<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      FOR THE TRANSITION PERIOD FROM ___________________ TO __________________

                         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) 435-9001

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (Title of Class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [   ]

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

      The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on February 28, 1997 was
approximately $260 million, based on the last sale price as reported on The
Nasdaq Stock Market.

      As of February 28, 1997, the registrant had 32,927,058 shares of common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the following documents are incorporated by reference into the
following parts of this Form 10-K: Certain information required in Part III of
this Annual Report on Form 10-K is incorporated from the Registrant's Proxy
Statement for the 1997 Annual Meeting of Stockholders. With the exception of the
portions of the 1997 Proxy Statement expressly incorporated into this Form 10-K
by reference, such document shall not be deemed filed as part of this Form 10-K.
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS

                                    OVERVIEW

        Creative BioMolecules, Inc. ("Creative BioMolecules" or the "Company")
is developing products for the regeneration and restoration of human tissues
and organs based on morphogenic proteins identified and characterized by the
Company. The Company's lead morphogenic protein, OP-1, has been shown to induce
formation of several types of tissues including bone, cartilage, kidney, tooth
and brain. For orthopaedic and dental applications of OP-1, the Company's
corporate partner is Stryker Corporation ("Stryker"), a leading surgical and
medical products company.  Stryker has completed a pivotal trial to evaluate
the use of an OP-1 bone regeneration product as a bone graft substitute. Stryker
is also undertaking clinical studies of OP-1 in acute fractures and other bone
indications, as well as preclinical studies in cartilage regeneration. The
Company's corporate partner in development of renal disease therapies is
Biogen, Inc. ("Biogen"), a leading biopharmaceutical company with expertise in
development and commercialization of protein therapies. Creative BioMolecules
and Biogen are developing OP-1 products to moderate or halt the progression of
renal failure. In addition to the Stryker and Biogen programs, Creative
BioMolecules has proprietary programs in place to develop OP-1 product
candidates for neurological disorders and osteoporosis.

      The Company has discovered a family of morphogenic proteins that initiate
the cascade of cellular events responsible for tissue formation. One member of
this family is OP-1, a naturally occurring morphogenic protein produced
primarily in the kidney. OP-1 has the capacity to trigger the formation of a
variety of tissues by activating cells to respond to their specific environment.
The activated cells then differentiate and form the type of tissue dictated by
their environment. The Company believes that as a result of such action, OP-1
may be helpful in the treatment of defects and diseases involving a number of
different types of human tissues and organs. OP-1 was first isolated and
characterized by Creative BioMolecules' scientists and is the subject of issued
patents covering the protein itself as well as OP-1 based products for certain
applications.

        The Company's agreement with Stryker gives Stryker the exclusive right
to develop, market and sell OP-1 based products for use in the repair or
replacement of bone and joint tissue ("orthopaedic reconstruction"). This
agreement provides for the payment of royalties to the Company on such sales,
gives the Company the exclusive right to supply Stryker's worldwide commercial
requirements for such products and provides for research funding to the
Company. The Company's agreement with Biogen gives Biogen the exclusive right
to develop, manufacture, market and sell OP-1 based products for use in the
treatment of renal disease. This agreement provides for the payment of
royalties to the Company on such sales and provides for research funding to the
Company. The Company has retained commercial rights to OP-1 based products for
all indications other than orthopaedic reconstruction, dental therapeutics and
kidney disorders. The Company's retained applications include neurological
disorders and metabolic bone diseases such as osteoporosis.

      ORTHOPAEDIC RECONSTRUCTION. In 1995 there were 1.6 million procedures in
the United States for which the Company believes an OP-1 bone regeneration
product could have been utilized. These procedures included non-healing
fractures, open fracture reductions, spinal fusions, maxillofacial
reconstructions, prosthetic fixations and gap fillings. In addition to the
pivotal trial in non-union fractures, the Company's corporate partner, Stryker,
has initiated clinical studies in Europe in acute fractures and other bone
indications, and has a preclinical program in cartilage regeneration underway to
evaluate OP-1 in the treatment of both cartilage defects and combination
bone-cartilage defects in animal models.

      KIDNEY DISORDERS. Acute renal failure involves the rapid loss of kidney
function and is associated with a high mortality rate. Chronic renal failure, in
contrast, is the slow progressive loss of kidney function ultimately resulting
in the need for kidney transplantation or dialysis. The high mortality rate of
acute renal


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failure and the substantial costs associated with dialysis therapy represents
areas of significant unmet medical and economic healthcare needs. Creative
BioMolecules and its partner, Biogen, are developing OP-1 product candidates to
treat both acute and chronic renal failure. The Company believes that there is a
substantial commercial opportunity for renal therapies that could delay or
eliminate the need for costly dialysis treatments. Studies have shown that OP-1
administration improves kidney function in animal models of both acute and
chronic renal failure.

      DENTAL THERAPEUTICS. The Company and its partner, Stryker, are developing
an OP-1 product for dentin regeneration that may offer an alternative to certain
root canal procedures. In a pilot clinical trial, the Company's OP-1 product
induced statistically significant dentin formation. The Company commenced a
second pilot clinical trial in September 1995 to evaluate this application
further. The Company also has an OP-1 product candidate in preclinical testing
which it believes can restore the periodontal tissues necessary to maintain
tooth attachment when used in conjunction with standard surgical treatments of
periodontal disease.

      NEUROLOGICAL DISORDERS. Creative BioMolecules is developing OP-1 product
candidates for use in the treatment of certain neurological disorders involving
stroke and Parkinson's Disease. Preclinical studies have shown that OP-1
promotes survival of neurons and can promote the establishment of new neuronal
connections which aid recovery from brain injury or disease. The Company
believes that therapies which promote survival and growth of neurons could have
substantial commercial potential.

      OTHER PROGRAMS. Research studies have suggested that OP-1 may be useful in
treating osteoporosis. In addition to its work with the OP-1 protein, the
Company has a program underway to develop small molecules that can stimulate the
same regeneration results induced by morphogenic proteins via activation of
various steps in the tissue formation cascade.

      The Company's principal offices are located at 45 South Street, Hopkinton,
Massachusetts 01748, and its telephone number is (508) 435-9001. The Company is
the successor to a California corporation of the same name organized in 1981. In
1987, the Company completed a corporate reorganization and became a Delaware
corporation.

                            SCIENTIFIC BACKGROUND

      As humans age, the body's capacity to form or regenerate tissue after
injury diminishes substantially. Tissue formation begins when an activated stem
cell responds to the program of cues produced in that cell's location and
becomes committed to a cell type consistent with that particular set of
information. Stem cells are found throughout the body in people of all ages and
are the precursor cells from which all tissues and organs are derived. Once a
stem cell is activated, its interactions with its surroundings determine the
particular cell type (e.g., bone, cartilage, kidney, tooth and brain) into which
it will differentiate. For example, an activated stem cell in a bone defect will
produce bone because the information available to that cell from neighboring
cells and the extracellular environment specifies a unique program of signal and
response that results in that cell becoming a bone-forming cell.

      This process of cell interaction depends on morphogenic proteins which can
activate stem cells to begin the process of differentiation and commitment,
leading to tissue and organ formation. Diminished capacity to produce
morphogenic proteins, due to aging or disease, is believed to be associated with
reduced ability to form tissue in response to injury. The ability to reinitiate
tissue formation processes with morphogenic proteins may provide the basis for
novel therapeutics to treat tissue disorders.


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                            THE COMPANY'S TECHNOLOGY


      Creative BioMolecules has played a significant role in advancing
scientific understanding of the process of tissue regeneration. The Company has
established a technology platform based on the molecular and cellular events
responsible for tissue and organ development. This platform provides the basis
for development of the Company's proprietary therapeutic products.

      Creative BioMolecules was the first to identify and characterize a family
of morphogenic proteins that are key regulators of tissue and organ formation in
humans. The Company's lead morphogenic protein, OP-1, is a naturally occurring
substance produced primarily in the kidney. OP-1's role early in the cascade of
events that leads to tissue and organ formation, prior to commitment of a stem
cell to a particular cell type, has led the Company to believe that OP-1 is
capable of inducing the formation of many different types of tissues.
Preclinical studies conducted by the Company have indicated a prominent role for
OP-1 in the formation of bone, cartilage, kidney, tooth and brain.

      The illustration below depicts the cascade of molecular and cellular
events involved in the tissue formation process.

        [GRAPHIC DEPICTING MORPHOGEN INDUCED TISSUE AND ORGAN FORMATION.]


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      In addition to identifying and characterizing the OP-1 protein and other
morphogenic proteins, Creative BioMolecules also has identified the DNA
sequences which regulate the expression of OP-1, has identified the cellular
receptors to which OP-1 binds and through which it acts, and has determined the
three-dimensional structure of OP-1. These discoveries have enabled Creative
BioMolecules to initiate a small molecule program, the goal of which is to
identify second generation, orally-active drug compounds that either promote
morphogenic protein expression or mimic the biological activities of morphogenic
proteins.

                              BUSINESS STRATEGY

      Creative BioMolecules' objective is to lead the discovery and development
of therapeutics for tissue regeneration. Key elements of the Company's
continuing business strategy include:

      SECURING MARKETING APPROVAL FOR OP-1 IN ORTHOPAEDIC RECONSTRUCTION. The
Company is supporting Stryker in obtaining marketing approval of the OP-1 bone
regeneration product for use in the United States and foreign markets. The
Company has focused its manufacturing, quality control and quality assurance
efforts on generating the manufacturing related data for the PMA application to
be filed by Stryker, and preparing the Company's manufacturing facility for Food
and Drug Administration ("FDA") inspection and approval.

      DEVELOPING OP-1 AS A THERAPY FOR RENAL DISEASE. In late 1996, the Company
established a worldwide partnership with Biogen to develop OP-1 as a therapy for
acute and chronic renal disease. The Company believes that preclinical results
have demonstrated the promise of this molecule in protecting against kidney
damage in acute conditions and in slowing kidney function decline in chronic
disease. The Company and Biogen are working closely together in the development
of a renal therapy based on these findings. The Company is supplying OP-1 for
the initial development stages and Biogen is preparing to conduct clinical
trials of this therapy.

      GENERATING A BREADTH OF PRODUCT PROGRAMS. The Company has targeted a
number of initial indications for its OP-1 products, including the regeneration
of bone, cartilage, kidney, tooth and brain. The Company believes the potential
for expansion of its product pipeline is extensive, since OP-1 has shown
activity in inducing the formation of a broad range of tissues and organs. In
addition, the Company is investigating the role in tissue formation of related
morphogenic proteins in its proprietary portfolio.

      ESTABLISHING CORPORATE COLLABORATIONS. The Company's strategy is to seek
collaborations for several of its discovery and development programs. Through
collaborations, the Company augments its financial resources and leverages its
equity capital. Collaborations also allow the Company to broaden its pipeline of
programs, to access complementary technologies and to gain significant
development, manufacturing and commercialization expertise.

      DEVELOPING A SMALL MOLECULE PROGRAM. The Company believes it may be able
to stimulate the same regeneration induced by morphogenic proteins via
activation of various steps in the cascade of tissue formation with small,
orally-active compounds. The Company has been able to develop biochemical and
cell-based screens that mimic discrete points within the tissue formation
cascade to enable the identification of small molecule candidates. In connection
with establishment of a partnership to develop a renal disease therapy, Biogen
extended to the Company a $15 million line of credit to fund research in a small
molecule discovery program.

      ACCESSING NEW TECHNOLOGIES/ESTABLISHING ACADEMIC COLLABORATIONS. The
Company has utilized a large network of academic collaborators to gain knowledge
of new technologies, to identify additional uses for morphogenic proteins and to
extend research on existing indications. These collaborators, who are located
around the world, help leverage the Company's resources.


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      CAPITALIZING ON PROCESS DEVELOPMENT AND MANUFACTURING CAPABILITIES. The
Company has significant capabilities in process development and in manufacturing
OP-1 for use in both the ongoing clinical trials and for future OP-1
indications. In addition, the Company's process development and protein
manufacturing capabilities are transferable to the production of other proteins,
enabling the Company to fill existing plant capacity and to generate additional
revenues in the near-term. The manufacture of products in-house also allows the
Company to increase its participation in corporate partnerships by deriving
revenues from manufacturing as well as product sales.

                  PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

      The Company is developing therapeutic products based on OP-1 for use in
orthopaedic reconstruction, kidney disorders, dental therapeutics, neurological
disorders and osteoporosis. The following table sets forth these programs:

                         OP-1 PRODUCTS UNDER DEVELOPMENT

<TABLE>
<CAPTION>
                                           Commercial    U.S. Regulatory
Potential Application                        Rights      Classification(1)    Status(2)
---------------------                      ----------    -----------------    ---------
<S>                                        <C>           <C>                  <C>
ORTHOPAEDIC RECONSTRUCTION:                  Stryker          Device
  Non-Union Fractures -- Tibia                                                U.S. Pivotal Clinical Trial
                                                                              completed, data analysis in
                                                                              progress

  Non-Union Fractures -- All long bones                                       U.S. Treatment Study
  Other Bone Indications (3)                                                  European Clinical Studies
  Cartilage Regeneration                                                      Preclinical Studies

KIDNEY DISORDERS:                            Biogen           Biologic
  Acute Renal Failure                                                         Preclinical Studies
  Chronic Renal Failure                                                       Preclinical Studies

DENTAL THERAPEUTICS:                         Stryker           Device
  Periodontal Disease                                                         Preclinical Studies
  Dentin Regeneration                                                         U.S. Pilot Clinical Trial

NEUROLOGICAL DISORDERS:                      Company          Biologic
  Stroke                                                                      Preclinical Studies
  Parkinson's Disease                                                         Preclinical Studies

OSTEOPOROSIS                                 Company            Drug          Research
</TABLE>

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

(1) "Device" refers to products which will be reviewed by the FDA's Center for
Devices and Radiological Health; "Biologic" refers to products which will be
reviewed by the FDA's Center for Biologics Evaluation and Research; "Drug"
refers to products which will be reviewed by the FDA's Center for Drug
Evaluation and Research. The indicated regulatory classifications are either
current (orthopaedic reconstruction and dentin regeneration) or anticipated
(kidney disorders, periodontal disease, neurological disorders and
osteoporosis). These regulatory classifications may be subject to change, as the
FDA has the authority to regulate the Company's products under more than one
regulatory classification.

(2) "Pivotal Clinical Trials" are investigations conducted under an
Investigational Device Exemption ("IDE"), intended to be used as the primary
supporting documentation for regulatory approval of a new medical device.
"Treatment Study" denotes an open label study pursuant to a supplement to an
IDE. "European Clinical Studies" are physician sponsored feasibility
investigations conducted among a small number of patients. "Pilot Clinical
Trials" are feasibility investigations


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conducted under an IDE, that are intended to assess the initial safety and/or
efficacy of a new medical device. "Preclinical Studies" denotes the collection
and analysis of data from multiple studies in animals relating to toxicity
and/or efficacy in preparation for an Investigational New Drug ("IND") or IDE
application filing. "Research" denotes all investigative activities with respect
to product candidates prior to initiation of Preclinical Studies. See "--
Regulatory Issues."

(3) Stryker has indicated that it has initiated clinical studies for multiple
orthopaedic reconstruction applications of OP-1.

ORTHOPAEDIC RECONSTRUCTION PROGRAMS

      Creative BioMolecules believes there is a significant commercial
opportunity for the use of OP-1 products to regenerate bone and cartilage tissue
in orthopaedic reconstruction. The number of procedures for which the Company
believes an OP-1 bone regeneration product could have been utilized exceeded 1.6
million in 1995 in the United States. These procedures included non-healing
fractures (170,000), open fracture reductions (439,000), spinal fusions
(202,000), maxillofacial reconstructions (219,000), prosthetic fixations
(541,000), and gap fillings (31,000). In addition, in 1995 there were 570,000
cartilage-related injuries in the United States. For orthopaedic reconstruction
applications, the Company's corporate partner is Stryker, a leader in surgical
and medical products for orthopaedic reconstruction.

      Pursuant to its agreement with Stryker, the Company receives funding to
support research and development in orthopaedic reconstruction, has an exclusive
right to supply OP-1 bone and cartilage regeneration products for Stryker's
orthopaedic reconstruction applications, and upon marketing, will also receive
royalties on any sales of such OP-1 bone and cartilage regeneration products.
See "--Collaborative and Licensing Agreements -- Stryker Corporation."

      BONE. The Company has amassed a large body of evidence that OP-1 is a
potent stimulator of cartilage and bone formation. The natural conversion of
stem cells into cartilage is activated by morphogenic proteins such as OP-1. In
a bone environment, cartilage tissue becomes permeated by blood vessels and
mineralizes to become bone. Numerous studies in six different animal species
have demonstrated that OP-1 is capable of inducing bone regeneration at a wide
array of sites within the body in which bone is normally present. Bone formed in
response to OP-1 is biochemically and biomechanically identical to normal bone.

      The most widely employed reconstruction procedure for the replacement of
lost or damaged bone is bone grafting. Grafting involves surgical
transplantation of bone or bone chips to the site of the defect facilitating new
bone formation. Autograft, the currently preferred grafting approach, involves
two surgical steps: one step to harvest the graft and a second step to implant
the graft at the site of the defect or injury. In addition to the pain and cost
associated with this two-step procedure, an estimated twenty-five percent of
patients experience complications resulting from the graft harvesting step.
Allograft procedures, a second approach, utilize bone grafts or demineralized
bone powder taken from cadavers. While allografts avoid the need for an
ancillary surgical procedure, they carry the risk of infectious disease
transmission. The Company believes that its OP-1 bone regeneration product
applied locally to the site of the defect could be used as an alternative to
many bone graft procedures, providing more reliable healing, accelerating the
rate of healing and obviating the need for graft harvesting with its associated
complications.

