<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, 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 August 11, 1998, there were outstanding 13,011,833 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, 1998

                                       INDEX

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

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements                                            4

            Balance Sheets as of June 30, 1998 (Unaudited)
            and December 31, 1997                                           5

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

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

            Notes to Financial Statements                                   8

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

PART II.    OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders            14

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>

                                                                  June 30,    December 31,
                                                                    1998           1997   
                                                                -----------   ------------
                                                                (Unaudited)
<S>                                                             <C>           <C>
     ASSETS
Current Assets:
     Cash and cash equivalents                                   $6,222,870    $ 9,661,310
     Short term investments                                               -        693,279
     Prepaid expenses and other current assets                      412,167      1,013,872
                                                                 ----------    -----------
         Total current assets                                     6,635,037     11,368,461

Furniture, equipment and leasehold improvements, net              2,114,225      2,624,332
Intangible and other assets, net                                  1,082,983        972,266
                                                                 ----------    -----------
     Total assets                                                $9,832,245    $14,965,059
                                                                 ----------    -----------
                                                                 ----------    -----------
     LIABILITIES & STOCKHOLDERS' EQUITY


Current liabilities:
     Accounts payable and accrued liabilities                  $    301,802    $   864,674
     Deferred revenue                                               380,000        180,000
     Obligations under capital lease                                      -          3,556
     Note payable                                                    61,612        218,606
                                                               ------------    -----------
         Total current liabilities                                  743,414      1,266,836

Stockholders' equity:
     Series B Convertible Preferred Stock, $0.01 par value
          (liquidation value $35,105,000; 760,000 shares 
          authorized, 698,100 and 702,100 shares issued 
          and outstanding, respectively)                         33,842,599     33,853,380
     Common Stock, $0.01 par value (30,000,000 shares
          authorized, 12,995,112 and 12,251,434 shares issued
          and outstanding, respectively)                            129,951        122,514
     Additional paid-in capital                                  36,952,326     34,926,594
     Accumulated deficit                                        (61,836,045)   (55,204,265)
                                                               ------------    -----------
          Total stockholders' equity                              9,088,831     13,698,223
                                                               ------------    -----------
          Total liabilities and stockholders' equity           $  9,832,245    $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>
                                                     Three Months Ended              Six Months Ended
                                                          June 30,                       June 30,
                                                    1998            1997           1998           1997
                                                -----------     -----------    -----------    ----------- 
<S>                                              <C>             <C>            <C>            <C>
REVENUES:
     Sponsored research revenues                $    88,474     $   536,520    $   257,067    $   987,972
     Interest and investment income                  64,795         151,316        158,508        280,230
                                                -----------     -----------    -----------    ----------- 

          Total revenues                            153,269         687,836        415,575      1,268,202

COSTS AND EXPENSES:
     Research and development                     1,888,038       2,343,748      4,412,232      4,518,462
     General and administrative                     505,954         647,798      1,052,698      1,250,262
                                                -----------     -----------    -----------    ----------- 

          Total costs and expenses                2,393,992       2,991,546      5,464,930      5,768,724
                                                -----------     -----------    -----------    ----------- 

NET LOSS                                        $(2,240,723)    $(2,303,710)   $(5,049,355)   $(4,500,522)
                                                -----------     -----------    -----------    ----------- 
                                                -----------     -----------    -----------    ----------- 
NET LOSS PER COMMON SHARE -  
     BASIC AND DILUTED                          $     (0.24)    $     (0.27)   $     (0.53)   $     (0.52)
                                                -----------     -----------    -----------    ----------- 
                                                -----------     -----------    -----------    ----------- 
SHARES USED IN COMPUTING
     NET LOSS PER COMMON SHARE                   12,739,286      11,677,358     12,496,708     11,602,987
                                                -----------     -----------    -----------    ----------- 
                                                -----------     -----------    -----------    ----------- 
</TABLE>

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


                                       6

<PAGE>


                        ENERGY BIOSYSTEMS CORPORATION

                          STATEMENTS OF CASH FLOWS   
                                  (UNAUDITED)        
<TABLE>
                                                                                    Six Months Ended
                                                                                        June 30,
                                                                               ---------------------------
                                                                                   1998           1997
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                  $(5,049,355)   $(4,500,522)
     Adjustments to reconcile net loss to net cash provided by
          (used in) operating activities:
            Depreciation and amortization                                          704,111        682,602
            Issuance of warrants                                                   404,500               
     Changes in assets and liabilities:
               Decrease in prepaid expenses and other  current assets              601,706         73,406
               Increase in intangible and other assets and notes
                    receivable                                                    (144,179)      (129,457)
               Decrease in accounts payable and accrued
                    liabilities                                                   (562,872)      (163,643)
               Increase (decrease) in deferred revenues                            200,000        (13,500)
                                                                               ------------   ------------
     Net cash used in operating activities                                      (3,846,089)    (4,051,114)
                                                                               ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                         (160,542)      (271,432)
     Net sale of investments                                                       693,279      5,891,584
                                                                               ------------   ------------
          Net cash provided by investing activities                                532,737      5,620,152
                                                                               ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payment on capital lease obligations                                           (3,556)        (3,945)
     Payments on notes payable, net                                               (156,995)      (203,400)
     Issuance of stock, net                                                         35,463     10,201,991
                                                                               ------------   ------------
          Net cash provided by (used in) financing activities                     (125,088)     9,994,646
                                                                               ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                                                (3,438,440)    11,563,684
CASH AND CASH EQUIVALENTS AT BEGINNING OF
     PERIOD                                                                      9,661,310      3,106,004
                                                                               ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     $ 6,222,870    $14,669,688
                                                                               ------------   ------------
                                                                               ------------   ------------
</TABLE>

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


                                       7

<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION
                                       
                         NOTES TO FINANCIAL STATEMENTS
                                JUNE 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 1998, 4,000 shares of the Series B Preferred 
Stock were converted to 27,586 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.



