<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, 1998

                                       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)

<TABLE>
<CAPTION>
<S>                                          <C>

           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)
</TABLE>


       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 31, 1998, the registrant had 34,010,809 shares of common stock
outstanding.


<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                      <C>
PART I.    FINANCIAL INFORMATION

           Item 1.    Financial Statements

                      Consolidated Balance Sheets - September 30, 1998 and December 31, 1997               3

                      Consolidated Statements of Operations for the three months and
                          nine months ended September 30, 1998 and 1997                                    4

                      Consolidated Statements of Cash Flows for the nine months ended
                          September 30, 1998 and 1997                                                      5

                      Notes to Consolidated Financial Statements                                           6

           Item 2.    Management's Discussion and Analysis
                          of Financial Condition and Results of Operations                                 8


PART II. OTHER INFORMATION

           Item 1.    Legal Proceedings                                                                   14

           Item 2.    Changes in Securities                                                               14

           Item 3.    Defaults Upon Senior Securities                                                     14

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

           Item 5.    Other Information                                                                   14

           Item 6.    Exhibits and Reports on Form 8-K                                                    15


SIGNATURES
</TABLE>


                                      2
<PAGE>   3


                   CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                     September 30,       December 31,
                                                                                         1998               1997
                                                                                    --------------      -------------
                                                                                      (unaudited)
<S>                                                                                 <C>                  <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                         $   4,197,072       $   2,158,909
  Marketable securities                                                                35,575,721          28,438,841
  Accounts receivable                                                                   1,462,197           4,572,518
  Inventory                                                                             1,444,426           1,249,330
  Prepaid expenses and other                                                              651,937             284,649
                                                                                    -------------       -------------
    Total current assets                                                               43,331,353          36,704,247
                                                                                    -------------       -------------

PROPERTY, PLANT AND EQUIPMENT - net                                                    18,871,266          17,245,338
                                                                                    -------------       -------------
OTHER ASSETS:
  Notes receivable - officers                                                             150,839             273,334
  Patents and licensed technology - net                                                   404,422             417,070
  Deferred patent application costs - net                                               4,972,631           4,220,080
  Deposits and other                                                                      168,629             177,930
                                                                                    -------------       -------------
    Total other assets                                                                  5,696,521           5,088,414
                                                                                    -------------       -------------
TOTAL                                                                               $  67,899,140       $  59,037,999
                                                                                    =============       =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Lease obligations - current portion                                               $     341,924       $     124,575
  Accounts payable                                                                      1,924,735           2,311,710
  Accrued liabilities                                                                     947,846             575,171
  Accrued compensation                                                                  1,487,377           1,312,274
                                                                                    -------------       -------------
    Total current liabilities                                                           4,701,882           4,323,730
                                                                                    -------------       -------------

LEASE OBLIGATIONS                                                                       2,919,698           2,004,927
                                                                                    -------------       -------------
SERIES PREFERRED STOCK, $.01 par value, 24,461 shares issued 
  and outstanding at September 30, 1998, liquidation preference 
  of $24,883,487 at September 30, 1998                                                 23,668,257                  --
                                                                                    -------------       -------------

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
    24,461 shares and none issued and outstanding at 
    September 30, 1998 and December 31, 1997, respectively
  Common stock, $.01 par value, 50,000,000 shares authorized, 
    33,831,109 shares and 33,392,582 shares issued and outstanding
    at September 30, 1998 and December 31, 1997, respectively                             338,311             333,926
  Additional paid-in capital                                                          141,638,675         140,465,512
  Accumulated deficit                                                                (105,367,683)        (88,090,096)
                                                                                    -------------       -------------
    Total stockholders' equity                                                         36,609,303          52,709,342
                                                                                    -------------       -------------
TOTAL                                                                               $  67,899,140       $  59,037,999
                                                                                    =============       =============
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       3
<PAGE>   4


