<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 JUNE 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)


                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 August 6, 1998, the registrant had 33,617,975 shares of common stock
outstanding.
<PAGE>   2
                                TABLE OF CONTENTS


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

         Item 1. Financial Statements

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

                 Consolidated Statements of Operations for the three months and
                   six months ended June 30, 1998 and 1997                                4

                 Consolidated Statements of Cash Flows for the six months ended
                   June 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                                          13

               Item 2.        Changes in Securities and Use of Proceeds                  13

               Item 3.        Defaults Upon Senior Securities                            14

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

               Item 5.        Other Information                                          15

               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>
                                                                          June 30,       December 31,
                                                                            1998            1997
                                                                       -------------    -------------
                                                                        (unaudited)
<S>                                                                    <C>              <C>          
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                            $   6,374,213    $   2,158,909
  Marketable securities                                                   39,524,981       28,438,841
  Accounts receivable                                                      1,343,366        4,572,518
  Inventory                                                                1,421,052        1,249,330
  Prepaid expenses and other                                                 493,040          284,649
                                                                       -------------    -------------
    Total current assets                                                  49,156,652       36,704,247
                                                                       -------------    -------------

PROPERTY, PLANT AND EQUIPMENT - net                                       18,200,262       17,245,338
                                                                       -------------    -------------

OTHER ASSETS:
  Notes receivable - officers                                                260,005          273,334
  Patents and licensed technology - net                                      412,391          417,070
  Deferred patent application costs - net                                  4,796,253        4,220,080
  Deposits and other                                                         145,579          177,930
                                                                       -------------    -------------
    Total other assets                                                     5,614,228        5,088,414
                                                                       -------------    -------------
TOTAL                                                                  $  72,971,142    $  59,037,999
                                                                       =============    =============


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Lease obligations - current portion                                        247,057          124,575
  Accounts payable                                                         2,299,261        2,311,710
  Accrued liabilities                                                        776,228          575,171
  Accrued compensation                                                     1,120,644        1,312,274
                                                                       -------------    -------------
     Total current liabilities                                             4,443,190        4,323,730
                                                                       -------------    -------------

LEASE OBLIGATIONS                                                          2,537,092        2,004,927
                                                                       -------------    -------------


SERIES PREFERRED STOCK, $.01 par value,
   25,000 shares issued and outstanding at June 30, 1998,
   liquidation preference of $25,116,438 at June 30, 1998                 23,870,293
                                                                       -------------

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
    25,000 shares and none issued and outstanding at June 30, 1998
    and December 31, 1997, respectively 
  Common stock, $.01 par value, 100,000,000 shares authorized,
    33,582,620 shares and 33,392,582 shares issued and outstanding at
    June 30, 1998 and December 31, 1997, respectively                        335,826          333,926
  Additional paid-in capital                                             141,054,299      140,465,512
  Accumulated deficit                                                    (99,269,558)     (88,090,096)
                                                                       -------------    -------------
    Total stockholders' equity                                            42,120,567       52,709,342
                                                                       -------------    -------------
TOTAL                                                                  $  72,971,142    $  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               Six Months Ended
                                       ----------------------------    ----------------------------
                                         June 30,        June 30,        June 30,        June 30,
                                           1998            1997            1998            1997
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>         
REVENUE:
  Research and development contracts   $  1,800,615    $  3,137,593    $  4,803,474    $  5,889,065
  Manufacturing contracts                      --           161,687            --           393,926
  Interest and other                        480,175         616,951         895,435       1,280,177
                                       ------------    ------------    ------------    ------------
    Total revenues                        2,280,790       3,916,231       5,698,909       7,563,168
                                       ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Research and development                6,130,923       6,437,127      12,428,790      12,016,180
  Manufacturing contracts                      --           112,720            --           273,758
  General and administrative              2,171,785       1,536,937       4,138,395       3,139,853
  Interest                                   86,633          52,882         159,143         105,354
                                       ------------    ------------    ------------    ------------
       Total costs and expenses           8,389,341       8,139,666      16,726,328      15,535,145
                                       ------------    ------------    ------------    ------------

NET LOSS                                 (6,108,551)     (4,223,435)    (11,027,419)     (7,971,977)
                                       ------------    ------------    ------------    ------------

ACCRETION ON SERIES
PREFERRED STOCK
                                           (152,043)            --         (152,043)            --
                                       ------------    ------------    ------------    ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS                    $ (6,260,594)   $ (4,223,435)   $(11,179,462)   $ (7,971,977)
                                       ============    ============    ============    ============

