<PAGE>   1

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

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

                                    FORM 10-Q

(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 0-19910

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

                           CREATIVE BIOMOLECULES, INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                      94-2786743
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

   45 SOUTH STREET, HOPKINTON, MA                         01748
(Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (508) 782-1100

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

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.

                                                 [X] Yes    [ ] No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.

As of October 29, 1999, the registrant had 36,132,466 shares of Common Stock
outstanding.


<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I.    FINANCIAL INFORMATION                                                                       Page Number

<S>                                                                                                       <C>
           Item 1.    Financial Statements

                      Consolidated Balance Sheets - September 30, 1999 (unaudited) and
                      December 31, 1998                                                                    3

                      Unaudited Consolidated Statements of Operations for the three months
                      and nine months ended September 30, 1999 and 1998                                    4

                      Unaudited Consolidated Statements of Comprehensive Loss for the three
                      months and nine months ended September 30, 1999 and 1998                             4

                      Unaudited Consolidated Statements of Cash Flows for the nine months
                      ended September 30, 1999 and 1998                                                    5

                      Notes to Unaudited Consolidated Financial Statements                                 6

           Item 2.    Management's Discussion and Analysis of Financial Condition
                      and Results of Operations                                                            7

           Item 3.    Quantitative and Qualitative Disclosures About Market Risk                          12

PART II.   OTHER INFORMATION

           Item 1.    Legal Proceedings                                                                   13

           Item 2.    Changes in Securities                                                               13

           Item 3.    Defaults Upon Senior Securities                                                     13

           Item 4.    Submission of Matters to a Vote of Security Holders                                 13

           Item 5.    Other Information                                                                   13

           Item 6.    Exhibits and Reports on Form 8-K                                                    13

SIGNATURES                                                                                                14
</TABLE>


<PAGE>   3


CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================

<TABLE>
<CAPTION>
                                                                         September 30,          December 31,
                                                                              1999                  1998
                                                                        --------------        --------------

ASSETS                                                                    (unaudited)
------
<S>                                                                     <C>                   <C>
CURRENT ASSETS:
  Cash and cash equivalents                                             $   2,195,302         $  17,738,044
  Marketable securities                                                    21,272,748            40,197,407
  Accounts receivable                                                         122,158               669,232
  Inventory                                                                    15,004                28,733
  Prepaid expenses and other                                                  184,130               272,168
                                                                        -------------         -------------
    Total current assets                                                   23,789,342            58,905,584
                                                                        -------------         -------------

PROPERTY, PLANT AND EQUIPMENT - net                                         2,295,445             1,925,602
                                                                        -------------         -------------

OTHER ASSETS:
  Notes receivable - officers                                                      --               116,668
  Patents and licensed technology - net                                     1,112,010               375,000
  Deferred patent application costs - net                                   4,219,359             4,732,629
  Deposits and other                                                          108,574               108,574
                                                                        -------------         -------------
     Total other assets                                                     5,439,943             5,332,871
                                                                        -------------         -------------
TOTAL                                                                   $  31,524,730         $  66,164,057
                                                                        =============         =============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Lease obligations - current portion                                   $     336,906         $     165,934
  Accounts payable                                                            308,183             1,621,417
  Accrued liabilities                                                       1,805,235             2,508,161
  Accrued compensation                                                        877,256             1,335,692
  Deferred revenue                                                          1,411,279             3,661,279
                                                                        -------------         -------------
     Total current liabilities                                              4,738,859             9,292,483
                                                                        -------------         -------------

LEASE OBLIGATIONS                                                           1,100,359               713,459
                                                                        -------------         -------------

COMMITMENTS

SERIES 1998/A PREFERRED STOCK, $.01 par value, 0 and 23,414
  shares issued and outstanding at September 30, 1999 and
  December 31, 1998, respectively                                                  --            23,052,787
                                                                        -------------         -------------

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
   0 and 23,414 issued and outstanding at September 30, 1999 and
   December 31, 1998, respectively
  Common Stock, $.01 par value, 100,000,000 shares authorized,
   36,129,266 and 34,457,469 shares issued and outstanding at
   September 30, 1999 and December 31, 1998, respectively                     361,293               344,575
  Additional paid-in capital                                              146,826,858           143,127,113
  Accumulated other comprehensive income                                       (3,582)              105,461
  Accumulated deficit                                                    (121,499,057)         (110,471,821)
                                                                        -------------         -------------
     Total stockholders' equity                                            25,685,512            33,105,328
                                                                        -------------         -------------
TOTAL                                                                   $  31,524,730         $  66,164,057
                                                                        =============         =============
</TABLE>

See notes to consolidated financial statements.


