)   $(7,070,426)
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------

NET LOSS PER COMMON SHARE -
  BASIC AND DILUTED                         $     (0.19)   $     (0.29)   $     (0.72)   $     (0.81)
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------

SHARES USED IN COMPUTING
  NET LOSS PER COMMON SHARE                  13,006,238     11,767,017     12,668,418     11,658,264
                                            -----------    -----------    -----------    -----------
                                            -----------    -----------    -----------    -----------
</TABLE>

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



                                        6
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                       September 30,
                                                                ---------------------------
                                                                    1998            1997
                                                                -----------     -----------
<S>                                                             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                      $(6,769,999)    $(7,070,426)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
      Depreciation and amortization                               1,055,708       1,035,384
  Changes in assets and liabilities:
      Decrease (increase) in prepaid expenses and other
        current assets                                              685,887        (121,787)
      Increase in intangible and other assets and notes
        receivable                                                 (202,309)       (160,071)
      Increase (decrease) in accounts payable and accrued
        liabilities                                                (639,554)        109,798
      Increase (decrease) in deferred revenues                           --         (13,500)
                                                                -----------     -----------
  Net cash used in operating activities                          (5,870,267)     (6,220,602)
                                                                -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                             (164,758)       (509,972)
  Net sale of investments                                           693,279       5,891,584
                                                                -----------     -----------
    Net cash provided by investing activities                       528,521       5,381,612
                                                                -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment on capital lease obligations                               (3,556)         (5,974)
  Payments on notes payable                                        (218,606)       (277,042)
  Issuance of notes payable                                              --         324,412
  Issuance of stock, net                                            447,062      10,224,836
                                                                -----------     -----------
    Net cash provided by (used in) financing activities             224,900      10,266,232
                                                                -----------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                    (5,116,846)      9,427,242
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD                                                          9,661,310       3,106,004
                                                                -----------     -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                      $ 4,544,464     $12,533,246
                                                                -----------     -----------
                                                                -----------     -----------
</TABLE>

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



                                        7
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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 
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.  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, 1997.

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.

     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 adopted this Standard for the year ended December 31, 1997 and 
management believes that this statement has 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 placement agent for the 
Series B Preferred Stock received warrants to purchase an aggregate of
                                       


                                       8
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

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.

     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.  In April and July 1998, 4,000 shares and 1,700 shares 
of the Series B Preferred Stock were converted to 27,586 shares and 11,724 
shares of common stock, respectively.

     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.
                                       


                                       9
<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 September 30, 1998, the Company's accumulated deficit was 
$64,340,776.

RESULTS OF OPERATIONS

     The Company had total revenues for the nine months ended September 30, 
1998 and 1997 of $900,816 and $1,620,854, respectively.  The decrease of 
$720,038 in total revenues was attributable to decreases in sponsored 
research revenues and interest and investment income.  The Company had 
sponsored research revenues of $561,659 during the first nine months of 1998 
as compared to $1,140,119 during the first nine months of 1997.  The decrease 
of  $578,460 in sponsored research revenues resulted primarily from the 
decrease in sponsored research revenues from a National Institute of 
Standards and Technology ("NIST") grant to $33,954 in the first nine months 
of 1998 compared to $876,619 in the first nine months of 1997 and the 
completion in 1997 of sponsored research under a collaboration agreement with 
The Carbide/Graphite Group, Inc. ("Carbide/Graphite") under which the Company 
received $250,000 in sponsored research revenue in the first nine months of 
1997, offset in part by sponsored research revenues of $327,705 received from 
a Department of Energy ("DOE") grant and a $200,000 site license fee received 
from Petro Star Inc. ("Petro Star") in the first nine months of 1998.

     The Company had interest and investment income of $339,157 for the first 
nine months of 1998 compared to $480,735 for the first nine months of 1997.  
The decrease of $141,578 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 total revenues for the three months ended September 30, 
1998 and 1997 of $485,241 and $352,652, respectively.  The increase in total 
revenues of $132,589 was attributable to increases in sponsored research 
revenues offset in part by a decrease in interest and investment income.  The 
Company had sponsored research revenues of $304,592 during the third quarter 
of 1998 as compared to $152,147 during the third quarter of 1997.  The 
increase of $152,445 in sponsored research revenues resulted primarily from 
the recognition of $200,000 in deferred revenue under the Petro Star 
agreement at completion of the first phase.

     The Company had interest and investment income of $180,649 in the third 
quarter of 1998 as compared to $200,505 in the third quarter of 1997.  The 
decrease of $19,856 in interest and investment income resulted primarily 
because the Company's average balances of cash, cash equivalents and 
short-term investments during the third quarter of 1998 were less than those 
during the corresponding period of 1997.
                                       


                                       10
<PAGE>
                                       
     The Company had research and development expenses for the three months 
ended September 30, 1998 and 1997 of $1,741,727 and $2,352,404, respectively, 
and for the nine months ended September 30, 1998 and 1997 of $6,153,959 and 
$6,870,866, respectively.  The decrease in research and development expenses 
of $610,677 and $716,907, respectively, for the three and nine months ended 
September 30, 1998 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.  
The Company expects its research and development expenses to remain below 
1997 levels for the remainder of 1998, reflecting a reduction in the 
workforce at the end of the first quarter of 1998.

     The Company had general and administrative expenses for the three months 
ended September 30, 1998 and 1997 of $464,158 and $570,152, respectively, and 
for the nine months ended September 30, 1998 and 1997 of $1,516,856 and 
$1,820,414, respectively. The decrease of $105,994 and $303,558 for the three 
and nine months ended September 30, 1998, respectively, as compared to the 
corresponding periods of 1997 resulted from the reduction of the general and 
administrative personnel at the end of the first quarter of 1998.  The 
Company expects a slight decrease from 1997 levels in its general and 
administrative expenses during the remainder of 1998, reflecting a reduction 
in administrative personnel at the end of the first quarter of 1998.

LIQUIDITY AND CAPITAL RESOURCES

     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 Series B 
Preferred  Stock were converted to 27,586 and 11,724 shares of common stock, 
respectively.  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.
     
     For the nine months ended September 30, 1998, the Company used 
$5,870,267 of net cash in operating activities, incurred $164,758 in capital 
expenditures and provided $224,900 in financing activities.  At September 30, 
1998, the Company had cash and cash equivalents totaling $4,544,464 and 
working capital of $4,467,329.

     The Company intends to spend approximately $335,000 during the remainder 
of 1998 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, Baker Petrolite 
                                       


                                       11
<PAGE>
                                       
Corporation, 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 
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

     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, involved the 
completion of scoping economics, is completed.  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.  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 200,000 
shares of its common stock at an exercise price of $3.11 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.  In July 1998, Total informed the Company of its intent to build a BDS 
pilot plant in one European industrial facility in 1999. In contemplation of 
Total's plans, the Company and Total have extended the term of their 
collaboration agreement and are evaluating the conditions under which the 
pilot plant would 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 agreements with respect 
to the commercial application of its technology within the time anticipated 
or at all.  See "Factors Affecting 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 
fund its operations through early 1999. 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 
                                       


                                       12
<PAGE>
                                       
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 31, 1998.  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. 
                                       


                                       13
<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.
                                       


                                       14
<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/ William E. Nasser
     ------------------------
     William E. Nasser
     Chairman of the Board, Chief Executive Officer and President

Date: November 13, 1998

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

Date: November  13, 1998



                                      15