      Stryker has completed a pivotal clinical trial under an IDE to evaluate
the use of an OP-1 bone regeneration product as a bone graft substitute. This
clinical trial focuses on regeneration of bone tissue in non-union fractures in
the tibia, a long bone in the leg. Non-union fractures are fractures which have
failed to heal for a period of at least nine months. The trial was designed to
compare the safety and efficacy of the OP-1 bone regeneration product candidate
with autograft procedures in the treatment of non-union fractures. The OP-1 bone
regeneration product used in this trial consists of a paste-like formulation
that is applied locally at the site of defect. The trial is being conducted at a
number of specialized orthopaedic hospitals and trauma centers in the United
States. In accordance with the protocol of this trial, patients are followed for


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nine months after treatment to assess bone regeneration. The endpoints of the
trial are clinical outcome and a blinded panel radiographic assessment of
healing which is currently in progress. Stryker and the Company are working to
prepare a PMA application for this OP-1 bone regeneration product.

      In October 1995, the FDA approved a supplemental treatment arm (an
"Open-Label Trial") of the pivotal trial, allowing Stryker to expand the study
to test the OP-1 bone regeneration product for the treatment of all long bone
non-union fractures. Stryker is currently treating patients in this Open-Label
Trial which will allow for the evaluation of various clinical parameters prior
to market launch.

      In addition to the U.S. pivotal trial and its supplemental treatment arm,
Stryker initiated clinical studies in several European countries, under
physician sponsorship. Stryker is expected to initiate further clinical testing
of OP-1 bone regeneration products in a number of countries for an increasing
array of orthopaedic reconstruction indications. The Company believes that
Stryker's goal is to sell OP-1 bone regeneration products for a number of
orthopaedic reconstruction indications in major markets around the world.

      CARTILAGE. Creative BioMolecules and Stryker are also engaged in research
on the regeneration of cartilage. Cartilage tissue is found in different parts
of the body and serves various purposes. The focus of the Company's
collaboration is articular cartilage, a thin layer of tough opaque tissue that
lines the opposing bone surfaces of all moving joints to provide almost
frictionless movement. When articular cartilage tissue in a joint suffers more
than superficial damage, it does not regenerate and may further deteriorate over
time. In an initial series of animal experiments, Creative BioMolecules
demonstrated that an OP-1 product induced the formation of articular cartilage
in cartilage defect sites.

      Current techniques to repair cartilage damage are limited. Arthroscopic
surgery is used to relieve pain and lessen the chance of further tissue damage
but cannot repair defects or stop degeneration. Many patients need to undergo
more than one treatment and often never achieve lasting pain relief. Another
procedure, recently developed in Sweden, has been used to treat patients with
articular cartilage defects in the knee. In this procedure, a small portion of
the patient's healthy knee cartilage tissue is surgically removed. The cells
within the extracted tissue sample are multiplied over several weeks using cell
culture techniques and then those cells are reimplanted in the patient's knee.
This process is costly, time consuming and involves two separate surgical
procedures at different times.

      The Company believes that OP-1 can be used to stimulate the regeneration
of articular cartilage. Initial animal studies show that OP-1 induces cartilage
formation in surgically prepared defects. The Company and Stryker are expanding
the preclinical program to evaluate locally applied OP-1 in the treatment of
both cartilage defects and combination bone-cartilage defects in animal studies.

KIDNEY DISORDERS

      Kidney disorders, particularly various types of renal failure, are a large
and growing health care problem. Billions of dollars are spent annually in the
United States on the treatment of renal failure patients. Despite these
expenditures, mortality rates remain high and quality of life low. Recent
research has indicated that kidneys which recover from acute renal failure may
be doing so by repeating some of those morphogenic processes that were initially
involved in kidney development. Studies conducted by the Company's scientists
and its collaborators have shown that OP-1 is a key morphogenic signal that
initiates kidney formation at the earliest stages of kidney development. The
Company's corporate partner in development of a renal disease therapy is Biogen,
a leading biopharmaceutical company with expertise in development and
commercialization of protein based therapeutics. Creative BioMolecules and its
partner, Biogen, are


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developing an OP-1 product to moderate or halt the progression of renal failure.
See "-- Collaborative and Licensing Agreements -- Biogen, Inc."

      ACUTE RENAL FAILURE. Acute renal failure is the rapid and sudden loss of
the kidneys' ability to perform their essential functions and is often
associated with multiple organ failure and a high mortality rate. The primary
causes of acute renal failure are interruptions of blood flow (often as a result
of certain surgical procedures or cardiac arrest), trauma and certain
medications with toxic side effects to the kidneys. Based on data from the
National Center for Health Statistics and other sources, Creative BioMolecules
estimates that there were 250,000 diagnosed cases of acute renal failure in the
United States in 1995. Currently, therapies that prevent, improve recovery or
reduce the extent of kidney injury from acute renal failure are limited. The
Company believes that there is a substantial commercial opportunity for a
therapy that could prevent, facilitate recovery or reduce the extent of kidney
injury in acute renal failure.

      Animal studies have been conducted by the Company and its academic
collaborators to determine if the rapid onset of acute renal failure injury can
be moderated by systemic administration of OP-1. Results of these studies
indicate that an OP-1 product can reduce the extent of injury to the kidneys in
an animal model of acute renal failure. The Company and its partner, Biogen,
currently have additional preclinical studies underway with the goal of
initiating human clinical investigation of an OP-1 product for the treatment of
acute renal failure.

      CHRONIC RENAL FAILURE. Unlike acute renal failure with its sudden and
rapid onset, chronic renal failure is characterized by a gradual and progressive
loss of kidney function. Chronic renal failure may take several years to
manifest symptoms and to require therapeutic intervention. The most common
conditions associated with onset of chronic renal failure are diabetes and high
blood pressure. Chronic renal failure eventually results in end stage renal
disease, a condition which requires dialysis or kidney transplantation. Aside
from the substantial economic costs associated with dialysis, there are
significant side effects and the average life expectancy of patients on dialysis
is substantially diminished. Based on reports from the United States Renal Data
System and epidemiology studies, Creative BioMolecules estimates that in 1995
there were more than 300,000 patients on dialysis and that the numbers are
rising by 10% each year. In addition, the Company estimates that there were more
than 700,000 patients with some degree of chronic renal failure in the United
States in 1995. The Company believes that there is a significant commercial
opportunity for a therapy that could reduce, delay or prevent the need for
dialysis or that could halt the progression of chronic renal failure.

      The Company has initiated a series of studies to investigate the potential
of OP-1 to moderate the progression of chronic renal failure. Results indicate
that systemic administration of OP-1 can retard the progressive loss of kidney
function in an animal model of chronic renal failure. The Company and Biogen are
conducting additional preclinical studies with the goal of initiating human
clinical investigation of an OP-1 product for the treatment of chronic renal
failure.

DENTAL THERAPEUTICS

      Dental medicine has few therapeutics to treat the hard and soft tissues
which comprise the tooth and its associated attachment structures. Creative
BioMolecules, in partnership with Stryker, is developing regenerative therapies
to treat these tissues. The Company and Stryker are evaluating OP-1 products to
treat periodontal disease and for dentin regeneration as an alternative to
certain root canal procedures.

      PERIODONTAL TISSUE REPAIR. Periodontal disease is a bacterially induced
inflammatory disorder that results in the progressive destruction of the
periodontal tissues that hold teeth in place. Reliable and effective restoration
of periodontal tissue damaged or lost as a result of periodontal disease is not
possible with current


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therapies. The Company estimates based on data from the most recent American
Dental Association Survey of Services Rendered ("ADA Survey") that in 1995
approximately four million patients underwent periodontal surgery in the United
States for severe periodontal disease. The Company believes that most of these
procedures would have been candidates for treatment with an OP-1 periodontal
product.

      DENTIN REGENERATION. Dentin is a hard, mineralized tissue that lies
immediately beneath the enamel of the tooth, surrounding the dental pulp which
contains the tooth's nerve and blood vessels. Dentin acts as a protective layer
to the dental pulp. A pulp exposure occurs when a defect in the tooth penetrates
through the enamel and dentin into the pulp chamber. This often results in
infection of the pulp, necessitating tooth extraction or removal of the pulp by
root canal surgery. The Company's estimates based on data from the most recent
ADA Survey that in 1995 there were approximately 16 million root canal
procedures performed in the United States. The Company believes that
approximately one quarter of these procedures represent candidates for dentin
regeneration therapy with an OP-1 product.

      A pilot clinical trial completed in 1994 in the United States with an OP-1
product showed statistically significant evidence of dentin formation. The trial
was conducted under an IDE"and involved placement of an OP-1 product onto an
exposed pulp which was then sealed with standard dental filling material. The
Company and Stryker are conducting additional trials to evaluate OP-1's safety
and activity in dentin formation.

NEUROLOGICAL DISORDERS

      A number of neurological disorders, including stroke, Parkinson's Disease,
brain trauma, Alzheimer's Disease, and Amyotrophic Lateral Sclerosis (Lou
Gehrig's Disease), are characterized by the acute or progressive death of
neurons. A major advance in neuroscience was the discovery of naturally
occurring proteins that promote the survival of neurons. It is generally
believed that application of such proteins to neurons could slow or halt
neuronal degeneration and hence slow disease progression. Studies conducted by
Creative BioMolecules and its academic collaborators have indicated that OP-1
can promote neuron survival. The Company has initiated preclinical investigation
of OP-1 as a treatment for certain neurological disorders.

      STROKE. Strokes occur when blood flow to the brain is interrupted by a
clogged or burst artery. The interruption deprives the brain of oxygen and
nutrients, and causes neurons to die. Stroke is the third leading cause of death
in the United States and the number one cause of adult disability. The National
Stroke Association estimates that there are 550,000 strokes every year in the
United States and that three million Americans are permanently disabled because
of stroke. Therapeutics currently available to aid the recovery from stroke are
limited. The Company believes that there is a substantial commercial opportunity
for a therapeutic that could promote enhanced recovery from stroke.

      Recent research by Creative BioMolecules' academic collaborators has
indicated that OP-1 can promote the development of neurons and thereby enhance
the ability of neurons to establish connections with adjacent neurons. The
Company therefore believes that treatment with OP-1 has the potential to enhance
recovery after brain injury caused by stroke. In a preclinical study in an
animal model of stroke conducted by one of the Company's collaborators, OP-1
treated animals showed a statistically significant improvement in the recovery
of motor skills compared to untreated animals. Creative BioMolecules is
continuing these studies with the goal of initiating human clinical
investigation of OP-1 as a treatment to enhance recovery from stroke.

      PARKINSON'S DISEASE. Parkinson's disease is a progressive neurological
condition characterized by tremor, muscular rigidity, and slowness of movement.
The disease is caused by the gradual loss of function and eventual death of the
neurons which control the coordination of voluntary movement. Current therapies


                                        9
<PAGE>   11
offer a temporary palliative effect, but, for reasons not well understood, these
therapies become ineffective after several years. The National Institute of
Neurological Disorders and Stroke estimates that more than 500,000 people in the
United States are affected by Parkinson's Disease at any one time, and that
50,000 people in the United States are diagnosed with Parkinsons's Disease each
year. The Company believes that a therapy that promotes the survival of the
neurons which degenerate in Parkinson's Disease could have substantial
commercial potential.

      Initial studies in a preclinical model of Parkinson's Disease conducted
by the Company's academic collaborators have indicated that OP-1 enhances
survival of the neurons which are most affected by Parkinson's Disease and that
this enhancement correlates with improved recovery of normal function. These
studies are being continued with the goal of initiating human clinical
investigation of OP-1 as a treatment for Parkinson's Disease.

OSTEOPOROSIS

      Creative BioMolecules is engaged in a research program to develop
therapeutic products for use in osteoporosis and other metabolic bone diseases.
Osteoporosis is a term used to describe a variety of disorders that are
characterized by a reduction in the mass of bone per unit volume. Current
therapies for osteoporosis are thought to work by inhibiting further loss of
bone tissue rather than stimulating the formation of new bone. The Company
believes that treatments that would stimulate bone formation rather than inhibit
bone resorption may be preferable for therapy in osteoporosis. The Company
believes an OP-1 product, or a small molecule that triggers OP-1 production or
mimics its action, may cause the body to rebuild the bone mass lost to
osteoporosis or other metabolic bone diseases.

SMALL MOLECULE PROGRAM

      In addition to identifying and characterizing the OP-1 protein, Creative
BioMolecules also has identified the DNA sequences which regulate the expression
of OP-1, has identified the cellular receptors to which OP-1 binds and through
which it acts and has determined the three-dimensional structure of OP-1. The
Company is seeking to use these recent discoveries to identify orally-active
drug compounds that either promote endogenous morphogenic protein expression or
mimic morphogenic protein biological activities. For instance, the DNA sequences
that regulate OP-1 expression and the receptors which bind OP-1 are being
formatted into assays to screen and identify small molecules that increase OP-1
synthesis or mimic OP-1 action. In addition, the information that relates to the
three-dimensional structure of OP-1 can be used to aid the rational design or
modification of small molecule drug candidates. These assays and information
have enabled the Company to develop a small molecule program that seeks to
identify the next generation of drug development candidates based on morphogenic
protein biology. The Company may fund this small molecule research program in
part through a $15 million line of credit from Biogen. This credit facility was
established by the Company and Biogen in connection with the December 1996
partnership agreement for renal disease therapy. If the Company successfully
identifies one or more small molecule candidates for clinical development,
Biogen has a right to license such compounds for its renal disease program.

                    COLLABORATIVE AND LICENSING AGREEMENTS

      STRYKER CORPORATION. Creative BioMolecules entered into a collaboration
with Stryker in 1985 to identify and develop bone-inducing proteins. OP-1 was
first isolated and characterized by the Company's scientists through research
funded by Stryker. The Company will receive royalty payments based on Stryker's
worldwide commercial sales of OP-1 products for use in orthopaedic
reconstruction and manufacturing revenue for supply of Stryker's product
requirements for such sales. The Company is currently supplying an OP-1 bone
regeneration product to Stryker for use in clinical trials as part of the


                                       10
<PAGE>   12
research program. The Company is conducting research on additional indications
for OP-1 in orthopaedic reconstruction including cartilage regeneration. In
1996, the Company and Stryker extended their collaboration to include dental
therapeutics incorporating OP-1. The Company's agreement with Stryker provides
for research funding to the Company for this work. The current work plan
establishes research objectives and funding through April 30, 1998.

      Stryker has exclusive rights to develop, market and sell products
incorporating bone and cartilage-inducing proteins developed under the research
program, including OP-1, for use in the field of orthopaedic reconstruction and
dental therapeutics. The Company has also agreed not to undertake research to
develop bone and cartilage-inducing proteins for use in orthopaedic
reconstruction, on its own behalf or for third parties, for five years after
conclusion of the research program. The Company has the exclusive and
irrevocable right to develop, market and sell products incorporating morphogenic
proteins developed under the research program, including OP-1, for all uses and
applications other than orthopaedic and dental reconstruction such as renal
failure, neurological diseases, metabolic bone disorders, and others. Both the
Company and Stryker have the right to grant licenses to third parties in their
respective fields, and each is obligated to pay royalties to the other on its
sales of such products and to share royalties received from licensees. The
Company has been responsible for preclinical studies of OP-1 products, and
Stryker and the Company are each responsible for clinical studies in their
respective fields. The Company has the exclusive right to supply OP-1 products
to Stryker for worldwide commercial sales in the field of orthopaedic and dental
reconstruction. See "-- Patents and Proprietary Rights."

      BIOGEN, INC. In December 1996, the Company entered into a Research
Collaboration and License Agreement with Biogen to collaborate on the
development of novel therapeutics for the treatment of renal disorders. The
initial focus of the collaboration is on advancing the development of the
Company's morphogenic protein, OP-1, for the treatment of acute and chronic
renal failure. Under the agreement, the Company granted to Biogen exclusive
worldwide rights to manufacture, market and sell OP-1 and OP-1 products
developed through the collaboration for the treatment of renal disease. Biogen
paid the Company a $10,000,000 license fee in 1996 and made an $18,000,000
equity investment which were recorded in the quarter ended December 31, 1996. In
addition, Biogen has guaranteed $10,500,000 in research funding over the next
three years, will pay up to an additional $69,000,000 upon the attainment of
certain milestones and will make available a $15,000,000 line of credit. The
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
three years to fund the research and development of small molecule products
based on OP-1. Advances are limited to $5,000,000 per year. Biogen received an
exclusive option to obtain an exclusive, worldwide license to OP-1 protein 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 principle,
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 covers 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 production under current Good
Manufacturing Practices as mandated by the FDA ("cGMP") using


                                       11
<PAGE>   13
bacterial fermentation at an estimated total cost of $2,900,000. 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 $2,100,000. 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 $2,400,000, 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.

      GENETICS INSTITUTE. In July 1996 Creative BioMolecules and Stryker and
Genetics Institute, Inc., now a wholly-owned subsidiary of American Home
Products, ("Genetics Institute") announced that they had cross-licensed their
worldwide patent rights, royalty-free, in the bone morphogenetic/osteogenic
protein family. The agreement allows the companies to commercialize
their respective lead compounds, which are now in clinical trials for bone
repair and regeneration, free of the risk of patent litigation among the
parties. Under the agreement, which covers both issued patents and pending
patent applications, Creative BioMolecules and Stryker have exclusive rights to
OP-1, their lead compound under both their own and Genetics Institute's patents.
Genetics Institute and Yamanouchi Pharmaceutical Company, Ltd., its partner in
the worldwide development of Genetics Institute's bone growth factors, have
exclusive rights to BMP-2, their lead compound under both their own and Creative
BioMolecules/Stryker patents. In addition, the companies have granted each other
royalty-free, non-exclusive cross-licenses to patents and patent applications
covering certain other related morphogenic proteins.

      PURDUE UNIVERSITY. In May 1996, Creative BioMolecules entered into an
agreement with Purdue Research Foundation to define signaling pathways in the
cell that result in tissue formation. The goal of this collaboration is to aid
in the discovery of small molecule compounds that can regenerate a variety of
tissues. This agreement expands the Company's effort to extend its technology
from morphogenic proteins such as OP-1 to small, orally-active compounds that
mimic or upregulate these proteins. As part of the agreement, Creative
BioMolecules also has licensed rights to a class of small molecule compounds
that have already been demonstrated to influence signal transduction pathways.