                                       3
<PAGE>   4


CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>
                                                              Three Months Ended                        Nine Months Ended
                                                                 September 30                              September 30
                                                     ---------------------------------        -----------------------------------
                                                          1999                1998                  1999                1998
                                                          ----                ----                  ----                ----
                                                      (unaudited)                               (unaudited)
<S>                                                  <C>                  <C>                  <C>                  <C>
REVENUES:
  Research and development contracts                 $    823,573         $  2,197,479         $  2,405,760         $  7,000,953
  Interest and other                                      366,177              629,328            1,617,577            1,524,762
                                                     ------------         ------------         ------------         ------------
     Total revenues                                     1,189,750            2,826,807            4,023,337            8,525,715
                                                     ------------         ------------         ------------         ------------

COSTS AND EXPENSES:

  Research and development                              2,689,158            6,354,031            8,031,283           18,934,863
  General and administrative                            1,448,623            2,048,438            4,508,951            6,034,790
  Interest                                                 46,528              100,250              114,780              259,393
                                                     ------------         ------------         ------------         ------------
     Total costs and expenses                           4,184,309            8,502,719           12,655,014           25,229,046
                                                     ------------         ------------         ------------         ------------

NET LOSS                                               (2,994,559)          (5,675,912)          (8,631,677)         (16,703,331)
                                                     ------------         ------------         ------------         ------------

ACCRETION AND REPURCHASE COSTS ON
SERIES 1998/A
PREFERRED STOCK                                                --             (422,213)          (2,395,559)            (574,256)
                                                     ------------         ------------         ------------         ------------

NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS                                  $ (2,994,559)        $ (6,098,125)        $(11,027,236)        $(17,277,587)
                                                     ============         ============         ============         ============

BASIC AND DILUTED LOSS PER
COMMON SHARE                                         $       (.08)        $       (.18)        $       (.31)        $       (.52)

COMMON SHARES FOR BASIC AND DILUTED
LOSS COMPUTATION                                       35,993,359           33,620,764           35,395,653           33,523,588
                                                     ============         ============         ============         ============


CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

NET LOSS                                             $ (2,994,559)        $ (5,675,912)        $ (8,631,677)        $(16,703,331)

UNREALIZED LOSS ON MARKETABLE
SECURITIES                                               (109,043)                  --             (109,043)                  --
                                                     ------------         ------------         ------------         ------------

COMPREHENSIVE LOSS                                   $ (3,103,602)        $ (5,675,912)        $ (8,740,720)        $(16,703,331)
                                                     ============         ============         ============         ============
</TABLE>


See notes to consolidated financial statements.


                                       4
<PAGE>   5


CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

<TABLE>
<CAPTION>
                                                                          Nine Months Ended September 30
                                                                        ---------------------------------
                                                                             1999                 1998
                                                                             ----                 ----

                                                                                    (unaudited)
<S>                                                                     <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                $ (8,631,677)        $(16,703,331)
                                                                        ------------         ------------
Adjustments to reconcile net loss to net cash used:
  Depreciation and amortization                                              736,761            1,981,409
  Compensation expense                                                        64,000               15,828
  Deferred patent and application costs                                      128,104                   --
  Increase (decrease) in cash from:
    Accounts receivable                                                      547,074            3,110,321
    Inventory and prepaid expenses                                           101,767             (562,384)
    Accounts payable and accrued liabilities                              (2,372,684)             160,803
    Deferred contract revenue                                             (2,250,000)                  --
                                                                        ------------         ------------
       Total adjustments                                                  (3,044,978)           4,705,977
                                                                        ------------         ------------

