<PAGE>

------------------------------------------------------------------------------
------------------------------------------------------------------------------

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

                                ------------------------

                                      FORM 10-K
               /X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                         THE SECURITIES EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                          OR

               / /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                         THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM                  TO
                             COMMISSION FILE NO. 0-21130

                                ------------------------

                            ENERGY BIOSYSTEMS CORPORATION
                (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                        DELAWARE                       04-3078857
          (STATE OR OTHER JURISDICTION OF             (IRS EMPLOYER
           INCORPORATION OR ORGANIZATION)           IDENTIFICATION NO.)

             ENERGY BIOSYSTEMS CORPORATION                77381
                  4200 RESEARCH FOREST DRIVE            (ZIP CODE)
                  THE WOODLANDS, TEXAS
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                     (281) 364-6100
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                ------------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
            SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                   Title of Class
                       Common Stock, par value $.01 per share
                          Preferred Stock Purchase Rights

     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
                                                    ---      ---

     Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  / /

     The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $33,008,727 as of March 27, 1998, based on
the closing sales price of the registrant's common stock on the Nasdaq
National Market on such date of $2.4375 per share and assuming full
conversion of the registrant's Series B Convertible Preferred Stock.  For
purposes of the preceding sentence only, all directors, executive officers
and beneficial owners of ten percent or more of the common stock are assumed
to be affiliates.  As of March 14, 1998, 12,251,434 shares of common stock
were outstanding and 702,100 shares of Series B Convertible Preferred Stock
were outstanding.

     Certain sections of the registrant's definitive proxy statement relating
to the registrant's 1998 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120
days of the end of the registrant's fiscal year ended December 31, 1997, are
incorporated by reference into Part III of this Form 10-K.

------------------------------------------------------------------------------
------------------------------------------------------------------------------
<PAGE>


     WHEN USED IN THIS DOCUMENT, 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.  FOR ADDITIONAL DISCUSSION OF SUCH RISKS,
UNCERTAINTIES AND ASSUMPTIONS, SEE "ITEM 1. BUSINESS--RISK FACTORS" INCLUDED
ELSEWHERE IN THIS REPORT.

PART I.

ITEM 1.  BUSINESS

OVERVIEW

     Energy BioSystems Corporation ("EBC" or the "Company") is developing and
commercializing innovative biotechnology-based processes for the petroleum
refining and production industries.  The Company's focus to date has been on
developing biocatalytic desulfurization ("BDS"), a proprietary process
involving the use of enzymes to remove sulfur from petroleum.  EBC believes
that BDS can be used as a substitute for, or in conjunction with, existing
desulfurization technology and expects BDS to be significantly less expensive
than conventional desulfurization methods.  The Company's BDS pilot plant,
which is a fully integrated desulfurization unit capable of processing up to
five barrels of diesel fuel per day, was completed in late 1994 and began
processing diesel feedstock in March 1995.  The pilot plant is providing the
basis for the design of commercial-scale BDS units.

     Removal of sulfur is one of the most costly issues facing the petroleum
industry and is a growing problem worldwide.  Sulfur removal is desirable to
the refining industry because of (i) environmental regulations mandating
decreased sulfur in refined products, (ii) an increasing level of sulfur in
crude oil processed by refiners and (iii) high operating and maintenance
costs associated with the existence of sulfur in petroleum.  Desulfurization
is also attractive to the crude oil production market, where low-sulfur crude
oil commands a premium price over high-sulfur crude oil.

     The Company has entered into a number of strategic alliances with
recognized industry leaders in support of the Company's BDS development and
commercialization activities, providing an opportunity for the Company to
build on established expertise and resources in critical areas.  The Company
has an agreement with The M.W. Kellogg Company ("M.W. Kellogg") for the basic
engineering services necessary for BDS implementation at customer sites, and
an agreement with Baker Petrolite Corporation ("Petrolite") relating to the
development of the Company's BDS technology and the construction and
operation of the Company's pilot plant.  The Company also has entered into
collaborations focusing on the application of the BDS technology as follows:
an alliance with TOTAL Raffinage Distribution, S.A. ("TOTAL") to develop a
BDS process for diesel fuel streams; an alliance with Koch Refining Company
("Koch") to develop a BDS process for certain gasoline streams; and an
alliance with the Exploration and Production Technology Division of Texaco
Inc. ("Texaco") to develop a BDS process for crude oil. The Company is
pursuing additional alliances with potential customers, particularly in the
Middle East and Asia, two markets that are expected to make significant
investments in desulfurization technology over the next decade. See
"--Alliances."

     To date, the Company has engaged primarily in research and development
related to its BDS process.  In March 1998, the Company entered into an
agreement with Petro Star Inc. ("Petro Star") regarding the design and
installation of a BDS unit at Petro Star's Valdez, Alaska refinery. The
Company's BDS process will require additional research, development and testing
in order to determine its commercial viability.  See "--Risk
Factors--Technological Uncertainty; Risks Associated with Commercialization of
BDS Technology."

     The Company was incorporated in Delaware on December 20, 1989.  The
Company's executive offices are located at 4200 Research Forest Drive, The
Woodlands, Texas 77381 and its telephone number is (281) 364-6100.

                                       1
<PAGE>

THE COMPANY'S TECHNOLOGY

BACKGROUND OF BDS

     The first patents covering the use of bacteria to reduce the sulfur
content of petroleum were issued in the United States in 1948.  However,
early attempts to utilize bacteria and enzymes to selectively remove sulfur
from hydrocarbons failed primarily because of an inability to control the
action of the bacteria, which resulted in significant degradation of the fuel
value of the hydrocarbon. In 1988, researchers at the Institute of Gas
Technology ("IGT") achieved a breakthrough in microbial desulfurization when
they isolated two unique strains of bacteria.  These strains have the ability
to desulfurize coal and selectively remove sulfur from dibenzothiophene, the
industry-recognized model for heterocyclic sulfur molecules found in coal and
petroleum.  U.S. patents were issued on these two bacterial strains in 1992.

     In 1991, the Company obtained exclusive, worldwide, royalty-free rights
to IGT's desulfurization technology.  A critical milestone was achieved in
1992 when the relevant genes from the patented bacteria were cloned and
sequenced. These genes have now been characterized extensively.  The cloned
genes now are being manipulated and transferred to alternative microbial
hosts and modified to increase the expression of the desired properties.  The
Company has been issued a fundamental patent on these genes, plus numerous
other patents on the BDS process by the U.S. and foreign patent offices.
With bacteria strain isolation and molecular cloning of the genes achieved,
further development of BDS technology involves primarily a new combination of
established biotechnology and chemical engineering processes.

     A fully integrated BDS pilot plant capable of processing up to five
barrels of diesel fuel per day was constructed in late 1994 and began
processing diesel feedstock for desulfurization in March 1995.  The pilot
plant was designed with the instrumentation and scale necessary to provide
the operating data needed for commercial scale-up.  The pilot plant is
utilizing hydrotreated diesel fuel from TOTAL and straight-run diesel fuel
from Petro Star as feedstock, allowing the Company's team of scientists and
engineers to evaluate the performance of the biocatalyst, the reactor and the
separations systems under a wide range of operating conditions.  The
information generated from the pilot plant is also being used to guide
further development of the Company's other BDS applications for crude oil and
other petroleum products.

OVERVIEW OF THE COMPANY'S BDS TECHNOLOGY

     BDS is a proprietary process based on naturally occurring bacteria that
can remove organically bound sulfur from petroleum without degrading the fuel
value of the hydrocarbon.  Enzymes in the bacteria selectively cleave
carbon-sulfur bonds in the presence of oxygen to yield an oxygenated
hydrocarbon product and a sulfate byproduct.  Because the chemical reaction
is catalyzed by enzymes associated with the bacteria, the bacteria do not
have to grow in order to desulfurize fossil fuels.  Operating at ambient
temperatures and atmospheric pressure, BDS is expected to be significantly
lower in cost than conventional hydrodesulfurization ("HDS") technology in
achieving sulfur levels below those required by current regulatory standards
and flexible enough to desulfurize a wide range of petroleum streams
including crude oil.  Since the process is oxidative, the addition of
hydrogen is not required, thus avoiding a significant element of conventional
desulfurization operating costs.

     The basic steps of the BDS process are:

     -    The biocatalyst is combined with water and transferred to the
          bioreactor.

     -    The biocatalyst slurry and high-sulfur petroleum stream are mixed in
          the continuous stirred-tank bioreactor and air is sparged in as a
          source of oxygen.

     -    The desulfurized oil is separated from the oil/aqueous/biocatalyst
          output stream.

                                       2
<PAGE>

     -    The aqueous phase is further treated to separate out the biocatalyst
          and water.

     -    The sulfur byproduct is captured from the aqueous phase as a sulfate
          salt or other water-soluble sulfur compound and removed from the
          process.

     -    The biocatalyst and water are recycled to the bioreactor and spent
          biocatalyst is drawn off.

CONVENTIONAL DESULFURIZATION TECHNOLOGIES

     Hydrotreating is the conventional technology for the removal of sulfur,
nitrogen and other impurities from oil.  When this process is used primarily
for the removal of sulfur, it is called hydrodesulfurization ("HDS").  In
this process, petroleum fractions are subjected to high temperatures and
pressure in the presence of an inorganic catalyst and hydrogen.  As a result,
organic sulfur molecules are converted to hydrogen sulfide, which is further
processed to yield elemental sulfur.  HDS is relatively ineffective against
more complex sulfur molecules found in diesel and heavier fractions.

     HDS is a costly process for refiners.  A typical HDS unit costs between
$30 million and $80 million to construct, depending on the product stream to
be treated, the level of desulfurization required and the unit size.  The
high pressure and temperature required for HDS translate directly into high
capital and maintenance costs because these units require high-pressure
vessels and exotic metals, which are expensive to manufacture and maintain.
Although some refinery units produce hydrogen, the large amount of hydrogen
required for HDS may require refiners to build new hydrogen production
capacity at an additional significant capital expense.

BENEFITS OF BDS

     The Company believes that its BDS technology will offer the refining
industry an effective alternative to HDS and will in many cases complement
existing technology.  The Company believes that BDS may provide refiners with
the following principal benefits:

-    COST EFFECTIVENESS.  BDS is designed to operate at ambient temperatures and
     pressures, in contrast to HDS, which requires thick-walled reactors and
     other equipment designed to tolerate high temperatures and pressures.  As a
     result, the Company expects that its BDS units will be significantly less
     expensive to build than HDS units.  The Company expects that the capital
     costs of a BDS unit will be approximately 50 percent less than a comparable
     HDS unit.  In addition, the BDS process will not require hydrogen, which is
     an expensive component of HDS.

-    EASE OF INTEGRATION.  The Company believes the BDS process can be
     integrated into refinery operations without significant difficulty.  Most
     of the components of the BDS units are expected to be readily available
     equipment.  The biocatalyst will be produced off-site and delivered to the
     refinery, as is now the case with inorganic catalysts used in conventional
     refinery processes.  The BDS process is not expected to generate any
     unusual byproducts, and byproduct disposition is expected to be
     accomplished with existing processes that are familiar to most refiners.
     The mild operating conditions of BDS are also expected to contribute to
     improved operating safety over HDS in many applications.

-    EFFECTIVENESS AGAINST COMPLEX SULFUR MOLECULES.  The Company believes that
     BDS will be effective in removing complex sulfur molecules that are
     resistant to conventional desulfurization technologies.  Diesel fractions,
     for example, contain more complex sulfur molecules against which HDS is
     relatively ineffective.  As a result, HDS becomes increasingly more costly
     and less effective in desulfurizing diesel fuel as the lighter-sulfur
     compounds are removed and the remaining complex molecules constitute an
     increasing proportion of the remaining sulfur.  Accordingly, the Company
     expects that any reduction in the level of sulfur permitted under
     applicable regulations will make BDS increasingly cost-effective as
     compared to HDS.

                                        3
<PAGE>

     While EBC believes its BDS process will be economically attractive to
petroleum refiners and to crude oil producers, the BDS process will require
significant capital expenditures by refiners and producers.  The refining and
oil production industries historically have been reluctant to accept new
technologies.  There is a risk, therefore, that the Company will have
difficulty in obtaining the refining and oil production industries'
acceptance of the BDS process.  Also, the rate of purchase of the Company's
BDS process may be affected by economic conditions in the refining and oil
production industries. The refining and oil production industries have been
subject to periods of depressed profitability and are affected substantially
by fluctuations in the price of crude oil and finished products.  Oil
production and drilling activity are also largely dependent on the level and
volatility of oil prices.

MARKET OVERVIEW

REFINING INDUSTRY

     One of the principal markets for the Company's BDS technology is the
worldwide refining industry, which processes more than 78 million barrels of
crude oil per day or approximately 29 billion barrels per year.  A
significant portion of worldwide refining capacity is concentrated among a
small number of large corporations and national oil companies.  In the United
States, the top ten companies process approximately 60 percent of the refined
petroleum products, and in Western Europe and Asia, the ten largest refining
companies process more than half of the refined petroleum products.

     Refineries purchase crude oil and process it into three principal
products: (i) middle distillates (including diesel fuel), (ii) gasoline and
(iii) residual fuel oil (used primarily by electric utilities and ships).  In
the refining process, crude oil is subjected to distillation, resulting in
the separation or fractionation of the hydrocarbons into several intermediate
products.  These intermediate products are subjected to additional processing
steps before formulation into finished products.  These additional processing
steps include the removal of impurities (such as sulfur, metals and
nitrogen), the "cracking" of large hydrocarbon molecules and the upgrading of
lower-quality intermediate products.

REFINERY DESULFURIZATION

     The refining industry is expected to spend more than $37 billion in
capital and up to $10 billion annually in operating expenditures for sulfur
removal through the next decade, assuming the use of conventional
technologies.  Asia accounts for approximately 40 percent of this total
expenditure with Western Europe and the United States accounting for
approximately 30 percent each.

     Pollution regulations have targeted sulfur in fossil fuels due to its
harmful effects on the environment.  The combustion of sulfur results in the
emission of sulfur oxides ("SOx"), which are believed to be a cause of "acid
rain" and smog.  Regulations issued under the 1990 amendments to the U.S.
federal Clean Air Act (the "Amendments") required a reduction in the sulfur
content of all on-highway diesel fuels to 500 ppm on October 1, 1993, from a
prior national average of over 2,000 ppm.  Similar regulations worldwide will
significantly reduce the level of sulfur allowed in certain petroleum
products, including diesel fuel.  In Western Europe, diesel fuel was required
to meet the 500 ppm sulfur specification by October 1996.  In Asia, many
countries have adopted or plan to adopt similar sulfur regulations on diesel
fuel, which will be implemented in various stages over the next decade.  The
European Union has announced its intention to implement regulations requiring
the further reduction in the sulfur content of diesel fuel, with the
expectation that the diesel sulfur specification will be reduced to 350 ppm
(or possibly 200 ppm) by the year 2000 and to 100 ppm or lower by the year
2005.  Historically, the adoption of more stringent environmental standards
in the United States and European Union have often been followed by the
adoption of similarly stringent standards elsewhere in the developed world.
Therefore, it is possible that another series of diesel sulfur regulations,
similar to those now anticipated in Europe, will be forthcoming in the United
States and in Asian countries.

                                       4
<PAGE>

     Sulfur also inactivates catalysts contained in automobile catalytic
converters over time, resulting in a significant increase in the emission of
unburned hydrocarbons and nitrogen oxides ("NOx") from automobile tailpipes,
which in turn contribute to smog.  The Amendments required a targeted
reduction in U.S. gasoline emissions of 15 percent by the year 1995 and call
for a targeted reduction of 25 percent by the year 2000.  The Environmental
Protection Agency (the "EPA") established a detailed model (the "Complex
Model") for determining the emissions of various gasoline formulations to be
sold in most large cities that have not attained certain prescribed levels of
improvement in air quality ("Nonattainment Areas").  Use of the Complex Model
becomes mandatory starting in 1998 for certifying gasoline sold in
Nonattainment Areas, which currently represents approximately 25 percent of
all gasoline produced in the U.S.  The Complex Model explicitly recognizes
the detrimental impact of sulfur on gasoline tailpipe pollution, giving
refiners incentive to decrease the level of sulfur in the gasoline they
produce.  Regulations in Europe further limiting sulfur levels permitted in
gasoline are anticipated for the year 2000 and similar regulations may be
adopted in Asia.  Industry sources believe that sulfur will play a key role
in refiners' plans to reduce gasoline emissions in the latter part of this
decade.

     The Amendments, as well as various state and local regulations,
generally limit the atmospheric emission of SOx by stationary sources, such
as refineries and utilities.  For example, permit regulations limit allowable
SOx emissions from fluid catalytic cracking units ("FCCUs") (the refinery
processing unit for upgrading heavier oil molecules to gasoline), which may
cause refiners to constrain the output of a unit that is critical to refining
profitability.  New or modified FCCUs are also subject to SOx emissions
limitations.  The Amendments and state and local regulations also limit the
amount of high-sulfur fuel that electric utilities may burn, restricting one
of the refining industry's largest end markets for residual fuels.
Consequently, the value of residual fuel is affected significantly by its
sulfur content.

     The increasing average level of sulfur in crude oils is also expected to
stimulate demand for new desulfurization technologies.  Low-sulfur crude oils
traditionally have been in greater demand and commanded a price premium over
higher-sulfur crude oils.  Over the last decade, the average sulfur content
of crude oil processed by U.S. refiners increased by more than 20 percent.
In the future, refiners worldwide are expected to process increased volumes
of high-sulfur crude oil, raising the demand for additional desulfurization
capacity.

     Sulfur in crude oil increases refiners' operating costs because of
sulfur's detrimental effect on refinery equipment and catalytic processes.
Many sulfur compounds are corrosive, and the processing of high-sulfur crude
oil necessitates more frequent maintenance of refinery processing units.  The
presence of sulfur in the feedstock for FCCUs decreases the effectiveness of
the inorganic catalyst used to crack the fuel, increasing the operating cost
of the FCCU and decreasing product yield.  Sulfur has a similar degrading
effect on most catalytic processes in the refinery, increasing operating
costs on a variety of key processing units.