      NATIONAL INSTITUTES OF HEALTH. The Company has a cooperative research and
development agreement with the National Institutes of Health to explore the
biology of certain morphogenic proteins that were first identified by U.S.
government researchers. As part of this agreement Creative BioMolecules has a
right to license patentable inventions that may arise from this collaboration.

      ACADEMIC COLLABORATIONS. The Company has relationships with a number of
academic investigators which are focused on testing morphogenic proteins in
tissue regeneration and restoration applications. In its collaborations, the
Company seeks to expand the scientific knowledge concerning tissue formation as
well as the activities and characteristics of various proteins under development
by the Company. The academic collaborators are not employees of Creative
BioMolecules. Hence, the Company has limited control over their activities and
limited amounts of their time are dedicated to the Company's projects. The
Company's collaborators may have relationships with other commercial entities,
some of which compete with the Company. Although the precise nature of each
relationship varies, the collaborators and their primary affiliated institutions
generally sign agreements which provide for confidentiality of the Company's
proprietary technology and results of studies. The Company seeks to obtain
exclusive rights to license developments that may result from these studies.

      PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP. In December 1986, the
Company granted to entities associated with Prudential Securities Incorporated
(PruTech Research and Development Partnership III and PruTech Product
Development Partnership; collectively, the "PruTech Entities") a license to use


                                       12
<PAGE>   14
certain technology developed by the Company relating to Epidermal Growth
Factor ("EGF") and Platlet Derived Growth Factor ("PDGF"). Technology developed
as a result of such research and development is owned by the PruTech Entities.
During 1988, the Company exercised its option under a related contract to take
a worldwide, exclusive license to all such technology. The license requires the
Company to pay the PruTech Entities royalties on sales of any PDGF or
EGF-related products or on sublicenses of the technology through December 31,
1999.

      ENZON CROSS-LICENSING AGREEMENT. The Company owns a number of issued U.S.
and foreign patents with broad claims on the composition of BABS(TM)
(Biosynthetic Antibody Binding Sites) proteins and their interdomain linkers.
BABS(TM) represents a separate technology developed by the Company, as to which
the Company has retained rights, but is not currently being utilized in its OP-1
development programs. One important European patent in this family has been
opposed. The opposition proceeding is in its early stages, and it is too early
to predict its outcome. There can be no assurance that this European patent will
not be narrowed or lost in the opposition. Some of the Company's BABS(TM)
technology is also covered by patents held by Enzon Corporation ("Enzon"). In
December 1993, the Company and Enzon signed cross-licensing and collaboration
agreements which consolidate the two companies' intellectual property rights and
know-how covering BABS(TM) proteins. The agreements allow each company, on a
royalty-free basis, to develop and manufacture products based on the combined
technology. Each party is also free to market products based on the combined
technology in collaboration with a limited number of third parties, subject to
the payment of a royalty by such third party. The parties have also agreed to
outlicense the technology to third parties on a non-exclusive basis in exchange
for license, milestone and royalty payments. Enzon has been designated the
exclusive marketing agent for such licenses. The Company believes that
consolidation of the companies' respective positions relating to BABS(TM)
proteins has created a strong position in the use and manufacture of these novel
proteins.


                                  MANUFACTURING

      The Company has significant manufacturing experience in the scaling-up and
production of recombinant proteins, including its own OP-1 protein. This
manufacturing experience prepares the Company to move forward with its OP-1
product programs utilizing its own manufacturing capabilities. The Company has
produced its recombinant proteins by bacterial fermentation as well as by
mammalian cell culture techniques in the laboratory. The Company has scaled-up
both of these production processes and has produced clinical grade recombinant
proteins using each of them. In March 1993, the Company acquired a 47,000 square
foot manufacturing facility in Lebanon, New Hampshire from Verax Corporation
("Verax") to scale-up the production of its proteins. The facility was designed
to enable production for clinical research and commercial use in accordance with
cGMP.

      In September 1994, the Company signed a three-year manufacturing contract
with Biogen to produce in the manufacturing facility several of Biogen's
protein-based therapeutic candidates for Biogen's use in its clinical trials. 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 and agreed to lease
equipment to the Company for the operation of such portion of the facility. See
"-- Collaborative and Licensing Agreements -- Biogen, Inc." The Company believes
that the acquisition and expansion of this manufacturing facility will
significantly enhance its ability to produce qualified products for clinical
trials and commercialization of OP-1.


                                       13
<PAGE>   15
                                   COMPETITION

      The potential therapeutic products which Creative BioMolecules is
developing will compete with existing and new products being developed by others
for treatment of the same indications. Competition in the development of human
therapeutics is particularly intense and includes many large pharmaceutical and
biopharmaceutical companies, specialized biotechnology firms, universities and
other research institutions. Certain of these companies have extensive
financial, marketing and human resources which may result in significant
competition. Many pharmaceutical companies have extensive experience in
undertaking clinical trials, in obtaining regulatory approval to market products
and in manufacturing on a large scale. Other biopharmaceutical companies may
also have more resources and experience in these areas than the Company. Several
pharmaceutical companies have entered or expanded their presence in the
biotechnology field by acquiring specialized biotechnology companies, thus
providing additional resources to the acquired companies which may allow them to
become more competitive.

      The technology underlying the development of human therapeutic products is
expected to continue to undergo rapid and significant advancement and change. In
the future, the Company's technological and commercial success will be based on
its ability to develop proprietary positions in key scientific areas and
efficiently evaluate potential product opportunities.

      A number of companies are engaged in the research and development of
morphogenic proteins for the repair of bone and cartilage. The Company is aware
that Genetics Institute is pursuing the development of bone morphogenetic
proteins and, to the Company's knowledge, is the only other company that has
begun human clinical trials of a recombinant bone morphogenetic protein for the
repair of orthopaedic and other skeletal defects. Genetics Institute has entered
into relationships with Yamanouchi Pharmaceuticals Co., Ltd. and Sofamor Danek
Group, Inc. covering development and marketing of bone morphogenetic proteins.
In addition, the Company believes that a number of biopharmaceutical companies
are developing other recombinant human proteins, primarily growth factors, for
use in the repair of bone and cartilage defects and in other indications. A
number of other companies are pursuing traditional therapies, including
autografts, allografts and electrical stimulation devices, as well as cell
therapies for the repair of bone and cartilage defects that may compete with the
Company's products.

      The Company's potential products for dental indications through its
collaboration with Stryker will compete primarily with traditional therapies.
The Company is not aware of any companies pursuing the development of
recombinant proteins for dentin applications. The Company is aware that Genetics
Institute is pursuing the development of bone morphogenetic proteins for the
repair of periodontal tissue.

      The Company is aware of several biotechnology companies that are
developing recombinant protein based products for the treatment of renal and
neurological disorders. In the field of renal failure two different products are
being evaluated in human clinical studies for acute renal failure and one of
those products is also being evaluated preclinically for chronic renal failure.
Creative BioMolecules is not aware of any companies developing morphogenic
protein based products for either acute or chronic renal failure. In the field
of neurological disorders, particularly in the areas of recovery from stroke and
treatment of Parkinson's Disease, there are several companies engaged in
preclinical and clinical studies with recombinant protein based and more
traditional small molecule products. One of those product candidates (for the
treatment of Parkinson's Disease) is based on a morphogenic protein that is part
of the same family of proteins of which OP-1 is a member.

      A number of biotechnology and pharmaceutical companies are pursuing the
development of other recombinant growth factors and hormones for the treatment
of osteoporosis. The Company believes that only a limited number of companies
are seeking to develop morphogenic proteins for the treatment of


                                       14
<PAGE>   16
osteoporosis. However, many major pharmaceutical companies are pursuing the
development of traditional drug therapies for the treatment of osteoporosis.

      In addition to competing with pharmaceutical and biotechnology companies,
the Company's products and technologies will also compete with those developed
by academic institutions, government agencies and other public organizations
conducting research that may discover new therapies, seek patent protection or
establish collaborative arrangements for product research.

      The Company believes that in addition to a product's patent position,
efficacy and price, the timing of a product's introduction may be a major factor
in determining eventual commercial success and profitability. Early entry may
have important advantages in gaining product acceptance and market share.
Accordingly, the relative speed with which the Company can complete preclinical
and clinical testing, obtain regulatory approvals, and supply commercial
quantities of the product is expected to have an important impact on the
Company's competitive position, both in the United States and abroad. Other
companies may succeed in developing similar products that are introduced
earlier, are more effective, or are produced and marketed more effectively.
There can be no assurance that research and development by others will not
render any of the Company's products obsolete or noncompetitive.


                         PATENTS AND PROPRIETARY RIGHTS

      Creative BioMolecules pursues a policy of obtaining patent protection for
patentable subject matter in its proprietary technology. As of March 6, 1997,
the Company owned or had rights to 40 issued patents and 81 pending patent
applications in the United States. The Company also owned or had rights to
approximately 41 issued foreign patents and 126 foreign patent applications
pending in Europe, Japan and certain other countries. Many of these applications
were filed through the Patent Cooperation Treaty and the European Patent Office
seeking to preserve for the Company the right to file applications in various
countries. Certain patents and patent applications relating to morphogenic
proteins, including OP-1, are owned by Stryker and have been licensed
exclusively to the Company for use in all indications other than orthopaedic
reconstruction. See "-- Collaborative and Licensing Agreements -- Stryker
Corporation." Certain other patents and patent applications are owned jointly
with other collaborators. There can be no assurance, however, that any such
patent applications will issue as patents, or that any patent now issued, or to
be issued, will provide a preferred position with respect to the technology or
products it covers.

      MORPHOGENIC PROTEIN TECHNOLOGY. Within the Company's patent estate, 15
issued U.S. patents, 21 granted foreign patents, 75 U.S. pending applications
and 89 pending foreign applications pertain to the Company's morphogenic protein
technology. Of these, 14 U.S. patents, 17 foreign patents, 16 U.S. pending
applications and 34 foreign applications pertain to composition of matter; 1
U.S. patent, 4 U.S. pending applications and 8 foreign applications pertain to
methods of production; 19 U.S. applications and 17 foreign applications pertain
to the Company's small molecule program and 4 foreign patents, 26 U.S. pending
applications and 30 foreign applications pertain to particular tissue
applications, including renal, neural, bone, liver, periodontal, dentin,
gastrointestinal tract and immune cell-mediated tissue applications.

      On July 15, 1996, Creative BioMolecules, Stryker and Genetics Institute
entered into a cross-license agreement in which the parties granted world-wide,
royalty-free, cross licenses to each other in the bone
morphogenetic/osteogenetic protein family (see "-- Collaborative and Licensing
Agreements -- Genetics Institute"). This cross-license, covering both issued
patents and pending applications in the field of bone morphogenic proteins,
eliminates the risk of patent litigation between the parties relating to the
Company's individual and joint efforts with Stryker to commercialize OP-1.


                                       15
<PAGE>   17
      OTHER TECHNOLOGY. Within the Company's patent estate, the Company owns or
has rights to 7 U.S. patents, 4 foreign patents, 9 U.S. applications and 20
foreign applications, related to its BABS(TM) and interdomain linker technology.
The Company also has patents issued in the United States and certain foreign
countries, and applications pending in the United States and certain foreign
countries on compositions of matter, methods of use and methods of production
relating to other proprietary technology.

      The Company's success will depend in part on its ability to obtain
marketing exclusivity for its products for a period of time sufficient to
establish a market position and achieve an adequate return on its investment in
product development. The Company believes that protection of its products and
technology under United States and international patent laws and other
intellectual property laws is an important factor in securing such market
exclusivity. U.S. patents issued from applications filed prior to June 8, 1995
have a term of the longer of 17 years from patent grant or 20 years from the
earliest filing date to which the application is entitled benefit. U.S. patents
issued from applications filed on or after June 8, 1995 have a term of 20 years
from the earliest filing date to which the application is entitled benefit.
Patents in most foreign countries have a term of 20 years from the date of the
filing of the patent application. In the United States and certain foreign
countries, the exclusivity period provided by patents covering pharmaceutical
products may be extended by a portion of the time required to obtain regulatory
approval for a product. The Company's issued U.S. patents begin expiring in
2005, and issued foreign patents begin expiring in 2006.

      Although the Company pursues patent protection, significant legal issues
remain as to the extent to which patent protection may be afforded in the field
of biotechnology, in both the United States and foreign countries. Furthermore,
the scope of protection has not yet been broadly tested. Therefore, the Company
also relies upon trade secrets, know-how and continuing technological
advancement to develop and maintain its competitive position. Disclosure of the
Company's know-how is generally protected under confidentiality agreements.
There can be no assurance, however, that all confidentiality agreements will be
honored, that third parties will not develop equivalent technology
independently, that disputes will not arise as to the ownership of technical
information or that wrongful disclosure of the Company's trade secrets will not
occur.

      Certain products and processes important to Creative BioMolecules may be
subject in the future to patent protection obtained by others. Biotechnology is
developing rapidly. Because many patent applications have been filed in this
field in recent years, the scope that courts will give to the claims of patents
issued from such applications and the nature of these claims cannot be
predicted. Several patent applications based on work done years ago have been
issued to others with broad claims directed to the use of basic recombinant DNA
technology. It is premature to predict what general trend, if any, will emerge
as to the breadth of allowed claims for biotechnology products and related uses.
The allowance of broader claims may increase the incidence and cost of
interference proceedings at the United States Patent and Trademark Office and
the risk of infringement litigation. A policy of allowing narrower claims,
conversely, could limit the value of the Company's proprietary rights under its
patents. It is possible that Patent and Trademark Office interference
proceedings will occur with respect to a number of the Company's patent
applications or issued patents. It is also likely that subject matter patented
by others will be required by the Company to research, develop, or commercialize
at least some of the Company's products. No assurance can be given that licenses
under any such patent rights of others will be made available on acceptable
terms.


                                REGULATORY ISSUES

      Regulation by governmental agencies in the United States and other
countries is a significant factor in the clinical evaluation and licensing of
the Company's potential products as well as in the development and research of
new products. All of the Company's products currently under development will
require regulatory approval by the FDA under the Food, Drug, and Cosmetic Act
("FD&C Act"), as a drug or device, or under


                                       16
<PAGE>   18
the Public Health Service Act as a biological, to be marketed in the United
States. Regardless of the classification assigned to the Company's products, all
human diagnostic and therapeutic products are subject to rigorous testing.
Generally, considerable time and expense are required to clinically evaluate the
safety and efficacy of a new product. Moreover, even after extensive preclinical
testing, unanticipated side effects can arise during clinical trials that can
halt or delay the regulatory process at any point. The Company believes that
seeking and obtaining regulatory approval for a new therapeutic or diagnostic
product is likely to take several years and require the expenditure of
substantial resources.

      Products developed through genetic engineering, such as the Company's
products, are relatively new, and state and local regulation may increase as
genetically engineered products become more common. The federal government
oversees certain recombinant DNA research activity through the National
Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules
(the "NIH Guidelines"). The Company believes it complies with the NIH
Guidelines, which prohibit or restrict certain recombinant experiments, set
forth levels of biological and physical containment of recombinant DNA molecules
to be met for various types of research, and require that institutional
biosafety committees approve certain experiments before they are initiated.
Compliance with the NIH Guidelines has not had, and the Company does not foresee
that it will have, a material effect on the competitive position or cash flow of
the Company. Discussions have been underway since 1996 between NIH and FDA
regarding alternative models for regulation of recombinant DNA research and the
products resulting from such research, and the appropriateness of any continued
NIH role. It is not possible to predict the effect of such potential regulatory
changes on the Company or its potential competitors.

      PHARMACEUTICAL AND BIOLOGICAL PRODUCTS. The Company expects that
certain of its potential products will be regulated by the FDA as
pharmaceuticals or biologicals. The regulatory approval of pharmaceutical and
biological products in the United States intended for therapeutic use in humans
involves many steps. The initial phase of the FDA approval process involves
preclinical testing to demonstrate that the product would not be an
unreasonable hazard in clinical studies with human subjects. Upon completion of
preclinical testing, an IND application must be filed with the FDA. The
application includes (i) information on the composition of the product
including pharmacology and toxicology, (ii) chemistry, manufacturing, and
control information, (iii) results of all the preclinical safety and efficacy
investigations including in vivo and in vitro studies, (iv) information on any
previous human experience with the product, (v) a clinical design and protocol,
(vi) information on the investigators, (vii) the necessary agreements among
parties involved in the testing and (viii) approval of an Institutional Review
Board at the center(s) conducting the study or studies. If the application has
not been denied or if additional information has not been requested by the FDA
within 30 days of filing, the applicant may then begin clinical studies.

      Clinical testing usually occurs in three phases to demonstrate safety and
efficacy of the product. Phase I clinical trials consist of testing for the
safety and tolerance of the product with a small group of subjects and may also
yield preliminary information about the efficacy and dosage levels of the
product. Phase II clinical trials involve testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. Currently, FDA requires a separate IND
for each distinct clinical study. After product approval, FDA may request or
require an additional phase (Phase IV) of clinical studies to provide additional
information on safety and efficacy.

      Upon successful completion of Phase III testing, either a New Drug
Application ("NDA") or Product License Application/Establishment License
Application ("PLA/ELA") can be filed, depending upon whether the product is
designated as a drug or a biological, respectively. The FDA normally requires at
least two


                                       17
<PAGE>   19
adequate and well-controlled clinical trials for product approval. Certain
biological products may be eligible for a unified application known as a
Biologics License Application ("BLA"), which reduces the amount of information
required to be filed concerning manufacturing facilities. All approval types
require a detailed review of all data collected from clinical studies, the
composition of the drug or biological, non-clinical pharmacology and toxicology
data, environmental impact data, human pharmacokinetics and bioavailability
data, patent information, certain case report data and forms, the labeling that
will be used, information on chemistry, manufacturing, and controls, and samples
of the product. After the FDA completes its review of the application, the
product is typically reviewed by a panel of medical experts, and the applicant
is required to answer questions on its safety and efficacy. The FDA considers
the recommendation of the panel, and may in its own discretion approve an NDA,
PLA/ELA, or BLA. If so approved, the product may then be marketed.

