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                             EMPLOYMENT AGREEMENT


         THIS EMPLOYMENT AGREEMENT is made this 4th day of December, 1998 
by and between Energy BioSystems Corporation, a Delaware corporation (the 
"Company"), and Peter P. Policastro, Ph.D. ("Employee").

                             W I T N E S S E T H :

         WHEREAS, the Company wishes to employ Employee and Employee wishes 
to be employed by the Company on the terms and subject to the conditions set 
forth below;

         NOW, THEREFORE, in consideration of the foregoing recital and of the 
mutual covenants herein set forth, the Company and Employee hereby agree as 
follows:

         1.       EMPLOYMENT. Effective as of January 1, 1999 (the "Effective
                  Date"), the Company hereby employs Employee as its Executive
                  Vice President and Chief Operating Officer and Employee
                  accepts such employment, for the compensation and on the terms
                  and subject to the conditions herein set forth.

         2.       COMPENSATION. The Company shall pay Employee an initial
                  monthly salary of $15,416.67 in accordance with the Company's
                  normal pay practices, which monthly salary shall be increased
                  (assuming continued employment and good performance) to
                  $16,666.67 effective on the date that is six months after the
                  Effective Date. Employee's salary shall be reviewed no less
                  than annually and from time to time changed (but not to be
                  decreased to an amount below Employee's initial monthly
                  salary) at the discretion of the Board of Directors of the
                  Company. Employee shall also be entitled to all rights and
                  benefits for which he shall be eligible under group insurance
                  and other fringe benefits which may be in force from time to
                  time (including any profit-sharing, option or other incentive
                  compensation plan either Company-wide or specific to the
                  Employee) and provided to the Company's employees generally.

         3.       DUTIES. Prior to the termination hereof, Employee agrees to
                  devote his full time and attention to the service of the
                  Company and, in furtherance thereof, to use his best efforts
                  and to perform his duties as the Company's Executive Vice
                  President and Chief Operating Officer and such other duties as
                  may be assigned to him from time to time by or under authority
                  of the Board of Directors of the Company. Employee agrees that
                  he will not undertake any other employment, consulting
                  services or business venture during the period of his
                  employment hereunder, unless the Company, by action of the
                  Board, shall consent thereto in writing. The foregoing shall
                  not be construed as preventing Employee from engaging in such
                  personal and business investment activities as are essentially
                  passive in nature and do not conflict with or adversely affect
                  in any material respect the performance or discharge of
                  Employee's duties and responsibilities hereunder.

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         4.       TERM AND TERMINATION.

         4.1      The term of this Agreement shall commence on the Effective
                  Date and continue, unless earlier terminated as hereinafter
                  provided, until December 31, 2001; provided that the term of
                  this Agreement will automatically renew on December 31, 2001
                  and December 31 of each subsequent year during which this
                  Agreement remains in effect (a "Renewal Date") unless the
                  Company or Employee has delivered written notice of
                  non-renewal to the other party at least six (6) months prior
                  to the relevant Renewal Date.

         4.2      This Agreement shall terminate automatically on the death of
                  Employee.

         4.3      The Company shall have the right to terminate Employee's
                  employment for cause by giving notice in writing to Employee.
                  As used herein, the term "cause" shall mean (i) dishonesty;
                  (ii) conviction of any crime other than misdemeanors or minor
                  traffic violations; (iii) material breach of any provision of
                  this Agreement; (iv) commission of any action or omission to
                  take any action in bad faith and to the detriment of the
                  Company; or (v) willful refusal or failure of Employee to obey
                  the lawful directions of the Board of Directors of the
                  Company.

         4.4      The Company shall have the right to terminate Employee's
                  employment in the event of complete disability by giving
                  notice in writing to Employee. As used herein, the term
                  "complete disability" shall mean the inability of Employee,
                  due to illness or injury, to perform his duties hereunder for
                  a period of 180 consecutive days.

         4.5      The foregoing notwithstanding, the Company may terminate
                  Employee's employment for whatever reason it deems appropriate
                  by one month's prior notice in writing, subject to the
                  Company's obligation to pay Employee the severance
                  compensation specified in Section 4.9.