CRUDE OIL DESULFURIZATION

     The price of crude oil is affected by its sulfur content.  The
difference in price between low-sulfur and high-sulfur crude oils is affected
by increasingly stringent regulation of sulfur content in finished products.
Lower-sulfur crude oils have typically commanded a $1 to $3 per barrel
premium in the market compared to higher-sulfur crude.  Over 50 percent of
the crude oil produced worldwide is considered high in sulfur (greater than
one percent).  The Company believes the price difference between low-sulfur
crude oil and high-sulfur crude oil will create an incentive for oil
producers to reduce the sulfur levels in their product, resulting in demand
for crude oil desulfurization technologies. The Company believes that by
reducing the sulfur content of crude oil at the production stage, BDS has the
potential to improve the marketability and value of higher-sulfur oil
reserves and improve producers' access to pipelines that limit the sulfur
content of crude oil.  To date, conventional desulfurization technologies
have not proven economically viable for the desulfurization of crude oil.

     Large reserves of high-sulfur crude oil exist in Venezuela, Canada, the
United States, Mexico, the former Soviet Union, and the Middle East.
Venezuela has proven reserves in excess of one trillion barrels of crude oil
with a sulfur content greater than two percent.  Canada has in excess of 50
billion barrels of proven reserves of crude oil

                                        5
<PAGE>

with a two percent or greater sulfur content, and the United States has
approximately 125 billion barrels of proven reserves of crude oil with a two
percent or greater sulfur content.  Cost-effective desulfurization technology
will play a key role in making many of these high-sulfur crude oil reserves
more economically exploitable.

OTHER POTENTIAL APPLICATIONS OF BIOREFINING

     The Company believes there are numerous other applications for its
biorefining technology. These potential applications include the following:

     NITROGEN REMOVAL.  Nitrogen compounds in petroleum present refiners with
many of the same problems associated with sulfur.  Refiners currently remove
nitrogen using a hydrotreating process.  The Company believes that a system
similar to the BDS system can be developed to remove nitrogen.

     METALS REMOVAL.  Heavy metals in petroleum damage refinery catalysts and
reduce the value of refined petroleum products.  In addition, heavy metals
limit the efficiency of conventional desulfurization technologies.
Bioreactor systems have been developed for the extraction of metals from
wastewater.  EBC believes that similar systems can be developed for the
biocatalytic removal of metals from crude oil and residual oil.

     VISCOSITY REDUCTION AND CRACKING.  Bioprocessing technologies have been
used for many years to depolymerize very viscous solutions of corn starch to
produce high fructose corn syrup. A similar chemical process in refineries,
called "cracking," refers to the thermal degradation of complex hydrocarbon
molecules into simpler, higher-value products. The Company believes that a
biocatalytic liquefaction system could be applied to molecules in some highly
viscous crude oils, which currently have little commercial value.  The
Company believes that this process could produce crude oil with significantly
reduced viscosity, a higher proportion of molecules in the gasoline and
diesel fuel boiling range, and increased commercial value.

     COAL DESULFURIZATION.  Conventional desulfurization technologies cannot
economically remove organic sulfur from coal.  Therefore, high-sulfur coal
represents a potential future market for the Company's desulfurization
technology.  The Company believes that the BDS technology it develops for
liquid fossil fuels eventually may have application in the desulfurization of
coal and, in particular, coal slurries.

BUSINESS STRATEGY

     EBC's goal is to become the leading provider of biorefining solutions
for the petroleum industry.  The Company's strategy is to concentrate its
internal resources on the research, development and marketing of its BDS
technology while entering into strategic alliances to assist in the
engineering and construction of BDS units and in the manufacturing of the
biocatalyst employed in the BDS process.  To commercialize BDS, the Company
must develop the BDS process to a competitive commercial level, establish the
infrastructure required to deliver, supply and service the BDS units, and
sell the BDS units to refiners and oil producers.  The Company believes it
has chosen the most rapid commercialization strategy by working on these
efforts in parallel and leveraging internal resources with strategic
alliances.

     EBC believes that its technology has broad potential application in the
processing of petroleum products.  Although its technology will first be
directed at biocatalytic desulfurization, the Company's long-term plan is to
expand the capabilities of its technology to address the removal of other
petroleum impurities (e.g., nitrogen and metals), to address other refining
processes (e.g., viscosity reduction and cracking) and to remove sulfur from
coal.

RESEARCH AND DEVELOPMENT

     To commercialize BDS, the Company must improve the productivity of the
biocatalyst to a competitive economic level while developing an engineered
bioreactor system that allows the control of several variables to induce
optimal biocatalytic desulfurization.  To accomplish these goals, the Company
has conducted extensive

                                      6
<PAGE>

research, development and testing of the biocatalyst and bioreactor, and has
assembled a team of scientists and engineers with extensive experience in
microbial physiology, molecular biology, biochemistry, fermentation, process
development and scale-up, biochemical engineering, separations technology,
and refinery process engineering and operations.

     The focus of EBC's research and development efforts has been to develop
the BDS process for use in treating diesel fuel, gasoline and crude oil.
The Company expects the desulfurization of diesel fuel, where its development
efforts are the most advanced, to be the first commercial application of its
BDS technology.  As a result of the specificity of the biocatalyst for each
product application, the Company expects that further development will be
required to commercialize its BDS technology for use in treating gasoline and
crude oil.

     In late 1992, EBC initiated operations of a continuous bench-scale unit
capable of desulfurizing up to one-half of a barrel of crude oil per day.  A
fully integrated BDS pilot plant capable of processing up to five barrels of
diesel fuel per day was constructed in late 1994 and began processing diesel
feedstock for desulfurization in March 1995.  The pilot plant was designed
with the instrumentation and scale necessary to provide the operating data
needed for commercial scale-up.  The pilot plant is utilizing hydrotreated
diesel fuel from TOTAL and straight-run diesel fuel from Petro Star as
feedstock, and is undergoing a variety of experiments that will allow the
Company's team of scientists and engineers to evaluate the performance of the
biocatalyst, the reactor and the separations systems under a wide range of
operating conditions. The information derived from operating the pilot plant
is providing the design basis for commercial-scale BDS units and is also
being used to guide further development of the Company's other BDS
applications for crude oil and other petroleum products.

     In 1994, the Company was awarded $2 million of federal funding under the
Advanced Technology Program ("ATP") administered by the National Institute of
Standards and Technology.  The ATP project is dedicated to the development of
a biotechnology-based method of removing sulfur from crude oil.  The
three-year program funded with this award is intended to accelerate the pace
of development in crude oil desulfurization, moving the BDS technology in
this area from the research level toward the pilot plant phase.  In 1997, the
Company was awarded funding by the U.S. Department of Energy ("DOE") for a
$2.4 million, three-year program dedicated to the development of a BDS
application for gasoline.  The DOE-funded program is intended to accelerate
the advancement of the Company's BDS technology for gasoline desulfurization
from bench-scale research and development to pilot-scale development.

     The Company had research and development expenses for the years ended
December 31, 1995, 1996, and 1997 of $7,338,319, $9,210,227, and $9,087,149,
respectively.   See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

BIOCATALYST DEVELOPMENT

     The central element of the Company's BDS technology is the
"biocatalyst," a microorganism originally isolated from the soil that has
been genetically engineered to maximize its effectiveness in removing the
sulfur molecules in petroleum.  The effectiveness of the biocatalyst, as with
any other catalyst, depends upon the optimization of three important
attributes: (i) the rate of reaction; (ii) the specificity of the catalyst
for the target molecules; and (iii) the stability of the catalyst under
operating conditions.  EBC has made significant progress in each of these
areas.  See "-- Risk Factors --Technological Uncertainty; Risks Associated
with Commercialization of BDS Technology."

     REACTION RATE.  The observed reaction rate in the Company's BDS process
is a function both of the intrinsic abilities of the biocatalyst (i.e., its
specific activity) and of the conditions in the particular reactor.  The
intrinsic activity of the biocatalyst depends upon several factors at the
cellular level.  In 1997, the Company maximized one of these factors by
"overexpressing" the critical enzymes in the biocatalyst's cells so that they
represent about 30 percent of its total cellular protein.  The overexpression
of these enzymes was achieved through a combination of

                                      7
<PAGE>

genetic engineering strategies, the most significant of which were the
amplification of the genes responsible for producing these enzymes (i.e.,
creating multiple copies of such genes in each organism) and the modification
of the DNA sequence of these genes to encourage the cells to make between 100
and 1,000 times more of the key enzymes than they normally would.  The
Company also was able to incorporate the earlier discovery of a fourth
component of the system into its current biocatalyst.  When appropriately
amplified with the other enzymes, the incorporation of this fourth component
has significantly increased the reaction rate of the biocatalyst.

     SPECIFICITY.  The Company's BDS process employs enzymes specifically
directed at a certain class of sulfur molecules in petroleum to catalyze the
desulfurization reactions.  Although this class of sulfur molecules includes
the predominant types of sulfur molecules found in diesel fuel, anticipated
regulations governing the sulfur content of diesel fuel are expected to
require such low concentrations of sulfur that the Company's BDS process will
also need to address the less predominant, more complex sulfur molecules
found in diesel fuel.  In 1997, the Company's scientists identified and
characterized these "desulfurization resistant" molecules and developed a
strategy for the optimization of the biocatalyst to increase the specificity
of the biocatalyst for such molecules.  The Company believes that its lab
results support the feasibility of this approach and that it is making rapid
progress in broadening the biocatalyst specificity to address these molecules.

     STABILITY.  The BDS biocatalyst is a living organism and a dynamic
system in which enzymes within the cell are continually being made and
destroyed.  The Company's research and development team has observed a
gradual decay of biocatalyst activity in the reactor system as a result of
these metabolic processes.  In 1997, EBC researchers demonstrated that the
cells remained active in the reactor for days after desulfurization activity
had ceased.  The Company's research and development team has characterized
the nature of the inactivation of the desulfurization characteristics of
these cells and is working to develop new strains that degrade the
desulfurization enzymes more slowly and are genetically engineered to produce
more desulfurization enzymes while the biocatalyst remains in the reactor
system.  In 1997, the Company developed a new strain of the biocatalyst
organism that terminates the desulfurization reaction at a point that allows
removal of the oxidized sulfur molecules (as an organic sulfinate) while
minimizing the metabolic consequences of complete conversion of the molecules
to inorganic sulfate.  This change increased the activity of the biocatalyst
significantly and had very positive effects on its stability.

PROCESS ENGINEERING

     In addition to efforts in biocatalyst development, EBC has allocated
considerable resources to the development of the process technology for the
first BDS units. The Company believes that scale-up of its BDS process can be
accomplished with conventional process engineering technology.  The Company
began pursuing several opportunities in 1997 to accelerate the commercial
viability of its BDS technology through more innovative use of available
process technology.  The Company's process development team substantially
improved the efficiency of the BDS reactor system and reduced the cost of the
BDS process in 1997, and is continuing to pursue additional improvements in
efficiency and cost through process engineering efforts in three main areas:
(i) separations technology; (ii) biocatalyst regeneration; and (iii)
byproduct disposition. The Company's objectives in these three areas are to
adapt conventional process technology from other commercially proven
processes in a manner that lowers the activity and stability requirements
placed on the BDS biocatalyst, thereby reducing the cost and improving the
commercial viability of BDS units. Each of the three targeted engineering
innovations represents an attempt to take greater advantage of some
established characteristic or capability of EBC's current biocatalyst
technology, creating a synergy between biocatalyst and process development.
Representatives of the Company meet regularly with representatives of M.W.
Kellogg to ensure that all of the targeted innovations are appropriate and
suitable for scale-up and commercialization within a typical petroleum
refinery.  See "-- Risk Factors -- Technological Uncertainty; Risks
Associated with Commercialization of BDS Technology."

     BDS PILOT PLANTS.  The Company and Petrolite jointly operate the Company's
principal BDS pilot plant at Petrolite's facilities in St. Louis, Missouri.  The
St. Louis pilot plant, completed in late 1994, is a fully integrated
desulfurization unit capable of processing up to five barrels of diesel fuel per
day.  It began processing diesel

                                       8
<PAGE>

feedstock in March 1995 and was extensively revamped in 1997 to capitalize on
process engineering improvements.  The pilot plant is providing the basis for
the design of commercial-scale BDS units. EBC built a second, smaller pilot
plant during the second quarter of 1997 at its research facility in The
Woodlands, Texas. The new pilot plant, which is capable of processing three
gallons of diesel fuel per day, was built to facilitate the Company's process
engineering initiatives, and was used to develop the reactor improvements
that were implemented at the St. Louis pilot plant in the third quarter of
1997.  It is a fully integrated unit, with three staged BDS reactors,
separations equipment, recycle capabilities, and a PC-based process control
system. The Company consulted with its alliance partner, M.W. Kellogg, during
the revamp of the St. Louis pilot plant, and M.W. Kellogg provided the design
for the this smaller pilot unit.

     BIOREACTOR TECHNOLOGY.  The Company has designed and constructed both
pilot plants to develop the catalytic process with hydrocarbon molecules in
the presence of air, water and various process chemicals.  Variables such as
temperature, agitation rate and pH (acidity or alkalinity) can be controlled,
and measured amounts of oxygen and process chemicals can be added to the
mixture of biocatalyst and petroleum, optimizing the desulfurization
environment.  EBC implemented a redesigned, staged reactor system at the St.
Louis pilot plant during the third quarter of 1997.  Experiments at the pilot
plant confirmed that the redesigned reactor system significantly increased
the level of desulfurization, with no increase in total reactor volume.
Experiments at the Company's smaller pilot plant further indicated that the
Company's biocatalysT can be used more effectively by operating with a higher
concentration of biocatalyst in the reactor.  This discovery lead to the
initiation in 1997 of engineering research efforts focused on the development
of a low-cost separation scheme capable of recovering the oil from the
reactor effluent when a much higher cell-loading is used in the reactor
section of the process.

     SEPARATIONS.   The BDS process produces a mixture of water, desulfurized
hydrocarbons, biocatalyst, and sulfur byproduct. The mixture must be
separated into its components, a process which involves substantial increases
in difficulty and cost as the concentration of biocatalyst increases. The
Company previously has developed technology, demonstrated in the laboratory
and successfully implemented at the Company's St. Louis pilot plant in 1996,
for the efficient separation of these components if the biocatalyst is
present in the reactor at a relatively low concentration.  This low
concentration separation process employs a combination of conventional
technologies which the Company believes can be scaled up to commercial levels
without substantial difficulty. In connection with the Company's decision in
1997 to pursue efforts to increase the biocatalyst concentration used within
the process as a complement to its efforts to increase the activity of the
biocatalysT, the Company began working toward developing a low-cost
separation process compatible with higher concentrations of biocatalyst that
could still be scaled up economically to commercial levels. The Company's
engineers are working closely with several equipment vendors and conducting
experiments in the lab and the two pilot plants towards achievement of this
objective.

     BIOCATALYST REGENERATION.  As the biocatalyst used in the Company's BDS
process circulates and is used to catalyze the BDS reaction, its activity
level decreases with time, a phenomenon common in both biological and
chemical catalysts.  Prior to 1997, the Company's BDS process design was
based upon continually feeding fresh biocatalyst into the process, using the
biocatalyst for a period of time, and discarding the spent biocatalyst.  In
1997, the Company discovered a biocatalyst formulation and a set of process
operating conditions that allowed the biocatalyst to be regenerated,
permitting the operation of the bioreactor system with a reduced amount of
biocatalyst.  The Company is pursuing this new process concept, which it
believes may significantly reduce the operating cost of a BDS unit.  In
addition, the Company believes that the byproduct of the biocatalyst
developed for this new mode of operation provides an opportunity to further
improve the economics of the BDS process.

     BYPRODUCT DISPOSITION.  The principal byproduct of the BDS process, when
using a non-regenerative biocatalyst, is a water-soluble, inorganic sulfur
compound that can be separated from the biorefined petroleum at relatively
low cost.  The Company has evaluated alternatives for the disposition of the
sulfur resulting from this process and believes that the best alternative for
most refineries would be conversion of the sulfur byproduct either to
ammonium sulfate, which can be used as a fertilizer, or to sodium sulfate.  A
secondary byproduct of this process is the spent biocatalyst stream, which
would be expected to be disposed of at an off-site commercial disposal
facility as either a solid or other refinery waste. The principal byproduct
of the BDS process concept currently being

                                      9
<PAGE>

developed by the Company, using a regenerative biocatalyst, is an ionic salt
of an organic sulfinic acid, called organic sulfinate, which the Company
believes could have commercial value. The Company currently is exploring the
market potential for this possible byproduct.

     MASS TRANSFER ISSUES.  The Company's progress on improving the activity
of the biocatalyst prior to 1997 increased the intrinsic reaction rate of the
biocatalyst to a point where it was capable of performing at a rate that
exceeded the rate at which sulfur molecules and the products of
desulfurization could be transported to and from the enzymes.  Limitations in
the speed of a catalytic reaction as a result of the rate at which a
substrate transfers to a catalyst (known as "mass transfer limitations") are
commonly encountered in both biological and chemical catalysis and can
frequently be overcome through one or more commonly used biological and
chemical engineering solutions.  In 1997, the Company modified both the
biocatalyst and the reactor design to successfully overcome the mass transfer
limitation, such that current biocatalyst is functioning at its maximum
intrinsic activity in the current process design (i.e., the present rate of
biodesulfurization is no longer being limited by mass transfer limitations).