  Net cash used for operating activities                                 (11,676,655)         (11,997,354)
                                                                        ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities                                         (7,391,106)         (23,190,611)
Sale of marketable securities                                             26,208,936           16,053,731
Expenditures for property, plant and equipment                              (593,777)          (2,365,189)
Expenditures for patents                                                    (551,158)            (892,887)
Note receivable - officer                                                         --              (10,000)
Repayment of note receivable - officer                                       116,668              116,667
Decrease (increase) in deposits and other                                         --                9,301
                                                                        ------------         ------------

  Net cash provided by (used for) investing activities                    17,789,563          (10,278,988)
                                                                        ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
  Series 1998/A Preferred Stock                                           25,000,000
  Common Stock - other                                                       674,464              653,183
Cost of raising equity                                                            --           (1,381,634)
Repurchase of Series 1998/A Preferred Stock                              (22,470,347)                  --
Increase in obligations under capital leases                                 311,031              193,524
Repayments of obligations under capital leases                              (170,798)            (150,568)
                                                                        ------------         ------------

  Net cash provided by (used for) financing activities                   (21,655,650)          24,314,505
                                                                        ------------         ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (15,542,742)           2,038,163

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            17,738,044            2,158,909
                                                                        ------------         ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                $  2,195,302         $  4,197,072
                                                                        ============         ============

SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations        $    313,512         $  1,089,164
                                                                        ============         ============

Conversion of Series 1998/A Preferred Stock to Common Stock             $  2,978,000         $    524,365
                                                                        ============         ============
</TABLE>


See notes to consolidated financial statements.


                                       5
<PAGE>   6


CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================

1.   OPINION OF MANAGEMENT - The accompanying unaudited consolidated financial
     statements have been prepared in accordance with generally accepted
     accounting principles applicable to interim periods. These statements are
     condensed and do not include all disclosures as required by generally
     accepted accounting principles. In the opinion of management, the unaudited
     financial statements contain all adjustments (all of which were considered
     normal and recurring) necessary to present fairly the Company's financial
     position at September 30, 1999 and the results of operations and cash flows
     for the periods presented. The financial statements should be read in
     conjunction with the Company's audited consolidated financial statements
     and notes thereto for the year ended December 31, 1998.

     Interim results are not necessarily indicative of results for a full year
     and such results are subject to year- end adjustments and independent
     audit.

2.   SALE OF MANUFACTURING OPERATIONS - In November 1998, the Company sold
     certain of its Osteogenic Protein-l (OP-1) manufacturing rights and
     facilities to Stryker Corporation ("Stryker"). The transaction is expected
     to provide the Company with increased royalties on Stryker products, if
     approved for commercial sale, in lieu of the manufacturing revenue
     anticipated under the prior agreement.

     As a result of this transaction, the Company recorded a charge of
     $1,362,249 in the quarter ended December 31, 1998. Approximately $267,000
     and $903,000 of accrued costs, principally representing future cash outlays
     for employee termination costs, remained to be paid at September 30, 1999
     and December 31, 1998, respectively.

3.   REPURCHASE OF SERIES 1998/A PREFERRED STOCK - On May 7, 1999, the Company
     repurchased 20,486 shares, which represented all of the outstanding Series
     1998/A Preferred Stock following final conversions, for approximately
     $22,470,000 in cash. As a result of this transaction, the Series 1998/A
     Preferred Stock has been retired and there will be no subsequent
     conversions into Common Stock. Additionally, in the quarter ended June 30,
     1999, the Company recorded a charge to the Accretion and Repurchase Costs
     on Series 1998/A Preferred Stock line in the Statement of Operations of
     approximately $1,867,000, which represented accretion of the Series 1998/A
     Preferred Stock up to its repurchase amount and accretion of the remaining
     unamortized issuance costs as of May 7, 1999.

4.   STOCK PLANS - In June 1999, the stockholders of the Company voted to amend
     the Company's 1992 Non-employee Director Non-qualified Stock Option Plan
     (the "Director Plan") to increase the aggregate number of shares of Common
     Stock authorized for issuance under the Director Plan by 200,000 from
     300,000 to 500,000.