      DEVICES.  The Company expects that certain of its potential products
will be regulated by the FDA as Class III devices. Preclinical evaluations of
Class III devices are similar to those of pharmaceuticals and biologicals, with
additional emphasis on implant persistence, implant sensitization, and carrier
characterization and specifications. Upon completion of preclinical testing, an
IDE application is filed with the Center for Devices and Radiological Health in
the FDA. This application consists of (i) identifying information on the
sponsor, (ii) complete reports of prior investigations of the device, (iii) a
summary of the investigational plan (or the complete plan), (iv) a description
of the methods, facilities, and controls used for manufacturing, processing,
packing, storage, and installation of the device, (v) example investigator
agreements, (vi) a list of investigators, (vii) certifications concerning
investigators and Investigational Review Boards, (viii) copies of labeling and
(ix) materials relating to environmental impact and informed consent. If the
application has not been denied by the FDA within 30 days of filing, the
applicant may then begin clinical studies. The FDA may approve the IDE before
the end of the 30 day period, in which case the applicant may begin clinical
studies immediately.

      The clinical testing of a device may consist of a preliminary feasibility
study leading to a much larger pivotal safety and effectiveness study, or it may
consist of only the larger pivotal safety and effectiveness study. Upon
successful completion of the clinical testing and compilation of the data, a PMA
application can be filed. This application consists of (i) indications for use,
(ii) product description, (iii) discussion of alternatives to use of the device,
(iv) marketing history (worldwide), (v) review of clinical studies and results,
(vi) methods, facilities and controls (as in an IDE), (vii) non-clinical data,
(viii) if only one clinical study is used, a justification of that approach,
(ix) identification and bibliography of any information relevant to the safety
and effectiveness of the device, (x) product samples, (xi) product labeling and
(xii) certain environmental information. The FDA is required to respond to the
PMA submission within 180 days, although the FDA may not adhere to this schedule
and further review may take additional time. After the FDA completes its review
of the application, the product is typically reviewed by a panel of medical
experts, and the applicant is required to answer questions on its safety and
effectiveness. At the recommendation of the panel, a PMA may be granted, and the
product may then be marketed.

      TREATMENT IND STATUS.  Before the completion of clinical trials for
products, a company may file for Treatment IND status under provisions of the
IND regulations. These regulations apply to products for patients with serious
or life-threatening diseases and are intended to facilitate the availability of
new products to desperately ill patients after clinical trials have shown
convincing evidence of efficacy, but before general marketing approval has been
granted by the FDA. Under these regulations, it may be possible for the Company
to recover some of the costs of research, development and manufacture of its
products before commercial marketing begins. The


                                       18
<PAGE>   20
Company may seek Treatment IND status for qualified products, although the
decision whether to grant such status lies with the FDA.

      The FDA has also adopted regulations intending to accelerate the approval
of therapeutic products for serious and life threatening diseases under certain
circumstances. The Company may seek to utilize these regulations for qualified
products. Approvals under these regulations may be conditioned on further
studies by the Company, may include restrictions on marketing, may require prior
submission of promotional materials, and may be subject to expedited withdrawal
of approval.

      USER FEES.  The United States Congress passed the Prescription Drug
User Fee Act ("User Fee Act") in October 1992. The purpose of the User Fee Act
is to reduce the time that the FDA takes to act on completed PLAs, ELAs, and
NDAs. Priority applications should be acted upon in six months and regular
applications should be acted upon in 12 months from date of submission. The
User Fee Act contemplates that establishment, application and product fees paid
by pharmaceutical companies seeking license approval or who already have
products on the market will be used to pay for extra resources at the FDA. The
increase in resources is intended to allow the FDA to meet the above deadlines.
Small companies with no product on the market may receive a reduction and
deferral of some fees. User fee waivers are possible for companies with limited
resources if they can show that fees are a barrier to innovation or to
development of products. Waivers are also possible to protect the public
health, if fees would exceed FDA costs, or on equitable grounds. The FDA has
stated that it will grant these waivers on a case-by-case basis. In particular,
smaller entities (less than $10 million in annual gross revenues and no
corporate parent or funding source with annual gross revenues of $100 million
or more), or up to medium-sized entities (annual gross revenues of less than
$100 million) developing Orphan Drugs, may qualify for a fee waiver. The FDA
has issued a draft guidance document describing criteria for user fee
exceptions and waivers, and the Company may seek such exceptions or waivers for
its products if appropriate under this guidance. The user fee program does not
apply to generic drugs and medical devices at this time. Because the original
legislation creating user fees will expire in the fall of 1997, negotiations
are currently underway between the regulated industry, the FDA, and the
Congress to draft reauthorizing legislation. It is impossible to predict
whether these efforts will be successful, and what effect their success or
failure may have on approval times and availability of FDA resources.

      FACILITIES INSPECTION.  In addition to product approval prior to
marketing, the Company must also obtain FDA approval of the facility in which
its products will be manufactured. In the case of a pharmaceutical or a device,
the Company must be in compliance with cGMP requirements; inspection of the
Company's facilities to determine such compliance would be conducted as part of
the overall NDA or PMA approval. In the  case of a biological, unless the
product qualifies for a BLA, a separate application specific to the
manufacturing facility must be approved (in the form of an ELA), and the
facility must meet guidelines set by the Center for Biologics Evaluation and
Research. Since any NDA, PMA or ELA approved by the FDA is both site and
process specific, any material change by the Company in its manufacturing
process, equipment or location would necessitate additional FDA review and
approval. Recently, the FDA promulgated new regulations concerning cGMPs for
medical devices. These new regulations include elements drawn from existing
international standards and a new emphasis on design of medical devices (in
addition to the existing focus on manufacturing). Until these new regulations
are better understood by industry, compliance with medical device cGMPs may
prove more difficult than in the past, and may require the use of additional
resources or even the redesign of some existing devices or facilities.


                                       19
<PAGE>   21

      FOREIGN REGULATIONS.  Regulations concerning the marketing of human
therapeutic and diagnostic  products are generally imposed by foreign
governments and may have an impact on the Company's anticipated operations. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement levels vary widely from country to country. The
Company attempts to conduct its development activities in a manner that would
also support regulatory filings in selected foreign countries.

      OTHER.  The current Congress is considering various possible reforms to
limit the FD&C Act. Examples of possible changes include, but are not limited
to, alternative approval mechanisms, variations in the length of statutory
exclusivity and patent restoration, and modified FDA regulatory procedures. At
present, it is not possible to predict whether such changes will, in fact,
occur, and what their possible effect on the Company might be. Amendments to
the federal laws have loosened export restrictions on therapeutic products,
including amendments permitting the export of products not yet approved in the
United States but approved in certain foreign countries. The Company may choose
to conduct such exports of its products prior to obtaining FDA marketing
approval in the United States.

      In addition, the Company is subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Research Conservation and Recovery Act, regulations
administered by the Nuclear Regulatory Commission, national restrictions on
technology transfer, import, export and customs regulations and other present or
possible future local, state or federal regulation. From time to time, other
federal agencies and congressional committees have indicated an interest in
implementing further regulation of biotechnology applications. The Company is
not able to predict whether any such regulations will be adopted or whether, if
adopted, such regulations will adversely affect the Company's business.

                                  EMPLOYEES

      As of February 28, 1997, the Company had 191 full-time employees, 27 of
whom hold Ph.D., D.V.M., or M.D. degrees. The Company considers its relations
with its employees to be good and has experienced a low rate of employee
turnover. None of the Company's employees is covered by a collective bargaining
agreement. The Company has entered into confidentiality agreements with all of
its employees.


                                       20
<PAGE>   22
ITEM 2.  DESCRIPTION OF PROPERTY

      The Company currently leases an aggregate of 69,000 square feet in two
facilities in Hopkinton, Massachusetts. The location is approximately 30 miles
west of Cambridge and Boston and 20 miles east of Worcester, all of which are
major research centers in health care and biotechnology in Massachusetts. The
Company's larger facility, encompassing 54,000 square feet of space, houses
research and development laboratories and small scale production suites. The
research and development laboratories are fully equipped for recombinant DNA
synthesis, protein engineering, analytical chemistry, cell biology, and process
development activities. The production suites are designed and equipped to
produce clinical grade protein products. The smaller facility, with 15,000
square feet of space, houses its corporate offices. Both leases expire in 1998.

      The Company purchased a leasehold interest in, and an option to purchase,
a 47,000 square foot manufacturing facility in Lebanon, New Hampshire on March
15, 1993. The location is approximately 130 miles north by northwest of Boston,
Massachusetts and 90 miles southeast of Burlington, Vermont. This facility
houses two functional cGMP production suites, quality assurance/quality control
laboratories and support offices. The facility is fully equipped for cGMP
production of recombinant proteins from mammalian cell culture and monoclonal
antibodies from Hybridoma cultures. The lease expires in 2008.
The Company has room for expansion within the site.

      In September 1994, the Company signed a three-year manufacturing contract
with Biogen to produce for clinical trials several of Biogen's protein-based
therapeutic candidates in the manufacturing facility in Lebanon, New Hampshire.
To enable the Company to meet its obligations under the manufacturing contract,
Biogen is constructing and financing a 7,000 square foot addition to the present
facility for cGMP production using bacterial fermentation and agreed to lease
equipment to the Company for the operation of such portion of the facility and
for the cGMP production of bacterial fermentation products by the Company.

      The Company believes that its existing facilities, including the addition
of bacterial fermentation capacity in Lebanon, New Hampshire, are adequate for
its current needs.

ITEM 3.  LEGAL PROCEEDINGS

      There are no material pending legal proceedings to which the Company is a
party or of which any of its property is the subject.

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

      No matters were submitted during the fourth quarter of the year ended
December 31, 1996 to a vote of the Company's security holders.


                                       21
<PAGE>   23
                                     PART II

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

MARKET INFORMATION

           The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol CBMI. The following table presents quarterly information on the price
range of the Company's Common Stock, indicating the high and low sale prices
reported by The Nasdaq Stock Market.

<TABLE>
<CAPTION>
                                       High                 Low
                                       ----                 ---
<S>                                  <C>                 <C>
1996
    4th Quarter..................    $12.75              $ 6.50
    3rd Quarter..................      8.50                5.13
    2nd Quarter..................     10.88                7.56
    1st Quarter..................     13.00                6.88
1995
    4th Quarter..................      7.00                4.50
    3rd Quarter..................      6.25                2.50
    2nd Quarter..................      3.13                1.69
    1st Quarter..................      3.25                1.50
1994
    4th Quarter..................      3.88                1.38
</TABLE>

STOCKHOLDERS

           As of February 28, 1997, there were approximately 318 stockholders of
record of the Company's Common Stock.

DIVIDENDS

           The Company has not paid any dividends on its Common Stock since its
inception and does not intend to pay any dividends on its Common Stock in the
foreseeable future. The Company intends to retain its earnings, if any, for the
development of its business.

RECENT SALES OF UNREGISTERED SECURITIES

           On December 9, 1996, the Company sold to Biogen 1,542,680 shares of
Common Stock at a premium to the then-current market price of the Common Stock.
Proceeds to the Company were $18,000,000. The Company issued these securities
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act, since no public offering was involved. No underwriters were
involved in the offer and sale of the securities.


                                       22
<PAGE>   24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

           The selected consolidated financial data set forth below with respect
to the Company's consolidated statements of operations for the year ended
December 31, 1996, the three months ended December 31, 1995 and for the years
ended September 30, 1995 and 1994, and with respect to the consolidated balance
sheets as of December 31, 1996 and 1995, are derived from the consolidated
financial statements that have been audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Form 10-K. The
consolidated statement of operations data for the years ended September 30, 1993
and 1992, and the consolidated balance sheet data as of September 30, 1995,
1994, 1993 and 1992, are derived from audited consolidated financial statements
not included herein. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes included
herein.


<TABLE>
<CAPTION>
                                                                  THREE
                                                   YEAR           MONTHS
                                                   ENDED          ENDED                      YEARS ENDED SEPTEMBER 30,
                                                 DECEMBER        DECEMBER        -----------------------------------------------
                                                 31, 1996       31, 1995(1)        1995         1994         1993         1992
                                                 --------       -----------      --------     --------     --------     --------
                                                                    (In thousands, except per share amounts)
<S>                                              <C>            <C>              <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Research and development contracts .....       $  5,548        $    971        $  5,824     $  3,652     $  1,576     $  4,469
  Manufacturing contracts ................          4,486             770           6,159        1,411          461           --
  License fees and royalties .............         11,122               2             544            7           30           --
  Product sales ..........................             --              --              --           16           35           56
  Interest ...............................          1,174             261             649          580          549          472
  Other ..................................             22              --              53          141            3            5
                                                 --------        --------        --------     --------     --------     --------
    Total revenues .......................         22,352           2,004          13,229        5,807        2,654        5,002
                                                 --------        --------        --------     --------     --------     --------
Cost and expenses:
  Research and development ...............         15,651           3,194          11,688       17,680       12,898        7,489
  Cost of manufacturing contracts ........          3,823             715           5,330        1,389          439           --
  Cost of product sales ..................             --              --              --            3            6           13
  Marketing, general and administrative ..          4,901           1,254           3,604        4,794        3,121        3,292
  Interest ...............................            217              61             229          200          209          200
                                                 --------        --------        --------     --------     --------     --------
    Total costs and expenses .............         24,592           5,224          20,851       24,066       16,673       10,994
                                                 --------        --------        --------     --------     --------     --------
Net loss .................................       $ (2,240)       $ (3,220)       $ (7,622)    $(18,259)    $(14,019)    $ (5,992)
                                                 ========        ========        ========     ========     ========     ========
Net loss per common share(2) .............       $  (0.07)       $  (0.11)       $  (0.37)    $  (0.95)    $  (0.94)    $  (0.55)
                                                 ========        ========        ========     ========     ========     ========
Weighted average number of
  common shares outstanding(2) ...........         30,062          28,120          20,431       19,212       14,855       10,812
                                                 ========        ========        ========     ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     SEPTEMBER 30,
                                                       DECEMBER     DECEMBER     -----------------------------------------------
                                                       31, 1996     31, 1995       1995         1994         1993         1992
                                                       --------     --------     --------     --------     --------     --------
                                                                                        (In thousands)
<S>                                                    <C>          <C>          <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents
 and marketable securities .....................       $ 50,075     $ 20,002     $ 10,486     $  5,423     $ 25,255     $  6,739
Working capital ................................         48,174       21,743       11,651        4,927       23,940        5,015
Total assets ...................................         73,819       41,341       32,192       27,470       45,326       12,235
Capital lease obligations,  less current portion          1,651        1,711        1,713        1,750        1,798          216
Accumulated deficit ............................        (71,438)     (69,198)     (65,978)     (58,356)     (40,098)     (26,079)
Total stockholders' equity .....................         67,261       37,829       28,269       22,807       40,675        9,676
</TABLE>

(1)   In January 1996, the Company changed its fiscal year end from September 30
      to December 31, effective with the three month period ended December 31,
      1995.

(2)   See Note 1 of Notes to Consolidated Financial Statements for an
      explanation of the computation of net loss per common share.


                                       23
<PAGE>   25
ITEM 7. 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. Beginning in the year ended September 30, 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 such collaborative agreements. 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 to develop products for
orthopedic reconstruction and with Biogen to develop products for the treatment
of renal disorders. Under the research portion of the collaboration with
Stryker, the Company supplies an OP-1 product 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
establishes research objectives and funding through April 1998. In December
1996, the Company signed a Research Collaboration and License Agreement with
Biogen. Under the research collaboration, the Company will perform research work
pursuant to work plans established annually by the two companies and supply OP-1
to Biogen for preclinical and clinical uses. 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. The Company is presently a party to a
manufacturing contract with Biogen to produce several of Biogen's protein-based
therapeutic candidates through December 1997 for use in Biogen's clinical
trials. The Company agreed to provide Biogen with all available cell culture and
bacterial fermentation capacity within the manufacturing facility, and Biogen
agreed to pay the Company's costs associated with such capacity, for
approximately six months in each of the three years beginning in January 1995.
The companies have agreed that the supply of OP-1 to Biogen pursuant to the
research collaboration during 1997 will satisfy Biogen's 1997 obligations 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.

           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.


                                       24
<PAGE>   26
           In January 1996, the Board of Directors voted to change the Company's
fiscal year end from September 30 to December 31, effective with the three month
period ended December 31, 1995.

RESULTS OF OPERATIONS

           YEARS ENDED DECEMBER 31, 1996, SEPTEMBER 30, 1995 AND 1994. The
Company's revenues in the fiscal years ended December 31, 1996, September 30,
1995 and September 30, 1994 were $22,352,000, $13,229,000 and $5,807,000,
respectively. Research and development contract revenues increased 59% from
$3,652,000 in the year ended September 30, 1994 to $5,824,000 in the year ended
September 30, 1995 and decreased 5% to $5,548,000 in the year ended December 31,
1996. These increases and decreases are primarily due to fluctuations in
research funding from Stryker. The Company anticipates that research revenues
will increase in 1997 primarily as a result of the research activity under the
research collaboration with Biogen.

            Manufacturing contract revenues reflect manufacturing, principally
for Biogen beginning in the year ended September 30, 1995, performed at the
Company's manufacturing facility in Lebanon, New Hampshire. The Company
anticipates using the facility for the production of OP-1 for Stryker, Biogen
and the Company's own uses for a substantial portion of 1997. Therefore, the
Company does not anticipate significant contract manufacturing revenues in 1997.

           Product sales are sales of proteins to the research market. The
Company does not anticipate significant product sales, if any, in 1997.

           License fees and royalties revenues for the year ended December 31,
1996 include a $10,000,000 license fee from Biogen as part of the research
collaboration with the Company to develop products for the treatment of renal
disorders, $500,000 from Stryker for the Company's licensing to Stryker of
patent rights and know-how in the dental field and $622,000 received for the
licensing patent rights and know-how associated with certain protein technology
which is not central to the Company's business. License fees and royalties
revenues for the year ended September 30, 1995 include revenue from licensing
patent rights and know-how associated with certain protein technology which is
not central to the Company's business.