                   CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                 Three Months Ended                  Nine Months Ended
                                          -------------------------------       -------------------------------
                                          September 30,      September 30,      September 30,     September 30,
                                              1998               1997              1998               1997  
                                          ------------       ------------       ------------       ------------
<S>                                       <C>                <C>                <C>                <C>   
REVENUE:
  Research and development contracts      $  2,197,479       $  3,762,674       $  7,000,953       $  9,651,740
  Manufacturing contracts                           --                 --                 --            393,926
  Interest and Other                           629,328            555,893          1,524,762          1,836,070
                                          ------------       ------------       ------------       ------------
    Total revenues                           2,826,807          4,318,567          8,525,715         11,881,736
                                          ------------       ------------       ------------       ------------
COSTS AND EXPENSES:
  Research and development                   6,354,031          6,342,867         18,934,863         18,359,049
  Manufacturing contracts                           --                 --                 --            273,757
  General and administrative                 2,048,438          1,467,658          6,034,790          4,607,512
  Interest                                     100,250             52,413            259,393            157,767
                                          ------------       ------------       ------------       ------------
    Total costs and expenses                 8,502,719          7,862,938         25,229,046         23,398,085
                                          ------------       ------------       ------------       ------------

NET LOSS                                    (5,675,912)        (3,544,371)       (16,703,331)       (11,516,349)
                                          ------------       ------------       ------------       ------------
ACCRETION ON SERIES
PREFERRED STOCK                               (422,213)                --           (574,256)                --  
                                          ------------       ------------       ------------       ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS                       $ (6,098,125)      $ (3,544,371)      $(17,277,587)      $(11,516,349)
                                          ============       ============       ============       ============
BASIC AND DILUTED
LOSS PER COMMON SHARE                     $       (.18)      $       (.11)      $       (.52)      $       (.35)
                                          ============       ============       ============       ============
COMMON SHARES FOR
BASIC AND DILUTED                           33,620,764         33,110,299         33,523,588         32,993,795
                                          ============       ============       ============       ============
</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       4
<PAGE>   5


                  CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                                             Nine Months Ended
                                                                      --------------------------------
                                                                      September 30,      September 30,
                                                                          1998               1997
                                                                      ------------       -------------
<S>                                                                   <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                            $(16,703,331)      $(11,516,349)
                                                                      ------------       ------------
  Adjustments to reconcile net loss to net cash
   provided by (used for) operating activities:
    Depreciation and amortization                                        1,981,409          1,692,591
    Consulting expense                                                          --            254,350
    Compensation expense                                                    15,828                 --
    Increase (decrease) in cash from:
       Accounts receivable                                               3,110,321         (2,835,354)
       Inventory and prepaid expenses                                     (562,384)           (34,817)
       Accounts payable and accrued liabilities                            160,803         (1,847,536)
       Deferred contract revenue                                                --          1,000,000
                                                                      ------------       ------------
          Total adjustments                                              4,705,977         (1,770,766)
                                                                      ------------       ------------

  Net cash used for operating activities                               (11,997,354)       (13,287,115)
                                                                      ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities                                   (23,190,611)       (21,572,059)
  Sales of marketable securities                                        16,053,731          6,282,828
  Expenditures for property, plant and equipment                        (2,365,189)        (2,037,824)
  Expenditures for patents                                                (892,887)          (888,020)
  Note receivable - officer                                                (10,000)           (40,000)
  Repayment of note receivable - officer                                   116,667            116,666
  Decrease in deposits and other                                             9,301            113,820
                                                                      ------------       ------------

  Net cash used for investing activities                               (10,278,988)       (18,024,589)
                                                                      ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of equity:
    Series Preferred Stock                                              25,000,000                 --
    Common stock - other                                                   653,183          1,298,185
  Cost of raising equity                                                (1,381,634)                --
  Increase in obligations under capital leases                             193,524                 --
  Repayments of obligations under capital leases                          (150,568)           (39,808)
                                                                      ------------       ------------

  Net cash provided by financing activities                             24,314,505          1,258,377
                                                                      ------------       ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     2,038,163        (30,053,327)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                           2,158,909         38,248,988
                                                                      ------------       ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                              $  4,197,072       $  8,195,661
                                                                      ============       ============

SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations      $  1,089,164
                                                                      ============
Conversion of Series Preferred Stock                                  $    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 financial statements contain all
adjustments (all of which were considered normal and recurring) necessary to
present fairly the Company's financial position 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, 1997.