         4.6      Employee shall have the right to terminate Employee's
                  employment at any time following the occurrence of a Change in
                  Control, as defined below, if Employee's duties or
                  responsibilities are materially reduced in connection with or
                  following the Change in Control from those in effect
                  immediately prior to the Change in Control, except in
                  connection with the termination of Employee's employment
                  pursuant to Sections 4.2, 4.3, 4.4, 4.5 or 4.7. For purposes
                  of this Agreement, a "Change in Control" shall be deemed to
                  have occurred if:

                                    (i) any individual, entity or group (within
                           the meaning of Section 13(d) or 14(d)(2) of the
                           Securities and Exchange Act of 1934) shall become
                           (directly or indirectly) the "beneficial owner"
                           (within the meaning of Rule 13d-3 promulgated under
                           such Act) of more than 50% of the combined voting
                           power of the then outstanding securities of the
                           Company entitled to vote generally in the election of
                           directors ("Voting Power"); or


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                                    (ii) the Company's stockholders shall
                           approve a merger or consolidation, sale or
                           disposition of all or substantially all of the
                           Company's assets or a plan of liquidation or
                           dissolution of the Company, other than (A) a merger
                           or consolidation in which the voting securities of
                           the Company outstanding immediately prior thereto
                           will become (by operation of law), or are to be
                           converted into, voting securities of the surviving
                           corporation or its parent corporation that,
                           immediately after such merger or consolidation, (x)
                           are owned by the same person or entity or persons or
                           entities that owned the voting securities of the
                           Company immediately prior thereto and (y) possess at
                           least 75% of the Voting Power held by the voting
                           securities of the surviving corporation or its parent
                           corporation, or (B) a merger or consolidation
                           effected to implement a recapitalization of the
                           Company (or similar transaction) in which no person
                           acquires more than 50% of the Voting Power.

         4.7      The foregoing notwithstanding, Employee shall have the right
                  to terminate Employee's employment for whatever reason
                  Employee deems appropriate by one month's prior notice in
                  writing.

         4.8      In the event of termination of Employee's employment pursuant
                  to Sections 4.2, 4.3, 4.4 or 4.7 hereof, the Company shall pay
                  Employee his salary at the then current rate up to the date of
                  such termination, and Employee shall be entitled to no further
                  compensation hereunder.

         4.9      In the event of termination of Employee's employment pursuant
                  to Sections 4.5 or 4.6 hereof, the Company shall pay Employee
                  severance compensation for a period of twelve (12) months from
                  the date of such termination.

         5.       NONDISCLOSURE; INVENTIONS; NON-COMPETITION.

         5.1      For the purposes of this Agreement the terms set forth below
                  shall have the following meanings:

         5.1.1    CONFIDENTIAL INFORMATION. That secret proprietary information
                  of the Company of whatever kind or nature disclosed to
                  Employee or known by Employee (whether or not invented,
                  discovered or developed by Employee). Such proprietary
                  information shall include information relating to the design,
                  manufacture and application of the Company's products,
                  know-how and research and development relating to the
                  Company's products, sources of supply and material, operating
                  and other cost data, lists of present, past or prospective
                  customers, customer proposals, and price lists and data
                  relating to pricing of the Company's products or services, any
                  of which information is not generally known in the industry,
                  and shall specifically include, without limitation, all
                  information contained in manuals, memoranda, formulae, 


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                  plans, drawings and designs, specifications, supply sources,
                  and records of the Company.

         5.1.2    CONCEPTS AND IDEAS. Those concepts and ideas known to Employee
                  relating to the Company's activities and products.