           Interest revenues increased 12% from $580,000 in the year ended
September 30, 1994 to $649,000 in the year ended September 30, 1995 and
increased 81% to $1,174,000 in the year ended December 31, 1996. The increase
from the year ended September 30, 1994 to the year ended September 30, 1995 was
due to increased cash balances resulting from a private placement of the
Company's equity during the year ended September 30, 1995. The increase from the
year ended September 30, 1995 to the year ended December 31, 1996 was due to
increased cash balances resulting from an underwritten public offering of the
Company's common stock in July 1996. Other revenues consist primarily of
non-recurring gains from the sale of certain manufacturing equipment.

           The Company's total costs and expenses, consisting primarily of
research and development expenses, decreased 13% from $24,066,000 in the year
ended September 30, 1994 to $20,851,000 in the year ended September 30, 1995 and
increased 18% to $24,592,000 in the year ended December 31, 1996.

           Research and development expenses decreased 34% from $17,680,000 in
the year ended September 30, 1994 to $11,688,000 in the year ended September 30,
1995 and increased 34% to $15,651,000 in the year ended December 31, 1996.
Substantially all of the cost of operating the manufacturing facility from
January 1995 through mid-September 1995 is reported as cost of manufacturing
contracts, contributing to the decrease in research and development expenses
from the year ended September 30, 1994 to the year ended September 30, 1995.
From the date of acquisition of the manufacturing facility in March 1993 through
December 1994, the facility was primarily used for development activities by the
Company and therefore the facility operating costs related to such development
activities were reported as research and development


                                       25
<PAGE>   27
expenses for such periods. As discussed further below, commencing in January
1995 through September 1995, facility operating costs were reported as cost of
manufacturing contracts. The decrease in research and development expenses from
the year ended September 30, 1994 to the year ended September 30, 1995 also was
due to a 20% staff reduction in the Company's Massachusetts operations
implemented in September 1994 and a corresponding reduction in purchases of
laboratory supplies and services. The increase in research and development
expenses from the year ended September 30, 1995 to the year ended December 31,
1996 was due in part to an increase in development activities by the Company at
the manufacturing facility. The facility operating costs related to such
development activities were reported as research and development expenses for
such periods. Also contributing to the increase were staff increases and a
corresponding increase in purchases of laboratory supplies, services, recruiting
and relocation expenses, and increased expenditures on academic collaborations
and subcontracted research related to product and technology development. The
Company anticipates that research expenses will increase in 1997 primarily as a
result of the research activity under the research collaboration with Biogen.

           Cost of manufacturing contracts includes the costs associated with
the manufacturing for third parties conducted at the Company's manufacturing
facility in Lebanon, New Hampshire. Cost of manufacturing contracts increased
significantly beginning in the year ended September 30, 1995, as the Company
began production for Biogen in January 1995. The Company anticipates using the
facility for the production of OP-1 for Stryker, Biogen and the Company's own
uses for a substantial portion of 1997. Costs associated with the production of
OP-1 for Stryker, Biogen and the Company's own uses will be reported as research
and development expenses.

           Marketing, general and administrative expenses decreased 25% from
$4,794,000 in the year ended September 30, 1994 to $3,604,000 in the year ended
September 30, 1995 and increased 36% to $4,901,000 in the year ended December
31, 1996. The decrease from the year ended September 30, 1994 to the year ended
September 30, 1995 was due to a 20% staff reduction in the Company's
Massachusetts operations implemented in September 1994 and a corresponding
reduction in purchases of supplies and services and a reduction in recruiting
and relocation expenses. The increase from the year ended September 30, 1995 to
the year ended December 31, 1996 was due to increases in executive staff and
recruiting and relocation costs, along with additional costs associated with the
Biogen transaction.

           Interest expense increased 15% from $200,000 in the year ended
September 30, 1994 to $229,000 in the year ended September 30, 1995 and
decreased 5% to $217,000 in the year ended December 31, 1996. The increase from
the year ended September 30, 1994 to the year ended September 30, 1995 was due
to an increase in interest rates on capital lease obligations, partially offset
by the repayment of obligations under capital leases. The decrease from the year
ended September 30, 1995 to the year ended December 31, 1996 was due to the
repayment of obligations under capital leases.

           As a result of the foregoing, the Company incurred a net loss of
$2,240,000 in the year ended December 31, 1996 compared to a net loss of
$7,622,000 in the year ended September 30, 1995 and a net loss of $18,259,000 in
the year ended September 30, 1994.

LIQUIDITY AND CAPITAL RESOURCES

           At December 31, 1996, the Company's principal sources of liquidity
consisted of cash and cash equivalents of $38,249,000, marketable securities of
$11,826,000 and a $15,000,000 unsecured line of credit from Biogen, as discussed
futher below. The Company has financed its operations primarily through
placements of equity securities, revenues received under agreements with
collaborative partners, and more recently, manufacturing contracts. Since
inception, sales of equity securities have raised approximately $131,998,000 in
gross proceeds, including approximately $12,717,000 in an underwritten public
offering of common stock completed in July 1996 and $18,000,000 in a private
placement of common stock with Biogen


                                       26
<PAGE>   28
completed in December 1996. Since inception, the Company has earned
approximately $79,660,000 in gross revenues.

           The Company increased its investment in property, plant and equipment
to $28,458,000 at December 31, 1996 from $24,680,000 at December 31, 1995. The
Company currently plans to spend approximately $3,200,000 in the year ended
December 31, 1997 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
addition, as part of a manufacturing contract with Biogen, Biogen financed the
construction of leasehold improvements to the Company's manufacturing facility
at an estimated total cost of $2,900,000 and is installing and financing certain
equipment with an estimated total cost of $2,400,000 for the Company, as
discussed further below.

           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
orthopedic 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. In May 1996, the Company and
Stryker agreed to extend the research portion of the collaboration for two years
through April 1998. The Company estimates that the contract extension will
provide approximately $12,000,000 of revenue to the Company over the two year
period.

           In December 1996, the Company signed a Research Collaboration and
License Agreement with Biogen 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.
Biogen has guaranteed $10,500,000 in research funding over the next three years,
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 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
three years to fund the research and development of small molecule products
based on OP-1. Advances are limited to $5,000,000 per year. In exchange for the
line of credit, Biogen received an exclusive 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 covers 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 $2,900,000. 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 $2,100,000. 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 $2,400,000, as provided in an equipment
lease agreement. The Company has the option to purchase the equipment at the end
of


                                       27
<PAGE>   29
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. Biogen currently plans to
complete the installation of the equipment and prepare the bacterial facility
for operation in 1997.

           The Company anticipates that its existing capital resources should
enable it to maintain its current and planned operations through 1999. 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 beyond 1999 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. In addition, the Company is investigating the feasibility of raising
capital through the sale/leaseback or debt financing of some of its capital
assets. 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-K 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 clinical progress 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 efforts involve a high degree of risk.


                                       28
<PAGE>   30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                     Page
Index to Consolidated Financial Statements                          Number
------------------------------------------                          ------
Creative BioMolecules, Inc. And Subsidiary:

      Financial Statements:

             Independent Auditors' Report........................     30

             Consolidated Balance Sheets.........................     31

             Consolidated Statements of Operations...............     32

             Consolidated Statements of Stockholders' Equity.....     33

             Consolidated Statements of Cash Flows...............     34

             Notes to Consolidated Financial Statements..........     35


                                       29
<PAGE>   31
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Creative BioMolecules, Inc.

We have audited the accompanying consolidated balance sheets of Creative
BioMolecules, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1996, the three month period ended
December 31, 1995 and each of the two years in the period ended September 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiary at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the year ended December 31, 1996, the three month period ended
December 31, 1995 and each of the two years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.



/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 21, 1997


                                       30
<PAGE>   32
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                -------------------------------
ASSETS                                                                               1996              1995
------                                                                          -------------     -------------
<S>                                                                             <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                     $  38,248,988     $  11,917,779
  Marketable securities                                                            11,826,266         8,084,269
  Accounts receivable                                                               1,454,696         2,818,618
  Inventory                                                                         1,341,914           562,290
  Prepaid expenses and other                                                          208,886           149,105
                                                                                -------------     -------------
    Total current assets                                                           53,080,750        23,532,061
                                                                                -------------     -------------
PROPERTY, PLANT AND EQUIPMENT - net                                                16,224,376        14,736,306
                                                                                -------------     -------------
OTHER ASSETS:
  Note receivable - officer                                                           350,000
  Patents and licensed technology - net                                               401,629           382,703
  Deferred patent application costs - net                                           3,471,169         2,431,298
  Deposits and other                                                                  290,950           258,473
                                                                                -------------     -------------
    Total other assets                                                              4,513,748         3,072,474
                                                                                -------------     -------------
TOTAL                                                                           $  73,818,874     $  41,340,841
                                                                                =============     =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Lease obligations - current portion                                           $      53,532     $      42,567
  Accounts payable                                                                  2,830,356           738,100
  Accrued liabilities                                                                 561,562           512,446
  Accrued compensation                                                              1,460,856           495,633
                                                                                -------------     -------------
    Total current liabilities                                                       4,906,306         1,788,746
                                                                                -------------     -------------
LEASE OBLIGATIONS                                                                   1,651,493         1,710,910
                                                                                -------------     -------------
DEFERRED COMPENSATION - officers                                                                         12,500
                                                                                -------------     -------------
COMMITMENTS (Notes 6, 7 and 11) STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued
  Common stock, $.01 par value, 50,000,000 shares authorized,
    32,769,553 shares and 28,894,996 shares issued and
    outstanding at December 31, 1996 and 1995, respectively                           327,696           288,950
  Common stock payable                                                                                1,736,586
  Additional paid-in capital                                                      138,371,802       105,001,625
  Accumulated deficit                                                             (71,438,423)      (69,198,476)
                                                                                -------------     -------------
     Total stockholders' equity                                                    67,261,075        37,828,685
                                                                                -------------     -------------
TOTAL                                                                           $  73,818,874     $  41,340,841
                                                                                =============     =============
</TABLE>

See notes to consolidated financial statements


                                       31
<PAGE>   33
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            Three Months
                                           Year Ended          Ended            Year Ended September 30,
                                           December 31,     December 31,     -----------------------------
                                               1996             1995             1995             1994
                                           ------------     ------------     ------------     ------------
<S>                                        <C>              <C>              <C>              <C>
REVENUES:
  Research and development contracts       $  5,547,976     $    970,806     $  5,824,344     $  3,651,949
  Manufacturing contracts                     4,485,531          770,133        6,158,574        1,411,262
  License fees and royalties                 11,122,584            2,157          544,000            7,500
  Product sales                                                                                     15,600
  Interest                                    1,174,219          260,953          648,602          580,160
  Other                                          21,900              349           53,470          140,757
                                           ------------     ------------     ------------     ------------
    Total revenues                           22,352,210        2,004,398       13,228,990        5,807,228
                                           ------------     ------------     ------------     ------------
COSTS AND EXPENSES:
  Research and development                   15,650,986        3,193,979       11,687,847       17,679,692
  Cost of manufacturing contracts             3,823,442          715,171        5,329,779        1,388,577
  Cost of product sales                                                                              3,494
  Marketing, general and administrative       4,900,823        1,254,566        3,603,954        4,793,508
  Interest                                      216,906           60,784          229,477          200,563
                                           ------------     ------------     ------------     ------------
    Total costs and expenses                 24,592,157        5,224,500       20,851,057       24,065,834
                                           ------------     ------------     ------------     ------------
NET LOSS                                   $ (2,239,947)    $ (3,220,102)    $ (7,622,067)    $(18,258,606)
                                           ============     ============     ============     ============
NET LOSS PER COMMON SHARE                  $      (0.07)    $      (0.11)    $      (0.37)    $      (0.95)
                                           ============     ============     ============     ============
WEIGHTED AVERAGE NUMBER
  OF COMMON AND
  COMMON  EQUIVALENT
  SHARES OUTSTANDING                         30,062,334       28,120,190       20,430,900       19,212,477
                                           ============     ============     ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       32
<PAGE>   34
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                    Convertible
                                                                                  Preferred Stock              Common Stock
                                                                              -----------------------    -----------------------
                                                                                 Shares       Amount        Shares       Amount
                                                                              -----------    --------    -----------    --------
<S>                                                                           <C>            <C>         <C>            <C>
BALANCE, SEPTEMBER 30, 1993                                                             0    $      0     18,575,966    $185,760

Repayment of notes receivable
Forgiveness of notes receivable
Issuance of common stock in connection with asset purchase                                                   394,890       3,949
Issuance of common stock for note receivable                                                                 467,715       4,677
Other issuances of common stock                                                                               96,247         962
Net loss
                                                                              -----------    --------    -----------    --------
BALANCE, SEPTEMBER 30, 1994                                                             0           0     19,534,818     195,348

Forgiveness of notes receivable
Issuance of common stock for note receivable                                                                  66,271         663
Repayment of notes receivable
Issuance of Series 1994/A Preferred Stock in connection
  with private placement (net of costs $269,064)                                1,130,000      11,300
Issuance of common stock in connection with asset purchase                                                   394,890       3,949
Conversion of Series 1994/A Preferred Stock into
  common stock                                                                 (1,130,000)    (11,300)     5,650,000      56,500
Other issuances of common stock                                                                              186,675       1,867
Net loss
                                                                              -----------    --------    -----------    --------
BALANCE, SEPTEMBER 30, 1995                                                             0           0     25,832,654     258,327

Issuance of common stock in connection with self-managed
  public offering of common stock (net of costs of $108,026)                                               3,000,000      30,000
Other issuances of common stock                                                                               62,342         623
Net loss
                                                                              -----------    --------    -----------    --------
BALANCE, DECEMBER 31, 1995                                                              0           0     28,894,996     288,950

Reclassification of equity consideration in connection with asset purchase
Issuance of common stock in connection with underwritten
  public offering of common stock (net of costs of $1,283,236)                                             2,000,000      20,000
Issuance of common stock in connection with research collaboration                                         1,542,680      15,427
Stock based compensation
Other issuances of common stock                                                                              331,877       3,319
Net loss
                                                                              ----------    ---------    -----------    --------
BALANCE, DECEMBER 31, 1996                                                             0    $       0     32,769,553    $327,696
                                                                              ==========    =========    ===========    ========
</TABLE>

<TABLE>
<CAPTION>

                                                                                Common        Additional
                                                                                Stock           Paid-In       Accumulated
                                                                                Payable         Capital         Deficit
                                                                              -----------    ------------    ------------
<S>                                                                           <C>            <C>             <C>
BALANCE, SEPTEMBER 30, 1993                                                   $ 5,785,131    $ 74,914,056    $(40,097,701)

Repayment of notes receivable
Forgiveness of notes receivable
Issuance of common stock in connection with asset purchase                     (4,048,545)      4,044,596
Issuance of common stock for note receivable                                                    1,763,286
Other issuances of common stock                                                                   316,496
Net loss                                                                                                      (18,258,606)
                                                                              -----------    ------------    ------------
BALANCE, SEPTEMBER 30, 1994                                                     1,736,586      81,038,434     (58,356,307)

Forgiveness of notes receivable
Issuance of common stock for note receivable                                                       69,358
Repayment of notes receivable
Issuance of Series 1994/A Preferred Stock in connection
  with private placement (net of costs $269,064)                                               10,949,011
Issuance of common stock in connection with asset purchase                                        (3,949)
Conversion of Series 1994/A Preferred Stock into
  common stock                                                                                    (45,200)
Other issuances of common stock                                                                   245,097
Net loss                                                                                                       (7,622,067)
                                                                              -----------    ------------    ------------
BALANCE, SEPTEMBER 30, 1995                                                     1,736,586      92,252,751     (65,978,374)

Issuance of common stock in connection with self-managed
  public offering of common stock (net of costs of $108,026)                                   12,611,974
Other issuances of common stock                                                                   136,900
Net loss                                                                                                       (3,220,102)
                                                                              -----------    ------------    ------------
BALANCE, DECEMBER 31, 1995                                                      1,736,586     105,001,625     (69,198,476)

Reclassification of equity consideration in connection with asset purchase     (1,736,586)      1,736,586
Issuance of common stock in connection with underwritten
  public offering of common stock (net of costs of $1,283,236)                                 12,696,744
Issuance of common stock in connection with research collaboration                             17,984,573
Stock based compensation                                                                           17,000
Other issuances of common stock                                                                   935,274
Net loss                                                                                                       (2,239,947)
                                                                              -----------    ------------    ------------
BALANCE, DECEMBER 31, 1996                                                    $         0    $138,371,802    $(71,438,423)
                                                                              ===========    ============    ============
</TABLE>

<TABLE>
<CAPTION>

                                                                              Stockholders'
                                                                                  Notes
                                                                               Receivable        Total
                                                                              ------------   ------------
<S>                                                                           <C>            <C>
BALANCE, SEPTEMBER 30, 1993                                                   $  (112,491)   $ 40,674,755

Repayment of notes receivable                                                      24,183          24,183
Forgiveness of notes receivable                                                    44,154          44,154
Issuance of common stock in connection with asset purchase
Issuance of common stock for note receivable                                   (1,763,286)          4,677
Other issuances of common stock                                                                   317,458
Net loss                                                                                      (18,258,606)
                                                                              -----------    ------------
BALANCE, SEPTEMBER 30, 1994                                                    (1,807,440)     22,806,621

Forgiveness of notes receivable                                                    44,154          44,154
Issuance of common stock for note receivable                                      (70,021)
Repayment of notes receivable                                                   1,833,307       1,833,307
Issuance of Series 1994/A Preferred Stock in connection
  with private placement (net of costs $269,064)                                               10,960,311
Issuance of common stock in connection with asset purchase
Conversion of Series 1994/A Preferred Stock into
  common stock
Other issuances of common stock                                                                    246,964
Net loss                                                                                       (7,622,067)
                                                                              -----------    ------------
BALANCE, SEPTEMBER 30, 1995                                                             0      28,269,290