BASIC AND DILUTED
LOSS PER COMMON SHARE                  $       (.19)   $       (.13)   $       (.33)   $       (.24)
                                       ============    ============    ============    ============

COMMON SHARES FOR BASIC AND DILUTED      33,507,137      33,016,188      33,474,918      32,934,903
                                       ============    ============    ============    ============
</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                        4
<PAGE>   5
                   CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        Six Months Ended
                                                                            June 30,
                                                                   ----------------------------
                                                                       1998            1997
                                                                   ------------    ------------
                                                                          (unaudited)
<S>                                                                <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                         $(11,027,419)   $ (7,971,977)
                                                                   ------------    ------------
  Adjustment to reconcile net loss to net cash
   provided by (used for) operating
   activities:
    Depreciation and amortization                                     1,285,577       1,037,675
    Consulting expense                                                     --           196,500
    Compensation expense                                                 13,329            --
    Increase (decrease) in cash from:
       Accounts receivable                                            3,229,152      (2,470,176)
       Inventory and prepaid expenses                                  (380,113)       (166,785)
       Accounts payable and accrued liabilities                          (3,022)       (775,917)
       Deferred contract revenue                                           --             6,250
                                                                   ------------    ------------
          Total adjustments                                           4,144,923      (2,172,453)
                                                                   ------------    ------------

  Net cash used for operating activities                             (6,882,496)    (10,144,430)
                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities                                (22,938,601)    (21,572,059)
  Sales of marketable securities                                     11,852,461       4,344,070
  Expenditures for property, plant and equipment                     (1,596,529)     (1,606,163)
  Expenditures for patents                                             (673,361)       (611,923)
  Decrease in deposits and other                                         32,351         110,598
                                                                   ------------    ------------

  Net cash used for investing activities                            (13,323,679)    (19,335,477)
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of equity:
    Series Preferred Stock                                           25,000,000            --
    Common Stock - other                                                590,687         933,348
  Cost of raising equity                                             (1,281,750)           --
  Increase in obligations under capital leases                          193,524            --
  Repayments of obligations under capital leases                        (80,982)        (26,582)
                                                                   ------------    ------------

  Net cash provided by financing activities                          24,421,479         906,766
                                                                   ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  4,215,304     (28,573,141)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        2,158,909      38,248,988
                                                                   ------------    ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                           $  6,374,213    $  9,675,847
                                                                   ============    ============
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations   $    542,105
                                                                   ============
</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 $1,282,000 (offset against the
Series Preferred Stock proceeds in the accompanying balance sheet at June 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 the 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.


                                        6
<PAGE>   7
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.


                                        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 and from contract manufacturing. 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 presently
a party to major research collaborations with Stryker Corporation ("Stryker") to
develop products for orthopaedic reconstruction 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. The current work plan established research objectives and funding
through June 1998. The two companies currently are negotiating whether and to
what extent Stryker will continue to provide financial support for research
work. During the current negotiations, 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. 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. 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. The companies agreed that the
supply of OP-1 to Biogen pursuant to the Biogen Research Agreement during 1997
satisfied Biogen's 1997 obligation under the Manufacturing Contract. The
companies also 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 in one of the
two years. Although the Company is seeking additional manufacturing contracts
for available cell culture and bacterial fermentation capacity, there can be no
assurance that the Company will be able to obtain such contracts on acceptable
terms, if at all.

            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.


                                        8
<PAGE>   9
RESULTS OF OPERATIONS

            THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997. The
Company's total revenues for the three and six month periods ended June 30, 1998
were $2,281,000 and $5,699,000, respectively. This compared to total revenues of
$3,916,000 and $7,563,000 for the three and six month periods ended June 30,
1997, respectively. Research and development contract revenues decreased 43% to
$1,801,000 for the three month period ended June 30, 1998 from $3,138,000 for
the three month period ended June 30, 1997 and 18% to $4,803,000 for the six
month period ended June 30, 1998 from $5,889,000 for the six month period ended
June 30, 1997. The decrease in research and development contract revenues is due
to a reduction in research funding from Stryker. The Company anticipates that
research and development contract revenues for each of the remaining quarters in
1998 will be less than the three month period ended June 30, 1998 and less than
the research and development contract revenues for the comparable periods in
1997 due to decreases in research funding from Stryker (see discussion under
"Liquidity and Capital Resources" below). In addition, research and development
contract revenues for the six month period ended June 30, 1997 included revenue
from the supply of OP-1 to Biogen pursuant to the Biogen Research Agreement. The
Company does not anticipate significant revenues from the supply of OP-1 to
Biogen during the year ending December 31, 1998.