         5.1.3    INVENTIONS. Those discoveries and developments, whether or not
                  patentable, relating to the Company's activities and products
                  (whether made by Employee acting alone or in conjunction with
                  others) made on or after the date on which Employee was first
                  employed by the Company in any capacity and prior to three
                  years after the termination of Employee's employment with the
                  Company. The term "Invention" shall also include any other
                  discovery or development made by Employee on or after the date
                  on which Employee was first employed by the Company in any
                  capacity and prior to the termination of this Agreement,
                  except for any invention or discovery for which no equipment,
                  supplies, facility, or trade secret information of the Company
                  was used and which was developed entirely on the Employee's
                  own time and (i) which does not relate (a) to the business of
                  the Company, or (b) to the Company's actual or demonstrably
                  anticipated research or development, or (ii) which does not
                  result from any work performed by the Employee for the
                  Company. Such term shall not be limited to the meaning of
                  "invention" under the United States patent laws. Listed below
                  by descriptive title for purposes of identification are all
                  inventions made by Employee prior to the date on which
                  Employee was first employed by the Company in any capacity
                  which he considers to be his property and which are hereby
                  excluded from this Agreement:

                                      NONE

         5.2      All Inventions and all Concepts and Ideas shall be the
                  property of and are hereby assigned to the Company free of any
                  reserved or other rights of any kind on the part of Employee
                  in respect thereof.

         5.3      Employee will promptly make full disclosure of any such
                  Inventions and Concepts and Ideas to the Company. Further,
                  Employee will, at the Company's cost and expense, promptly
                  execute formal applications for patents and also do all other
                  acts and things (including, among others, the execution and
                  delivery of instruments of further assurance or confirmation)
                  deemed by the Company to be necessary or desirable at any time
                  or times in order to effect the full assignment to the Company
                  of Employee's right and title to such Inventions and Concepts
                  and Ideas, without, during the term of this Agreement, further
                  compensation beyond Employee's agreed salary. Employee further
                  understands that the absence of a request by the Company for
                  information, or for the making of an oath, or for the
                  execution of any document, shall in no way be construed to
                  constitute a waiver of the Company's rights under this
                  Agreement.


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         5.4      Except as required by Employee's duties hereunder, Employee
                  will not, directly or indirectly, use, publish, disseminate or
                  otherwise disclose any Confidential Information, Concepts and
                  Ideas or Inventions relating to the past, present or planned
                  business of the Company without the prior written consent of
                  the Company, unless any such items are, prior to such
                  disclosure, part of the written public knowledge or become
                  part of the written public knowledge through no fault of
                  Employee or are disclosed to Employee by a third party having
                  the right to do so.

         5.5      All documents, procedural manuals, guides, specifications,
                  plans, drawings, designs and similar materials, lists of
                  present, past or prospective customers, customer proposals,
                  invitations to submit proposals, price lists and data relating
                  to pricing of the Company's products and services, records,
                  notebooks and similar repositories of or containing
                  Confidential Information and Inventions, including all copies
                  thereof, that are or come into Employee's possession or
                  control by reason of Employee's employment, whether prepared
                  by Employee or others, are the property of the Company, will
                  not be used by Employee in any way adverse to the Company,
                  will not be removed from the Company's premises except as
                  Employee's normal duties require and, at the termination of
                  Employee's employment with the Company, will be left with or
                  forthwith returned by Employee to the Company.

         5.6      During the term of Employee's employment with the Company and
                  for a period of three (3) years thereafter, Employee shall
                  not, individually or on behalf of or in conjunction with any
                  other person or entity, directly or indirectly, own, manage,
                  operate, control or be employed by, solicit the Company's
                  past, present or prospective employees or customers on behalf
                  of, or, otherwise participate in any manner in any
                  corporation, partnership, proprietorship or other business
                  entity which is engaged in the development or sale of
                  technology for the microbial desulfurization of hydrocarbons
                  or in any activity or development of any product directly
                  competitive with any of the activities engaged in or products
                  developed by the Company at the time of Employee's
                  termination; provided, however, that Employee may own not more
                  than 1% of the outstanding capital stock of a company in a
                  competitive business whose stock is publicly traded.