Issuance of common stock in connection with self-managed
  public offering of common stock (net of costs of $108,026)                                   12,641,974
Other issuances of common stock                                                                   137,523
Net loss                                                                                       (3,220,102)
                                                                              -----------    ------------
BALANCE, DECEMBER 31, 1995                                                              0      37,828,685

Reclassification of equity consideration in connection with asset purchase
Issuance of common stock in connection with underwritten
  public offering of common stock (net of costs of $1,283,236)                                 12,716,744
Issuance of common stock in connection with research collaboration                             18,000,000
Stock based compensation                                                                           17,000
Other issuances of common stock                                                                   938,593
Net loss                                                                                       (2,239,947)
                                                                              -----------    ------------
BALANCE, DECEMBER 31, 1996                                                    $         0    $ 67,261,075
                                                                              ===========    ============
</TABLE>

See notes to consolidated financial statements


                                       33
<PAGE>   35
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             Three Months
                                                             Year Ended         Ended           Year Ended September 30,
                                                              December         December       -----------------------------
                                                              31, 1996         31, 1995           1995             1994
                                                            ------------     ------------     ------------     ------------
<S>                                                         <C>              <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                    $ (2,239,947)    $ (3,220,102)    $ (7,622,067)    $(18,258,606)
                                                            ------------     ------------     ------------     ------------
Adjustments to reconcile net loss to net cash used:
  Depreciation and amortization                                2,423,002          758,544        2,471,184        2,347,602
  Compensation expense                                            35,249           29,750          107,002           78,967
  Deferred patent and application costs                                                             92,426          137,474
  Bad debt expense                                                                                                  232,671
  Increase (decrease) in cash from:
    Accounts receivable                                        1,345,673         (255,691)      (1,101,169)      (1,020,377)
    Inventory and prepaid expenses                              (839,405)          87,655          142,375         (146,662)
    Accounts payable and accrued liabilities                   3,151,969         (417,120)        (477,274)          66,282
    Deferred contract revenue                                                                     (147,920)         147,920
                                                            ------------     ------------     ------------     ------------
      Total adjustments                                        6,116,488          203,138        1,086,624        1,843,877
                                                            ------------     ------------     ------------     ------------
    Net cash provided by (used for) operating activities       3,876,541       (3,016,964)      (6,535,443)     (16,414,729)
                                                            ------------     ------------     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities                            (17,362,723)      (4,735,565)     (12,701,607)     (16,740,819)
Sale of marketable securities                                 13,620,727        2,710,190        9,407,869       22,208,504
Expenditures for property, plant and equipment                (3,778,278)         (47,495)        (445,082)      (2,949,005)
Expenditures for patents                                      (1,191,591)        (175,902)        (832,552)        (644,879)
Note receivable from officer                                    (350,000)
Decrease (increase) in deposits and other                        (32,477)                          (27,679)          12,233
                                                            ------------     ------------     ------------     ------------
  Net cash provided by (used for) investing activities        (9,094,342)      (2,248,772)      (4,599,051)       1,886,034
                                                            ------------     ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
  Public placement of common stock                            14,000,000       12,750,000
  Private placement of common stock                           18,000,000
  Series 1994/A Preferred Stock                                                                 11,229,375
  Common stock - other                                           880,698          137,523          239,465          322,135
Costs of raising equity                                       (1,283,236)        (108,026)        (269,064)
Decrease in stockholders' notes receivable                                                       1,833,307           24,183
Repayments of obligations under capital leases                   (48,452)         (23,211)        (128,776)        (182,472)
                                                            ------------     ------------     ------------     ------------
  Net cash provided by financing activities                   31,549,010       12,756,286       12,904,307          163,846
                                                            ------------     ------------     ------------     ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                          26,331,209        7,490,550        1,769,813      (14,364,849)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR                                             11,917,779        4,427,229        2,657,416       17,022,265
                                                            ------------     ------------     ------------     ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR                                                 $ 38,248,988     $ 11,917,779     $  4,427,229     $  2,657,416
                                                            ============     ============     ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       34
<PAGE>   36
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1.        NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           Nature of Business - Creative BioMolecules is developing products for
           the regeneration and restoration of human tissues and organs. The
           Company's products in development are based on OP-1, a morphogenic
           protein identified and characterized by the Company. OP-1 has been
           shown to induce formation of several tissues including bone,
           cartilage, kidney, brain and tooth.

           Change in Year End - In January 1996, the Board of Directors voted to
           change the Company's fiscal year end from September 30 to December
           31, effective with the three month period ended December 31, 1995.

           Use of Estimates - The preparation of the Company's consolidated
           financial statements in conformity with generally accepted accounting
           principles requires management to make estimates and assumptions that
           affect the reported amounts and disclosure of certain assets and
           liabilities at the balance sheet date. Actual results may differ from
           such estimates.

           Reclassifications - Certain reclassifications have been made to
           amounts at December 31, 1995 to conform to the presentation at
           December 31, 1996.

           Consolidation - The accompanying consolidated financial statements
           include the Company and its wholly owned subsidiary, California
           Medicinal Chemistry Corporation (the "Subsidiary"). Intercompany
           balances are eliminated in consolidation. The Subsidiary has been
           inactive since 1985.

           Revenue Recognition - 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 resulting products. These research agreements are generally
           cancelable on short-term notice by the collaborative partner. In
           certain of these agreements, the Company retains the right to
           manufacture and supply the active ingredient. 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 the
           related agreements.

           The Company's manufacturing contracts provide for technical
           collaboration and manufacturing for third parties. Revenue is earned
           and recognized based upon work performed.


                                       35
<PAGE>   37
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1.        NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
           (CONTINUED)

           During the year ended December 31, 1996, the three months ended
           December 31, 1995 and the years ended September 30, 1995 and 1994,
           total revenues from major customers as a percent of total revenues of
           the Company were as follows:

<TABLE>
<CAPTION>
                                                          Three Months         Year Ended
                                              Year Ended     Ended            September 30,
                                               December     December       -----------------
                  Customer                     31, 1996     31, 1995       1995         1994
                  --------                    ----------  ------------     ----         ----
                  <S>                         <C>         <C>              <C>          <C>
                  Biogen, Inc.                    65%          37%          46%           2%
                  Stryker Corporation             27%          48%          35%          49%
                  Government Grant                                           2%          11%
                  Contract Manufacturing                                                 11%
                  Customer
</TABLE>

           Research and Development - Research and development costs are charged
           to operations as incurred. Certain research and development projects
           are partially funded with research and development contracts, and the
           expenses related to these activities are included in research and
           development costs.

           Cash Equivalents and Marketable Securities - Cash equivalents consist
           of short-term, highly liquid investments purchased with remaining
           maturities of three months or less. All other liquid investments are
           classified as marketable securities. Marketable securities are stated
           at market value which approximates amortized cost plus accrued
           interest.

           As of December 31, 1996 and 1995, the Company classified its
           marketable securities as available-for-sale and had approximately
           $5,678,000 and $5,251,000 in United States government and agency
           instruments, respectively, and $6,148,000 and $2,833,000 in corporate
           bonds and notes, respectively, all with maturities ranging from one
           to twenty-seven months.

           For the year ended December 31, 1996, the three months ended December
           31, 1995 and the years ended September 30, 1995 and 1994, gross
           realized gains and losses were not material. In computing realized
           gains and losses, the Company computes the cost of its investments on
           a specific identification basis. Such cost includes the direct costs
           to acquire the securities, adjusted for the amortization of any
           discount or premium. At December 31, 1996 and 1995, gross unrealized
           gains and losses were not material.

           Fair Value of Financial Instruments - The estimated fair value of
           financial instruments has been determined by the Company using
           available market information and appropriate valuation methodologies.
           However, considerable judgment is required in interpreting data to
           develop the estimates of fair value.


                                       36
<PAGE>   38
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1.        NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
           (CONTINUED)

           The estimated fair value of cash, accounts receivable and accounts
           payable approximates fair value due to the short-term nature of these
           instruments. The fair value of marketable securities is based on
           current market values. Lease obligations generally bear interest at a
           floating annual rate, subject to market conditions. Accordingly, fair
           value approximates market value.

           Inventory - Inventory consists principally of raw materials and
           laboratory supplies. Inventories are stated at the lower of cost or
           market.

           Property, Plant and Equipment - Purchased property, plant and
           equipment is recorded at cost. Leased property, plant and equipment
           is recorded at the lesser of cost or the present value of the minimum
           lease payments. Depreciation and amortization are provided on the
           straight-line method over the estimated useful lives of the related
           assets (three to fifteen years) or the remaining terms of the leases,
           whichever is shorter.

           Patents and Licensed Technology - The Company has filed applications
           for United States and foreign patents covering aspects of its
           technology. Costs related to pending patent applications have been
           deferred. Costs related to successful patent applications and costs
           related to pending applications from which the Company is currently
           deriving economic benefit, are amortized over the estimated useful
           life of the patent, generally 16 to 20 years, using the straight-line
           method. Costs related to licensed technology also have been deferred
           and are amortized over the estimated useful life of the underlying
           technology, generally 10 to 17 years, using the straight-line method.
           Accumulated amortization was approximately $358,000 and $225,000 at
           December 31, 1996 and 1995, respectively.

           Accumulated costs related to issued patents, pending patent
           applications and licensed technology are evaluated periodically and,
           if considered to have limited future value, are charged to expense.
           See Long Lived Assets below.

           Long Lived Assets - The Company adopted the provisions of Statement
           of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
           the Impairment of Long Lived Assets and Long Lived Assets to be
           Disposed Of" in 1996. SFAS No. 121 establishes recognition and
           measurement criteria for losses whenever events or changes in
           circumstances indicate that the carrying value of assets may not be
           recoverable. There was no effect on the Company's consolidated
           financial statements as a result of the adoption of SFAS No. 121.

           Net Loss Per Common Share - Net loss per common share is computed
           based on the weighted average number of shares of common stock
           outstanding during each year. Common equivalent shares from stock
           options and warrants are excluded from the computation as their
           effect is antidilutive.

           Stock-Based Compensation - The Company's stock options and purchase
           plans are accounted for under Accounting Principles Board ("APB") No.
           25, "Accounting for Stock Issued to Employees" (Note 8).


                                       37
<PAGE>   39
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.        COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT

           In December 1996, the Company entered into a Research Collaboration
           and License Agreement with Biogen to collaborate on the development
           of novel therapeutics for the treatment of renal disorders. The
           initial focus of the collaboration is on advancing the development of
           the Company's morphogenic protein, OP-1, for the treatment of acute
           and chronic renal failure. Under the agreement, the Company granted
           to Biogen exclusive worldwide rights to manufacture, market and sell
           OP-1 and OP-1 products developed through the collaboration for the
           treatment of renal disease. Biogen paid the Company a $10,000,000
           license fee in 1996 and made an $18,000,000 equity investment (Note
           9) which were recorded in the quarter ended December 31, 1996. In
           addition, Biogen has guaranteed $10,500,000 in research funding over
           the next three years, will pay up to an additional $69,000,000 upon
           the attainment of certain milestones and will make available a
           $15,000,000 line of credit. The 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 three years to fund the research and development of small
           molecule products based on OP-1. Advances are limited to $5,000,000
           per year. In exchange for the line of credit, Biogen received an
           exclusive 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.

 3.        NOTE RECEIVABLE - OFFICER

           In September 1996, the Company loaned $350,000 to an officer of the
           Company. The loan is evidenced by a fully secured promissory note
           bearing interest at the annual rate of 6.02% and payable in three
           equal annual installments, plus accrued interest.

 4.        ACQUISITION OF ASSETS

           On March 15, 1993, the Company acquired certain assets of Verax
           consisting principally of a leased manufacturing facility and
           equipment. The total purchase price of approximately $13,700,000
           consisted of approximately $3,100,000 in cash, assumption of certain
           liabilities of Verax totaling approximately $2,000,000, acquisition
           costs of approximately $160,000 and an equity consideration valued at
           $8,500,000. The equity consideration consisted of 1,184,670 shares of
           the Company's common stock issued in annual installments from March
           1993 through March 1995.


                                       38
<PAGE>   40
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 5.        PROPERTY, PLANT AND EQUIPMENT

           Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                             -----------------------------
                                                                 1996             1995
                                                             ------------     ------------
           <S>                                               <C>              <C>
           Land                                              $    352,000     $    352,000
           Building                                             1,500,000        1,500,000
           Laboratory equipment and furniture                   7,684,195        6,722,634
           Leasehold improvements                              16,403,420       13,971,149
           Office furniture and equipment                       2,495,095        1,970,138
           Construction in progress                                23,760          164,270
                                                             ------------     ------------
           Total                                               28,458,470       24,680,191
           Less accumulated depreciation and amortization     (12,234,094)      (9,943,885)
                                                             ------------     ------------
           Total                                             $ 16,224,376     $ 14,736,306
                                                             ============     ============
</TABLE>

           Amounts included in property, plant and equipment applicable to
           capital leases were as follows:

<TABLE>
<CAPTION>
                                                         December 31,
                                                 ---------------------------
                                                     1996            1995
                                                 -----------     -----------
           <S>                                   <C>             <C>
           Land                                  $   352,000     $   352,000
           Building                                1,500,000       1,500,000
           Laboratory equipment and furniture         47,000          47,000
                                                 -----------     -----------
           Total                                   1,899,000       1,899,000
           Less accumulated amortization            (397,960)       (293,463)
                                                 -----------     -----------
           Total                                 $ 1,501,040     $ 1,605,537
                                                 ===========     ===========
</TABLE>

 6.        LEASE OBLIGATIONS

           As part of the acquisition of certain assets of Verax (Note 4), the
           Company assumed certain liabilities consisting principally of
           obligations under capital leases totaling $1,852,000. These
           obligations bear interest at variable rates based on the prime rate
           ranging from 9.25 % to 10.5 % at December 31, 1996 and 1995 and are
           due monthly through the year 2008.

           In addition, the Company has an agreement to lease certain laboratory
           equipment for a period of five years, with an effective interest rate
           of 15%.

           The Company has noncancelable operating lease agreements for office
           and laboratory space and certain office and laboratory equipment.
           Rent expense for all operating leases was approximately $566,000,
           $150,000, $597,000 and $478,000 for the year ended December 31, 1996,
           the three months ended December 31, 1995 and the years ended
           September 30, 1995 and 1994, respectively.


                                       39
<PAGE>   41
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 6.        LEASE OBLIGATIONS (CONTINUED)

           Future minimum lease obligations at December 31, 1996 were as
           follows:


<TABLE>
<CAPTION>
                   Year Ending December 31                            Capital    Operating
                   -----------------------                            -------    ---------
                   <S>                                            <C>            <C>
                   1997                                           $   260,864     $553,376
                   1998                                               250,771      234,747
                   1999                                               247,406        8,340
                   2000                                               247,406
                   2001                                               247,406
                   Thereafter                                       2,352,899
                                                                  -----------     --------
                   Total minimum lease payments                     3,606,752     $796,463
                                                                                  ========
                   Less amount representing interest                1,901,727
                                                                   ----------
                   Present value of net minimum lease payments      1,705,025
                   Less current portion                                53,532
                                                                   ----------
                   Long-term obligations under capital leases      $1,651,493
                                                                   ==========
</TABLE>

           Under a security requirement of a lease agreement with a leasing
           company, the Company purchased and pledged as collateral a letter of
           credit totaling $31,152, which expires on February 26, 1997 and must
           be renewed annually until the end of the lease term.

 7.        COMMITMENTS

           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 covers the period from January 1995 through December 1997.
           As part of the research collaboration, the 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 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
           $2,900,000. The Company agreed to reimburse Biogen for the
           construction costs and leasehold improvements at the end of the
           contract term at an amount equal to Biogen's construction costs less
           $300,000 and less all accumulated depreciation. The reimbursement to
           Biogen is expected to be no more than $2,100,000. 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 $2,400,000, 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 negotiated by the parties. Biogen plans to complete the
           installation of the equipment and prepare the bacterial facility for
           operation in 1997.


                                       40
<PAGE>   42
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 7.        COMMITMENTS (CONTINUED)

           As security for its obligations under the manufacturing contract and
           the equipment lease agreement, the Company granted to Biogen a
           security interest in the manufacturing facility and certain of its
           equipment and furniture at the manufacturing facility and any
           applicable inventory or other assets related to the operation of the
           manufacturing facility with a total net book value at December 31,
           1996 of $13,504,000.

 8.        STOCK PLANS

           Stock Option Plans - In May 1987, the Company established the 1987
           Stock Plan ("1987 Plan") and terminated the 1983 Incentive Stock
           Option Plan ("1983 Plan") such that no further grants of options
           could be made thereunder. The 1987 Plan was subsequently amended to
           increase the number of shares of common stock authorized for issuance
           thereunder. A total of 5,150,000 shares of common stock have been
           reserved for issuance under the 1987 Plan upon the exercise of
           options or in connection with awards or direct purchases of stock.

           The 1987 Plan permits the granting of incentive and nonqualified
           stock options to consultants, employees or officers of the Company
           and its subsidiaries at prices determined by the Board of Directors.
           All options granted in the year ended December 31, 1996, the three
           months ended December 31, 1995 and the two years ended September 30,
           1995 and 1994 were granted at fair market value. Awards of stock may
           be made to consultants, employees or officers of the Company and its
           subsidiaries, and direct purchases of stock may be made by such
           individuals also at prices determined by the Board of Directors.
           Options become exercisable as determined by the Board of Directors
           and expire up to ten years from the date of grant.