PRODUCTION OF THE BIOCATALYST

     Large-scale growth and production, or fermentation, of biocatalysts is
essential to the commercialization of the BDS technology.  The Company's
efforts in developing alternative microbial hosts have been intended to
select hosts that can be produced more rapidly and at lower cost.  The
Company believes that this fermentation will not be substantially different
from the many antibiotic and enzyme fermentations routinely commercialized by
other biotechnology companies.  The Company currently conducts small- and
intermediate-scale (300 liter) fermentations at its laboratory facilities.
These facilities are sufficient to supply laboratory and preliminary pilot
plant needs for the biocatalyst.  The Company is pursuing agreements with
leading worldwide biocatalyst manufacturers to ensure a continuous supply of
biocatalyst for the Company's BDS process.  See "-- Risk Factors --
Technological Uncertainty; Risks Associated with Commercialization of BDS
Technology" and "-- Risk Factors --Manufacture of Biocatalyst."

SCIENTIFIC ADVISORY BOARD

     The Company has retained a group of distinguished research scientists
and engineers to provide advice on matters relating to its research,
development and business activities.  The Scientific Advisory Board, composed
of five members, meets with the Company's scientists and management and is
regularly available for consultation.  Scientific advisors are compensated
for expenses and certain advisors have been granted options to acquire Common
Stock.  The members of the Scientific Advisory Board are as follows:

     CHARLES L. COONEY, PH.D., PROFESSOR OF CHEMICAL AND BIOCHEMICAL
ENGINEERING, MASSACHUSETTS INSTITUTE OF TECHNOLOGY.  Dr. Cooney is widely
recognized as an expert in the field of bioreactor design and engineering.
He is the author or co-author of more than 200 scientific publications and
patents and has received many academic awards and honors, including being
named Founding Fellow, American Institute for Medical and Biological
Engineering, in 1992.  In addition to serving as Professor of Chemical and
Biochemical Engineering, Dr. Cooney also is Executive Officer in the
Department of Chemical Engineering and Co-Director of the Program on the
Pharmaceutical Industry at Massachusetts Institute of Technology.  Dr. Cooney
received his B.S. in Chemical Engineering from the University of Pennsylvania
and his M.S. and Ph.D. in Biochemical Engineering from Massachusetts
Institute of Technology.

     NORMAN HACKERMAN, PH.D., PRESIDENT EMERITUS AND DISTINGUISHED PROFESSOR
EMERITUS OF CHEMISTRY, RICE UNIVERSITY, AND FORMER PRESIDENT AND PROFESSOR
EMERITUS OF CHEMISTRY, THE UNIVERSITY OF TEXAS AT AUSTIN.  Dr. Hackerman is a
member of the National Academy of Sciences and of the American Philosophical
Society, a Fellow of the American Academy of Arts and Sciences, and Chairman of
the Scientific Board of the Robert A. Welch

                                    10
<PAGE>

Foundation.  Dr. Hackerman has been the recipient of many awards, including
the American Institute of Chemists Gold Medal and the Mirabeau B. Lamar Award
of the Association of Texas Colleges and Universities.  He received his A.B.
and Ph.D. from Johns Hopkins University.

     HERBERT L. HEYNEKER, PH.D., FOUNDER AND CHIEF TECHNICAL OFFICER, EOS
BIOTECHNOLOGY, INC.  Dr. Heyneker is an authority in microbial expression of
human proteins, including insulin, growth hormone and tPA; protein
engineering; and expression systems for industrial microorganisms.  Dr.
Heyneker serves as a director of Genpharm International, Inc. and Introgene,
B.V., and as chairman of the Scientific Advisory Board of Pharming, B.V. He
also serves as a scientific advisor for Genencor International, Inc., Genomyx
Corp., ProtoGene Laboratories, Inc., and MaxyGen, Inc.  He earned his Ph.D.
from the University of Leiden, The Netherlands and completed his
post-doctoral fellowship at the University of California-San Francisco
Medical School.

     CHARLES F. KULPA, JR., PH.D., PROFESSOR OF BIOLOGICAL SCIENCES,
UNIVERSITY OF NOTRE DAME.  Dr. Kulpa is regarded as an expert in the fields
of microbiology, bioremediation and biochemistry.  His laboratory research
work is concentrated in the areas of environmental and applied microbiology.
Dr. Kulpa has authored or co-authored numerous papers detailing his research
in microbiological and biochemistry processes.  Active in many scientific
organizations, Dr. Kulpa has served as President of the Indiana Branch of the
American Society for Microbiology and currently is a director of the Southern
Great Lakes Region, Society of Industrial Microbiology.  He received his
B.S., M.S. and Ph.D. in Microbiology from the University of Michigan.

     W. ARTHUR PORTER, PH.D., PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE
HOUSTON ADVANCED RESEARCH CENTER. In addition to his responsibilities as
President and Chief Executive Officer of The Houston Advanced Research Center
("HARC"), Dr. Porter is adjunct professor of electrical and computer
engineering at Rice University in Houston.  He is a recognized international
authority on technology commercialization and the management of collaborative
projects.  Dr. Porter serves on the boards of the Southwest Research
Institute, the Texas Academy of Mathematics and Science, the University of
Houston Center for Public Policy, and HARC.  He received his B.S. and M.S.
degrees in Physics from the University of North Texas and his Ph.D. in
Interdisciplinary Engineering from Texas A&M University.

ALLIANCES

     The Company has entered into alliances with potential customers and
suppliers in support of its BDS development and commercialization activities.
These alliances give the Company an opportunity to build on established
expertise and resources in areas critical to its success.  In the case of
alliances with potential customers, the Company believes that these
relationships may enhance its ability to sell BDS units.  Entering into
alliances with recognized industry suppliers is expected to facilitate
commercialization of the BDS technology.  However, there can be no assurance
that the Company will be successful in maintaining its existing collaborative
relationships or in establishing new relationships.

ALLIANCES WITH POTENTIAL CUSTOMERS

     TOTAL RAFFINAGE DISTRIBUTION S.A.  In July 1994, the Company entered
into an agreement with TOTAL Raffinage Distribution S.A. ("TOTAL") to
collaborate on the application of the Company's BDS process to diesel and
other middle distillate fuel streams.  The Company and TOTAL will each bear
their own costs and expenses incurred under the collaboration.  In addition,
as part of its obligations under the agreement, TOTAL has provided the
Company with the use of analytical equipment valued at approximately
$200,000.  The agreement with TOTAL provides that upon commercialization, the
site licenses will be waived on TOTAL's first commercial BDS unit.  In
addition, TOTAL will be entitled to receive a 10 percent discount on future
site license and service fees until it has recovered two and one-half times
its research costs and expenses for BDS projects under the agreement.  The
Company expects that its alliance with TOTAL will facilitate
commercialization of the BDS technology for diesel fuel and the Company's
entrance into the European market.

                                       11
<PAGE>

     The Company's alliance agreement with TOTAL contemplates an evaluation
of pilot plant operations, commencing after the Company's completion of the
development of a prototype biocatalyst.  The Company completed the
development of a prototype biocatalyst in late 1996 and continues to conduct
bench-scale and pilot plant experimentation using improved generations of the
prototype biocatalyst to address the desulfurization targets requested by
TOTAL. The prototype biocatalyst is intended to possess characteristics
sufficiently similar to the commercial biocatalyst to permit the design of a
commercial-scale BDS unit although it is not expected or intended to possess
sufficient specific activity or other characteristics necessary to be
commercially viable.  If the results from the pilot plant are satisfactory,
it is expected that TOTAL will build and operate at TOTAL's expense a pilot
BDS unit at TOTAL's European Center for Research and Technology and
simultaneously will build a commercial BDS unit at one of its refineries.
The Company intends to continue the development of the biocatalyst to improve
its specific activity and other characteristics necessary for commercial
viability during the period in which TOTAL is building these BDS units.
TOTAL has indicated that it intends to employ its initial BDS units for the
"ultra deep" (below 500 ppm) desulfurization of diesel, a range of
desulfurization below current regulatory standards in which BDS is expected
to possess greater cost advantages as compared to HDS.  The Company is also
continuing to develop its BDS technology for the desulfurization of diesel
fuel in ranges above 500 ppm.

     TOTAL is a wholly owned subsidiary of TOTAL S.A., a leading
international oil and gas company based in France.  TOTAL S.A. participates
in every phase of the oil and gas industry with operations in more than 80
countries worldwide and revenues of over $46 billion.

     KOCH REFINING COMPANY.  In December 1993, the Company entered into an
alliance with Koch Refining Company ("Koch") for the development of a
biotechnology-based desulfurization system for refinery oil streams.  The
alliance is expected to accelerate the development of BDS for certain
gasoline streams and customize that development for Koch's applications.
Under the terms of the alliance, the Company is primarily responsible for
improving the performance of the biocatalyst used in the BDS process and
developing a commercial BDS system.  Koch is primarily responsible for
selecting and providing the target gasoline stream as well as testing
desulfurized product quality.  Koch also will provide engineering support as
needed in the development of a BDS unit for Koch's operations.  Until
commercialization, the Company and Koch will each bear their own costs and
expenses incurred in connection with the collaboration.  Upon
commercialization, Koch will be repaid for direct costs and expenses incurred
in assisting BDS development.  Repayment will be in the form of a 10 percent
rebate on desulfurization processing fees charged to Koch until Koch has been
repaid its share of BDS development costs. EBC expects that the development
alliance with Koch will facilitate commercialization of the Company's BDS
technology for target gasoline streams.

     Koch is a part of Koch Industries, one of the largest privately held
companies in the United States.  Koch Industries, with annual revenues in excess
of $30 billion, is involved in virtually all phases of the oil and gas industry,
as well as chemicals, chemical technology products, agriculture, hard minerals,
real estate, and financial investments.

     TEXACO EXPLORATION AND PRODUCTION TECHNOLOGY DIVISION.  In July 1993,
the Company signed an agreement with the Exploration and Production
Technology Division of Texaco Inc. ("Texaco") for the development of a BDS
process for crude oil.  Under the terms of the alliance, the Company
primarily is responsible for improving the performance of the biocatalyst
used in the BDS process.  Texaco primarily is responsible for field
operations, analytical chemistry work, and selecting and providing the target
crude oil stream as well as testing desulfurized product quality.  Process
engineering is conducted jointly by the parties.  The Company and Texaco each
bear their own costs and expenses incurred in connection with the
collaboration.  In the event the Company sub-licenses Texaco's intellectual
property and proprietary information, licensed by Texaco to the Company, the
Company has agreed to pay Texaco an amount equal to 10 percent of the
desulfurization processing fee charged to Texaco until such time as the
Company has paid Texaco an aggregate amount equal to two and one-half times
the aggregate amount of Texaco's direct costs and expenses incurred in
connection with the collaboration.  The Company expects that the development
alliance with Texaco will facilitate commercialization of the Company's BDS
technology for crude oil applications.

                                    12
<PAGE>

     Texaco is one of the largest oil companies in the world with operations
in crude oil production, refining and marketing.  Texaco has annual revenues
in excess of $46 billion.

     PROSPECTIVE ADDITIONAL CUSTOMER ALLIANCES.  The Company is pursuing
additional alliances with potential customers, particularly in the Middle
East and Asia, two markets that are expected to make significant investments
in desulfurization technology over the next decade.

ALLIANCES WITH SUPPLIERS

     THE M.W. KELLOGG COMPANY.  In August 1994, the Company signed an
agreement with The M.W. Kellogg Company ("M.W. Kellogg") to collaborate on
the development and commercialization of BDS technology.  Under the terms of
the collaboration, M.W. Kellogg will serve as an engineering consultant to
the Company during completion of the BDS development process and will be the
exclusive provider of the basic engineering design services required for
commercial BDS units.  In return for these services, M.W. Kellogg will
receive a portion of the site license fee generated by the sale of BDS units.
The collaboration has a minimum term of at least five years or the
completion of 20 BDS units, whichever is longer, and applies to all
biorefining technologies the Company develops. During the first phase of the
collaboration, M.W. Kellogg provided 500 engineering work hours of service at
no cost to the Company.  M.W. Kellogg also agreed to provide an additional
1,500 work hours of service at M.W. Kellogg offices at reduced rates.  EBC
expects that the development alliance with M.W. Kellogg will substantially
enhance its refinery engineering capabilities and market access.

     M.W. Kellogg is an ISO 9001-certified, international technology-based
engineering and construction contractor, serving primarily the hydrocarbon,
chemical and energy related industries.  M.W. Kellogg is a wholly owned
subsidiary of Dresser Industries, Inc., a major supplier of highly engineered
products and services primarily used in hydrocarbon and energy-related
activities throughout the world.  Dresser Industries, Inc. has annual
revenues in excess of $7 billion.

     BAKER PETROLITE CORPORATION.  In March 1992, the Company entered into a
collaboration agreement with Petrolite Corporation, now Baker Petrolite
Corporation ("Petrolite").  The Company and Petrolite agreed to jointly
develop the Company's BDS process and utilize emulsification and separations
technologies and process chemicals developed by Petrolite, if needed.  In
connection with this collaboration, Petrolite agreed to provide the
emulsification and separations equipment necessary for the storage, mixing,
injection and delivery of biocatalysts and process chemicals used in the BDS
process and to pay the Company $5.4 million during the first two years of the
agreement for research and development.  Petrolite also agreed to design and
finance construction of the pilot plant and to provide service personnel to
operate and service the BDS units on site at customer locations.  The Company
agreed to market the BDS process and the Company's biocatalyst, and to fund,
during the third through fifth years of the agreement, research and
development related to BDS at an annual rate of not less than four percent of
the Company's net revenues from BDS projects or $2.5 million, whichever is
greater.  Under the collaboration agreement, the Company is obligated to pay
Petrolite 22 percent of all site license fees received by the Company from
BDS customers and 22 percent of adjusted gross profit (as defined in the
agreement) realized from operation of the BDS units.  The Company expects
that the development alliance with Petrolite, and now Baker Petrolite, will
facilitate commercialization of the Company's BDS technology through the
development and testing of the pilot plant.

     In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite. Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996 in exchange for the
option and the extension of Petrolite's obligations to provide operational
and technical support for the pilot plant from September 1, 1996 through
December 31, 1998.  If the Company exercises its option, the percentage of
site license fees and adjusted gross profit payable to Petrolite will be
reduced to 9.5% from 22%, in exchange for which the Company will (i) assume
responsibility for servicing the BDS units on site at customer locations (ii)
pay Petrolite an additional $9 million in

                                       13
<PAGE>

cash and (iii) issue to Petrolite a warrant entitling Petrolite to purchase
138,889 shares of Common Stock at an exercise price of $7.20 per share.  The
Company may exercise the Petrolite option at any time on or before the
earlier to occur of (i) ten business days following the closing of any equity
financing by the Company in which the gross cash proceeds raised in such
financing (together with the gross cash proceeds raised by the Company in any
other equity financing after the date of the option agreement, if applicable)
equal or exceed $25 million and (ii) December 30, 1998.  The Company does not
plan to exercise the option unless and until it has raised substantial
additional funds or received additional capital.

     Petrolite was acquired by Baker Hughes Incorporated ("Baker Hughes") in
1997 in connection with which it merged with Baker Hughes subsidiary Baker
Performance Chemicals.  Baker Hughes, which serves the worldwide petroleum
and processing industries, has annual revenues in excess of $3 billion.

CUSTOMER AGREEMENT

     In March 1998, the Company entered into a site license agreement with
Petro Star Inc. ("Petro Star") regarding the design and installation of a BDS
unit at Petro Star's Valdez, Alaska refinery.  The agreement involves several
stages of work, the first of which, involving the completion of scoping
economics, is currently under way. In addition, the agreement provides EBC
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 license fees and royalties to EBC, including a $200,000 initial site
license fee paid upon execution of the agreement and $300,000 additional site
license fees payable at various stages during the term of the agreement.  As
is customary in such arrangements 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 EBC Common Stock at an
exercise price of $3.11 per share. The successful implementation of a
commercial BDS unit will be dependent upon the Company's ability to achieve
additional improvements in the productivity of the biocatalyst (e.g.,
reaction rate, specificity and stability) and process technology (e.g.,
bioreactor and separations technology).   See "-- Risk Factors --
Technological Uncertainty; Risks Associated with Commercialization of BDS
Technology."

     Petro Star, a wholly owned subsidiary of Arctic Slope Regional
Corporation, refines and distributes petroleum products throughout Alaska.
The Anchorage-based company owns and operates oil refineries in Valdez and
North Pole, Alaska, with distribution facilities in Fairbanks, Kodiak and
Dutch Harbor.  The Petro Star Valdez refinery is a major supplier of military
jet fuel, as well as marine diesel and other middle distillate products.

COMPETITION

     The primary competition for BDS technology is expected to come from
licensors of HDS technology and the manufacturers of catalysts used in those
units.  In most initial diesel fuel applications, BDS will be sold as a
complementary process where expanded capacity is desired or a greater degree
of desulfurization becomes necessary in connection with an existing HDS unit.
Subsequently, BDS will be developed as a stand-alone diesel fuel
desulfurization process, competing directly with HDS.  In the case of
gasoline, where HDS units are not typically used, the Company expects BDS to
operate as a stand-alone desulfurization system.  The Company intends to
compete on the basis of cost effectiveness, ease of integration,
effectiveness in removing complex sulfur molecules that are resistant to
conventional desulfurization technologies, and the ability to process
petroleum streams that are difficult for HDS to process.

     HDS process technologies and catalysts are supplied by a small number of
companies that maintain their market positions through a combination of
recognized expertise, intellectual property rights and established
relationships with refiners.  Increasing environmental regulation has caused
these catalyst suppliers to make significant investments in research and
development during the past several years to develop more efficient HDS
technologies.  The Company believes that these efforts have been directed at
refinement of the conventional HDS technology rather than development of
entirely new processes.  Many of these companies supplying HDS

                                       14
<PAGE>

technology have substantially greater financial, technical and human
resources than the Company.

     BDS may face competition from other biotechnology processes, although
the Company believes it is the leading developer of biorefining in the world.
 The most significant competitive effort of which the Company is aware is
based in Japan at the Petroleum Energy Center ("PEC"), a consortium of
Japanese petroleum companies conducting research funded by the Japanese
Ministry of International Trade and Industry.  The Company believes, based
upon meetings with PEC personnel and third-party sources, that it has a
substantial lead in developing BDS technology and that its patents provide it
with a substantial competitive advantage over the PEC effort.  The Company is
also aware that one or more major oil companies have from time to time
attempted to develop microbial or biocatalytic desulfurization technologies,
although the Company believes that none of these companies has successfully
developed any of these technologies to date.  Based upon information
available to the Company, the Company believes that these efforts do not
currently present significant competition for its BDS technology in its
primary markets.