5.   NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
     Board (the "FASB") released Statement of Financial Accounting Standards No.
     133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
     No. 133") which the Company will be required to adopt effective January 1,
     2001. SFAS No. 133 establishes standards for reporting and accounting for
     derivative instruments, and conforms the requirements for treatment of
     hedging activities across the different types of exposures hedged. The
     Company has not yet completed its evaluation of SFAS No. 133 and is,
     therefore, unable to disclose the impact adoption will have on its
     consolidated financial position or results of operations.

6.   SUBSEQUENT EVENT - On October 19, 1999, the Company announced that it had
     focused its operational and financial resources on the development of its
     morphogenic protein-based clinical candidates for the treatment of stroke
     and renal disease. This resulted in a reduction of the Company's employee
     headcount from 70 to 43. Approximately $650,000 of costs will be recorded
     in the fourth quarter of 1999 as a result of this reorganization.


                                       6
<PAGE>   7


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================

GENERAL

To date, we have derived most of our revenues from research and development
payments and license fees under agreements with collaborative partners. We
anticipate that over the next several years we will derive most of our revenues
from agreements with collaborative partners, including possible royalty revenues
from Stryker. We have never been profitable and expect to incur additional
operating losses in the remainder of 1999 and in 2000. Results beyond 2000 will
depend largely on the timing and magnitude of royalty payments from Stryker if
the OP-1 device, currently manufactured by Stryker, is approved for commercial
sale. We may incur continued losses in future years.

Our research agreements with collaborative partners have typically obligated
such collaborative partners to provide for the partial or complete funding of
research and development for specified projects and pay royalties to us in
exchange for licenses to market the resulting products. We have been a party to
research collaborations with Stryker to develop products for orthopaedic
reconstruction and dental therapeutics and with Biogen Inc. ("Biogen") to
develop products for the treatment of renal disorders. Each of these research
collaborations was restructured in 1998.

Under the research portion of our collaboration with Stryker, prior to its
restructuring in November 1998, we supplied OP-1 products to Stryker for
clinical trials and other uses, provided manufacturing regulatory support and
performed research work pursuant to work plans we both established periodically.
In November 1998, we sold certain of our OP-1 manufacturing rights and
facilities to Stryker. In fiscal 1999, we have focused internal research efforts
on developing new tissue regeneration therapies in non-bone applications and do
not anticipate significant revenue from Stryker in the remainder of 1999.

In December 1996, we signed a Research Collaboration and License Agreement with
Biogen (the "Biogen Research Agreement"). Under the Biogen Research Agreement,
we performed research work pursuant to work plans we both established
periodically. In 1998, we signed an Amendment Agreement (the "Biogen Amendment
Agreement") with Biogen. Under this amendment, we have assumed primary
responsibility for the development of OP-1 products for the treatment of renal
disorders. Biogen has provided research funding to us through December 1999 and
retains an option to resume development of OP-1 products for use in chronic
renal failure during this period.

In October 1999, the Company announced that it had focused its operational and
financial resources on the development of its morphogenic protein-based clinical
candidates for the treatment of stroke and renal disease. This resulted in a
reduction of the Company's employee headcount from 70 to 43. Approximately
$650,000 of costs will be recorded in the fourth quarter of 1999 as a result of
this reorganization.

Although we are seeking and in the future may seek to enter into collaborative
arrangements with respect to certain other projects, there can be no assurance
that we will be able to obtain such agreements on acceptable terms or that the
costs required to complete the projects will not exceed the funding available
for such projects from the collaborative partners.

We earn and recognize revenue based upon work performed, upon the sale or
licensing of product rights, upon shipment of product for use in preclinical and
clinical testing or upon attainment of benchmarks specified in collaborative
agreements. Our results of operations vary significantly from year to year and
quarter to quarter and depend on, among other factors, the timing of payments
made by collaborative partners. The timing of our contract revenues may not
match the timing of our associated product development expenses. As a result,
research and development expenses may exceed contract revenues in any particular
period. Furthermore, aggregate research and development contract revenues for
any product may not offset all of our development expenses for such product.