                                       41
<PAGE>   43
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 8.        STOCK PLANS (CONTINUED)

           Activity under the plans is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                   Weighted Average
                                                                                        Number      Exercise Price
                                                                                      of Shares        Per Share
                                                                                      ---------    ----------------
           <S>                                                                        <C>          <C>
           Outstanding, October 1, 1993                                               1,180,739          $3.38
           Granted                                                                      281,400           8.36
           Exercised                                                                    (18,740)          1.97
           Canceled                                                                     (85,520)          6.36
                                                                                      ---------
           Outstanding, September 30, 1994                                            1,357,879           4.25
           (806,535 exercisable at a weighted average price of $2.48 per share)
           Granted                                                                    2,816,441           2.42
           Exercised                                                                   (106,471)           .90
           Canceled                                                                    (320,086)          4.04
                                                                                      ---------
           Outstanding, September 30, 1995                                            3,747,763           2.99
           (1,014,897 exercisable at a weighted average price of $2.89 per share)
           Granted                                                                       13,000           6.00
           Exercised                                                                     (9,477)           .82
           Canceled                                                                     (37,129)          4.28
                                                                                      ---------
           Outstanding, December 31, 1995                                             3,714,157           3.00
           (1,431,824 exercisable at a weighted average price of $3.11 per share)
           Granted                                                                    1,063,700           7.86
           Exercised                                                                   (276,178)          2.12
           Canceled                                                                    (139,535)          4.43
                                                                                      ---------
           Outstanding, December 31, 1996                                             4,362,144          $4.16
                                                                                      =========
           (1,904,110 exercisable at a weighted average price of $3.47 per share)
</TABLE>

           At December 31, 1996 85,024 shares were available for grant under the
           1987 Plan. In January 1997, the Company's Board of Directors
           approved, subject to stockholder approval, an increase in the number
           of shares of common stock authorized for issuance under the 1987 Plan
           from 5,150,000 to 6,150,000.

           Employee Stock Purchase Plan - The Employee Stock Purchase Plan
           permits eligible employees to purchase common stock of the Company up
           to an aggregate of 500,000 shares. During the year ended December 31,
           1996, 45,049 shares were issued under this Plan at prices of $6.11
           and $7.01 per share; during the three months ended December 31, 1995,
           55,515 shares were issued under this Plan at a price of $2.34 per
           share; during the year ended September 30, 1995, 143,475 shares were
           issued under this Plan at a price of $1.49 per share and during the
           year ended September 30, 1994, 77,507 shares were issued under this
           Plan at prices of $7.44 and $2.75 per share.


                                       42
<PAGE>   44
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 8.        STOCK PLANS (CONTINUED)

           Director Plan - The 1992 Non-Employee Director Non-Qualified Stock
           Option Plan provides for the granting of options to purchase up to an
           aggregate of 300,000 shares of common stock to non-employee
           directors. During the year ended December 31, 1996, options to
           purchase 70,000 shares were granted at a price of $9.34 per share;
           during the three months ended December 31, 1995 no options were
           granted; during the year ended September 30, 1995, options to
           purchase 20,000 shares were granted at a weighted average exercise
           price of $2.75 per share and during the year ended September 30, 1994
           no options were granted.

           During the year ended December 31, 1996, options to purchase 12,500
           shares were canceled at a weighted average exercise price of $9.18
           per share. During the year ended September 30, 1994, options to
           purchase 30,000 shares were canceled at a weighted average exercise
           price of $8.50 per share. At December 31, 1996, options to purchase
           47,500 shares were exercisable at a weighted average exercise price
           of $7.92 per share.

           Stock-Based Compensation - As discussed in Note 1, the Company
           continues to account for its stock-based awards using the intrinsic
           value method in accordance with APB No. 25, and its related
           interpretations. Accordingly, no compensation expense has been
           recognized in the financial statements for employee stock
           arrangements.

           SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
           disclosure of pro forma net income and earnings per share had the
           Company adopted the fair value method as of January 1, 1995. Under
           SFAS No. 123, the fair value of stock-based awards to employees is
           calculated through the use of option pricing models, even though such
           models were developed to estimate the fair value of freely tradable,
           fully transferable options without vesting restrictions, which
           significantly differ from the Company's stock option awards. These
           models also require subjective assumptions, including future stock
           price volatility and expected time to exercise, which greatly affect
           the calculated values. The Company's calculations were made using the
           Black-Scholes option pricing model with the following assumptions:
           expected life, six months following total vesting; stock volatility,
           76% to 86% in 1996 and 77% to 80% in 1995; risk free interest rates,
           5% in 1996 and 1995; and no dividends during the expected term. The
           Company's calculations are based on a multiple option valuation
           approach and forfeitures for broad-based grants are estimated at 2%
           per year and adjusted to actual as they occur. Forfeitures for grants
           to executives are recognized as they occur. If the computed fair
           values of the 1996 and 1995 awards had been amortized to expense over
           the vesting period of the awards, pro forma net loss would have been
           $3,811,000 or a net loss of $0.13 per share for the year ended
           December 31, 1996, $3,378,000 or a net loss of $0.12 per share for
           the three months ended December 31, 1995, and $7,822,000 or a net
           loss of $0.38 per share for the year ended September 30, 1995.
           Because the SFAS No. 123 method of accounting has not been applied to
           options granted prior to January 1, 1995, the resulting pro forma
           compensation cost may not be representative of that to be expected in
           future years. These amounts are based on calculated values for
           options awards in 1996 and 1995 aggregating $7,980,000. Had the
           assumptions regarding expected term and volatility been reduced by
           six months and 10% or increased by six months and 10%, total
           calculated value would have decreased by $975,000 or increased by
           $884,000, respectively.


                                       43
<PAGE>   45
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 8.        STOCK PLANS (CONTINUED)

           The Company also granted stock options to non-employee consultants in
           1996. These options were valued based on the fair value of the
           services received. Total compensation expense recognized related to
           these options was $17,000 in 1996.

 9.        STOCKHOLDERS' EQUITY

           In December 1994, the Board of Directors designated a series of
           preferred stock of the Company consisting of 1,500,000 shares of the
           authorized and unissued preferred stock, as Series 1994/A Convertible
           Preferred Stock (the "Series Preferred Stock"). Each share of the
           Series Preferred Stock was convertible, at the option of the holder,
           into five shares of common stock. Each share of the Series Preferred
           Stock automatically converted into five shares of common stock after
           twenty consecutive trading days on which the closing price of the
           Company's common stock exceeded $3.975 per share.

           In December 1994 and January 1995, the Company sold in a private
           placement, 1,130,000 units (the "Units"), consisting of one share of
           Series Preferred Stock and one warrant to purchase one share of the
           Company's common stock. Each warrant is exercisable for a period of
           five years from the date of issuance at an exercise price of $2.385.
           Net proceeds to the Company, after deducting fees and other expenses
           of the offering, were approximately $11,000,000. In June 1995,
           holders of 30,000 shares of Series Preferred Stock elected to convert
           their Series Preferred Stock into 150,000 shares of common stock. In
           August 1995, holders of 40,251 shares of Series Preferred Stock
           elected to convert their Series Preferred Stock into 201,255 shares
           of common stock. On August 31, 1995, after twenty consecutive trading
           days on which the closing price of the Company's common stock
           exceeded $3.975 per share, the remaining 1,059,749 shares of Series
           Preferred Stock automatically converted into 5,298,745 shares of
           common stock.

           In October 1995, the Company sold in a self-managed public offering
           3,000,000 shares of common stock at a price of $4.25 per share. Net
           proceeds to the Company, after deducting fees and other expenses of
           the offering, were approximately $12,650,000.

           In July 1996, the Company sold 2,000,000 shares of common stock in a
           public offering at a price of $7.00 per share. Net proceeds to the
           Company, after deducting fees and other expenses of the offering,
           were approximately $12,717,000.

           In December 1996, as part of a research collaboration (Note 2), the
           Company sold to Biogen 1,542,680 shares of common stock at a premium
           to the then-current market price of the common stock. Proceeds to the
           Company were $18,000,000.

           Common Stock Warrants - The Company issued in 1987 a warrant to
           purchase 17,600 shares of common stock at $5.00 per share to an
           equipment lessor. The warrant is fully exercisable and expires in
           December 1997.


                                       44
<PAGE>   46
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 9.        STOCKHOLDERS' EQUITY (CONTINUED)

           Stockholders' Notes Receivable - In connection with a research and
           development contract, the Company in 1986 sold to a partnership, for
           a purchase price of $25,100, warrants for the purchase of 467,715
           shares of common stock at an initial exercise price of $5.00 per
           share (subsequently adjusted to $3.78 per share). The warrants were
           exercised on December 22, 1993 by payment of $4,677 in cash and
           delivery of a secured full recourse promissory note for $1,763,286
           bearing interest at prime plus 1%. The note was repaid in full in
           February 1995.

10.        INCOME TAXES

           No income tax provision or benefit has been provided for federal
           income tax purposes as the Company has incurred losses since
           inception. As of December 31, 1996, the Company had available net
           operating loss carryforwards of approximately $64,400,000 for income
           tax purposes. In addition, the Company had approximately $1,500,000
           of unused investment and research and development tax credits. These
           net operating loss and tax credit carryforwards will expire at
           various dates between 1997 and 2012.

           Because of the change in ownership, as defined in the Internal
           Revenue Code, which occurred in July 1989, the net operating loss and
           tax credit carryforwards are subject to annual limitations regarding
           their utilization.

           The components of deferred income taxes at December 31, 1996 and 1995
           were primarily deferred tax assets of approximately $21,900,000 and
           $21,100,000, respectively, of net operating loss carryforwards and
           approximately $1,500,000 and $1,300,000, respectively, of investment
           and research and development tax credits. The Company has not yet
           achieved profitable operations. Accordingly, management believes that
           the tax benefits as of December 31, 1996 and 1995 do not satisfy the
           realization criteria set forth in SFAS No. 109 and has recorded a
           valuation allowance for the entire net asset.

11.        ROYALTY AGREEMENTS

           The Company has entered into various license agreements which require
           the Company to pay royalties based upon a set percentage of certain
           product sales and license fee revenue subject, in some cases, to
           certain minimum amounts. Total royalty expense approximated $25,000,
           $5,000, $21,000 and $22,000 for the year ended December 31, 1996, the
           three months ended December 31, 1995 and the years ended September
           30, 1995 and 1994, respectively.

12.        RETIREMENT SAVINGS PLAN

           The Company has a 401(k) retirement savings plan covering
           substantially all of the Company's employees. Matching Company
           contributions are at the discretion of the Board of Directors. The
           Board of Directors authorized matching contributions up to 3% of
           participants' salaries amounting to approximately $202,000, $53,000,
           $180,000 and $175,000 for the year ended December 31, 1996, the three
           months ended December 31, 1995 and the years ended September 30, 1995
           and 1994, respectively.


                                       45
<PAGE>   47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        Not applicable.


                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

         The response to this item is incorporated by reference from the
discussions responsive thereto under the captions "Information Concerning
Current Directors, Nominees and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement
relating to the 1997 Annual Meeting of Stockholders.


ITEM 11. EXECUTIVE COMPENSATION

         The response to this item is incorporated by reference from the
discussion responsive thereto under the caption "Compensation of Directors and
Executive Officers" in the Company's Proxy Statement relating to the 1997 Annual
Meeting of Stockholders.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement relating to
the 1997 Annual Meeting of Stockholders.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions "Certain Transactions" and
"Compensation of Directors and Executive Officers --Employment Agreements" in
the Company's Proxy Statement relating to the 1997 Annual Meeting of
Stockholders.


                                       46
<PAGE>   48
                                     PART IV

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

Item 14(a)    The following documents are filed as part of this Annual Report on
              Form 10-K.

     14(a)(1) Financial Statements

              See "Index to Consolidated Financial Statements" at Item 8 in
              this Annual Report on Form 10-K.

     14(a)(2) Financial Statement Schedules and Other Financial Statements - See
              14(d) below.

     14(a)(3) Exhibits - See 14 (c) below.

Item 14(b)    Reports on Form 8-K

              No reports on Form 8-K were filed during the three-month period
              ended December 31, 1996.

Item 14(c)    Exhibits

              The following is a list of exhibits filed as part of this Annual
              Report on Form 10-K:

               3.    Articles of Incorporation and By-Laws

               3.1   Restated Certificate of Incorporation, as amended, of the
                     Registrant. (Filed as Exhibit 3.1 to Registrant's Annual
                     Report on Form 10-K for the period ended September 30, 1995
                     (File No. 0-19910), and incorporated herein by reference.)

               3.2   Restated By-Laws of the Registrant. (Filed as Exhibit 3.4
                     to Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

               4.    Instruments Defining the Rights of Security Holders

               4.1   Article FOURTH of the Restated Certificate of Incorporation
                     of the Registrant, as amended (see Exhibit 3.1).

               10.   Material Contracts

               10.1  Second Amended and Restated Registration Rights Agreement,
                     dated as of January 31, 1992. (Filed as Exhibit 10.4 to
                     Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

               10.2  Amendment No. 1 to Second Amended and Restated Registration
                     Rights Agreement, dated as of December 23, 1994, by and
                     between the Registrant and certain of its Stockholders, and
                     Instruments of Adherence to the Second Amended and Restated
                     Registration Rights Agreement. (Filed as Exhibit 10.51 to
                     Registrant's Quarterly Report on Form 10-Q for the Period
                     Ended December 31, 1994 (File No. 0-19910), and
                     incorporated herein by reference.)


                                       47
<PAGE>   49
               10.3  Amendment No. 2 to Second Amended and Restated Registration
                     Rights Agreement, dated as of May 24, 1996, by and between
                     the Registrant and certain of its Stockholders. (Filed as
                     Exhibit 10.1 to Form S-3 Registration Statement
                     (Registration No. 333-5477), and incorporated herein by
                     reference.)

               10.4  Amendment No. 3 to Second Amended and Restated Registration
                     Rights Agreement, dated as of December 9, 1996, by and
                     between the Registrant and certain of its Stockholders.

               #10.5 Second Amended and Restated Research, Development and
                     Supply Agreement, As Amended, dated as of May 17, 1991,
                     between Stryker Corporation and the Registrant ("Stryker
                     Development Agreement"). (Filed as Exhibit 10.5 to Form S-1
                     Registration Statement (Registration No. 33-42159), or
                     amendments thereto, and incorporated herein by reference.)

               #10.6 Amendment Agreement, dated October 23, 1991, between the
                     Registrant and Stryker Corporation. (Filed as Exhibit 10.6
                     to Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

               10.7  Amendment, dated March 27, 1992, to Stryker Development
                     Agreement between Stryker Corporation and the Registrant.
                     (Filed as Exhibit 10.6A to Form S-1 Registration Statement
                     (Registration No. 33-46200), or amendments thereto, and
                     incorporated herein by reference.)

               10.8  Amendment, dated November 19, 1992, to Stryker Development
                     Agreement between Stryker Corporation and the Registrant.
                     (Filed as Exhibit 10.6B to Form S-1 Registration Statement
                     (Registration No. 33-46200), or amendments thereto, and
                     incorporated herein by reference.)

               10.9  Amendment Agreement, dated May 13, 1994, between the
                     Registrant and Stryker Corporation. (Filed as Exhibit 99.2
                     to Registrant's Report on Form 8-K for the May 9, 1996
                     Event (File No. 0-19910), and incorporated herein by
                     reference.)

               10.10 Amendment Agreement, dated April 30, 1996, between the
                     Registrant and Stryker Corporation. (Filed as Exhibit 99.3
                     to Registrant's Report on Form 8-K for the May 9, 1996
                     Event (File No. 0-19910), and incorporated herein by
                     reference.)

              +10.11 Amendment Agreement, dated October 31, 1996, between the
                     Registrant and Stryker Corporation.

               10.12 Irrevocable License Agreement, dated May 17, 1991, between
                     Stryker Corporation and the Registrant. (Filed as Exhibit
                     10.7 to Form S-1 Registration Statement (Registration No.
                     33-42159), or amendments thereto, and incorporated herein
                     by reference.)

               10.13 Amended and Restated Agreement for License or Sale of
                     Technology, dated December 14, 1988, by and among PruTech
                     Research and Development Partnership III, PruTech Project
                     Development Partnership and the Registrant. (Filed as
                     Exhibit 10.9 to Form S-1 Registration Statement
                     (Registration No. 33-42159), or amendments thereto, and
                     incorporated herein by reference.)


                                       48
<PAGE>   50
               10.14 Master Lease Agreement, dated as of May 1, 1987, between
                     the Registrant and Phoenix Leasing Incorporated. (Filed as
                     Exhibit 10.23 to Form S-1 Registration Statement
                     (Registration No. 33-42159), or amendments thereto, and
                     incorporated herein by reference.)

               10.15 Common Stock Purchase Warrant, dated June 1, 1987, issued
                     by the Registrant to Phoenix Leasing Incorporated. (Filed
                     as Exhibit 10.24 to Form S-1 Registration Statement
                     (Registration No. 33-42159), or amendments thereto, and
                     incorporated herein by reference.)

               10.16 Real Estate Standard Form Industrial Lease, dated as of
                     October 24, 1988, as amended September 17, 1991, between
                     WRC Properties, Inc. and the Registrant. (Filed as Exhibit
                     10.26 to Form S-1 Registration Statement (Registration No.
                     33-42159), or amendments thereto, and incorporated herein
                     by reference.)

               10.17 Second Amendment, dated January 28, 1994, to Standard Form
                     Industrial Lease dated October 24, 1988, as amended
                     September 17, 1991, by and between the Registrant and WRC
                     Properties, Inc. (Filed as Exhibit 10.15 to Registrant's
                     Annual Report on Form 10-K for the Period Ended September
                     30, 1994 (File No. 0-19910), and incorporated herein by
                     reference.)

               10.18 Third Amendment, dated September 20, 1994, to Standard Form
                     Industrial Lease dated October 24, 1988, as amended
                     September 17, 1991 and January 28, 1994, by and between the
                     Registrant and WRC Properties, Inc. (Filed as Exhibit 10.16
                     to Registrant's Annual Report on Form 10-K for the Period
                     Ended September 30, 1994 (File No. 0-19910), and
                     incorporated herein by reference.)

               10.19 Standard Form Industrial Lease, dated February 25, 1992, by
                     and between the Registrant and WRC Properties, Inc. (Filed
                     as Exhibit 10.52 to Form S-1 Registration Statement
                     (Registration No. 33-46200), or amendments thereto, and
                     incorporated herein by reference.)