PATENTS AND PROPRIETARY TECHNOLOGY

     The Company's ability to compete will depend in part on maintaining the
proprietary nature of its technology.  The Company has established an active
program for the protection of its intellectual property.  This program
includes, among other things: procedures, notebooks and forms for
documenting, evidencing and disclosing all Company inventions to management;
a Patent Review Committee which meets regularly to discuss all intellectual
property issues; a system for continuously monitoring patents issued to, and
patent applications filed by, relevant third parties; a program of seminars
for employees on intellectual property topics; a recognized intellectual
property law firm on retainer; a patent administrator and other personnel
dedicated to assisting in the preparation and prosecution of the Company's
patents; personnel policies and agreements requiring disclosure by employees
of all inventions and protection of confidential information; and agreements
with all technical and scientific employees providing for the assignment of
inventions made by such employees to the Company.

     The Company has an active program in place to maintain and build its
intellectual property position.  Seven U.S. patents on BDS technology have
been issued to The Institute of Gas Technology ("IGT") and licensed
exclusively to the Company, subject to the U.S. government's rights to
certain of such patents. Additionally, one U.S. patent has been issued to the
Korean Institute of Science & Technology and licensed on a nonexclusive basis
to the Company.  A U.S. patent claiming the use of BDS in combination with
HDS for BDS technology was issued to the Company in 1993.   The two-stage
process for deep desulfurization covered by this patent involves the use of
BDS in conjunction with conventional HDS technology, taking advantage of the
significant synergies between the two technologies.  The Company was issued
three patents during the year ended December 31, 1994 and three patents
during the year ended December 31, 1995. The most significant of the three
patents issued in 1994 is the "Recombinant DNA Encoding a Desulfurization
Biocatalyst" patent, which is a fundamental recombinant DNA patent on the
genetic sequences for enzymes that desulfurize petroleum.  This patent is an
important milestone in the development of the Company's worldwide competitive
position and establishes its technical leadership in biodesulfurization.  The
remaining two patents issued in 1994 include "A Process for the
Desulfurization and the Desalting of Fossil Fuels" and "Microemulsion Process
for Direct Biocatalytic Desulfurization of Organosulfur Molecules."  The
patents issued in 1995 include "Multistage Process for Deep Desulfurization
of Fossil Fuels," "Method for Separating a Sulfur Compound from Carbonaceous
Materials" and "Continuous Process for Biocatalytic Desulfurization of
Sulfur-Bearing Heterocyclic Molecules."  In 1996, an additional five U.S.
patents were issued to the Company, including continuations in part on the
HDS/BDS patent first issued in 1993 and the desalting patent first issued in
1994 as well as two entirely new patents related to oil/water separations
technology and a novel process for the reduction of oil viscosity.  The
technologies to which these patents relate are expected to yield long-term
improvement in the economics of biodesulfurization for the Company.  In 1997,
an additional U.S. patent was issued to the Company relating to a method for
removing and separating metals from fossil fuels.  Patents issued to or
licensed by the Company begin to expire in the year 2010.

                                     15
<PAGE>

     The Company has filed patent applications in the U.S. and worldwide
under the Patent Cooperation Treaty as well as in targeted countries not
involved in the treaty such as Venezuela.  In total, the Company has rights
to 21 U.S. patents (including cell recombinant DNA and fundamental process
patents) and 32 foreign patents.  In addition, the Company has 14
applications pending in the U.S. patent office, and more than 70 foreign
patent applications pending to cover BDS process technology and the molecular
cloning of the biocatalyst gene. See "--Risk Factors--Patents and Proprietary
Technologies."

EMPLOYEES AND CONSULTANTS

     The Company believes that its success will be based, among other things,
on achieving and retaining scientific and technological superiority and on
identifying and retaining capable management in order to conduct a fully
integrated program of biorefining technology development.  The Company has
assembled a highly qualified team of scientists as well as executives with
extensive experience in the petroleum industry.  The Company's product
development program combines basic scientific disciplines, such as molecular
biology, microbial genetics, biochemistry and biochemical engineering, with
applied disciplines such as fermentation, process development, petroleum
product separations and recovery, and byproduct disposition expertise.

     As of December 31, 1997, the Company employed 84 people, 26 of whom hold
Ph.D. degrees and 13 of whom hold other advanced degrees.  The Company's
employees with doctoral degrees represent collective expertise in molecular
biology, microbiology, biochemistry, chemistry and chemical and process
engineering.  The Company believes that its relationship with its employees
is good.

GOVERNMENT REGULATION

     Certain of the Company's current and planned operations are, or may be,
subject to regulation under various federal and state laws pertaining to
protection of the environment and employee health and safety.  In the course
of its current research and development activities, the Company generates
small quantities of solid and hazardous wastes that are subject to regulation
under the Resource Conservation and Recovery Act ("RCRA") and various other
federal and state regulations.  The research and development activities of
the Company are also subject to the Occupational Safety and Health Act
("OSHA") and similar state laws and regulations.  Upon commercialization of
the Company's technology, the Company's operations will be subject to the
full scope of environmental and employee health and safety regulations
including not only RCRA and OSHA, but also the Clean Air Act, the Federal
Water Pollution Control Act, the Toxic Substances Control Act ("TSCA") and
other applicable state and federal environmental laws and regulations.
Although current information is not definitive enough to accurately predict
compliance requirements with such laws and regulations, the Company believes
that compliance will not materially affect its operations.

     Under TSCA, the U.S. Environmental Protection Agency ("EPA") regulates
the use of chemicals for commercial purposes, and the EPA has asserted that
it has jurisdiction under TSCA to regulate genetically engineered
microorganisms ("GEMs").  Prior to commercialization of the Company's
biocatalyst product, the Company will most likely be subject to the
Premanufacture Notice Requirements under TSCA in marketing its BDS
technology.  Under the Premanufacture Notice Requirements, if the EPA finds
that the Company's biocatalyst product poses an unreasonable risk to the
environment, it may establish controls on its manufacture, distribution or
disposal.  Based on written communication with the EPA, the Company does not
believe that compliance with TSCA will delay the commercialization of the BDS
process.

     Commercialization of the Company's technology outside the U.S. will
require compliance with the regulations of foreign countries.  In
anticipation of early commercialization in Europe, the Company has begun
efforts to prepare for compliance with European Union regulations for
genetically modified organisms ("GMOs").  Directive 90/219 of the European
Commission provides a framework for contained use of GMOs.  Each of the
member countries has enacted specific regulations consistent with this
directive.  Based upon discussions with authorities in France, Belgium and
the United Kingdom regarding their regulations under Directive 90/219, the
Company does not believe that compliance with such regulations will delay
commercialization of the BDS process in Europe.

                                   16
<PAGE>

RISK FACTORS

TECHNOLOGICAL UNCERTAINTY; RISKS ASSOCIATED WITH COMMERCIALIZATION OF BDS
TECHNOLOGY

     Since its inception, the Company has engaged primarily in research and
development related to its BDS process.  The Company's BDS process will
require substantial additional research, development and testing in order to
determine its commercial viability.  The Company has not proven its BDS
technology other than to a limited extent in laboratory, bench-scale and
pilot plant trials.  The Company's ability to make its BDS technology
commercially viable will depend in large part on its success in (i) achieving
improvement of its biocatalyst, including the manipulation of the genes
responsible for desulfurization activity to increase the reaction rate,
specificity and stability of the biocatalyst, (ii) improving the rate at
which sulfur molecules transfer from petroleum to the biocatalyst, (iii)
developing the fermentation process, (iv) contracting for the manufacture of,
or manufacturing, sufficient biocatalyst for use in commercial BDS units, (v)
developing a bioreactor for use with the BDS process capable of operating at
commercial levels of throughput and desulfurization, (vi) identifying
economically viable processes for commercial-scale sulfur byproduct
disposition and (vii) marketing its BDS systems effectively.  The
accomplishment of some or all of these objectives may take longer than
anticipated or may never occur.  If the accomplishment of any of these
objectives takes longer than anticipated, the Company may require additional
capital to continue the development and commercialization of  its BDS
technology, and there can be no assurance that such capital will be available
or that the Company will be able to successfully commercialize the BDS
technology.

HISTORY OF OPERATING LOSSES AND UNCERTAINTY OF FUTURE PROFITABILITY

     The Company has incurred net losses since its inception and expects its
losses to increase in the foreseeable future as it increases its expenditures
for the continued development and commercialization of its biorefining
technology.  The Company has not derived any revenues to date from the use or
sale of its biorefining technology and had an accumulated deficit of
$55,204,265 at December 31, 1997.  The time required for the Company to
become profitable is uncertain, and there can be no assurance that the
Company will achieve profitability on a sustained basis, if at all.

MANUFACTURE OF BIOCATALYST

     The Company currently intends to manufacture, at its own facility, only
a quantity of biocatalyst sufficient for its in-house research and pilot
plant needs.  The Company expects that the biocatalyst to be employed in the
commercial BDS process initially will be manufactured by a third party.  The
Company has had discussions regarding non-exclusive biocatalyst supply
arrangements with several parties that it believes are capable of satisfying
the Company's supply requirements.  If the Company is unable to enter into
agreements for the supply of commercial quantities of biocatalyst, the
Company may be forced to establish its own fermentation facilities.  This
alternative could delay the commercialization of the BDS process and would
require significant capital expenditures.

MARKET ACCEPTANCE

     The BDS process will require significant capital expenditures by
refiners and producers.  The refining and oil production industries
historically have been reluctant to accept new technologies.  There is a
risk, therefore, that the Company will have difficulty in obtaining the
refining and oil production industries' acceptance of the BDS process.  Also,
the rate of purchase of the Company's BDS process may be affected by economic
conditions in the refining and oil production industries.  The refining and
oil production industries have been subject to periods of depressed
profitability and are substantially affected by fluctuations in the price of
crude oil and finished products.   Oil production and drilling activity are
also largely dependent on the level and volatility of oil prices.

                                      17
<PAGE>

RELIANCE ON ENVIRONMENTAL REGULATION

     Demand for the BDS units and services being developed by the Company is
based, in large part, on legislation and regulations in the United States,
Europe and Asia that specify stringent environmental quality standards and
that impose penalties for noncompliance.  The amendments to the federal Clean
Air Act required the EPA to develop maximum sulfur content standards for
highway diesel fuel and new standards for gasoline content.  In response, EPA
promulgated regulations regarding the maximum sulfur content of highway
diesel fuel in 1990 and regulations for a reformulated gasoline program in
1994.  Similar regulations regarding the maximum sulfur content of diesel
fuel have been adopted in Western Europe and certain Asian countries.  The
Company also expects that European and Asian countries will adopt and enforce
additional standards requiring a reduction in the sulfur content of petroleum
products.  Any reduction of severity in current regulations, lax enforcement
of current regulations, delay in implementation and enforcement of planned
regulations, or reduction of severity in planned or anticipated regulations
worldwide may delay or decrease the worldwide demand for the Company's BDS
process.

PATENTS AND PROPRIETARY TECHNOLOGIES

     The Company's success is heavily dependent upon its proprietary BDS and
other technologies.  In total, the Company has rights to 21 U.S. and 32
foreign patents.  In addition, the Company has 14 patent applications pending
in the U.S. patent office and more than 70 foreign patent applications
pending to cover BDS process technology and the molecular cloning of the
biocatalyst genes. There can be no assurance concerning the scope, validity
or value of such patents, patent applications or related intellectual
property rights. Furthermore, there can be no assurance that the steps taken
by the Company to protect its proprietary technologies will be adequate to
prevent misappropriation of these technologies by third parties, particularly
where third parties may independently develop similar technologies, duplicate
any of the Company's technologies or design around any proprietary
technologies owned by the Company.  Any such misappropriation could have a
material adverse effect on the Company.  Although the Company does not
believe any of its proprietary technologies infringe the patent or other
proprietary rights of third parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future or
that any such claims will not require the Company to enter into license
arrangements or result in litigation.  In the event that the Company  may be
required to obtain licenses to patents or other proprietary rights of third
parties, there can be no assurance that any required licenses would be made
available to the Company on terms acceptable to the Company, or at all.  If
the Company does not obtain such licenses, it could encounter delays in
commercializing its BDS technology while it attempts to design around such
patents or could find that the commercialization of its BDS technology could
be foreclosed.  In addition, to the extent that the Company seeks to protect
its proprietary technologies overseas, there can be no assurance that steps
taken by the Company to protect its proprietary technologies will be adequate
under the laws of certain foreign countries, which may not protect the
Company's proprietary rights to the same extent as do the laws of the United
States.

     The Company relies on secrecy to protect its proprietary technologies in
addition to patent protection, especially where patent protection is not
believed to be appropriate or obtainable.  The Company has entered into
confidentiality agreements with its employees, licensors and certain of its
collaborators and consultants.  There can be no assurance that such
obligations of confidentiality will be honored, that other parties will not
otherwise gain access to the Company's trade secrets or that the Company can
effectively protect its rights to its unpatented trade secrets.  See " --
Patents and Proprietary Technology."

DEPENDENCE ON COLLABORATORS

     The Company has been dependent on collaborative relationships for
development of certain key components of the BDS process, and the Company's
commercialization strategy contemplates continued dependence on collaborative
relationships.  The Company has signed an agreement with M. W. Kellogg to
provide the basic engineering designs necessary for BDS implementation at
customer sites and an agreement with Petrolite relating to the development of
the Company's BDS technology and the construction and operation of the

                                      18
<PAGE>

Company's pilot plant.  Each alliance partner is currently providing
technical assistance during the development of the BDS process.  The Company
also has entered into an alliance with TOTAL relating to the application of
the BDS process to diesel fuel, an alliance with Koch to develop the BDS
process for certain gasoline products, and an alliance with Texaco to develop
a process for desulfurizing high-sulfur crude oil.  Collaborative
arrangements involve risks that the participating partners may disagree on
business decisions and strategies, which may result in delays, additional
costs or litigation.  The inability of the Company to successfully maintain
existing collaborative relationships or enter into new collaborative
relationships could have a material adverse effect on the Company.  See "--
Alliances."

NEED FOR ADDITIONAL FUNDS

     EBC's operations to date have consumed substantial amounts of cash.  The
negative cash flow from operations is expected to continue over the
foreseeable future.  The Company believes that its existing capital resources
will be sufficient to fund its operations through early 1999.  The report of
Arthur Andersen LLP, the Company's independent auditors, on EBC's financial
statements for the year ended December 31, 1997 includes an emphasis
paragraph with respect to the Company's need for future financing to develop
and commercialize its technology. Thereafter, the Company will need to raise
additional funds to continue development and commercialization of its
biorefining technology.  The Company may seek additional funding through
public or private financings, including equity financings, and through
collaborative arrangements.  Adequate funds for these purposes, whether
obtained through financial markets or collaborative or other arrangements
with corporate partners or from other resources, may not be available when
needed or on terms acceptable to the Company.  The Company's inability to
raise funds when needed may require the Company to delay, scale back or
eliminate some or all of its research and product development programs. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."

LIMITED MARKETING EXPERIENCE

     The Company has only limited experience marketing its BDS technology,
and has assembled only a small sales and marketing staff.  There can be no
assurance that the Company will be able to successfully implement its sales
and marketing plan.

DEPENDENCE ON KEY PERSONNEL

     The Company is dependent on the efforts of its executive officers,
scientists and other key employees, the loss of any one of whom could have a
materially adverse effect on the Company's business.  Shortages of qualified
scientists within certain disciplines may occur and competition for the
services of qualified scientists may intensify.  The Company may not be
successful in recruiting or retaining such personnel in the future.

GOVERNMENT REGULATION

     Certain of the Company's current and planned operations are, or may be,
subject to regulation under various federal and state laws pertaining to
protection of the environment and employee health and safety.  In the course
of its current research and development activities, the Company generates
small quantities of solid and hazardous wastes that are subject to regulation
under the Resource Conservation and Recovery Act ("RCRA") and various other
federal and state regulations.  The research and development activities of
the Company are also subject to the Occupational Safety and Health Act
("OSHA") and similar state laws and regulations.  Upon commercialization of
the Company's technology, the Company's operations will be subject to the
full scope of environmental and employee health and safety regulations
including not only RCRA and OSHA, but also the Clean Air Act, the Federal
Water Pollution Control Act, the Toxic Substances Control Act ("TSCA") and
other applicable state and federal environmental laws and regulations.  In
addition, commercialization of the BDS technology outside the United States
will require compliance with the regulations of foreign countries.  Failure
to comply with applicable regulations could have an adverse effect on the
Company.  See "--Government Regulation."

                                      19
<PAGE>

COMPETITION

     The Company expects to encounter competition from suppliers of existing
desulfurization technology in the marketing of the Company's BDS units.
These companies have well-established relationships in the refining industry
and have substantially greater financial, technical and human resources than
the Company. In addition, new desulfurization technologies could be developed
that are competitive with or superior to the Company's BDS technology.   See
"--Competition."

ITEM 2. PROPERTIES

FACILITIES

     The Company's corporate offices and laboratories are situated in a
28,500 square-foot leased building located at 4200 Research Forest Drive in
The Woodlands, Texas, a suburb of Houston, Texas.  Pursuant to the lease,
monthly payments of $30,440 are required for base rent.  The lease for this
facility expires in 1998 and the Company has a renewal option extending the
lease to 2003.  Approximately 20,500 square feet of this space is devoted to
research and development.  The facility includes two laboratories designed
for molecular biology/microbiology/microbial physiology, a process
engineering laboratory, a biochemistry laboratory, a media preparation
laboratory, and an analytical laboratory that provides all the routine sulfur
and hydrocarbon analyses for the operation.  In March 1995 the Company
completed construction of a fermentation laboratory, microbiology laboratory
and accelerated development program laboratories.