                                       7
<PAGE>   8


RESULTS OF OPERATIONS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998. Our total
revenues for the three and nine month periods ended September 30, 1999 were
approximately $1,190,000 and $4,023,000, respectively. Our total revenues for
the three and nine month periods ended September 30, 1998 were approximately
$2,827,000 and $8,526,000, respectively. Research and development contract
revenues decreased 63% to approximately $824,000 for the three month period
ended September 30, 1999 from approximately $2,197,000 for the three month
period ended September 30, 1998 and decreased 66% to approximately $2,406,000
for the nine month period ended September 30, 1999 from approximately $7,001,000
for the nine month period ended September 30, 1998. The decrease in research and
development contract revenues from 1998 to 1999 was primarily the result of a
decrease in our research and development contract revenues from Stryker. We
anticipate that research and development contract revenues in the last quarter
in 1999 will be substantially less than the comparable period in 1998 because we
are no longer providing research services or supplying OP-1 to Stryker.

Interest revenues decreased 42% to approximately $366,000 for the three month
period ended September 30, 1999 from $629,000 for the three month period ended
September 30, 1998 because we had lower average balances of cash and marketable
securities during the three month period ended September 30, 1999, as compared
to the same period in 1998. Interest revenues increased 6% to approximately
$1,618,000 for the nine month period ended September 30, 1999 from approximately
$1,525,000 for the nine month period ended September 30, 1998 because we had
higher average balances of cash and marketable securities during the nine month
period ended September 30, 1999 as compared to the same periods of 1998. In May
1998, we sold 25,000 shares of Series 1998/A Preferred Stock. Net proceeds to
us, after deducting fees and other expenses of the offering, were approximately
$23,618,000. In addition, we received approximately $19,530,000 in the fourth
quarter of 1998 from the sale of our OP-1 manufacturing-related assets to
Stryker. As discussed further below, in May of 1999 we repurchased all of the
outstanding Series 1998/A Preferred Stock for approximately $22,470,000 in cash.
We therefore expect interest revenues for the second half of 1999 to be lower
than interest revenues from the first half of 1999 and lower than comparable
periods in 1998.

Our total costs and expenses decreased 51% to approximately $4,184,000 for the
three month period ended September 30, 1999, from approximately $8,503,000 for
the three month period ended September 30, 1998 and decreased 50% to
approximately $12,655,000 for the nine month period ended September 30, 1999
from approximately $25,229,000 for the nine month period ended September 30,
1998. Research and development expenses decreased 58% to approximately
$2,689,000 for the three month period ended September 30, 1999 from
approximately $6,354,000 for the three month period ended September 30, 1998 and
decreased 58% to approximately $8,031,000 for the nine month period ended
September 30, 1999 from approximately $18,935,000 for the nine month period
ended September 30, 1998. The decrease in research and development expenses was
primarily due to the sale of certain of our OP-1 manufacturing rights and
facilities to Stryker in November 1998 and the elimination of manufacturing and
facility-related expenses with respect thereto. We had previously reported the
costs associated with such production of OP-1 as research and development
expenses. We anticipate that research and development expenses in the last
quarter of 1999 will be substantially less than in the comparable period of
1998. During 1999, our research and development expenses included research
relating to a renal disease therapy as part of the Biogen collaboration and
research relating to neurological disease therapies and other indications
proprietary to us.

Stryker initiated a modular PMA filing for the bone graft substitute product in
1998. In June 1999, Stryker stated that they had completed submission of the
modular PMA to the FDA, and in July 1999 stated that the FDA has accepted the
PMA for filing. Stryker has also submitted for European regulatory review the
OP-1 bone graft substitute product.

General and administrative expenses decreased 29% to approximately $1,449,000
for the three month period ended September 30, 1999 from approximately
$2,048,000 for the three month period ended September 30, 1998 and decreased 25%
to approximately $4,509,000 for the nine month period ended September 30, 1999
from approximately $6,035,000 for the nine month period ended September 30,
1998. The decrease was primarily due to a reduction in external legal and other
consulting costs and a reduction in personnel-related costs. We anticipate that
general and administrative expenses for the last quarter of 1999 will continue
at amounts consistent with the nine-month period ended September 30, 1999 but at
amounts lower than the comparable period in 1998.