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. NEW ACCOUNTING STANDARDS - The Financial Accounting Standards Board has
issued two new statements that became effective in reporting periods after
December 15, 1997. Statement of Financial Accounting Standards ("SFAS") Number
130 "Reporting Comprehensive Income" ("SFAS 130") establishes standards for
reporting comprehensive income and its components in the consolidated financial
statements. SFAS Number 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") establishes standards for reporting
information on operating segments in interim and annual financial statements.
The Company adopted both standards on January 1, 1998. The adoption of SFAS 130
and SFAS 131 resulted in no additional reporting as the Company has no other
items of comprehensive income or loss and does not have multiple operating
segments.

3. Series 1998/A Convertible Preferred Stock - On May 27, 1998 (the "Issue
Date"), the Company completed a private placement with three institutional
investors (the "Investors") for the sale of 25,000 shares of Series 1998/A
Convertible Preferred Stock, $.01 par value per share (the "Series Preferred
Stock"), with a stated value of $1,000 per share resulting in gross proceeds of
$25,000,000. Issuance costs totaled approximately $1,382,000 (offset against the
Series Preferred Stock proceeds in the accompanying balance sheet at September
30, 1998). Accretion of the issuance costs will be recorded on the interest
method over three years.

The Series Preferred Stock is convertible into the number of shares of the
Company's common stock, $.01 par value per share (the "Common Stock") equal to
the stated value plus accretion of 5% per annum divided by the then applicable
conversion price. The conversion price is equal to the average of the five
lowest closing bid prices of the Common Stock during the twenty consecutive
trading days immediately preceding the conversion date (the "Conversion Price").
From the Issue Date through May 1999, the Conversion Price may not exceed
$10.00. From June 1999 through January 2000, the Conversion Price may not exceed
$11.00. The Investors are subject to certain limits on the number of shares of
Series Preferred Stock that they can convert per month from the Issue Date
through January 2000 and no Investor will be permitted at any time to convert an
amount of shares of Series Preferred Stock which would result in such Investor
owning more than 4.9% of the then outstanding Common Stock.

The Series Preferred Stock is subject to redemption at varying percentages of
the stated value plus accretion of 5% per annum. The Company may redeem all or a
portion of the Series Preferred Stock (i) at a redemption percentage of 115% or
(ii) if the market price of the Common Stock falls below certain thresholds, at
a redemption percentage of 105%. The Company may also redeem the Series
Preferred Stock in connection with certain acquisitions of the Company at
redemption percentages ranging from 125% to 135%. Upon the occurrence of certain
events described in the Certificate of Designations, the Company may be required
to redeem the Series Preferred Stock at a redemption percentage of 110%. If the
market price of the Common 


                                       6

<PAGE>   7


Stock falls below certain thresholds, the Company may be required to redeem a
portion of the outstanding Series Preferred Stock at a redemption percentage of
100%. Any shares of Series Preferred Stock not converted into Common Stock by
May 2001 will convert into Common Stock at the then effective Conversion Price.
During the three month period ended September 30, 1998, holders of Series
Preferred Stock elected to convert 539 shares of Series Preferred Stock into
209,934 shares of Common Stock.

4. STOCK PLANS - In April 1998, the Board of Directors adopted and in June 1998,
the stockholders of the Company approved the 1998 Stock Plan (the "1998 Plan"),
which permits the granting of incentive and non-qualified stock options to
consultants, employees or officers of the Company at prices determined by the
Board of Directors. The number of shares of Common Stock subject to the 1998
Plan is 3,000,000. Also in June 1998, the stockholders of the Company voted to
amend the Company's Employee Stock Purchase Plan to increase by 250,000 from
500,000 to 750,000 the aggregate number of shares of Common Stock which may be
purchased by eligible employees.

5. SUBSEQUENT EVENT - On October 16, 1998, the Company announced that it had
entered into an agreement for the sale of its OP-1 manufacturing rights to
Stryker Corporation for increased royalties in lieu of the manufacturing profits
anticipated under the prior agreement and manufacturing-related assets for
approximately $20,000,000 in cash (which approximates net book value). Subject
to the satisfaction of certain closing conditions, this transaction is expected
to close during the three month period ending December 31, 1998.