     See "Item 1. Business - Patents and Proprietary Technology" for a
description of the Company's patents.

ITEM 3. LEGAL PROCEEDINGS.

     There are no material pending legal proceedings required to be reported
in response to this item.

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

     No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended December 31, 1997.


                                      20
<PAGE>

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS.

     The Company's common stock (symbol: ENBC) is traded on the Nasdaq
National Market.  The following table sets forth the range of high and low
sales prices for each calendar quarterly period in the two years ended
December 31, 1997 as reported on the Nasdaq National Market:


<TABLE>
  YEAR ENDED DECEMBER 31, 1997                                  HIGH         LOW
  ----------------------------                                -------      -------
 <S>                                                          <C>          <C>
  First Quarter . . . . . . . . . . . . . . . . . . . .       $  8.25      $  5.00
  Second Quarter  . . . . . . . . . . . . . . . . . . .          6.50         4.00
  Third Quarter . . . . . . . . . . . . . . . . . . . .          6.63         4.00
  Fourth Quarter  . . . . . . . . . . . . . . . . . . .          7.81         2.63


  YEAR ENDED DECEMBER 31, 1996                                  HIGH         LOW
  ----------------------------                                -------      --------
  First Quarter . . . . . . . . . . . . . . . . . . . .       $  8.75      $  5.25
  Second Quarter  . . . . . . . . . . . . . . . . . . .          9.50         5.50
  Third Quarter . . . . . . . . . . . . . . . . . . . .          8.63         4.38
  Fourth Quarter  . . . . . . . . . . . . . . . . . . .          7.50         4.88
 </TABLE>

     As of March 14, 1998, 12,251,434 shares of common stock were outstanding
and the Company had approximately 118 shareholders of record.

DIVIDENDS

     EBC has never paid cash dividends on its common stock. The Company
currently intends to retain any earnings to finance the growth and development
of its business and does not anticipate paying cash dividends in the foreseeable
future.


                                      21
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data set forth below with respect to the
Company's statements of operations for each of the five years in the period
ended December 31, 1997 and with respect to the Company's balance sheets as
of December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the
audited Financial Statements of the Company.  The Company's independent
public accountants, Arthur Andersen LLP, have included an emphasis
paragraph in their report on the Company's Financial Statements as of
December 31, 1997 to the effect that in order to develop and
commercialize its technology, additional financing will be required.
The financial data should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto
included elsewhere in this report.

<TABLE>
                                                                  YEAR ENDED DECEMBER 31,
                                                                  -----------------------
                                               1993         1994            1995               1996            1997
                                            ----------   ----------      -----------        ----------     ------------
<S>                                         <C>          <C>             <C>                <C>            <C>
STATEMENTS OF OPERATIONS DATA:                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:

  Sponsored research revenues  . . . . . . .$    1,134   $    1,148      $     1,567        $    1,778      $     1,652
  Interest and investment income . . . . . .       510          573            1,401               807              650
                                            ----------   ----------      -----------        ----------     ------------
    Total revenues . . . . . . . . . . . . .     1,644        1,721            2,968             2,585            2,302
Costs and Expenses:
  Research and development . . . . . . . . .     4,894        5,723            7,338             9,210            9.087

  General and administrative . . . . . . . .     2,037        2,978            2,877             2,608            2,754
                                            ----------   ----------      -----------        ----------     ------------
    Total costs and expenses . . . . . . . .$    6,931   $    8,701      $    10,215       $    11,818      $    11,841
                                            ----------   ----------      -----------        ----------     ------------
Net loss . . . . . . . . . . . . . . . . . .$   (5,287)  $   (6,980)     $    (7,247)      $    (9,233)     $    (9,539)
                                            ----------   ----------      -----------        ----------     ------------
                                            ----------   ----------      -----------        ----------     ------------
Net loss per common share - basic and
 diluted . . . . . . . . . . . . . . . . . .$    (0.57)  $    (0.75)(1)  $     (0.95)(1)    $    (1.04)(1)  $     (1.09)(2)
                                            ----------   ----------      -----------        ----------     ------------
                                            ----------   ----------      -----------        ----------     ------------
Shares used in computing net loss
 per common share - basic and
 diluted  . . . . . . . . . . . . . . . . .  9,195,517    9,967,645       10,227,595        11,248,029       11,769,458
                                            ----------   ----------      -----------        ----------     ------------
                                            ----------   ----------      -----------        ----------     ------------
</TABLE>
--------------

(1) Net loss per common share has been computed by dividing the net loss, which
    has been increased for periodic accretion and dividends on the Series A
    Preferred Stock issued in October 1994, by the weighted average number of
    shares of common stock outstanding during the period.

(2) Net loss per common share has been computed by dividing the net loss, which
    has been increased for periodic accretion and dividends on the Series A
    Preferred Stock issued in October 1994 and the Series B Preferred Stock
    issued in February and March 1997, by the weighted average number of
    shares of Common Stock outstanding during the period.

<TABLE>
                                                                  DECEMBER 31,
                                                                  ------------

                                                     1993      1994        1995        1996        1997
                                                     ----      ----        ----        ----        ----
                                                                      (IN THOUSANDS)
<S>                                               <C>        <C>         <C>         <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . .     $  6,135   $ 28,284    $  6,172    $  3,106     $  9,661
Working capital . . . . . . . . . . . . . . .       11,650     26,269      15,084       8,770       10,102
Total assets  . . . . . . . . . . . . . . . .       16,055     32,175      23,809      13,711       14,965
Long-term capital lease obligations . . . . .           32         21          11          --           --
Accumulated deficit . . . . . . . . . . . . .      (14,501)   (21,907)    (31,321)    (42,713)     (55,204)
Total stockholders' equity  . . . . . . . . .       12,891     28,444      21,577      12,715       13,698
</TABLE>

                                      22
<PAGE>

ITEM 7. 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 of its resources to 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 losses since inception and expects to incur
substantial losses for at least the next several years, due primarily to the
increase in its research and development activities and acceleration of the
development of its biocatalyst, fermentation and bioreactor programs.  The
Company expects that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial. As of December 31, 1997, the Company's
accumulated deficit was $55,204,265.

RESULTS OF OPERATIONS

     The Company had total revenues for the years ended December 31, 1995,
1996 and 1997 of $2,967,954, $2,585,419 and $2,302,733, respectively.
Sponsored research revenues increased by $211,354 from 1995 to 1996,
primarily as a result of the Company's grant from the National Institute of
Standards and Technology ("NIST") and a research and development agreement
with The Carbide/Graphite Group, Inc. ("Carbide/Graphite").  Sponsored
research revenues decreased by $126,907 from 1996 to 1997, primarily as a
result of a decrease in deferred revenue recognized under the Petrolite
agreement offset in part by an increase in revenues from the NIST and
Department of Energy ("DOE") grants and Carbide/Graphite research and
development agreement.  Payments under the Petrolite agreement were initiated
on April 1, 1992 and totaled $5,400,000 through March 1994. No payments were
received from Petrolite in 1995, 1996 or 1997.  In each of the years ended
December 31, 1995 and 1996, $1,134,000 was recognized as revenue and in the
year ended December 31, 1997, $13,500 was recognized as revenue under the
Petrolite agreement; as of December 31, 1995, 1996 and 1997, the Company had
balances of $1,147,500, $13,500 and zero, respectively, of deferred revenues
under the Petrolite agreement.  The amount recognized was based on the total
payments received in relation to the total research and development costs to
be incurred under the terms of the agreement.  Interest and investment income
decreased by $593,889 and $156,287 in 1996 and 1997, respectively, as a
result of a decrease in cash and cash equivalents and related investments in
marketable securities.

     The Company had research and development expenses for the years ended
December 31, 1995, 1996 and 1997 of $7,338,319, $9,210,227 and $9,087,150,
respectively.  The increase of $1,871,908 from 1995 to 1996 resulted from the
addition of nine personnel in the research and development department,
additional office space acquired during the first quarter of 1996 for
research personnel and a $1,000,000 option payment to Petrolite. The decrease
of $123,077 from 1996 to 1997 reflects the nonrecurring payment to Petrolite
in 1996 of $1,000,000, offset in part by payment of pilot plant operating
expenses to Baker Petrolite, the hiring of a vice president for process
development and increases in catalyst production.  The Company expects its
research and development expenses to decrease during 1998 as a result of the
implementation of certain reductions in costs and expenses to conserve its
resources for the development of the Company's proprietary BDS technology.
The Company's research and development expenses will increase substantially,
however, if the Company makes the $9,000,000 payment to exercise the
Petrolite option in 1998, the entire amount of which will be recorded as a
research and development expense.  The Company does not presently intend to
exercise the Petrolite option until it has raised additional funds or
received additional capital.

     The Company had general and administrative expenses for the years ended
December 31, 1995, 1996 and 1997 of  $2,877,351, $2,607,972 and $2,754,137,
respectively. The $269,379 decrease from 1995 to 1996 resulted primarily from
decreased consulting fees, legal fees and insurance.  The $146,165 increase
from 1996 to 1997 resulted primarily from the severance compensation payable
to the Company's former chief executive officer in 1997.  The Company expects
to decrease its general and administrative expenses in 1998 as a result of
the implementation of certain reductions in costs and expenses to conserve
its resources for the development of the Company's proprietary BDS technology.

                                      23
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     In February 1997, the Company completed a convertible preferred stock
offering resulting in net cash proceeds of approximately $10.2 million in
exchange for the sale of 224,100 shares of Series B Convertible Preferred
Stock. In October 1994, the Company completed a convertible preferred stock
offering resulting in net cash proceeds of approximately $22.2 million in
exchange for the sale of 480,000 shares of Series A Convertible Preferred
Stock.  The Company completed its initial public offering in the first
quarter of 1993, resulting in net cash proceeds of approximately $14.9
million.

     For the year ended December 31, 1997, the Company used $8,222,274 of
funds in operating activities, and incurred $682,017 of capital expenditures.
At December 31, 1997, the Company had cash, cash equivalents, and short term
investments totaling $10,354,589 and working capital of $10,101,625.

     The Company expects to incur substantial additional research and
development expenses, including expenses associated with biocatalyst,
fermentation and bioreactor development.  The Company has 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 collaborative agreements, as discussed below.  The
Company also expects its general and administrative expenses to decrease as
it reduces its marketing, sales and other personnel to conserve its resources
for the development of the Company's proprietary BDS technology.

     The Company signed an agreement with M.W. Kellogg in August 1994, to
collaborate on the development and commercialization of the Company's
proprietary biocatalytic desulfurization technology for reducing sulfur
levels in petroleum streams.  Under the terms of the collaboration, M.W.
Kellogg will serve as an engineering partner to the Company during completion
of the BDS development process and will be the exclusive provider of the
basic engineering design services required for the commercial BDS units.  In
return for these services, M.W. Kellogg will receive a portion of the site
license fee generated by the sale of BDS units.  The collaboration has a
minimum term of at least five years or the completion of 20 BDS units,
whichever is longer, and has applications to all biorefining technologies the
Company develops.  During the first phase of the collaboration, M.W. Kellogg
provided 500 engineering work hours of service at no cost to the Company.
M.W. Kellogg has agreed to provide an additional 1,500 work hours of service
at M.W. Kellogg offices at reduced rates, of which 500 had been utilized by
the Company at December 31, 1997.

     In July 1994, the Company entered into an Agreement with TOTAL to
collaborate on the application of the Company's biodesulfurization process to
diesel fuel streams.  Following the evaluation of results from Energy
BioSystems' domestic pilot operation, it is anticipated that TOTAL will build
and operate at TOTAL's expense a pilot BDS unit at TOTAL's European Centre for
Research and Technology.  Upon successful economic trials of the pilot unit,
TOTAL plans to build the first commercial BDS unit at one of its refineries.

     In December 1993, the Company entered into a research collaboration
agreement with Koch, to facilitate the development of BDS technology in
refinery petroleum streams.  Under the terms of the alliance, the Company
will be primarily responsible for improving the performance of the
biocatalyst used in the desulfurization process.  Koch will be primarily
responsible for selecting and improving the target refinery stream as well as
testing desulfurized product quality.  Koch will also provide engineering
support as needed in the development of a BDS unit for Koch's operation.  The
Company and Koch will each bear their own costs and expenses incurred in
connection with the collaboration. The Company expects that the development
alliance with Koch will facilitate commercialization of the Company's BDS
technology.

     In October 1993, the Company amended its existing Collaboration
Agreement with Petrolite.  The Collaboration Agreement, as amended (the
"Agreement"), provides for an expanded territory covered by the Agreement and
permits the use of third party engineering and construction companies to
assist with certain matters.  The Agreement expands the territory of
Petrolite's participation from North America, Venezuela and Mexico to the

                                      24
<PAGE>

entire world.  In return for the expansion of the territory covered by the
Agreement, the Company's primary participation rate was increased from 70% of
gross profits from biodesulfurization unit sales and fees to 78% of worldwide
gross profits from such sales and fees.  Additionally, the Agreement allows
the Company, after obtaining the advice and input of Petrolite, to enter into
an alliance with one or more world-class third party engineering and
construction firms to provide certain equipment and services in connection
with the design and construction of biodesulfurization units.

     In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite.  Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996 in exchange for the
option and the extension of Petrolite's obligations to provide operational
and technical support for the pilot plant from September 1, 1996 through
December 31, 1998.  If the Company exercises its option, the percentage of
site license fees and adjusted gross profit payable to Petrolite will be
reduced to 9.5% from 22%, in exchange for which the Company will (i) assume
responsibility for servicing the BDS units on site at customer locations,
(ii) pay Petrolite an additional $9 million in cash and (iii) issue to
Petrolite a warrant entitling Petrolite to purchase 138,889 shares of Common
Stock at an exercise price of $7.20 per share.  The Company may exercise the
Petrolite option at any time on or before the earlier to occur of (i) ten
business days following the close of any equity financing by the Company in
which the gross cash proceeds raised in such financing (together with cash
proceeds raised by the Company in any other equity financing after the date
of the option agreement, if applicable) equal or exceed $25 million and (ii)
December 30, 1998.  The Company does not plan to exercise the option unless
and until it has raised substantial additional funds or received additional
capital.

     In July 1993, the Company entered into a research collaboration
agreement with Texaco to facilitate the development of the Company's BDS
technology in crude oil.  Under the terms of the alliance, the Company will
be primarily responsible for improving the performance of the biocatalyst
used in the desulfurization process.  Texaco will be primarily responsible
for field operations and analytical chemistry work with respect to the
application of the Company's BDS technology to crude oil.  The Company and
Texaco will each bear their own costs and expenses incurred in connection
with the collaboration.  The Company expects that the development alliance
with Texaco will facilitate commercialization of the Company's BDS technology.

     The Company entered into a license agreement with Stanford University in
November 1993 for the use of its patented recombinant DNA technology which
may be employed in the development of the Company's biocatalytic
desulfurization process.  The license requires a minimum annual advance on
earned royalties of $10,000.  The final payment required under this license
was made in 1997.

     The Company has experienced negative cash flow from operations since its
inception and has funded its activities to date primarily from equity
financings and sponsored research revenues.  The Company will continue to
require substantial funds to continue its research and development activities
and to market, sell and commercialize its technology.  The Company believes
that its available cash, investments and interest income will be adequate to
satisfy its funding operations through 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

                                      25
<PAGE>

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     None.

ITEM 8.  FINANCIAL STATEMENTS.

     The financial statements required by this Item are incorporated under
Item 14 in Part IV of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

     None.


                                      26
<PAGE>

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this Item as to the directors and executive
officers of the Company is hereby incorporated by reference from the
information appearing under the captions "Election of Directors" and
"Executive Officers" in the Company's definitive proxy statement which
involves the election of directors and is to be filed with the Securities and
Exchange Commission ("Commission") pursuant to the Securities Exchange Act of
1934 within 120 days of the end of the Company's fiscal year on December 31,
1997.

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this Item as to the management of the
Company is hereby incorporated by reference from the information appearing
under the captions "Executive Compensation" and "Election of Directors -
Director Compensation" in the Company's definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
the Company's fiscal year on December 31, 1997.  Notwithstanding the
foregoing, in accordance with the instructions to Item 402 of Regulation S-K,
the information contained in the Company's proxy statement under the
sub-heading "Report of the Compensation Committee of the Board of Directors"
and "Performance Graph" shall not be deemed to be filed as part of or
incorporated by reference into this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this Item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference
from the information appearing under the caption "Security Ownership of
Certain Beneficial Owners and Management" to the Company's definitive proxy
statement which involves the election of directors and is to be filed with
the Commission pursuant to the Securities Exchange Act of 1934 within 120
days of the end of the Company's fiscal year on December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item as to certain business
relationships and transactions with management and other related parties of
the company is hereby incorporated by reference to such information appearing
under the captions "Certain Transactions" and "Compensation Committee
Interlocks and Insider Participation" in the Company's definitive proxy
statement which involves the election of directors and is to be filed with
the Commission pursuant to the Securities Exchange Act of 1934 within 120
days of the end of the Company's fiscal year on December 31, 1997.

                                      27
<PAGE>

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

    (a) Documents Filed as a Part of this Report

1.  FINANCIAL STATEMENTS:
                                                                   PAGE
                                                                   ----
<TABLE>
<S>                                                                <C>
 Report of Independent Public Accountants  . . . . . . . . . . .    F-1
 Balance Sheets as of December 31, 1996 and 1997 . . . . . . . .    F-2
 Statements of Operations for the Years Ended December 31,
  1995, 1996 and 1997. . . . . . . . . . . . . . . . . . . . . .    F-3
 Statements of Stockholders' Equity for the Period from
  December 31, 1994 to December 31, 1997 . . . . . . . . . . . .    F-4
 Statements of Cash Flows for the Years Ended December 31,
 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . .    F-5
 Notes to Financial Statements . . . . . . . . . . . . . . . . .    F-6
</TABLE>

     All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.