                                       8
<PAGE>   9


Interest expense decreased 54% to approximately $47,000 for the three month
period ended September 30, 1999 from approximately $100,000 for the three month
period ended September 30, 1998 and decreased 56% to approximately $115,000 for
the nine month period ended September 30, 1999 from approximately $259,000 for
the nine month period ended September 30, 1998. The decrease in interest expense
was due to a decrease in our obligations under capital leases. As part of the
sale to Stryker of certain of our manufacturing-related assets in November 1998,
Stryker assumed $710,000 of our obligations under equipment lease agreements and
$1,727,000 of our obligations under a facility capital lease.

As a result of the foregoing, we incurred a net loss of $2,995,000 and
$8,632,000 for the three month and nine month periods ended September 30, 1999,
respectively, compared to a net loss of $5,676,000 and $16,703,000 for the three
and nine month periods ended September 30, 1998.

Accretion and Repurchase Costs on Series 1998/A Preferred Stock was $2,396,000
for the nine month period ended September 30, 1999, and included the following:
$385,000 calculated at the rate of 5% per annum of the stated value of the
outstanding Series 1998/A Preferred Stock; $144,000 of accretion of issuance
costs related to the sale of Series 1998/A Preferred Stock; and as a result of
the repurchase of the Series 1998/A Preferred Stock on May 7, 1999 (see
discussion in "Liquidity and Capital Resources" below), a one-time charge of
approximately $1,867,000 recorded in the second quarter of 1999 which represents
accretion of the Series 1998/A Preferred Stock up to its repurchase amount and
accretion of all remaining issuance costs. Accretion and Repurchase Costs on
Series 1998/A Preferred Stock was $422,000 and $574,000 for the three and nine
month periods ended September 30, 1998, respectively, and included the
following: $315,000 and $431,000, respectively, calculated at a rate of 5% per
annum of the stated value of the outstanding Series 1998/A Preferred Stock and
$107,000 and $143,000, respectively, of accretion of issuance costs related to
the sale of the Series 1998/A Preferred Stock. As a result of the repurchase of
the Series 1998/A Preferred Stock, there will be no further charges relating to
the Series 1998/A Preferred Stock.

In computing the net loss applicable to common stockholders for the three and
nine month periods ended September 30, 1999 and 1998, accretion and repurchase
costs of the Series 1998/A Preferred Stock mentioned above is included.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, our principal sources of liquidity consisted of cash,
cash equivalents and marketable securities of $23,468,000 and $203,000 remaining
on an equipment lease line as discussed below. We have financed our operations
primarily through placements of equity securities, revenues received under
agreements with collaborative partners, and more recently, manufacturing
contracts and the sale of certain of our OP-1 manufacturing rights and
facilities to Stryker.

We increased our investment in property, plant and equipment to $8,609,000 at
September 30, 1999 from $7,702,000 at December 31, 1998. We currently plan to
spend approximately $150,000 during the last quarter of 1999 on leasehold
improvements and equipment purchases to upgrade our research and development
capabilities. In May of 1999, we extended a master lease agreement, which was
originally entered into in October 1997, that provides for the sale and
leaseback or lease of up to $750,000 of laboratory and office equipment and
expires on December 31, 1999. At September 30, 1999, $203,000 was available
under this lease agreement.

On May 27, 1998, we completed a private placement with three institutional
investors for the sale of 25,000 shares of Series 1998/A Preferred Stock, with a
stated value of $1,000 per share resulting in net proceeds of approximately
$23,618,000 after expenses. Since issuance of the Series 1998/A Preferred Stock,
the holders converted a total of 4,514 shares of Series 1998/A Preferred Stock
into 2,043,765 shares of Common Stock through May 7, 1999. On May 7, 1999, we
repurchased 20,486 shares, which represented all of the outstanding Series
1998/A Preferred Stock following final conversions, for approximately
$22,470,000 in cash. As a result of this transaction, the Series 1998/A
Preferred Stock has been retired and there will be no subsequent conversions
into Common Stock.