                                       7
<PAGE>   8


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


GENERAL

         To date, most of the Company's revenues have been derived from research
and development payments and license fees under agreements with collaborative
partners. In 1996 and 1995, a significant portion of the Company's revenues also
were derived from contract manufacturing. The Company anticipates that over the
next several years its revenues will be derived primarily from agreements with
collaborative partners. The Company has been unprofitable since its inception
and expects to incur additional operating losses over the next several years.

         The Company's research agreements with collaborative partners have
typically provided for the partial or complete funding of research and
development for specified projects and royalties payable to the Company in
exchange for licenses to market the resulting products. The Company is a party
to major research collaborations with Stryker Corporation ("Stryker") to develop
products for orthopaedic reconstruction and dental therapeutics and with Biogen,
Inc. ("Biogen") to develop products for the treatment of renal disorders.

         Under the research portion of the collaboration with Stryker, the
Company supplies OP-1 products to Stryker for clinical trials and other uses,
provides clinical support and performs research work pursuant to work plans
established periodically by the two companies. In October 1998, the Company
announced that it had entered into an agreement to sell its OP-1 manufacturing
rights and facilities to Stryker. The Company anticipates that the transaction
will close during the three month period ending December 31, 1998, subject to
the satisfaction of certain closing conditions. Until the close of the
transaction, the Company continues to supply OP-1 products to Stryker, provide
clinical support and perform research work pursuant to work plans established on
a month to month basis by the two companies. After the transaction, the Company
will focus internal research efforts on developing new tissue regeneration
therapies in non-bone applications (see discussion under "Liquidity and Capital
Resources" below).

         In December 1996, the Company signed a Research Collaboration and
License Agreement with Biogen (the "Biogen Research Agreement"). Under the
Biogen Research Agreement, the Company will perform research work through
December 1999 pursuant to work plans established periodically by the two
companies. In October 1998, the Company announced that Biogen and the Company
have agreed to modify the Biogen Research Agreement. Under the proposed revision
of the agreement, the Company will assume primary responsibility for the
development of products for the treatment of renal disorders. Biogen will
continue to provide research funding through December 1999 (see discussion under
"Liquidity and Capital Resources" below).

         Although the Company is seeking and in the future may seek to enter
into collaborative arrangements with respect to certain other projects, there
can be no assurance that the Company 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.

         The Company's manufacturing contracts provide for technical
collaboration and manufacturing for third parties at the Company's manufacturing
facility in Lebanon, New Hampshire and at the Company's research facility in
Hopkinton, Massachusetts. The Company is presently a party to a manufacturing
contract with Biogen (the "Manufacturing Contract") to produce several of
Biogen's protein-based therapeutic candidates. Under the Biogen Research
Agreement the companies agreed to extend the Manufacturing Contract for two
years through 1999, with Biogen having the option, but not the obligation, to
use the manufacturing facility for a mutually agreeable number of months (see
discussion under "Liquidity and Capital 


                                       8
<PAGE>   9


Resources" below). As part of the proposed sale to Stryker of the manufacturing
facility, Stryker would assume the Company's obligations under the Manufacturing
Contract.

         Revenue is earned and recognized 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. The Company's results of operations vary significantly
from year to year and quarter to quarter and depend on, among other factors, the
timing of contract manufacturing activities and the timing of payments made by
collaborative partners. The timing of the Company's contract revenues may not
match the timing of the Company's 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 the Company's development
expenses for such product.

Results of Operations

         THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997. The
Company's total revenues for the three and nine month periods ended September
30, 1998 were $2,827,000 and $8,526,000, respectively. This compared to total
revenues of $4,319,000 and $11,882,000 for the three and nine month periods
ended September 30, 1997, respectively. Research and development contract
revenues decreased 42% to $2,197,000 for the three month period ended September
30, 1998 from $3,763,000 for the three month period ended September 30, 1997 and
27% to $7,001,000 for the nine month period ended September 30, 1998 from
$9,652,000 for the nine month period ended September 30, 1997. Research and
development contract revenues for the nine month period ended September 30, 1997
included revenue from the supply of OP-1 to Biogen pursuant to the Biogen
Research Agreement. The Company does not anticipate revenues from the supply of
OP-1 to Biogen during the year ending December 31, 1998. The decrease in
research and development contract revenues from Biogen is partially offset by an
increase in research and development contract revenues from the supply of OP-1
to Stryker. The Company anticipates that research and development contract
revenues for the fourth quarter of fiscal 1998 will be less than the three month
period ended September 30, 1998 and less than the research and development
contract revenues for the comparable periods in 1997 due to decreases in
research funding from both Stryker and Biogen (see discussion under "Liquidity
and Capital Resources" below).