2.   EXHIBITS:

     Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Commission and the Nasdaq Stock Market.  Upon
request to the Company and payment of a reasonable fee, copies of the
individual exhibits will be furnished.


EXHIBIT NO.                              DESCRIPTION
-----------                              -----------

3.1(a) Amended and Restated Certificate of Incorporation of Registrant
       (incorporated by reference to Exhibit 2 filed with Post-
       Effective Amendment No. 1 to the Registrant's Registration
       Statement on Form 8-A as filed with the Commission on March 15,
       1993).

3.1(b) Certificate of the Powers, Designations, Preferences and Rights
       of the Series A Convertible Preferred Stock (incorporated by
       reference to Exhibit 10.2 to the Company's Quarterly Report on
       Form 10-Q for the quarter ended September 30, 1994).

3.1(c) Certificate of Designation of Series One Junior Participating
       Preferred Stock of the Company (incorporated by reference to
       Exhibit 3.1(c) to the Company's Annual Report on Form 10-K for
       the year ended December 31, 1994).

3.1(d) Certificate of the Powers, Designation, Preferences and Rights
       of the Series B Convertible Preferred Stock (incorporated by
       reference to Exhibit 3.1(d) to the Company's Annual Report on
       Form 10-K for the year ended December 31, 1996).

3.2    Bylaws of Registrant (incorporated by reference to Exhibit 3
       filed with Post-Effective Amendment No. 1 to the Registrant's
       Registration Statement on Form 8-A as filed with the Commission
       on March 15, 1993).

4.1    Form of Stock Purchase Agreement, dated as of October 27, 1994,
       by and between the Company and the Purchasers of the Series A
       Convertible  Preferred Stock (incorporated by reference to Exhibit
       10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
       ended September 30, 1994).


                                      28
<PAGE>

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

   4.2  Form of Stock Purchase Agreement, dated as of February 21, 1997,
        by and between the Company and the Purchasers of the Series B
        Convertible  Preferred Stock (incorporated by reference to
        Exhibit 4.2 to the Company's Annual Report on Form 10-K for the
        year ended December 31, 1996).

   4.3  Form of Stock Exchange Agreement, dated as of February 21, 1997,
        by and between the Company and the Exchanging Holders of Series
        A Convertible Preferred Stock (incorporated by reference to
        Exhibit 4.3 to the Company's Annual Report on Form 10-K for the
        year ended December 31, 1996).

   4.4  Stockholder Rights Agreement, dated as of March 8, 1995, between
        the Company and Society National Bank (incorporated by reference
        to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
        March 8, 1995).

  10.1  License and Technology Assistance Agreement, dated January 15,
        1991, between the Company and Institute of Gas Technology
        ("IGT") (incorporated by reference to Exhibit 10.1 to the
        Company's Registration Statement on Form S-1 (No. 33-56718)).

  10.2  First Amendment to License and Technology Assistance Agreement,
        dated June 25, 1992, between the Company and IGT (incorporated
        by reference to Exhibit 10.2 to the Company's
        Registration Statement on Form S-1 (No. 33-56718)).

  10.3  Second Amendment to License and Technology Assistance Agreement,
        dated September 23, 1993, between the Company and IGT
        (incorporated by reference to Exhibit 10.21 to the Company's
        Annual Report on Form 10-K for the fiscal year ended
        December 31, 1993).

  10.4  Agreement, dated August 27, 1992, among the Company, IGT, the
        University of North Dakota ("UND") and Dr. Kevin Young
        (incorporated by reference to Exhibit 10.3 to the Company's
        Registration Statement on Form S-1 (No. 33-56718)).

  10.5  Agreement, dated September 30, 1992, among the Company, UND and
        Dr. Kevin Young (incorporated by reference to Exhibit 10.4 to
        the Company's Registration Statement on Form S-1 (No. 33-56718)).

  10.6  Collaboration Agreement, dated March 5, 1992, between the
        Company and Petrolite Corporation (incorporated by reference to
        Exhibit 10.5 to the Company's Registration Statement on
        Form S-1 (No. 33-56718)).

  10.7  First Amendment to Collaboration Agreement, dated July 1, 1992,
        between the Company and Petrolite Corporation (incorporated by
        reference to Exhibit 10.16 to the Company's Registration
        Statement on Form S-1 (No. 33-56718)).

  10.8  Second Amendment to Collaboration Agreement, dated October 18,
        1993, between the Company and Petrolite Corporation
        (incorporated by reference to Exhibit 99.1 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended September
        30, 1993).

  10.9  Third Amendment and Addendum to Collaboration Agreement, dated
        August 24, 1995, between the Company and Petrolite Corporation
        (incorporated by reference to Exhibit 10.36 to the Company's
        Annual Report on Form 10-K for the year ended December 31,
        1996).


                                     29
<PAGE>

EXHIBIT NO.                      DESCRIPTION
-----------                      -----------

  10.10 Fourth Amendment and Addendum to Collaboration Agreement, dated
        October 25, 1996, between the Company and Petrolite Corporation,
        as  modified by Letter Agreement dated December 30, 1996
        (incorporated by reference to Exhibit 10.37 to the Company's
        Annual Report on Form 10-K for the year ended December 31,
        1996).

  10.11 Lease Agreement, dated January 24, 1994, between The Woodlands
        Corporation and the Company (incorporated by reference to
        Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
        fiscal year ended December 31, 1993).

  10.12 Lease Agreement, dated May 24, 1993, between the Company and The
        Woodlands Corporation (incorporated by reference to Exhibit 99.2
        to the Company's Quarterly Report on Form 10-Q for the quarter
        ended September 30, 1993).

  10.13 Registration Agreement, dated January 30, 1992, among the
        Company, The Travelers Indemnity Company and Gryphon Ventures
        II, Limited Partnership (incorporated by reference to Exhibit 10.7
        to the Company's Registration Statement on Form S-1 (No. 33-56718)).

  10.14 Registration Agreement, dated April 29, 1991, between the
        Company and Gryphon Ventures II,  Limited Partnership
        (incorporated by reference to Exhibit 10.8 to
        the Company's Registration Statement on Form S-1 (No. 33-
        56718)).

10.15** Energy BioSystems Corporation 1992 Stock Compensation Plan
        (incorporated by reference to Exhibit 10.10 to the Company's
        Registration Statement on Form S-1 (No. 33-56718)).

10.16** Energy BioSystems Corporation Non-Employee Director Option Plan
        (incorporated by reference to Exhibit 10.19 to the Company's
        Registration Statement on Form S-1 (No. 33-96096)).

10.17** Energy BioSystems Corporation 1997 Stock Option Plan (incorporated by
        reference to Exhibit 10.1 to the Company's Quarterly Report on
        Form 10-Q for the quarter ended March 31, 1997).

10.18** Simplified  Employee Pension Plan Retirement Plan Adoption
        Agreement (incorporated by reference to Exhibit 10.15 to the
        Company's Registration Statement on Form S-1 (No. 33-56718)).

10.19** Employment Agreement, dated January 31, 1996, between the
        Company and Daniel J. Monticello (incorporated by reference to
        Exhibit 10.10 to the Company's Annual Report on Form 10-K for
        the year ended December 31, 1996).

10.20** Consultant Agreement between the Company and John T. Preston
        (incorporated by reference to Exhibit 10.12 to the Company's
        Registration Statement on Form S-1 (No. 33-56718)).

10.21** Employment Agreement, dated August 21, 1991, between the Company
        and John H. Webb (incorporated by reference to Exhibit 10.13 to
        the Company's Registration Statement on Form S-1 (No. 33-
        56718)).

10.22** Amendment No. 1 to Employment Agreement, dated as of January 15,
        1996, between the Company and John H. Webb (incorporated by
        reference to Exhibit 10.35 to the Company's Annual Report on
        Form 10-K for the year ended December 31, 1995).

                                       30
<PAGE>

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

*10.23** Employment Termination and Severence Agreement, dated as of Sepember
         30, 1997, between the Company and John H. Webb.

 10.24** Employment Agreement, dated July 18, 1995, between the Company
         and Paul G. Brown, III (incorporated by reference to Exhibit 10.14
         to the Company's Registration Statement on Form S-1 (No. 33-96096)).

 10.25** Employment Agreement, dated July 18, 1995, between the Company
         and Mark W. John (incorporated by reference to Exhibit 10.15 to
         the Company's Registration Statement on Form S-1 (No. 33-96096)).

*10.26   Employment Agreement, dated October 1997, between the Company
         and Michael A. Pacheco.

 10.27   Research Agreement, dated November 8, 1993, between the Company
         and The University of Notre Dame (incorporated by reference to
         Exhibit 10.19 to the Company's Registration Statement on Form S-
         1 (No. 33-56718)).

 10.28   Research Collaboration Agreement, dated July 8, 1993, between
         the Company and Texaco, Inc. (incorporated by reference to
         Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1993).

 10.29   Extension and Assignment of Research Collaboration Agreement,
         dated June 23, 1995, between the Company and Texaco Inc.
         (incorporated by reference to the similarly numbered exhibits to
         the Company's Registration Statement on Form S-1 (No. 3-96096)).

 10.30   Extension and Assignment of Research Collaboration Agreement,
         dated July 3, 1996, between the Company and Texaco Group, Inc.
         (incorporated by reference to Exhibit 10.1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30,
         1996).

 10.31   Extension and Assignment of Research Collaboration Agreement, dated
         June 30, 1997, between the Company and Texaco Group, Inc.
         (incorporated by reference to Exhibit 10.1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

 10.32   Letter Agreement dated February 10, 1994, between The M. W.
         Kellogg Company and the Company (incorporated by reference to
         Exhibit 10.22 to the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1993).

 10.33   Letter Agreement for Accelerated Development Program dated
         December 8, 1993, between the Company and Koch Refining Company
         (incorporated by reference to Exhibit 10.23 to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1993).

                                      31
<PAGE>

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

  10.34 License Agreement dated November 1, 1993, between the Company
        and Stanford University (incorporated by reference to Exhibit
        10.25 to the Company's Annual Report on Form 10-K for the fiscal
        year ended December 31, 1993).

  10.35 Collaboration Agreement dated July 7, 1994, between the Company
        and Total Raffinage Distribution S.A. (incorporated by reference
        to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q
        for the second quarter ended June 30, 1994).

  10.36 Research Agreement, dated July 1, 1994, between the Company and
        Massachusetts Institute of Technology (incorporated by reference
        to Exhibit 10.27 to the Company's Annual Report on Form 10-K for
        the year ended December 31, 1994).

  10.37 Research Agreement, dated November 8, 1994, between the Company
        and The University of Notre Dame (incorporated by reference to
        Exhibit 10.28 to the Company's Annual Report on Form 10-K for
        the year ended December 31, 1994).

  10.38 Research, Option and License Agreement, dated December 15, 1994,
        between the Company and the University of Houston (incorporated
        by reference to Exhibit 10.29 to the Company's Annual Report on
        Form 10-K for the year ended December 31, 1994).

  10.39 Cooperative Agreement between the Company and the National
        Institute of Standards and Technology (incorporated by reference
        to Exhibit 10.30 to the Company's Annual Report on Form 10-K for
        the year ended December 31, 1994).

  *11.1 Computation of earnings per share.

  *23.1 Consent of Arthur Andersen LLP.

  *27.1 Financial Data Schedule.

------------------
 * Filed herewith
** Management contract or compensatory plan.

   (b) Reports on Form 8-K

   None.




                                      32
<PAGE>


                                  SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.


                              ENERGY BIOSYSTEMS CORPORATION


                              By: /s/ Ramon Lopez
                                  --------------------------------
                                      Ramon Lopez
                                      CHAIRMAN OF THE BOARD

DATED the 27th day of March, 1998.

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED:


          NAME                             TITLE                  DATE
          ----                             -----                  ----

/s/ Ramon Lopez                  Chairman of the Board       March 27, 1998
---------------------------       (Principal  executive
Ramon Lopez                       officer)

/s/ Paul G. Brown, III           Vice President--Finance     March 27, 1998
---------------------------       and Administration
Paul G. Brown, III                (Principal financial and
                                  accounting officer)

/s/ Daniel J. Monticello, Ph.D.  Vice President--Science     March 27, 1998
---------------------------       and Technology, and
Daniel J. Monticello, Ph.D.       Director

/s/ Edward B. Lurier             Director                    March 27, 1998
---------------------------
Edward B. Lurier

/s/ Thomas E. Messmore           Director                    March 27, 1998
---------------------------
Thomas E. Messmore

/s/ William E. Nasser            Director                    March 27, 1998
---------------------------
William E. Nasser

/s/ John S. Patton               Director                    March 27, 1998
---------------------------
John S. Patton

/s/ James R. Comeaux             Director                    March 27, 1998
---------------------------
James R. Comeaux

/s/ William D. Young             Director                    March 27, 1998
---------------------------
William D. Young

                                      33

<PAGE>

                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Energy BioSystems Corporation:

     We have audited the accompanying balance sheets of Energy BioSystems
Corporation (a Delaware corporation) as of December 31, 1996 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     As discussed in Note 1 to the Financial Statements, the Company will
require additional capital in order to continue the development and
commercialization of its technology. Management's projections indicate that
the Company can conserve its resources to maintain the Company's operations
through early 1999. Management's plans in regard to these matters are
described in Note 1.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Energy BioSystems
Corporation as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.


                                          ARTHUR ANDERSEN LLP



The Woodlands, Texas
March 9, 1998



                                      F-1
<PAGE>


                         ENERGY BIOSYSTEMS CORPORATION

                                 BALANCE SHEETS
<TABLE>

                                                                                     DECEMBER 31,
                                                                            --------------------------------
                                                                                 1996                1997
                                                                            ------------         -----------
<S>                                                                         <C>                 <C>
                                      ASSETS

 Current assets:
   Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .   $ 3,106,004         $ 9,661,310
   Short term investments  . . . . . . . . . . . . . . . . . . . . . . . .     5,891,584             693,279
   Prepaid expenses and other current assets . . . . . . . . . . . . . . .       767,893           1,013,872
                                                                            ------------         -----------
     Total current assets  . . . . . . . . . . . . . . . . . . . . . . . .     9,765,481          11,368,461
                                                                            ------------         -----------

 Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         6,683                  --
 Furniture, equipment and leasehold improvements, net  . . . . . . . . . .     3,136,635           2,624,332
 Intangible and other assets, net  . . . . . . . . . . . . . . . . . . . .       801,832             972,266
                                                                            ------------         -----------
     Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 13,710,631         $14,965,059
                                                                            ------------         -----------
                                                                            ------------         -----------

           LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued liabilities  . . . . . . . . . . . . . . .  $    537,583         $   864,674
   Current portion of deferred revenue . . . . . . . . . . . . . . . . . .       193,500             180,000
   Current portion of obligations under capital lease  . . . . . . . . . .        11,632               3,556
   Note payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       252,443             218,606
                                                                            ------------         -----------
     Total current liabilities . . . . . . . . . . . . . . . . . . . . . .       995,158           1,266,836
                                                                            ------------         -----------
Stockholders' equity:
   Series A convertible preferred stock
    $0.01 par value (liquidation value $24,000,000,
    508,800 shares authorized, 480,000  and zero shares
    issued and outstanding, respectively) . . . . . . . . . . . . . . . . .   23,295,585                 --
   Series B convertible preferred stock
    $0.01 par value (liquidation value $35,105,000, zero and
    760,000 shares authorized, zero and 702,100 shares
    issued and outstanding, respectively) . . . . . . . . . . . . . . . . .           --          33,853,380
   Common stock, $0.01 par value (30,000,000 shares
    authorized, 11,497,135 and 12,251,434 shares
    issued and outstanding, respectively) . . . . . . . . . . . . . . . . .      114,972             122,514
   Additional paid-in capital.  . . . . . . . . . . . . . . . . . . . . . .   32,018,218          34,926,594
   Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . .  (42,713,302)        (55,204,265)
                                                                            ------------         -----------
     Total stockholders' equity  . . . . . . . . . . . . . . . . . . . . .    12,715,473          13,698,223
                                                                            ------------         -----------
     Total liabilities and stockholders' equity  . . . . . . . . . . . . .  $ 13,710,631         $14,965,059
                                                                            ------------         -----------
                                                                            ------------         -----------
</TABLE>

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

                                     F-2
<PAGE>

                        ENERGY BIOSYSTEMS CORPORATION

                          STATEMENTS OF OPERATIONS
<TABLE>

                                                                   YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------
                                                      1995               1996                 1997
                                                    -----------        -----------         -----------
<S>                                                <C>                <C>                 <C>
REVENUES:
   Sponsored research revenues . . . . . . .       $ 1,567,329        $ 1,778,683         $ 1,651,776
   Interest and investment income  . . . . .         1,400,625            806,736             650,449
                                                   -----------        -----------         -----------

     Total revenues  . . . . . . . . . . . .         2,967,954          2,585,419           2,302,225
                                                   -----------        -----------         -----------
COSTS AND EXPENSES:
   Research and development  . . . . . . . .         7,338,319          9,210,227           9,087,149
   General and administrative  . . . . . . .         2,877,351          2,607,972           2,754,137
                                                   -----------        -----------         -----------
     Total costs and expenses  . . . . . . .        10,215,670         11,818,199          11,841,286
                                                   -----------        -----------         -----------
 NET LOSS  . . . . . . . . . . . . . . . . .       $(7,247,716)       $(9,232,780)        $(9,539,061)
                                                   -----------        -----------         -----------
                                                   -----------        -----------         -----------
 NET LOSS PER COMMON SHARE - BASIC
  AND DILUTED  . . . . . . . . . . . . . . .       $     (0.95)       $     (1.04)        $     (1.09)
                                                   -----------        -----------         -----------
                                                   -----------        -----------         -----------
 SHARES USED IN COMPUTING NET LOSS
  PER COMMON SHARE . . . . . . . . . . . . .        10,227,595         11,248,029          11,769,458
                                                   -----------        -----------         -----------
                                                   -----------        -----------         -----------

</TABLE>

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


                                      F-3
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY
          FOR THE PERIOD FROM DECEMBER 31, 1994 TO DECEMBER 31, 1997