                                      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 June 30, 1998, the Company's accumulated deficit was 
$61,836,045.

RESULTS OF OPERATIONS 

     The Company had total revenues for the six months ended June 30, 1998 
and 1997 of $415,575 and $1,268,2020, respectively.  The decrease in total 
revenues was attributable to decreases in sponsored research revenues and 
interest and investment income.  The Company had sponsored research revenues 
of $257,067 during the first six months of 1998 as compared to $987,972 
during the first six months of 1997.  The decrease of  $730,905 in sponsored 
research revenues resulted primarily from the decrease in sponsored research 
revenues from a National Institute of Standards and Technology ("NIST") grant 
to $55,934 in the first six months of 1998 compared to $724,472 in the first 
six 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 six months of 1997, offset in part by sponsored 
research revenues of $201,133 received from a Department of Energy ("DOE") 
grant in the first six months of 1998.

     The Company had interest and investment income of $158,508 for the first 
six months of 1998 compared to $280,230 for the first six months of 1997.  
The decrease of $121,722 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 June 30, 1998 
and 1997 of  $153,269 and $687,836, 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 $88,474 during the second quarter of 1998 as compared to $536,520 during 
the second quarter of 1997.  The decrease of $448,046 in sponsored research 
revenues resulted from the completion of the NIST grant in the first quarter 
of 1998 and the completion of the sponsored research under the collaboration 
agreement with Carbide/Graphite Group in the final quarter of 1997, which 
decrease was, however, offset in part by sponsored research revenue received 
under a DOE grant.
  
     The Company had interest and investment income of $64,795 in the second 
quarter of 1998 as compared to $151,316 in the second quarter of 1997.  The 
decrease of $86,521 in interest and investment income resulted primarily 
because the Company's average balances of 


                                      10
<PAGE>

cash, cash equivalents and short-term investments during the second quarter 
of 1998 were less than those during the corresponding period of 1997. 

      The Company had research and development expenses for the three months 
ended June 30, 1998 and 1997 of $1,888,038 and $2,343,748, respectively, and 
for the six months ended June 30, 1998 and 1997 of  $4,412,232 and 
$4,518,462, respectively.  The decrease in research and development expenses 
of $455,710 and $106,230, respectively, for the three and six months ended 
June 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 June 30, 1998 and 1997 of $505,954 and $647,798, respectively, and for 
the six months ended June 30, 1998 and 1997 of $1,052,698 and $1,250,262, 
respectively. The decrease of $141,844 and $197,564 for the three and six 
months ended June 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 and the 
resignation of the company's chief executive officer in October 1997.  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 1998, 4,000 shares of the Series B Preferred  
Stock were converted to 27,586 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. 
     
     For the three months ended June 30, 1998, the Company used $3,846,089 of 
net cash in operating activities, incurred $160,542 in capital expenditures 
and used $125,088 in financing activities.  At June 30, 1998, the Company had 
cash and cash equivalents totaling $6,222,870 and working capital of 
$5,891,623. 
 
     The Company intends to spend approximately $340,000 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.  The Company has funding commitments through 1998 
requiring the Company to spend approximately $25,000 under research and 
development agreements.  In addition, the Company is subject to cost sharing 
arrangements under various collaboration agreements. 

                                      11
<PAGE>

     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 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, 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 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.  Pilot plant studies 
are important milestones in implementing new technologies.  Notable expense 
is involved in gaining information on commercial design parameters as well as 
hands-on operations experience.  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. Construction and operation of the BDS pilot plant is the first 
step in the process of commercialization.  Successful completion of the pilot 
test program will lead directly to detailed design, engineering and 
construction of the commercial process.  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". 

                                      12
<PAGE>

     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 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

     Year 2000 issues result from the inability of certain computer programs or
computerized equipment to accurately calculate, store or use date 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.  This
could 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 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          Proposal 1:   The Election of Directors

     At the Company's 1998 Annual Meeting of Stockholders held on June 2, 
1998, 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>
                                                  FOR         WITHHELD
<S>                                           <C>             <C>
             Ramon Lopez                      14,456,136       42,640
             R. James Comeaux                 14,456,336       42,440
             Edward B. Lurier                 14,456,536       42,240
             Thomas E. Messmore               14,456,536       42,240
             Daniel J. Monticello, Ph.D.      14,456,536       42,240
             William E. Nasser                14,456,336       42,440
             John S. Patton                   14,456,136       42,640
             William D. Young                 14,456,336       42,440
</TABLE>

     Proposal 2:   The approval of the appointment of Arthur Andersen LLP as 
the Company's independent public accountants for 1998.

For  14,457,553           Against  11,580           Abstain  29,643


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: August 11, 1998


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

Date: August 11, 1998





                                      15