         6.       EXPENSES. Employee shall be entitled to reimbursement for
                  reasonable expenses incurred in the performance of services
                  hereunder, provided that the same are accounted for in
                  accordance with the Company's general requirements. In
                  addition, Employee shall be entitled to (i) an allowance of
                  $5,000 to cover Employee's reasonable costs of commuting
                  (including up to one round-trip airfare per week and
                  associated local transportation expenses) from Employee's home
                  in Fort Worth, Texas to the Company's offices in The
                  Woodlands, Texas for a period of up to five months from the
                  Effective Date; (ii) interim housing in the Houston, Texas
                  metropolitan area, selected and provided by the Company at the
                  Company's expense, for a period of up to five months from the
                  Effective Date; and (iii) reimbursement of reasonable costs
                  incurred by Employee and approved in advance by the Company
                  for 


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                  moving household belongings from Employee's home in Fort
                  Worth, Texas to a home in the Houston, Texas metropolitan
                  area. To the extent that the Company's payment of any of the
                  amounts specified in the foregoing sentence constitute taxable
                  income to Employee for which Employee is not entitled to a
                  corresponding deduction for federal income tax purposes
                  ("Expense Reimbursement Income"), the Company will pay
                  Employee an amount (a "Gross-Up Payment") equal to the amount
                  of federal income tax payable by Employee with respect to the
                  Expense Reimbursement Income (including, for such purposes,
                  the amount of the Gross-Up Payment).

         7.       SURVIVAL; REMEDIES. Employee's duties under sections 5.2, 5.3,
                  5.4, 5.5, and 5.6 of this Agreement shall survive termination
                  of this Agreement and Employee's employment with the Company.
                  Employee acknowledges that a remedy at law for any breach or
                  threatened breach by Employee of the provisions of this
                  Agreement may be inadequate and Employee therefore agrees that
                  the Company shall be entitled to injunctive relief in case of
                  any such breach or threatened breach.

         8.       ASSIGNMENT. This Agreement and the rights and obligations of
                  the parties hereto shall bind and inure to the benefit of each
                  of the parties hereto and shall also bind and inure to the
                  benefit of any successor or successors of the Company by
                  reorganization, merger or consolidation and any assignee of
                  all or substantially all of its business and properties, but,
                  except as to any such successor or assignee of the Company,
                  neither this Agreement nor any rights or benefits hereunder
                  may be assigned by the Company or by Employee.

         9.       GOVERNING LAW. This Agreement shall be construed in accordance
                  with and governed for all purposes by the laws and public
                  policy of the State of Texas applicable to contracts executed
                  and wholly performed within such state.

         10.      SEPARABILITY. In case any one or more of the provisions
                  contained in this Agreement shall, for any reason, be held to
                  be invalid, illegal or unenforceable in any respect, such
                  invalidity, illegality or unenforceability shall not affect
                  any other provisions of this Agreement, but this Agreement
                  shall be construed as if such invalid, illegal or
                  unenforceable provision had never been contained herein. If,
                  moreover, any one or more of the provisions contained in this
                  Agreement shall for any reason be held to be excessively broad
                  as to duration, geographical scope, activity or subject, it
                  shall be construed by limiting and reducing it, so as to be
                  enforceable to the extent compatible with the applicable law
                  as it shall then appear.

         11.      WAIVER. If either party should waive any breach of any
                  provision of this Agreement, he or it shall not thereby be
                  deemed to have waived any preceding or succeeding breach of
                  the same or any other provision of this Agreement. No party
                  shall be deemed to waive any rights hereunder unless such
                  waiver be in writing and signed by such party.


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         12.      ENTIRE AGREEMENT. The foregoing is the entire Agreement of the
                  parties with respect to the subject matter hereof and may not
                  be amended, supplemented, cancelled or discharged except by
                  written instrument executed by both parties hereto.

         IN WITNESS WHEREOF, the parties have executed this Agreement on the 
day, month and year first above stated.

                                          ______________________________________
                                          Peter P. Policastro, Ph.D.


                                          ENERGY BIOSYSTEMS CORPORATION


                                          By: __________________________________
                                                William E. Nasser
                                                Chairman of the Board, President
                                                and Chief Executive Officer


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