                                       9
<PAGE>   10


In November 1998, we sold certain of our OP-1 manufacturing rights and
facilities to Stryker for total proceeds of approximately $19,530,000. We expect
that under the terms of the sale, we will receive increased royalties on Stryker
products, if approved for commercial sale, in lieu of the manufacturing revenues
anticipated under the prior agreement. Approximately $267,000 of accrued costs
associated with such sale remain to be paid at September 30, 1999. These
accruals principally represent future cash outlays for employee termination
costs. In prior years, we had received significant revenue from Stryker for
research support and the supply of OP-1. As a result of the sale of certain of
our OP-1 manufacturing rights and facilities to Stryker, we have received
significantly reduced research funding and manufacturing revenue during 1999.

In December 1998, we signed the Biogen Amendment Agreement. Under the amended
agreement, Biogen paid $3,000,000 to fund our research in 1999 for development
of OP-1 as a therapy for chronic renal failure. Biogen retains an option through
December 1999 to resume responsibility for development of OP-1 as a therapy for
chronic renal failure. If Biogen chooses not to exercise its option or the
option lapses, Biogen has no further obligation to provide funds to us.

We anticipate that our existing capital resources should enable us to maintain
our current and planned operations through the end of fiscal year 2000. We
expect to incur substantial additional research and development and other costs,
including costs related to preclinical studies and clinical trials. Our ability
to continue funding planned operations is dependent upon our ability to generate
sufficient cash flow from royalties on Stryker products, if approved for
commercial sale, from collaborative arrangements and from additional funds
through equity or debt financings, or from other sources of financing, as may be
required. We are seeking additional collaborative arrangements and also expect
to raise funds through one or more financing transactions, if conditions permit.
Over the longer term, because of our significant long-term capital requirements,
we intend to raise funds when conditions are favorable, even if we do not have
an immediate need for additional capital at such time. If Stryker products are
not approved for commercial sale and we do not receive royalties from Stryker
and/or if substantial additional funding is not available, our business will be
materially and adversely affected.

NEW ACCOUNTING STANDARDS

In June 1998, the FASB released SFAS No. 133, which the Company will be required
to adopt effective January 1, 2001. SFAS No. 133 establishes standards for
reporting and accounting for derivative instruments, and conforms the
requirements for treatment of hedging activities across the different types of
exposures hedged. The Company has not yet completed its evaluation of SFAS No.
133, and is therefore unable to disclose the impact adoption will have on its
consolidated financial position or results of operations.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, by the end
of 1999, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. If they are not, it may
result in system failure or miscalculations causing disruption of operations.

We have developed a plan to address the Year 2000 issues. In 1998, we conducted
a review of our computer systems to identify those areas that could be affected
by the Year 2000 issue. We also completed implementation of a new financial
accounting system that the vendor designed to properly process transactions
which could be impacted by the Year 2000 problem. We presently believe that,
with the completed upgrades to existing hardware and software systems, the Year
2000 problem will not pose significant operational problems. We have also
communicated with our significant suppliers and customers to determine the
progress such suppliers and customers are making in remediating their own Year
2000 issues. We are requiring that such significant suppliers and customers
certify that those products and services that are used in our operations are
Year 2000 compliant. If such upgrades are not made, are not completed timely, or
if any of our suppliers or customers do not successfully deal with the Year 2000
issue, the Year 2000 issue could have a material impact on our operations. We
could experience delays in receiving or sending our material and products that


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<PAGE>   11


would increase our costs and that could cause us to lose research data and
certain other business and even customers and collaborators could subject us to
claims for damages. Problems with the Year 2000 issue could also result in
delays in invoicing our collaborators, partners and customers or in us receiving
payments from them. In addition, our research and development efforts, which
rely on the storage and retrieval of electronic information, could be
interrupted resulting in the loss of current collaborations or inventory
storage, and the impairment of our ability to enter into new collaborations and
vendor agreements. The severity of these possible problems would depend on the
nature of the problem and how quickly it could be corrected or an alternative
implemented, which is unknown at this time. In the extreme, such problems could
bring our operations to a standstill.

While management has not specifically determined the costs associated with our
Year 2000 readiness efforts, monitoring and managing the Year 2000 issue will
result in additional direct and indirect costs to us. Direct costs include
potential charges by third-party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. Such costs have not been material to date. Both direct and
indirect costs of addressing the Year 2000 issue will be charged to earnings as
incurred.