         Manufacturing contract revenues for the three and nine month periods
ended September 30, 1997 reflect manufacturing for Biogen conducted at the
Company's research facility in Hopkinton, Massachusetts under a Service
Agreement separate from the Biogen Research Agreement and Manufacturing
Contract.

         Interest revenues increased 13% to $629,000 for the three month period
ended September 30, 1998 from $556,000 for the three month period ended
September 30, 1997 and decreased 17% to $1,525,000 for the nine month period
ended September 30, 1998 from $1,836,000 for the nine month period ended
September 30, 1997. The fluctuations are due to increases and decreases in the
average funds available for investment, respectively. The Company anticipates
that interest income for the fourth quarter of fiscal 1998 will be higher than
the three month period ended September 30, 1998 due to an anticipated increase
in the average funds available for investment. In May 1998, the Company sold
25,000 shares of Series Preferred Stock. Net proceeds to the Company, after
deducting fees and other expenses of the offering, were approximately
$23,618,000. In addition, the Company expects to receive approximately
$20,000,000 in the fourth quarter of fiscal 1998 from the sale of its OP-1
manufacturing related assets to Stryker. See discussion under "Liquidity and
Capital Resources" below.

         The Company's total costs and expenses were $8,503,000 and $25,229,000
for the three and nine month periods ended September 30, 1998, respectively.
This compared to total costs and expenses of $7,863,000 and $23,398,000 for the
three and nine month periods ended September 30, 1997, respectively. Research
and development expenses increased less than 1% to $6,354,000 for the three
month period ended 

                                       9

<PAGE>   10

September 30, 1998 from $6,343,000 for the three month period ended September
30, 1997 and increased 3% to $18,935,000 for the nine month period ended
September 30, 1998 from $18,359,000 for the nine month period ended September
30, 1997. Research and development activities for the three and nine month
periods ended September 30, 1998 include work in preparation for the filing of a
Pre-Market Approval ("PMA") application and work in preparation for the U.S.
Food and Drug Administration's ("FDA") regulatory review of Stryker's bone graft
substitute product, research into renal disease therapy as part of the Biogen
collaboration and research into neurological disease therapies and other
indications proprietary to the Company. Stryker has initiated regulatory review
of the bone graft substitute product following a 122 patient pivotal trial in
the treatment of tibial non-union fractures which was presented at the American
Academy of Orthopaedic Surgeons in March 1998. The filing is being done on a
modular basis. Two of the three modules have been submitted and the FDA review
is ongoing. In connection with the review of the manufacturing module, the
Company completed revalidating certain manufacturing processes and Stryker is
working to complete the submission of the modular PMA to the FDA. The Company
anticipates that research and development expenses for the fourth quarter of
fiscal 1998 may be less than the three month period ended September 30, 1998 due
to the planned sale of its OP-1 manufacturing rights and facilities to Stryker
Corporation and the elimination of manufacturing-related expenses. See
discussion under "Liquidity and Capital Resources" below.

         Cost of manufacturing contracts for the three and nine month period
ended September 30, 1997 consists of the costs associated with the manufacturing
for Biogen, discussed under manufacturing contract revenues above.

         General and administrative expenses increased 40% to $2,048,000 for the
three month period ended September 30, 1998 from $1,468,000 for the three month
period ended September 30, 1997 and 31% to $6,035,000 for the nine month period
ended September 30, 1998 from $4,608,000 for the nine month period ended
September 30, 1997. The increase is primarily due to added headcount and higher
consulting expenses. The Company anticipates that general and administrative
expenses for the fourth quarter of fiscal 1998 will continue at amounts
consistent with the three month period ended September 30, 1998 but at amounts
higher than the comparable period in 1997.