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

            Interest revenues decreased 22% to $480,000 for the three month
period ended June 30, 1998 from $617,000 for the three month period ended June
30, 1997 and 30% to $895,000 for the six month period ended June 30, 1998 from
$1,280,000 for the six month period ended June 30, 1997. The decrease is due to
a decrease in the average funds available for investment. The Company
anticipates that interest income in each of the remaining quarters of 1998 will
be higher than for the six month period ended June 30, 1998 due to an 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
$23,700,000. See discussion under "Liquidity and Capital Resources" below.

            The Company's total costs and expenses were $8,389,000 and
$16,726,000 for the three and six month periods ended June 30, 1998,
respectively. This compared to total costs and expenses of $8,140,000 and
$15,535,000 for the three and six month periods ended June 30, 1997,
respectively. Research and development expenses, decreased 5% to $6,131,000 for
the three month period ended June 30, 1998 from $6,437,000 for the three month
period ended June 30, 1997 and increased 3% to $12,429,000 for the six month
period ended June 30, 1998 from $12,016,000 for the six month period ended June
30, 1997. Research and development activities for the three and six month
periods ended June 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 will be done on a
modular basis under a new regulatory review procedure initiated by the FDA. 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 is
currently revalidating certain manufacturing processes. The Company expects
that this revalidation will be completed and that the submission of the modular
PMA to the FDA will be completed in the fall of 1998. As part of the Biogen
collaboration, the two companies are conducting extensive preclinical studies
to understand questions associated with the development of OP-1 as a therapy
for acute and chronic renal failure. Based upon these data, the Company and
Biogen expect to determine the appropriate future development plans and time
line for the renal program. The Company anticipates that research and
development expenses for each of the remaining quarters in 1998 will continue
at amounts consistent with the three month period ended June 30, 1998.


                                        9
<PAGE>   10
            Cost of manufacturing contracts for the three and six month period
ended June 30, 1997 consists of the costs associated with the manufacturing for
Biogen, discussed under manufacturing contract revenues above.

            General and administrative expenses increased 41% to $2,172,000 for
the three month period ended June 30, 1998 from $1,537,000 for the three month
period ended June 30, 1997 and 32% to $4,138,000 for the six month period ended
June 30, 1998 from $3,140,000 for the six month period ended June 30, 1997. The
increase is primarily due to added headcount and higher consulting expenses.
The Company anticipates that general and administrative expenses for each of
the remaining quarters in 1998 will continue at amounts consistent with the
three month period ended June 30, 1998 but at amounts higher than the
comparable periods in 1997.

            Interest expense increased 64% to $87,000 for the three month period
ended June 30, 1998 from $53,000 for the three month period ended June 30, 1997
and 51% to $159,000 for the six month period ended June 30, 1998 from $105,000
for the six month period ended June 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 $1,218,000 is outstanding at June
30, 1998. See discussion under "Liquidity and Capital Resources" below.

            As a result of the foregoing, the Company incurred a net loss of
$6,109,000 and $11,027,000 for the three and six month periods ended June 30,
1998, respectively, compared to a net loss of $4,223,000 and $7,972,000 for the
three and six month periods ended June 30, 1997, respectively.

            Accretion on Series Preferred Stock includes $116,000 calculated at
the rate of 5% per annum of $25,000,000 of Series Preferred Stock from the Issue
Date through June 30, 1998 and $36,000 of accretion of issuance costs related to
the sale of Series Preferred Stock.

            The net loss applicable to common stockholders for the three and
six month periods ended June 30, 1998 reflects the net loss and the accretion
on Series Preferred Stock mentioned in the paragraphs above.

LIQUIDITY AND CAPITAL RESOURCES

            At June 30, 1998, the Company's principal sources of liquidity
consisted of cash, cash equivalents and marketable securities of $45,899,000, a
$15,000,000 unsecured line of credit from Biogen and $782,000 remaining on an
equipment lease line, as discussed further below.

            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 $23,718,000.

            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 the 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.


                                       10
<PAGE>   11
            The Company increased its investment in property, plant and
equipment to $33,016,000 at June 30, 1998 from $31,378,000 at December 31, 1997.
The Company currently plans to spend up to approximately $7,000,000 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 June 30, 1998, $782,000 is available under this lease commitment.

            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. 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. The current work plan
established research objectives and funding through June 1998. The two
companies currently are negotiating whether and to what extent Stryker will
continue to provide financial support for research collaborations. During the
current negotiations, 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.