<TABLE>
                                            PREFERRED STOCK           COMMON STOCK       ADDITIONAL
                                         ---------------------    --------------------     PAID-IN      ACCUMULATED
                                         SHARES       AMOUNT       SHARES      AMOUNT      CAPITAL        DEFICIT        TOTAL
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
<S>                                      <C>       <C>            <C>         <C>        <C>           <C>            <C>
BALANCE AT DECEMBER 31, 1994             480,000   $22,694,931    9,988,409   $ 99,884   $27,556,221   $(21,906,806)  $28,444,230
Exercise of stock options in
  1995 ($0.3036 to $7.25 per
  share). . . . . . . . . . . . . . . .       --            --      261,949      2,620       329,392             --       332,012
Issuance of stock for services
  ($6.25 per share) . . . . . . . . . .       --            --       10,000        100        62,400             --        62,500
Additional offering costs for Series
  A Preferred Stock . . . . . . . . . .       --       (14,132)          --         --            --             --       (14,132)
Dividends on Series A Preferred
  Stock paid in Common Stock. . . . . .       --    (2,178,000)     323,910      3,239     2,174,683             --           (78)
Accretion and dividends on
  Series A Preferred Stock. . . . . . .       --     2,465,353           --         --      (299,353)    (2,166,000)           --
Net loss. . . . . . . . . . . . . . . .       --            --           --         --            --     (7,247,716)   (7,247,716)
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
BALANCE AT DECEMBER 31, 1995             480,000    22,968,152   10,584,268    105,843    29,823,343    (31,320,522)   21,576,816
Exercise of stock options in 1996
  ($0.3036 to $5.50 per share). . . . .       --            --      589,200      5,892       365,620             --       371,512
Dividends on Series A Preferred
  Stock paid in Common Stock. . . . . .       --    (2,160,000)     323,667      3,237     2,156,688             --           (75)
Accretion and dividends on
  Series A Preferred Stock. . . . . . .       --     2,487,433           --         --      (327,433)    (2,160,000)           --
Net loss. . . . . . . . . . . . . . . .       --            --           --         --            --     (9,232,780)   (9,232,780)
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
BALANCE AT DECEMBER 31, 1996             480,000    23,295,585   11,497,135    114,972    32,018,218    (42,713,302)   12,715,473
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
Exercise of stock options in 1997
  ($0.3036 to $6.25 per share). . . . .       --            --      270,740      2,707       348,256             --       350,963
Issuance of Series B Preferred Stock. .  224,100    10,171,120           --         --            --             --    10,171,120
Exchange of Series A Preferred
  Stock for Series B Preferred
  Stock . . . . . . . . . . . . . . . . (478,000)  (22,853,138)          --         --            --             --            --
Issuance of Series B Preferred Stock
  for Series A Preferred Stock. . . . .  478,000    22,853,138           --         --            --             --            --
Issuance of Common Stock in
  exchange for Series A Preferred
  Stock . . . . . . . . . . . . . . . .   (2,000)      (99,526)      12,581        125        99,401             --            --
Dividends on Series A Preferred
  Stock paid in Common Stock. . . . . .       --      (691,575)      98,519        985       690,543             --           (47)
Accretion and dividends on
  Series A Preferred Stock. . . . . . .       --       360,604           --         --       (67,904)      (292,700)           --
Dividends on Series B Preferred
  Stock paid in Common Stock. . . . . .       --    (2,132,629)     372,559      3,725     2,128,679             --          (225)
Accretion and dividends on
  Series B Preferred Stock. . . . . . .       --     2,949,801           --         --      (290,597)    (2,659,202)           --
Net loss. . . . . . . . . . . . . . . .       --            --           --         --            --     (9,539,061)   (9,539,061)
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
BALANCE AT DECEMBER 31, 1997. . . . . .  702,100   $33,853,380   12,251,534   $122,514   $34,926,596   $(55,204,265)  $13,698,223
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
                                         -------   -----------    ---------   --------   -----------   ------------   -----------
</TABLE>


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


                                       F-4
<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
                                                                        YEAR ENDED DECEMBER 31,
                                                             --------------------------------------------
                                                                 1995            1996            1997
                                                             ------------     -----------     -----------
<S>                                                          <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $ (7,247,716)    $(9,232,780)    $(9,539,061)
  Adjustments to reconcile net loss to net cash provided
    by (used in) operating activities:
      Depreciation and amortization                               998,384       1,160,179       1,255,622
      Compensation expense related to stock options
        and stock issued for services rendered                     62,500              --              --
    Changes in assets and liabilities:
      Decrease (increase) in trading securities                (4,419,020)      4,444,020              --
      Decrease (increase) in prepaid expenses and
        other current assets                                      143,061         172,079         (27,373)
      Decrease in notes receivable                                 37,054          38,950           6,683
      Increase in intangible and other assets                    (211,804)       (182,196)       (231,736)
      Increase (decrease) in accounts payable and
        accrued liabilities                                      (377,958)        (53,951)        327,091
      Decrease in deferred revenue                             (1,134,000)     (1,134,000)        (13,500)
                                                             ------------     -----------     -----------
    Net cash provided by (used in) operating activities       (12,149,499)     (4,787,699)     (8,222,274)
                                                             ------------     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                       (1,505,045)       (936,877)       (682,017)
    Net sale (purchase) of investments held to maturity        (8,480,298)      2,588,713       5,198,305
                                                             ------------     -----------     -----------
      Net cash provided by (used in) investing activities      (9,985,343)      1,651,836       4,516,288
                                                             ------------     -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on notes payable, net                               (281,374)       (294,713)       (252,443)
    Payments on capital lease obligations                         (12,995)         (7,256)         (8,076)
    Proceeds from Series A Preferred Stock, net                   (14,132)             --              --
    Proceeds from Series B Preferred Stock, net                        --              --      10,171,120
    Proceeds from Common Stock, net                               331,934         371,436         350,691
                                                             ------------     -----------     -----------
      Net cash provided by financing activities                    23,433          69,467      10,261,292
                                                             ------------     -----------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          (22,111,409)     (3,066,396)      6,555,306
                                                             ------------     -----------     -----------

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                 28,283,809       6,172,400       3,106,004
                                                             ------------     -----------     -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                     $  6,172,400     $ 3,106,004     $ 9,661,310
                                                             ------------     -----------     -----------
                                                             ------------     -----------     -----------

SUPPLEMENTAL INFORMATION OF CASH FLOWS:
Cash paid for interest                                       $      4,010     $     2,046     $     1,752
                                                             ------------     -----------     -----------
                                                             ------------     -----------     -----------

SUPPLEMENTAL INFORMATION OF NONCASH FINANCING ACTIVITIES:
The Company had an outstanding note payable of $294,713, $252,442 and $218,606 for prepaid insurance for
the years ended December 31, 1995, 1996 and 1997, respectively.
</TABLE>

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



                                      F-5
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1997

1.   DESCRIPTION OF THE COMPANY

     Energy BioSystems Corporation (the "Company"), formerly Environmental
BioScience Corporation, was incorporated in the State of Delaware on December
20, 1989, and commenced operations in January 1990.  The Company was formed
to develop and commercialize innovative biotechnology-based processes for the
refining of fossil fuels.  The Company's focus to date has been on developing
biocatalytic desulfurization ("BDS"), a proprietary process involving the use
of enzymes to remove sulfur from petroleum.  The Company's BDS process will
require substantial additional research, development and testing in order to
determine its commercial viability.  The Company has not proven its BDS
technology other than to a limited extent in laboratory, bench-scale and
pilot plant trials.  If the Company successfully field tests its BDS
technology, the commercialization of the Company's BDS technology will
require significant additional time and expenditures.  The commercialization
of the technology will depend on the Company's success in achieving
improvement of its biocatalyst and success in developing fermentation
processes, as well as the Company's ability to manufacture or contract for
the manufacture of sufficient biocatalyst for use in commercial BDS units; to
apply process engineering to design bioreactor systems capable of
accomplishing the BDS process on a commercial scale; and to market its BDS
systems effectively.  The accomplishment of some or all of these objectives
may be delayed or may never occur.  The Company will require additional
capital to continue the development and commercialization of its BDS
technology, and there can be no assurance that such capital will be available
or that the Company will be able to successfully commercialize its BDS
technology. The Company currently plans to implement certain reductions in
costs and expenses that it believes will enable its available cash and
investments, sponsored research revenues and interest income to satisfy its
funding needs through early 1999. If the Company is unable to raise
sufficient capital, further reductions and, in certain cases, elimination of
operating activities will be required to enable the Company's present levels
of cash and investments to provide sufficient liquidity to fund the Company
through 1999. See "Liquidity and Capital Resources" and "Risk Factors"
included elsewhere herein.

     The Company has devoted substantially all of its efforts to research and
development.  There have been no revenues from operations other than
sponsored research revenues (see Note 7) and there is no assurance of future
revenues. Prior to the receipt of the sponsored research revenues, the
Company was in the development stage.

2.   ACCOUNTING POLICIES

     CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

     Debt and equity securities that the Company has the intent and ability
to hold to maturity are classified as "held to maturity" and reported at
amortized cost.  Debt and equity securities that are held for current resale
are classified as "trading securities" and reported at fair value with
unrealized gains and losses included in earnings.  Debt and equity securities
not classified as either "held to maturity" or "trading securities" are
classified as "securities available for sale" and reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.

     Cash and cash equivalents include corporate debt securities with an
original maturity less than 90 days and are classified as held to maturity.
These securities have an amortized cost and fair market value of $2,675,923.
Included in short-term investments are corporate bonds of $693,279 that are
classified as held to maturity and reported at amortized cost at December 31,
1997.

     At December 31, 1996 and 1997, the Company had cash and cash equivalents
of approximately $49,684 and $2,133,786, respectively, in excess of the
federally insured amounts.



                                      F-6
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Furniture and equipment consists of office furniture and equipment,
computers and laboratory equipment and is carried at cost.  Depreciation is
calculated on the straight-line method using a five-year estimated useful
life. Leasehold improvements are amortized on the straight-line method over
the term of the lease or the useful life of the assets, whichever is shorter.

     Maintenance and repairs that do not improve or extend the life of assets
and expenditures for research and development equipment for which there is no
future alternative use are expensed as incurred.  Expenditures which improve
or extend the life of assets are capitalized.

     INTANGIBLE AND OTHER ASSETS

     Intangible and other assets mainly consist of patent costs, which are
primarily legal fees.  These costs are being amortized over 17 years.
Accumulated amortization at December 31, 1996 and 1997 amounted to $235,878
and $297,180, respectively.

     RESEARCH AND DEVELOPMENT

     Sponsored research revenue is recognized based on the percentage of
total research payments to be received in relation to the total research and
development costs to be incurred under the specific research agreements.  All
research and development costs, both generated internally and from research
and development contracts, are expensed as incurred.  The Company allocates
certain indirect costs to research and development expenses which consist
primarily of overhead related to the administration of research and
development activities.

     NET LOSS PER COMMON SHARE

     Net loss per common share has been computed by dividing the net loss,
which has been increased for periodic accretion and accrued dividends on the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
issued in October 1994 and February 1997, respectively, by the weighted
average number of shares of Common Stock outstanding during the periods.

     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. In
all applicable years, all Common Stock equivalents were antidilutive and,
accordingly, were not included in the computation.

     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 at the
date of the financial statements and the reported amounts of expenses during
the reporting period.  Actual results could differ from those estimates.



                                      F-7
<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     PRESENTATION

     Certain reclassifications have been made to prior year balances to
conform to current year presentation.

3.   FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     A summary of furniture, equipment and leasehold improvements is as
follows:

<TABLE>
                                                                   DECEMBER 31,
                                                           --------------------------
                                                               1996           1997
                                                           -----------    -----------
<S>                                                        <C>            <C>
Office furniture and equipment. . . . . . . . . . . . . .  $   395,332    $   408,356
Laboratory equipment. . . . . . . . . . . . . . . . . . .    3,176,179      3,781,153
Computer equipment. . . . . . . . . . . . . . . . . . . .      805,850        852,506
Leasehold improvements. . . . . . . . . . . . . . . . . .    1,694,489      1,711,852
Equipment under capital lease . . . . . . . . . . . . . .       55,203         55,203
Automobiles . . . . . . . . . . . . . . . . . . . . . . .       23,670         23,670
                                                           -----------    -----------
                                                             6,150,723      6,832,740
Less--Accumulated depreciation and amortization . . . . .   (3,014,088)    (4,208,408)
                                                           -----------    -----------

Furniture, equipment and leasehold improvements, net. . .  $ 3,136,635    $ 2,624,332
                                                           -----------    -----------
                                                           -----------    -----------
</TABLE>


4.   STOCKHOLDERS' EQUITY

     SERIES B CONVERTIBLE PREFERRED STOCK

     In February and March 1997, the Company sold and aggregate of 224,100
shares of Series B Convertible 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 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.



                                      F-8
<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     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 Stock for common
stock.  Accordingly, the Series B Preferred Stock is included in
stockholders' equity.

     Concurrently with the private placement, the Company conducted an
exchange offering and consent solicitation with respect to its outstanding
Series A Preferred Stock, pursuant to which the Company offered to exchange
one share of Series B Preferred Stock for each of its 480,000 outstanding
shares of Series A Preferred Stock and requested the holders of its Series A
Preferred Stock consent to the ranking of the Series B Preferred Stock on a
parity with the Series A Preferred Stock with respect to the payment of
dividends and liquidation preference.  The Company did not receive any cash
proceeds from the exchange offering.  Of the 480,000 shares of Series A
Preferred Stock outstanding, 478,000 shares were exchanged for the same
number of shares of Series B Preferred Stock.  In September 1997 the
remaining 2,000 shares of Series A Preferred Stock was exchanged for 12,581
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.

     SERIES A CONVERTIBLE PREFERRED STOCK

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

     Dividends on the Series A Convertible Preferred Stock are cumulative and
payable semi-annually from October 27, 1994, at an annual rate equal to (i)
$4.00 per share if paid in cash and (ii) $4.50 per share if paid in



                                      F-9
<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


Common Stock.  All but 2,000 shares of the 480,000 shares of Series A
Preferred Stock outstanding were exchanged for shares of Series B Preferred
Stock in an exchange offering.

     Shares of Series A Preferred Stock were convertible into shares of the
Company's common stock at the option of the holder at a conversion price
equal to $8.25 per share of common stock, subject to certain adjustments.  In
September 1997, the remaining 2,000 shares of Series A Preferred Stock not
exchanged for Series B Preferred Stock were converted into 12,581 shares of
common stock.

     COMMON STOCK

     In March 1995, the Company adopted a Stockholder Rights Plan (the
"Rights Plan") in which Preferred Stock Purchase Rights (the "Rights") were
distributed for each share of Common Stock held as of the close of business
on March 27, 1995 and are distributed to each share of Common Stock issued
thereafter until the earlier of (i) the Distribution Date (as defined in the
Rights Plan), (ii) the date Rights are redeemed or (iii) March 8, 2005.  The
Rights Plan is designed to deter coercive takeover tactics and to prevent an
acquirer from gaining control of the Company without offering a fair price to
all of the Company's stockholders.  The Rights will expire on March 8, 2005.

     Each Right entitles stockholders to buy one-hundredth of a share of a
new series of Junior Preferred Stock of the Company at an exercise price of
$50.00 per one-hundredth of a share.  The Rights are exercisable only if a
person acquires beneficial ownership of 20% or more of the Company's
outstanding Common Stock.  The Rights Plan grandfathers certain stockholders
who beneficially owned more than 20% of the outstanding shares of the
Company's Common Stock on the effective date of the Rights Plan from
triggering the exercisability of the Rights.

5.   STOCK OPTIONS

     In January 1997, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "1996 Plan").  Under the 1996 Plan, the Company may issue
options for and sell up to 100,000 shares of Common Stock to employees and
consultants of the Company.  The options granted under this plan may not have
an exercise price per share less than the fair market value on the date of
grant and are limited to a term not to exceed ten years

     The 1992 Stock Compensation Plan (the "1992 Plan") is composed of
non-qualified stock options, incentive stock options, year-end stock bonuses
and restricted and non-restricted stock grants.  Under the 1992 Plan,
2,031,030 shares of Common Stock are reserved for issuance upon the exercise
of stock options.  Under a 1994 Non-Employee Director Option Plan, composed
of non-qualified stock options, 175,000 shares of Common Stock are reserved
for issuance upon the exercise of stock options.

     At December 31, 1997, employees had been granted options to purchase
1,617,199 shares of Common Stock pursuant to the 1992 Plan.  Additionally, as
of December 31, 1997 consultants and directors had been granted options to
purchase 345,320 shares of Common Stock that were not issued under the 1992
Plan. Options generally vest over a three-year period and upon the earlier of
the completion of the specified performance milestones or nine years and ten
months from the date of grant.  The options expire ten years from the date of
grant. At December 31, 1997, 1,047,306 shares of Common Stock were exercisable
at per share exercise prices ranging from $.296 to $13.00.