         Interest expense increased 92% to $100,000 for the three month period
ended September 30, 1998 from $52,000 for the three month period ended September
30, 1997 and 64% to $259,000 for the nine month period ended September 30, 1998
from $158,000 for the nine month period ended September 30, 1997. The increase
is due to an increase in obligations under capital leases. In October 1997, the
Company entered into a master lease agreement for the sale and leaseback or
lease of up to $2,000,000 of laboratory and office equipment, of which
$1,692,000 is outstanding at September 30, 1998. See discussion under "Liquidity
and Capital Resources" below.

         As a result of the foregoing, the Company incurred a net loss of
$5,676,000 and $16,703,000 for the three and nine month periods ended September
30, 1998, respectively, compared to a net loss of $3,544,000 and $11,516,000 for
the three and nine month periods ended September 30, 1997, respectively.

         Accretion on Series Preferred Stock includes $315,000 and $431,000 for
the three and nine month periods ended September 30, 1998, respectively,
calculated at the rate of 5% per annum of $25,000,000 of Series Preferred Stock
from the Issue Date and $107,000 and $143,000 for the three and nine month
periods ended September 30, 1998, respectively, of accretion of issuance costs
related to the sale of Series Preferred Stock.

         The net loss applicable to common stockholders for the three and nine
month periods ended September 30, 1998 reflect the net loss and the accretion of
Series Preferred Stock mentioned in the paragraphs above.


                                       10
<PAGE>   11


LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 1998, the Company's principal sources of liquidity
consisted of cash, cash equivalents and marketable securities of $39,773,000 and
$308,000 remaining on an equipment lease line, as discussed further below.

         The Company increased its investment in property, plant and equipment
to $34,332,000 at September 30, 1998 from $31,378,000 at December 31, 1997. The
Company currently plans to spend up to approximately $4,500,000 in the year
ending December 31, 1998 in leasehold improvements, equipment purchases and
validation expenses required to obtain FDA approval of the manufacturing
facility and to expand the Company's research, development and manufacturing
capabilities. In October 1997, the Company entered into a master lease agreement
for the sale and leaseback or lease of up to $2,000,000 of laboratory and office
equipment. At September 30, 1998, $308,000 is available under this lease
commitment.

         On May 27, 1998, the Company completed a private placement with three
institutional investors for the sale of 25,000 shares of Series Preferred Stock,
with a stated value of $1,000 per share resulting in net proceeds of
approximately $23,618,000.

         The Series Preferred Stock is convertible into the number of shares of
the Company's Common Stock, equal to the stated value plus accretion of 5% per
annum divided by the then applicable Conversion Price. The Conversion Price is
equal to the average of the five lowest closing bid prices of the Common Stock
during the twenty consecutive trading days immediately preceding the conversion
date. From the Issue Date through May 1999, the Conversion Price may not exceed
$10.00. From June 1999 through January 2000, the Conversion Price may not exceed
$11.00. The Investors are subject to certain limits on the number of shares of
Series Preferred Stock that they can convert per month from the Issue Date
through January 2000 and no Investor will be permitted at any time to convert an
amount of shares of Series Preferred Stock which would result in such Investor
owning more than 4.9% of the then outstanding Common Stock.

         The Series Preferred Stock is subject to redemption at varying
percentages of the stated value plus accretion of 5% per annum. The Company may
redeem all or a portion of the Series Preferred Stock (i) at a redemption
percentage of 115% or (ii) if the market price of the Common Stock falls below
certain thresholds, at a redemption percentage of 105%. The Company may also
redeem the Series Preferred Stock in connection with certain acquisitions of the
Company at redemption percentages ranging from 125% to 135%. Upon the occurrence
of certain events described in the Certificate of Designations, the Company may
be required to redeem the Series Preferred Stock at a redemption percentage of
110%. If the market price of the Common Stock falls below certain thresholds,
the Company may be required to redeem a portion of the outstanding Series
Preferred Stock at a redemption percentage of 100%. Any shares of Series
Preferred Stock not converted into Common Stock by May 2001 will convert into
Common Stock at the then effective Conversion Price. During the three month
period ended September 30, 1998, holders of Series Preferred Stock elected to
convert 539 shares of Series Preferred Stock into 209,934 shares of Common
Stock.