            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. Biogen paid a $10,000,000 license fee in 1996
and made an $18,000,000 equity investment in Common Stock at a premium over the
then-current market price per share. In addition, the agreement provides for
$10,500,000 in research funding over a three year period ending December 31,
1999. Biogen also will pay up to an additional $69,000,000 upon the attainment
of certain milestones and make available a $15,000,000 line of credit. The
Biogen Research Agreement further provides for the payment of royalties to the
Company based on product sales. The Company may draw upon the $15,000,000 line
of credit over the next two years to fund the research and development of small
molecule products based on OP-1. Advances are limited to $10,000,000 in 1998
and the remaining balance in 1999. In exchange for the line of credit, Biogen
received an option to obtain an exclusive, worldwide license to OP-1 based
small molecule products for the treatment of renal disorders. In the event
Biogen exercises its option, Biogen will forgive the lesser of $10,000,000 or
the principal amount outstanding under the line of credit. The remaining
principal, together with all accrued and unpaid interest is due and payable
five years from the date of the first advance and may be repaid, at the
Company's option, in either cash, Common Stock or reduction of royalties due
the Company from Biogen.

            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 in one of
the two extension years. To enable the Company to meet its obligations under the
Manufacturing Contract, 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.

            The Company anticipates that its existing capital resources,
including the net proceeds of the private placement in May 1998, should enable
it to maintain its current and planned operations through late 2000. The


                                       11
<PAGE>   12
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 beyond late
2000 is dependent upon its ability to generate sufficient cash flow from
collaborative arrangements and manufacturing contracts, 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. If substantial additional funding is not
available, the Company's business will be materially and adversely affected.

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; 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.


                                       12
<PAGE>   13
PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS.

            Not Applicable.


ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a)         On May 26, 1998, the Company filed a Certificate of Designations,
            Preferences and Rights of Series 1998/A Convertible Preferred Stock
            (the "Certificate of Designations"), which amended the Company's
            Restated Certificate of Incorporation (the "Restated Certificate")
            to create a new series of preferred stock designated as Series
            1998/A Convertible Preferred Stock (the "Series Preferred Stock").
            Pursuant to the Certificate of Designations, the shares of Series
            Preferred Stock ranks senior to the Company's Common Stock, par
            value $.01 per share (the "Common Stock"), now or hereafter issued,
            as to payment of dividends and distribution of assets upon
            liquidation, dissolution, or winding up of the Company, whether
            voluntary or involuntary. In addition, at the Annual Meeting of
            Stockholders of the Company held on June 16, 1998, the Restated
            Certificate was amended to increase the authorized number of shares
            of Common Stock by 50,000,000 from 50,000,000 to 100,000,000.

(b)         On May 26, 1998, the Company filed the Certificate of Designations,
            which amended the Company's Restated Certificate to create the
            Series Preferred Stock. Pursuant to the Certificate of Designations,
            the shares of Series Preferred Stock ranks senior to the Company's
            Common Stock , now or hereafter issued, as to payment of dividends
            and distribution of assets upon liquidation, dissolution, or winding
            up of the Company, whether voluntary or involuntary.

(c)         (1) Securities sold. (A) On May 27, 1998, the Company sold 25,000
            shares (the "Preferred Shares") of Series Preferred Stock. (B) On
            June 1, 1998, the Company issued a total of 14,779 shares (the
            "Warrant Shares") of its Common Stock.

            (2) Underwriters and other purchasers. (A) No underwriters were
            involved in the transaction. Diaz & Altschul Capital, LLC was the
            placement agent in the transaction. The Company sold the Preferred
            Shares to three institutional investors. (B) No underwriters were
            involved in the transaction. The Company issued the Warrant Shares
            pursuant to the cashless exercise of a warrant held by an
            institutional investor.

            (3) Consideration. (A) The Preferred Shares were sold for an
            aggregate purchase price of $25,000,000. In consideration for its
            services as placement agent, the Company paid Diaz & Altschul
            Capital, LLC a fee of $1,187,500. (B) The Warrant Shares were issued
            at an exercise price of $2.385 per share for an aggregate exercise
            price of $35,247.92.

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

            (5) Terms of conversion or exercise. (A) Each Preferred Share is
            convertible into the number of shares of 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 20 consecutive trading days immediately preceding the
            date of conversion. From the issuance date through May 1999 and from
            June 1999 through January 2000 the Conversion Price may not exceed
            $10.00 and $11.00, respectively. In addition, there are certain
            limits on the number of Preferred Shares that can be converted at
            certain times and no investor will be


                                       13
<PAGE>   14
            permitted at any time to convert an amount of Preferred Shares which
            would result in such investor owning more than 4.9% of the then
            outstanding Common Stock. (B) Not applicable.