To date, our Year 2000 remediation costs have not been material to our financial
position or results of operations and we believe that future costs to complete
such remediation will not be material to our financial position or results of
operations. We have substantially completed the remediation of our Year 2000
issues and have developed a contingency plan to address any unresolved Year 2000
issues. Some risks of the Year 2000 issue, however, are beyond our control and
the control of our suppliers and customers. For example, no preparations or
contingency plan will protect us from a downturn in economic activity caused by
the possible ripple effect throughout the entire economy caused by the Year 2000
issue.

CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements which are based on
management's current expectations and which involve risks and uncertainties. Our
actual results may differ significantly from the results discussed in the
forward-looking statements. We caution investors that there is no guarantee that
the actual results or business conditions will not differ materially from those
projected or suggested in such forward-looking statements as a result of various
factors, including, but not limited to the following:

-    Our reliance on current and prospective collaborative partners to supply
     funds for research and development and to commercialize our products;
-    Uncertainty as to timing of and our ability to commercialize our products;
-    Our reliance on our lead product candidate;
-    Our lack of control over the clinical or regulatory progress of several
     applications for our products, which are controlled by our collaborative
     partners;
-    Our reliance on programs in various stages of preclinical development and
     early stage research;
-    Our reliance on key management personnel;
-    Intense competition related to the research and development of morphogenic
     and other proteins for various applications and therapies and the
     possibility that others may discover or develop, and we may not be able to
     gain rights with respect to, the technology necessary to commercialize our
     products;
-    Our lack of development, commercial manufacturing, marketing and sales
     experience and the risk that any products that we develop may not be able
     to be marketed at acceptable prices or receive commercial acceptance in the
     markets that we expect to target;
-    Uncertainty regarding the effect on our operations of the Year 2000 issue;
-    Uncertainty related to market conditions affecting the biotechnology
     industry;
-    Uncertainty as to the extent of future government regulation of our
     business;
-    Our lack of control over governmental approvals on our lead product;
-    Uncertainty as to whether there will exist adequate reimbursement for our
     products from governments, private health insurers and other organizations.

As a result, our future development and commercialization efforts involve a high
degree of risk.


                                       11
<PAGE>   12


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================

We invest cash balances in excess of operating requirements in short-term
marketable securities, generally corporate bonds and notes with minimum rating
of A and United States Government and agency instruments. The maturities of
these instruments range from one to twenty-nine months, with a weighted average
maturity of less than one year. All marketable securities are considered
available for sale. At December 31, 1998, the fair market value of these
securities amounted to $40,197,000, with unrealized gains of $105,000 included
as a component of stockholders' equity. If interest rates were to increase
rapidly by 5%, an event we consider unlikely, the carrying value of the
securities portfolio could decline by approximately $1,400,000. However,
because of the quality of the investment portfolio and the short term nature of
the marketable securities, we do not believe that the principal amount of the
securities would be impaired and, therefore, no loss would be ultimately
recognized in the statement of operations.

                                       12
<PAGE>   13


PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

          Not Applicable.

ITEM 2.   CHANGES IN SECURITIES.

          (a)  Not Applicable.

          (b)  Not Applicable.

          (c)  Not Applicable.

          (d)  Not Applicable.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

          Not Applicable.

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

          Not Applicable.

ITEM 5.   OTHER INFORMATION.

          Not Applicable.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.

          (a)  Exhibits.

<TABLE>
<CAPTION>
               Exhibit
               Number     Description
               -------    -----------

<S>                       <C>
                 27       Financial Data Schedule.
</TABLE>

          (b)  Reports on Form 8-K.

               No reports on Form 8-K were filed during the three month period
               ended September 30, 1999.


                                       13
<PAGE>   14


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hopkinton, Massachusetts, on November
10, 1999.

                                            CREATIVE BIOMOLECULES, INC.


                                            By: /s/ STEVEN L. BASTA
                                                --------------------------------
                                                Steven L. Basta
                                                Vice President
                                                Finance and Business Development



                                       14
<PAGE>   15


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
      Exhibit
      Number        Description
      -------       -----------

<S>                 <C>
        27          Financial Data Schedule
</TABLE>


                                       15