         The Company's collaborative agreements with Stryker provide for
research payments to the Company and royalty payments to the nonseller from
sales of any OP-1 products. The Company also has the exclusive right to supply
Stryker's worldwide commercial requirements for OP-1 products for use in
orthopaedic reconstruction and dental therapeutics. Under the research portion
of the collaboration, the Company supplies OP-1 products to Stryker for clinical
trials and other uses and provides clinical support and performs research work
pursuant to work plans established periodically by the two companies. In October
1998, the Company announced that it had entered into an agreement for the sale
of its OP-1 manufacturing rights and facilities to Stryker. The proposed
transaction is expected to provide the Company with increased royalties in lieu
of the manufacturing profits anticipated under the prior agreement,
approximately $20,000,000 from the sale of the manufacturing-related assets and
the elimination of the manufacturing-related expenses. Subject to the
satisfaction of certain closing conditions, the Company anticipates that the
transaction will close during the 

                                       11
<PAGE>   12


three month period ending December 31, 1998. Until the close of the transaction,
the Company continues to supply OP-1 products to Stryker, provide clinical
support and perform research work pursuant to work plans established on a month
to month basis by the two companies. After the transaction, the Company will
focus internal research efforts on developing new tissue regeneration therapies
in non-bone applications.

         In December 1996, the Company signed the Biogen Research Agreement to
collaborate on the development of the Company's morphogenic protein, OP-1, for
the treatment of renal disorders. Under the agreement, the Company granted to
Biogen exclusive worldwide rights to manufacture, market and sell OP-1 for the
treatment of renal disease. In October 1998, the Company announced that Biogen
and the Company agreed to modify the Biogen Research Agreement. Under the
proposed revision of the agreement, the Company will assume primary
responsibility for the development of the Company's morphogenic protein, OP-1,
for the treatment of renal disorders. Biogen will continue to provide $4,750,000
in research support through the eighteen months ending December 1999 and will
retain an option through 1999 to resume responsibility for development of OP-1
as a therapy for chronic renal failure. The Company will assume all rights and
responsibilities, independent of Biogen, for the development of acute renal
failure therapies.

         In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce in the Company's manufacturing facility in
Lebanon, New Hampshire several of Biogen's protein-based therapeutic candidates
for use in Biogen's clinical trials. The contract covered the period from
January 1995 through December 1997. As part of the research collaboration, the
two companies agreed to extend the Manufacturing Contract for two years through
December 31, 1999, with Biogen having the option, but not the obligation, to use
the manufacturing facility for a mutually agreeable number of months. Biogen
financed the construction of a 7,000 square foot addition to the present
facility for cGMP production using bacterial fermentation at an estimated total
cost of $3,500,000. The Company agreed to reimburse Biogen for the construction
costs and leasehold improvements at the end of the contract term, including the
extension, at an amount equal to Biogen's construction costs less $300,000 and
less all accumulated depreciation. The reimbursement to Biogen is estimated to
be no more than $2,500,000. Biogen also agreed to lease equipment to the Company
for the operation of such portion of the facility and for cGMP production using
bacterial fermentation by the Company at an estimated total cost of $2,100,000,
as provided in an equipment lease agreement. The Company has the option to
purchase the equipment at the end of the extended lease term for an amount equal
to its then fair market value or for such other amount as is negotiated by the
two parties. As part of the proposed sale of the manufacturing facilities,
Stryker will assume the Company's obligations under the Manufacturing Contract.

         The Company anticipates that its existing capital resources, including
the net proceeds of the private placement in May 1998 and the planned sale of
the OP-1 manufacturing rights and facilities to Stryker, should enable it to
maintain its current and planned operations until the Company achieves
profitability. The Company expects to incur substantial additional research and
development and other costs, including costs related to preclinical studies and
clinical trials. The Company's ability to continue funding its planned
operations is dependent upon its ability to generate sufficient cash flow from
the receipt of royalties from Stryker on the sale of OP-1 based products for use
in orthopaedic reconstruction and dental therapeutics and other collaborative
arrangements and to obtain additional funds through equity or debt financings,
or from other sources of financing, as may be required. The Company is seeking
additional collaborative arrangements and also expects to raise funds through
one or more financing transactions, as conditions permit. Over the longer term,
because of the Company's significant long-term capital requirements, the Company
intends to raise funds when conditions are favorable, even if it does not have
an immediate need for additional capital at such time.

                                       12
<PAGE>   13


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, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.