            (6) Use of Proceeds. (A) Not applicable. (B) Not applicable.

(d)         Not applicable.



ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

            Not Applicable.


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

            The Annual Meeting of Stockholders of the Company was held on June
            16, 1998. The following actions were voted upon by the stockholders
            at the Annual Meeting:

            1. The following persons were elected as Directors of the Company
            and the number of votes cast for and withheld for each nominee for
            Director is set forth below:

<TABLE>
<CAPTION>
                                                                                  Votes
               Name                                             Votes For       Withheld
               ----                                             ---------       --------
<S>                                                             <C>             <C>      
               Brian H. Dovey (term expiring in 2001)           26,429,735      1,253,390
               Arthur J. Hale, M.D. (term expiring in 2001)     26,430,485      1,252,640
               Michael M. Tarnow (term expiring in 2001)        26,397,452      1,285,673
</TABLE>

            The terms of office of the following persons as Directors of the
            Company continued after the meeting:

               Martyn D. Greenacre (term expiring in 1999)
               Michael Rosenblatt, M.D. (term expiring in 1999) 
               James R. Tobin (term expiring in 1999)
               Charles Cohen, Ph.D. (term expiring in 2000) 
               Jeremy Curnock Cook (term expiring in 2000) 
               Suzanne Denbo Jaffe (term expiring in 2000)

            2. The stockholders of the Company voted to amend the Company's
            Restated Certificate of Incorporation to increase the authorized
            number of shares of Common Stock by 50,000,000 from 50,000,000 to
            100,000,000. The record votes cast by the holders of shares of
            Common Stock of the Company entitled to vote for or against, as well
            as the number of abstentions and shares not voted were as follows:
            25,714,661 shares FOR, 1,901,312 shares AGAINST, 67,152 shares
            ABSTAINED and 5,815,269 shares NOT VOTED.

            3. The stockholders of the Company voted to approve the 1998 Stock
            Plan. The record votes cast by the holders of shares of Common Stock
            of the Company entitled to vote for or against, as well as the
            number of abstentions, broker no votes and shares not voted were as
            follows: 10,033,318 shares FOR, 5,968,182 shares AGAINST, 1,805,648
            shares ABSTAINED, 9,875,977 BROKER NO VOTES and 5,815,269 shares NOT
            VOTED.

            4. 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. The record votes cast by the
            holders of shares of Common


                                       14
<PAGE>   15
            Stock of the Company entitled to vote for or against, as well as the
            number of abstentions, broker no votes and shares not voted were as
            follows: 17,340,298 shares FOR, 373,678 shares AGAINST, 93,175
            shares ABSTAINED, 9,875,974 BROKER NO VOTES and 5,815,269 shares NOT
            VOTED.

ITEM 5.     OTHER INFORMATION.

            In order to be considered for inclusion in the Proxy Statement and
            Form of Proxy distributed to Stockholders prior to the Annual
            Meeting of Stockholders in 1999, a stockholder proposal must be
            received by the Company no later than January 14, 1999. To be
            considered for presentation at the Annual Meeting of Stockholders in
            1999 although not included in the Proxy Statement and Form of Proxy,
            proposals must be received no later than April 17, 1999. All
            proposals should be delivered in writing to Wayne E. Mayhew III,
            Vice President and Chief Financial Officer, Treasurer and Secretary,
            Creative BioMolecules, Inc., 45 South Street, Hopkinton,
            Massachusetts 01748.


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

(a)         Exhibits.

            Exhibit
            Number                  Description

            10.41       Employee Stock Purchase Plan, as amended on April 16,
                        1998.

            10.55       Lease Agreement, dated as of May 15, 1998, by and
                        between the Registrant and Storm Meadows, Inc.

            27          Financial Data Schedule.

(b)         Reports on Form 8-K.

            On June 5, 1998, the Company filed a Current Report on Form 8-K,
            dated May 27, 1998, to report the sale of 25,000 shares of the
            Company's Series 1998/A Convertible Preferred Stock, with a stated
            value of $1,000 per share, for an aggregate purchase price of
            $25,000,000.


                                       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 August
  14, 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
<PAGE>   17
                                  EXHIBIT INDEX


  Exhibit
  Number                Description

  10.41     Employee Stock Purchase Plan, as amended on April 16, 1998.

  10.55     Lease Agreement, dated as of May 15, 1998, by and between the
            Registrant and Storm Meadows, Inc.

  27        Financial Data Schedule.