     The Company accounts for its stock options under APB Opinion No. 25
under which no compensation cost has been recognized.  The Company records
deferred compensation for the difference between the exercise price and the
fair market value on the measurement date.  During 1995, 1996 and 1997, the
Company issued all options at fair market value.  Had compensation cost for
these options been determined consistent with FASB Statement No. 123, the
Company's net loss and loss per share would have been increased to the
following pro forma amounts:



                                      F-10
<PAGE>

                          ENERGY BIOSYSTEMS CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<S>                                      <C>            <C>             <C>
                                            1995           1996            1997
                                         -----------    -----------     ------------
     Net Loss:            As Reported    $(7,247,716)   $(9,232,780)    $ (9,539,061)
                                         -----------    -----------     ------------
                          Pro Forma       (7,439,375)    (9,627,267)     (10,180,316)
                                         -----------    -----------     ------------

     Net Loss Per Share:  As Reported    $     (0.95)   $     (1.04)    $      (1.09)
                                         -----------    -----------     ------------
                          Pro Forma            (0.97)         (1.08)           (1.15)
                                         -----------    -----------     ------------
</TABLE>


     Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that expected in future years.
 A summary of the status of the Company's stock options at December 31, 1995,
1996 and 1997 and changes during the years then ended is presented in the
table and narrative below:

<TABLE>
                                        1992 PLAN                   OPTIONS NOT ISSUED UNDER PLAN
                                       ----------                   -----------------------------
                                         NUMBER      WEIGHTED AVG.     NUMBER      WEIGHTED AVG.
                                       OF OPTIONS   EXERCISE PRICE   OF OPTIONS   EXERCISE PRICE
                                       ----------   --------------   ----------   --------------
<S>                                    <C>          <C>              <C>
Balance at December 31, 1994 . . . .   1,269,064        $ 4.04        1,025,720       $1.34
  Granted. . . . . . . . . . . . . .     270,880          5.03               --          --
  Exercised. . . . . . . . . . . . .    (126,949)         1.86         (145,000)       0.64
  Forfeited. . . . . . . . . . . . .     (19,550)        10.08               --          --
                                       ---------        ------        ---------       -----
Balance at December 31, 1995 . . . .   1,393,445          4.35          880,720        1.46
  Granted. . . . . . . . . . . . . .     286,170          6.46               --          --
  Exercised. . . . . . . . . . . . .     (26,645)         1.83         (562,565)       0.57
  Forfeited. . . . . . . . . . . . .     (15,332)         8.49               --          --
                                       ---------        ------        ---------       -----
Balance at December 31, 1996 . . . .   1,637,638          4.74          318,155       $3.02
  Granted. . . . . . . . . . . . . .     323,360          4.91               --          --
  Exercised. . . . . . . . . . . . .    (201,805)         1.59           68,835        0.43
  Forfeited. . . . . . . . . . . . .    (141,994)         5.21               --          --
                                       ---------        ------        ---------       -----
Balance at December 31, 1997           1,617,199        $ 5.12          249,320       $3.73
                                       ---------        ------        ---------       -----
                                       ---------        ------        ---------       -----

Exercisable at December 31, 1995         652,466        $ 3.21          838,220       $1.08
Exercisable at December 31, 1996         727,029        $ 3.77          318,155       $3.02
Exercisable at December 31, 1997         701,986        $ 4.95          345,320       $3.73
</TABLE>

     The weighted average fair value of the options issued under the 1992
Plan for the years ended December 31, 1995, 1996 and 1997 was $3.98, $4.92
and $3.95, respectively.

     During the years ended December 31, 1995, 1996 and 1997, the Company
granted 24,000, 24,000 and 28,000 options, respectively, under the
Non-Employee Director Option Plan.  These options are fully vested upon
issuance. The weighted average exercise price per share on these grants was
$4.00, $7.88 and $4.63, respectively.  As of December 31, 1995, 1996 and
1997, the Company had 44,000, 68,000 and 96,000 options exercisable,
respectively, under this plan with weighted average exercise price of $5.82,
$6.54 and $6.22, respectively. The weighted average fair market value of the
options issued under this plan during the years ended December 31, 1995, 1996
and 1997 was $3.04, $5.31 and $ 4.63, respectively.

     The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997,
respectively:  risk-free interest rates of 6.6, 6.5  and 6.5 percent for the
1992 Plan options and 6.6, 6.9 and 6.5 percent for the Non-Employee Director
Plan options; expected dividend yields of zero for both the 1992 Plan and the
Non-Employee Director Plan; expected lives of nine years and ten months for
all options; and expected volatility of 58.3, 65.4 and 69.6 percent for the
1992 Plan and 60.5, 65.1 and 69.6 percent for the Non-Employee Director Plan.



                                     F-11
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


6.   FEDERAL INCOME TAXES

     The Company has had losses since inception and, therefore, has not been
subject to federal income taxes.  As of December 31, 1997, the Company had
accumulated net operating loss ("NOL") and research and development tax
credit carryforwards for income tax purposes of approximately $45,200,000 and
$1,284,000, respectively.  These carryforwards begin to expire in 2005.  The
Tax Reform Act of 1986 provided for an annual limitation on the use of NOL
and tax credit carryforwards following certain ownership changes that limit
the Company's ability to utilize these carryforwards.  In April 1991 and
October 1994, the Company underwent a "more than 50 percent change in
ownership" as defined by Internal Revenue Code Section 382.  Additionally,
because U.S. tax laws limit the time during which NOL and tax credit
carryforwards may be applied against future taxable income and tax
liabilities, the Company may not be able to take full advantage of its NOL
and tax credits for federal income tax purposes.

     Significant components of the Company's net deferred tax asset at
December 31, 1996 and 1997 are as follows:

<TABLE>
                                                         1996            1997
                                                     ------------    ------------
<S>                                                  <C>             <C>
DEFERRED TAX ASSETS RELATINTG TO:
Federal net operating loss carryforwards . . . . . . $ 11,814,351    $ 15,369,029
Research and development credit carryovers . . . . .      989,171       1,284,060
Capital and Texas business loss carryforwards. . . .      357,846         653,720
Book/tax differences on depreciable, amortizable
  and other assets and accrued liabilities . . . . .      263,347          26,998
Deferred revenue and unrealized gains                      65,790          61,200
                                                           ------    ------------

Deferred tax valuation reserve . . . . . . . . . . .  (13,490,505)   $(17,395,007)
Net deferred tax asset . . . . . . . . . . . . . . . $         --              --
                                                     ------------    ------------
                                                     ------------    ------------
</TABLE>

     Beginning January 1, 1993, the Company adopted SFAS 109 which requires
recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized in the financial
statements or tax returns.  Since the Company has had a net operating loss
carry forward since inception and there is no assurance of future taxable
income, a valuation allowance has been established to fully offset the
deferred tax assets.

7.   LICENSE AND RESEARCH AGREEMENTS

     To supplement its research and development budgets, the Company intends
to seek additional collaborative research and development agreements with
corporate partners.

     In August 1997, the Company was awarded funding by the U.S. Department
of Energy ("DOE") for a $2.4 million, three-year program dedicated to the
development of a BDS application for gasoline.  At December 31, 1997, the
Company had recognized $122,876 in sponsored research revenue from the grant
all of which was receivable at year end.

     In this regard, the Company entered into an agreement with The
Carbide/Graphite Group, Inc. ("Carbide/Graphite") in December 1995 to
collaborate on the development of the Company's BDS technology for the
removal of sulfur from decant oil. Under the terms of the agreement, the
Company will be primarily responsible for customizing and commercializing a
biocatalyst and desulfurization system specifically for decant oil.
Carbide/Graphite will be primarily responsible for providing the development
and commercialization funding for this particular BDS process.  The Company
recognized $650,000 in sponsored research revenue as of December 31, 1997.



                                      F-12
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     The Company signed an agreement with The M.W. Kellogg Company ("M.W.
Kellogg") in August 1994, to collaborate on the development and
commercialization of the Company's biocatalytic desulfurization ("BDS")
technology.  Under the collaboration, M.W. Kellogg will serve as an
engineering partner to the Company during completion of the BDS development
process and will be the exclusive provider of the basic engineering design
services required for the commercial units.  In return for these services,
M.W. Kellogg will receive a portion of the site license fee generated by the
sale of BDS units.  The collaboration has a minimum term of at least five
years or the completion of 20 BDS units, whichever is longer, and has
applications to all biorefining technologies the Company develops.  During
the first phase of the collaboration, M.W. Kellogg provided up to 500
engineering work hours of service at no cost to the Company.  M.W. Kellogg
has also agreed to provide an additional 1,500 work hours per year of service
at M.W. Kellogg offices at reduced rates.

     In July 1994, the Company entered into an agreement with Total Raffinage
Distribution S.A. ("Total") to collaborate on the application of the
Company's biodesulfurization process to diesel fuel streams.  Following the
evaluation of results from the Company's domestic pilot operation, it is
anticipated that Total will build and operate at Total's expense a pilot BDS
unit at Total's European Centre for Research and Technology.  Upon successful
economic trials of the pilot unit, Total plans to build the first commercial
BDS unit at one of its refineries.  The Company and Total will each bear
their own costs and expenses incurred under the collaboration.  In addition,
as part of its obligations under the agreement, Total will provide the
Company with the use of analytical equipment valued at approximately
$200,000.  The Total agreement provides that upon commercialization, the site
licenses will be waived on Total's first commercial BDS unit.  In addition,
Total will be entitled to receive a ten percent (10%) discount on future site
licenses and service fees until it has recovered two and one-half times its
research cost and expenses for BDS projects under the agreement.  The Company
expects that the development alliance with Total will facilitate
commercialization of the BDS technology for middle distillates and facilitate
the Company's entrance into the European market.

     In December 1993, the Company entered into an alliance with Koch
Refining Company ("Koch") to facilitate the development of BDS technology in
crude oil. Under the terms of the alliance, the Company will be primarily
responsible for improving the performance of the biocatalyst used in the
desulfurization process.  Koch will be primarily responsible for selecting
and improving the target oil stream as well as testing desulfurized product
quality.  Koch will also provide engineering support as needed in the
development of a BDS unit for Koch's operation.  The Company and Koch will
each bear their own costs and expenses incurred in connection with the
collaboration.  Repayment will be in the form of a ten percent (10%) rebate
on desulfurization processing fees charged to Koch until Koch has been repaid
their contribution of BDS development costs.  The Company expects that the
development alliance with Koch will facilitate commercialization of the
Company's BDS technology.

     The Company entered into a license agreement with Stanford University in
November 1993 for the use of their patented recombinant DNA technology, which
may be employed in the development of the Company's BDS process.  The license
requires a minimum annual advance on earned royalties of $10,000.  The final
payment under this licensing agreement was paid in 1997.

     In July 1993, the Company entered into an agreement with the Exploration
and Development Division of Texaco, Inc. ("Texaco") to facilitate the
development of the Company's BDS technology in crude oil.  Under the terms of
the alliance, the Company will be primarily responsible for improving the
performance of the biocatalyst used in the desulfurization process.  Texaco
will be primarily responsible for field operations and analytical chemistry
work with respect to the application of the Company's BDS technology to crude
oil.  The Company and Texaco will each bear their own costs and expenses
incurred in connection with the collaboration.  In the event the Company
sub-licenses Texaco's intellectual and proprietary information, licensed by
agreement to the Company by Texaco, the Company shall pay Texaco an amount
equal to ten percent (10%) of the desulfurization processing fee charged to
Texaco until such time as the Company has paid Texaco an aggregate amount
equal to two and one-half times the aggregate amount of Texaco's direct costs
and expenses incurred in connection with the collaboration.



                                      F-13
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


The Company expects that the development alliance with Texaco will facilitate
commercialization of the Company's BDS technology.

     In January 1991, the Company paid $25,000 and issued 730,800 shares of
its Common Stock to the Institute of Gas Technology ("IGT") for the license
to IGT's technology for desulfurizing petroleum which expires at the later of
20 years or when all patents related to the technology expire.  As
consideration for future royalties, the Company agreed to pay IGT $400,000,
of which $200,000 was paid and charged to expense as of December 31, 1992 and
the remaining $200,000 was paid and charged to expense as of December 31,
1993.  These payments eliminate the royalty to be paid upon future revenues.
Payments to IGT were approximately none, $150,000 and none in 1994, 1995 and
1996, respectively, for research performed under the terms of the research
agreements.  As part of the total payments made to IGT in 1993, the Company
had paid $150,000 under the amended agreement which provided an additional
$300,000 financing for research.  The remaining payment of $150,000 was made
in June 1995.

     The Company has also entered into other contracts with various
institutions for research and development.  The amounts paid under these
agreements totaled $211,500, $114,900 and $85,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.  The Company is also
committed to pay these institutions approximately $25,000 through December
1998 under various agreements.

     In March 1992, the Company entered into a collaborative agreement with
Petrolite Corporation ("Petrolite") to commercialize the Company's BDS
technology.  Under the terms of the agreement, both parties are to perform
research and development.  Petrolite is to perform research and development
in its own laboratory at its own cost and is to fund research, as agreed
under the terms of the agreement, at the Company beginning April 1, 1992, at
a rate of $225,000 per month for the first two years of the agreement for a
total of $5,400,000.  Additionally, Petrolite, under the terms of the
agreement, constructed a pilot plant at its own expense, not to exceed
$1,500,000, to begin testing the effectiveness of the BDS technology.  The
Company is committed to fund research and development at its own expense in
the third through fifth years of the agreement at an annual rate equal to the
greater of $2,500,000 per year or 4% of the Company's net revenues, as
defined in the agreement.  As of December 31, 1997, the Company has received
$5,400,000 in research payments of which $1,134,000 has been recognized as
revenue in each of the years ended December 31, 1995 and 1996 and $13,500 has
been recognized for the year ended December 31, 1997.  The revenue recognized
is based on the percentage of total research payments to be received from
Petrolite in relation to the total research and development costs to be
incurred under the terms of the agreement. The amended collaborative
agreement dated October 18, 1993, provides for an expanded territory covered
by the agreement from North America, Venezuela and Mexico to the entire world
and permits the use of third party engineering and construction companies to
assist with certain matters.  In return, the Company's obligation to pay
Petrolite decreased from 30% to 22% of all site licenses fees and adjusted
gross profit from the operation of the desulfurization units.  In the event
the collaboration is terminated, the percentage of site license fees and
adjusted gross profit paid to Petrolite will be adjusted as outlined under
the terms of the agreement.

     In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite.  Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996, which was expensed by
the Company when made, in exchange for the option and the extension of
Petrolite's obligations to provide operational and technical support for the
pilot plant from September 1, 1996 through December 31, 1998.  If the Company
exercises its option, the percentage of site license fees and adjusted gross
profit payable to Petrolite will be reduced to 9.5% from 22%, in exchange for
which the Company will (i) assume responsibility for servicing the BDS units
on site at customer locations, (ii) pay Petrolite an additional $9 million in
cash and (iii) issue to Petrolite a warrant entitling Petrolite to purchase
138,889 shares of Common Stock at an exercise price of $7.20 per share.  The
Company may exercise the Petrolite option at any time on or before the
earlier to occur of (i) ten business days following the close of any equity
financing by the Company in which the gross cash proceeds raised in such
financing (together with cash proceeds raised by the Company in any other
equity financing after the date of the option agreement, if applicable) equal
or exceed $25 million and (ii) December 30, 1998. The Company does not plan
to exercise the option unless and until it has raised substantial additional
funds or received additional capital.



                                      F-14
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     In December 1994, the Company was awarded a $2 million federal grant
under the Advanced Technology Programs administered by the National Institute
of Standards and Technology ("NIST").  The three-year program funded by this
grant is dedicated to the development of a biotechnology-based method of
removing sulfur from crude oil.  As of December 31, 1997, the Company has
recognized $1,943,412 in sponsored research revenue relating to this grant.
Included in this revenue amount is $290,928 of grant receivable from NIST.

8.   COMMITMENTS

     The Company maintains a Simplified Employee Pension Plan (the "Plan")
for all employees.  Under the terms of the Plan, employees are eligible to
participate after completion of six months of service.  The Company
contributes an amount equal to 8% of the employees' annual compensation to
the Plan. Employees are vested immediately and there is at present no
employee contribution.  Total expenses under the Plan were approximately
$246,000, $302,000 and $316,000 for the years ended December 31, 1995, 1996
and 1997, respectively.

     The Company maintains two capital leases for computer and laboratory
equipment.  In addition, the Company maintains an operating lease agreement
for its headquarters, which expires in 1998.

     Future minimum payments under the non-cancelable operating lease and
capital leases consist of the following at December 31, 1997:

<TABLE>
FISCAL YEAR                                 OPERATING   CAPITAL
-----------                                 ---------   -------
<S>                                         <C>         <C>
1998 . . . . . . . . . . . . . . . . . . .  $303,959    $3,556
1999 . . . . . . . . . . . . . . . . . . .     1,158        --
                                            --------    ------

  Total minimum lease payments . . . . . .  $305,117    $3,556
                                            --------    ------
                                            --------    ------
Less interest. . . . . . . . . . . . . . .                  95
Present value of future minimum
  lease payments . . . . . . . . . . . . .              $3,461
                                                        ------
</TABLE>

     The Company incurred rent expense of $320,456, $391,788 and $395,070
during 1995, 1996 and 1997, respectively.

9.   RELATED-PARTY TRANSACTIONS

     The Company paid consulting fees to certain stockholders and directors
totaling $60,021, $12,155 and $ 13,700 during the years ended December 31,
1995, 1996 and 1997, respectively.

     The former Chairman of the Board and Chief Executive Officer of
Petrolite serves as a director for the Company.

10.  SUBSEQUENT EVENTS

     In March 1998, the Company entered into a site license agreement with
Petro Star Inc. ("Petro Star") regarding the design and installation of a BDS
unit at Petro Star's Valdez, Alaska refinery.  The agreement involves several
stages of work, the first of which, involving the completion of scoping
economics, is currently under way.  In addition, the agreement provides EBC
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 license fees and royalties to EBC, including a $200,000 initial site
license fee upon execution of the agreement.  As is customary in such



                                      F-15
<PAGE>

                         ENERGY BIOSYSTEMS CORPORATION

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


arrangements 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 EBC Common Stock at an exercise price of $3.11 per
share.  The successful implementation of a commercial BDS unit will be
dependent upon the Company's ability to achieve additional improvements in
the productivity of the biocatalyst (e.g., reaction rates, specificity and
stability) and process technology (e.g., bioreactor and separations
technology.

     Petro Star, a wholly owned subsidiary of Arctic Slope Regional
Corporation, refines and distributes petroleum products throughout Alaska.
The Anchorage-based company owns and operates oil refineries in Valdez and
North Pole, Alaska, with distribution facilities in Fairbanks, Kodiak and
Dutch Harbor.  The Petro Star Valdez refinery is a major supplier of military
jet fuel, as well as marine diesel and other middle distillate products.





                                     F-16