         The Company has developed a plan to address the Year 2000 issues. It
has conducted a review of its computer systems to identify those areas that
could be affected by the Year 2000 issue. The Company also completed
implementation of a new financial accounting system which has been designed by
the vendor to properly process transactions which could be impacted by the Year
2000 problem. The Company presently believes that, with routine upgrades to
existing hardware and software systems, the Year 2000 problem will not pose
significant operational problems.

         The Company is communicating with its significant vendors to determine
the progress such vendors are making in remediating their own Year 2000 issues.
The Company is requiring that significant vendors certify those products and
services that are used in the Company's operations are Year 2000 compliant.

         To date, Year 2000 remediation costs have not been material to the 
Company's financial position or results of operations and the Company believes
that future costs to complete such remediation will not be material to its
financial position or results of operations. The Company expects to complete its
remediation of its Year 2000 issues by the end of the second fiscal quarter of
1999. The Company has not yet developed a contingency plan to address any
unresolved Year 2000 issues. The Company presently intends to develop a
contingency plan before the end of the first fiscal quarter of 1999.

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. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. The Company cautions investors that there can be
no assurance 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:
uncertainty as to timing of and the Company's ability to commercialize its
products; the Company's reliance on its lead product candidate and the Company's
lack of control over the research, clinical progress and regulatory filings of
several applications of its products, which are controlled by the Company's
collaborative partners; the Company's reliance on current and prospective
collaborative partners to supply funds for research and development and to
commercialize its products; 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 the
Company may not be able to gain rights with respect to, the technology
necessary to commercialize its products; the Company's lack of experience in
commercial manufacturing and unproven ability to manufacture products on a
large scale; the Company's lack of marketing and sales experience and the risk
that any products that the Company develops may not be able to be marketed at
acceptable prices or receive commercial acceptance in the markets that the
Company expects to target; uncertainty as to whether there will exist adequate
reimbursement for the Company's products from government, private health
insurers and other organizations; uncertainty regarding the effect on the
Company's operations of the Year 2000 issue; uncertainty regarding satisfaction
or waiver of all closing conditions related to the proposed sale of the OP-1
manufacturing rights and facilities to Stryker; uncertainty regarding the entry
into a mutually satisfactory amendment to the Biogen Research Agreement; and
uncertainties as to the extent of future government regulation of the Company's
business. As a result, the Company's future development and commercialization
efforts involve a high degree of risk.

                                       13
<PAGE>   14


PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

           Not Applicable.


ITEM 2.    CHANGES IN SECURITIES.

(a)        Not Applicable.

(b)        Not Applicable.

(c)        (1) Securities sold.  During August and September, 1998 the Company 
           issued a total of 209,934 shares (the "Conversion Shares") of its
           Common Stock.

           (2) Underwriters and other purchasers. No underwriters were involved
           in the transaction. The Company issued the Conversion Shares in 
           connection with the conversion of 539 shares (the "Preferred Shares")
           of Series 1998/A Convertible Preferred Stock by the holders thereof.

           (3) Consideration. The Conversion Shares were issued at conversion
           prices ranging from $2.53 to $3.01 per share for an aggregate 
           conversion price of $547,838.

           (4) Exemption from registration claimed. The Conversion Shares were
           issued in reliance upon Section 4(2) of the Securities Act of 1933, 
           as amended, because the transaction did not involve any public 
           offering by the Company.

           (5) Terms of conversion or exercise.  Not Applicable.

           (6) Use of Proceeds.  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.


                                       14
<PAGE>   15


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

(a) Exhibits

<TABLE>
<CAPTION>

 Exhibit
 Number            Description
 ------            -----------
<S>       <C>

 10.56    First amendment, dated August 10, 1998, to Lease dated April 10, 1997,
          by and between the Registrant and The Prudential Insurance Company
          of America.

 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, 1998.

                                       15
<PAGE>   16



                                   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
13, 1998.

                                 CREATIVE BIOMOLECULES, INC.


                                  By: /s/ Wayne E. Mayhew III   
                                      ------------------------------------------
                                      Wayne E. Mayhew III
                                      Vice President and Chief Financial Officer



                                  By: /s/ Susan B. Blanton    
                                      ------------------------------------------
                                      Susan B. Blanton
                                      Controller