               10.20 First Amendment, dated February 28, 1994, to Standard Form
                     Industrial Lease dated February 25, 1992 by and between the
                     Registrant and WRC Properties, Inc. (Filed as Exhibit 10.32
                     to Registrant's Annual Report on Form 10-K for the period
                     ended September 30, 1995 (File No. 0-19910), and
                     incorporated herein by reference.)

               10.21 Second Amendment, dated September 20, 1994, to Standard
                     Form Industrial Lease dated February 25, 1992, as amended
                     February 28, 1994, by and between the Registrant and WRC
                     Properties, Inc. (Filed as Exhibit 10.33 to Registrant's
                     Annual Report on Form 10-K for the period ended September
                     30, 1995 (File No. 0-19910), and incorporated herein by
                     reference.)

               10.22 Asset Purchase Agreement, dated March 4, 1993, by and
                     between the Registrant and Verax Corporation (the "Asset
                     Purchase Agreement"), including Exhibits thereto and List
                     of Schedules to Asset Purchase Agreement and to Exhibit A
                     thereto. Any of such Schedules will be supplied upon
                     request by the Commission. (Filed as Exhibit 2.1 and 2.2 to
                     the Registrant's Report on Form 8-K for March 15, 1993
                     Event (File No. 0-19910), and incorporated herein by
                     reference.)


                                       49
<PAGE>   51
               10.23 Assumption Agreement, dated March 15, 1993, by and between
                     the Registrant and Verax Corporation including Exhibits
                     hereto. (Filed as Exhibit 10.56 to the Registrant's
                     Quarterly Report on Form 10-Q for the period ended March
                     31, 1993 (File No. 0-19910), and incorporated herein by
                     reference.)

               10.24 Indenture of Lease between Wilton L. Buskey and Carol
                     Buskey and Verax Corporation, dated September 7, 1988 as
                     amended through September 25, 1992, (assumed by Registrant
                     pursuant to Assumption Agreement, dated March 15, 1993, by
                     and between the Registrant and Verax Corporation -- see
                     Exhibit 10.23 above). (Filed as Exhibit 10.57 to the
                     Registrant's Quarterly Report on Form 10-Q for the period
                     ended March 31, 1993 (File No. 0-19910), and incorporated
                     herein by reference.)

               10.25 Non-Disturbance and Attornment Agreement, dated as of
                     September 7, 1988, by and between Verax Corporation and
                     First NH Bank [successor to First NH Bank of Lebanon]
                     (assumed by Registrant pursuant to Assumption Agreement,
                     dated March 15, 1993, by and between the registrant and
                     Verax Corporation -- see Exhibit 10.23 above.) (Filed as
                     Exhibit 10.58 to the Registrant's Quarterly Report on Form
                     10-Q for the period ended March 31, 1993 (File No.
                     0-19910), and incorporated herein by reference.)

               10.26 Loan Agreement, dated as of September 7, 1988, by and
                     between Verax Corporation and First NH Bank [successor to
                     First NH Bank of Lebanon] (assumed by Registrant pursuant
                     to Assumption Agreement, dated March 15, 1993, by and
                     between the Registrant and Verax Corporation -- see Exhibit
                     10.23 above.) (Filed as Exhibit 10.59 to the Registrant's
                     Quarterly Report on Form 10-Q for the period ended March
                     31, 1993 (File No. 0-19910), and incorporated herein by
                     reference.)

              #10.27 CBM Cross-License Agreement, dated as of November 26,
                     1993, between Enzon, Inc. and the Registrant. (Filed as
                     Exhibit 10.42 to Registrant's Quarterly Report on Form 10-Q
                     for the period ended December 31, 1993 (File No. 0-19910),
                     and incorporated herein by reference.)

              #10.28 Enzon Cross-License Agreement, dated as of November 26,
                     1993, between Enzon, Inc. and the Registrant. (Filed as
                     Exhibit 10.43 to Registrant's Quarterly Report on Form 10-Q
                     for the period ended December 31, 1993 (File No. 0-19910),
                     and incorporated herein by reference.)

              #10.29 Exclusive Marketing Agreement, dated as of November 26,
                     1993, between Enzon, Inc. and the Registrant. (Filed as
                     Exhibit 10.44 to Registrant's Quarterly Report on Form 10-Q
                     for the period ended December 31, 1993 (Filed No. 0-19910),
                     and incorporated herein by reference.)

              #10.30 Manufacturing Agreement, dated as of September 28, 1994,
                     between Biogen, Inc. and the Registrant. (Filed as Exhibit
                     99.1 to Registrant's Report on Form 8-K for the September
                     30, 1994 Event (File No. 0-19910), and incorporated herein
                     by reference.)

              #10.31 Equipment Lease Agreement, dated as of September 28, 1994,
                     between Biogen, Inc. and the Registrant. (Filed as Exhibit
                     99.2 to Registrant's Report on Form 8-K for the September
                     30, 1994 Event (File No. 0-19910), and incorporated herein
                     by reference.)


                                       50
<PAGE>   52
               10.32 Security Agreement, dated as of September 28, 1994, between
                     Biogen, Inc. and the Registrant. (Filed as Exhibit 99.3 to
                     Registrant's Report on Form 8-K for the September 30, 1994
                     Event (File No. 0-19910), and incorporated herein by
                     reference.)

               10.33 Form of Preferred Stock and Warrant Purchase Agreement,
                     with Exhibits thereto, signed by the Registrant and the
                     persons listed on the Schedule attached at the end of the
                     Form of Preferred Stock and Warrant Purchase Agreement.
                     (Filed as Exhibit 10.52 to Registrant's Quarterly Report on
                     Form 10-Q for the Period Ended December 31, 1994 (File No.
                     0-19910), and incorporated herein by reference.)

               10.34 Form of Warrant issued by the Registrant to the persons
                     listed on the Schedule attached at the end of the Form of
                     Warrant on various dates between December 23, 1994 and
                     January 25, 1995. (Filed as Exhibit 10.53 to Registrant's
                     Quarterly Report on Form 10-Q for the Period Ended December
                     31, 1994 (File No. 0-19910), and incorporated herein by
                     reference.)

              #10.35 Cross-License Agreement, dated as of July 15, 1996,
                     between the Registrant, Genetics Institute, Inc. and
                     Stryker Corporation. (Filed as Exhibit 10.1 to the
                     Quarterly Report on Form 10-Q for the quarter ended
                     September 30, 1996 of Genetics Institute, Inc. (File
                     No.0-14587), filed with the Securities and Exchange
                     Commission on November 6, 1996 and incorporated herein by
                     reference.)

               10.36 Underwriting Agreement dated July 2, 1996 between the
                     Registrant and Hambrecht & Quist LLP and Cowen & Company.
                     (Filed as Exhibit 1.1 to Form S-3 Registration Statement
                     (Registration No. 333-5477), or amendments thereto, and
                     incorporated herein by reference.)

              +10.37 Research Collaboration and License Agreement, dated
                     December 9, 1996, between the Registrant and Biogen, Inc.

               10.38 Restricted Stock Purchase Agreement, dated December 9,
                     1996, between the Registrant and Biogen, Inc.

              *10.39 1983 Incentive Stock Option Plan, amended as of September
                     11, 1984. (Filed as Exhibit 10.34 to Form S-1 Registration
                     Statement (Registration No. 33-42159), or amendments
                     thereto, and incorporated herein by reference.)

              *10.40 1987 Stock Plan, as amended on December 7, 1994. (Filed as
                     Exhibit to Registrant's Preliminary Proxy Statement for
                     1995 Annual Meeting of Stockholders (File No. 0-19910), and
                     incorporated herein by reference.)

              *10.41 Employee Stock Purchase Plan, as amended on December 7,
                     1994. (Filed as Exhibit to Registrant's Preliminary Proxy
                     Statement for 1995 Annual Meeting of Stockholders (File No.
                     0-19910), and incorporated herein by reference.)

              *10.42 1992 Non-Employee Director Non-Qualified Stock Option
                     Plan, as amended on March 20, 1996. (Filed as Exhibit 10.25
                     to Registrant's Quarterly Report on Form 10-Q for the
                     period ended March 31, 1996 (File No. 0-19910), and
                     incorporated herein by reference.)


                                       51
<PAGE>   53
              *10.43 Form of Employment Agreement with confidentiality
                     provisions. (Filed as Exhibit 10.31 to Form S-1
                     Registration Statement (Registration No. 33-42159), or
                     amendments thereto, and incorporated herein by reference.)

              *10.44 Employment Agreement, dated as of January 2, 1992, between
                     Charles Cohen, Ph.D. and the Registrant. (Filed as Exhibit
                     10.47 to Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

              *10.45 Employment Agreement, dated February 25, 1992, between
                     Wayne E. Mayhew III and the Registrant. (Filed as Exhibit
                     10.51 to Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

              *10.46 Employment Agreement, dated July 20, 1992, between Ronald
                     D. Johnson, Ph.D., and the Registrant. (Filed as Exhibit
                     10.54 to Form S-1 Registration Statement (Registration No.
                     33-46200), or amendments thereto, and incorporated herein
                     by reference.)

              *10.47 Executive Severance Agreement, dated December 1, 1993,
                     between Gregory Liposky and the Registrant (assumed as part
                     of the Registrant's acquisition of the manufacturing
                     facility from Verax Corporation).  (Filed as Exhibit 10.51
                     to Registrant's Annual Report on Form 10-K for the period
                     ended September 30, 1995 (File No. 0-19910), and
                     incorporated herein by reference.)

              *10.48 Employment Agreement, dated July 17, 1995, between Michael
                     M. Tarnow and the Registrant. (Filed as Exhibit 99.1 to
                     Registrant's Report on Form 8-K for the August 31, 1995
                     Event (File No. 0-19910), and incorporated herein by
                     reference.)

              *10.49 Employment Agreement, dated May 21, 1996, between Thomas
                     J. Facklam, Ph.D. and the Registrant. (Filed as Exhibit
                     99.2 to Registrant's Report on Form 8-K for the June 3,
                     1996 Event (File No. 0-19910), and incorporated herein by
                     reference.)

               21    Subsidiaries of the Registrant. (Filed as Exhibit 22 to
                     Form S-1 Registration Statement (Registration No.
                     33-42159), or amendments thereto, and incorporated herein
                     by reference.)

               23.1  Independent Auditors' Consent.

               27    Financial Data Schedule

         The Registrant will supply the Commission, upon request, with copies of
all exhibits and schedules to exhibits listed above, as to which such exhibits
and schedules have not been included herein.

 *  Management contract or compensatory plan or arrangement required to be filed
    as an exhibit to this Form 10-K.

 +  Documents with respect to which Confidential Treatment has been requested.

 #  Documents with certain confidential information deleted.

Item 14(d)     Financial Statement Schedules and Other Financial Statements

               Financial statement schedules have not been included because they
               are not applicable or the information is included in the
               financial statements or notes thereto.


                                       52
<PAGE>   54
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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 March 28, 1997.

                                    CREATIVE BIOMOLECULES, INC.



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

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
below on date indicated.

<TABLE>
<CAPTION>
        Signature                            Capacity                               Date
        ---------                            --------                               ----
<S>                          <C>                                                <C>
/s/ Brian H. Dovey           Chairman of the Board and Director                 March 28, 1997
Brian H. Dovey

/s/ Michael M. Tarnow        President and Chief Executive Officer              March 28, 1997
Michael M. Tarnow            and Director (principal executive officer)

/s/ Charles Cohen, Ph.D.     Chief Scientific Officer and Director              March 28, 1997
Charles Cohen, Ph.D.

/s/ Wayne E. Mayhew III      Vice President and Chief Financial Officer,        March 28, 1997
Wayne E. Mayhew III          Treasurer and Secretary (principal financial
                             officer)

/s/ Susan B. Blanton         Controller (principal accounting officer)          March 28, 1997
Susan B. Blanton

/s/ Jeremy L. Curnock Cook   Director                                           March 28, 1997
Jeremy L. Curnock Cook

/s/ Martyn D. Greenacre      Director                                           March 28, 1997
Martyn D. Greenacre

/s/ Arthur J. Hale           Director                                           March 28, 1997
Arthur J. Hale, M.D.

/s/ Suzanne D. Jaffe         Director                                           March 28, 1997
Suzanne D. Jaffe

/s/ Michael Rosenblatt, M.D. Director                                           March 28, 1997
Michael Rosenblatt, M.D.

/s/ James R. Tobin           Director                                           March 28, 1997
James R. Tobin
</TABLE>
<PAGE>   55
                                  EXHIBIT INDEX
Exhibit
  No.    Description
-------  -----------
  3.1    Restated Certificate of Incorporation, as amended, of the Registrant.
         (Filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for
         the period ended September 30, 1995 (File No. 0-19910), and
         incorporated herein by reference.)

  3.2    Restated By-Laws of the Registrant. (Filed as Exhibit 3.4 to Form S-1
         Registration Statement (Registration No. 33-46200), or amendments
         thereto, and incorporated herein by reference.)

  4.1    Article FOURTH of the Restated Certificate of Incorporation of the
         Registrant, as amended (see Exhibit 3.1).

 10.1    Second Amended and Restated Registration Rights Agreement, dated as of
         January 31, 1992. (Filed as Exhibit 10.4 to Form S-1 Registration
         Statement (Registration No. 33-46200), or amendments thereto, and
         incorporated herein by reference.)

 10.2    Amendment No. 1 to Second Amended and Restated Registration Rights
         Agreement, dated as of December 23, 1994, by and between the Registrant
         and certain of its Stockholders, and Instruments of Adherence to the
         Second Amended and Restated Registration Rights Agreement. (Filed as
         Exhibit 10.51 to Registrant's Quarterly Report on Form 10-Q for the
         Period Ended December 31, 1994 (File No. 0-19910), and incorporated
         herein by reference.)

 10.3    Amendment No. 2 to Second Amended and Restated Registration Rights
         Agreement, dated as of May 24, 1996, by and between the Registrant and
         certain of its Stockholders. (Filed as Exhibit 10.1 to Form S-3
         Registration Statement (Registration No. 333-5477), and incorporated
         herein by reference.)

 10.4    Amendment No. 3 to Second Amended and Restated Registration Rights
         Agreement, dated as of December 9, 1996, by and between the Registrant
         and certain of its Stockholders.

 10.5    Second Amended and Restated Research, Development and Supply Agreement,
         as Amended, dated as of May 17, 1991, between Stryker Corporation and
         the Registrant ("Stryker Development Agreement"). (Filed as Exhibit
         10.5 to Form S-1 Registration Statement (Registration No. 33-42159), or
         amendments thereto, and incorporated herein by reference.)

 10.6    Amendment Agreement, dated October 23, 1991, between the Registrant and
         Stryker Corporation. (Filed as Exhibit 10.6 to Form S-1 Registration
         Statement (Registration No. 33-46200), or amendments thereto, and
         incorporated herein by reference.)

 10.7    Amendment, dated March 27, 1992, to Stryker Development Agreement
         between Stryker Corporation and the Registrant. (Filed as Exhibit 10.6A
         to Form S-1 Registration Statement (Registration No. 33-46200), or
         amendments thereto, and incorporated herein by reference.)

 10.8    Amendment, dated November 19, 1992, to Stryker Development Agreement
         between Stryker Corporation and the Registrant. (Filed as Exhibit 10.6B
         to Form S-1 Registration Statement (Registration No. 33-46200), or
         amendments thereto, and incorporated herein by reference.)
<PAGE>   56
Exhibit
  No.    Description
-------  -----------
 10.9    Amendment Agreement, dated May 13, 1994, between the Registrant and
         Stryker Corporation. (Filed as Exhibit 99.2 to Registrant's Report on
         Form 8-K for the May 9, 1996 Event (File No. 0-19910), and incorporated
         herein by reference.)

 10.10   Amendment Agreement, dated April 30, 1996, between the Registrant and
         Stryker Corporation. (Filed as Exhibit 99.3 to Registrant's Report on
         Form 8-K for the May 9, 1996 Event (File No. 0-19910), and incorporated
         herein by reference.)

 10.11   Amendment Agreement, dated October 31, 1996, between the Registrant and
         Stryker Corporation.

 10.12   Irrevocable License Agreement, dated May 17, 1991, between Stryker
         Corporation and the Registrant. (Filed as Exhibit 10.7 to Form S-1
         Registration Statement (Registration No. 33-42159), or amendments
         thereto and incorporated herein by reference.)

 10.13   Amended and Restated Agreement for License or Sale of Technology, dated
         December 14, 1988, by and among PruTech Research and Development
         Partnership III, PruTech Project Development Partnership and the
         Registrant. (Filed as Exhibit 10.9 to Form S-1 Registration Statement
         (Registration No. 33-42159), or amendments thereto, and incorporated
         herein by reference.)

 10.14   Master Lease Agreement, dated as of May 1, 1987, between the Registrant
         and Phoenix Leasing Incorporated. (Filed as Exhibit 10.23 to Form S-1
         Registration Statement (Registration No. 33-42159), or amendments
         thereto, and incorporated herein by reference.)

 10.15   Common Stock Purchase Warrant, dated June 1, 1987, issued by the
         Registrant to Phoenix Leasing Incorporated. (Filed as Exhibit 10.24 to
         Form S-1 Registration Statement (Registration No. 33-42159), or
         amendments thereto, and incorporated herein by reference.)

 10.16   Real Estate Standard Form Industrial Lease, dated as of October 24,
         1988, as amended September 17, 1991, between WRC Properties, Inc. and
         the Registrant. (Filed as Exhibit 10.26 to Form S-1 Registration
         Statement (Registration No. 33-42159), or amendments thereto, and
         incorporated herein by reference.)

 10.17   Second Amendment, dated January 28, 1994, to Standard Form Industrial
         Lease dated October 24, 1988, as amended September 17, 1991, by and
         between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.15
         to Registrant's Annual Report on Form 10-K for the Period Ended
         September 30, 1994 (File No. 0-19910), and incorporated herein by
         reference.)

 10.18   Third Amendment, dated September 20, 1994, to Standard Form Industrial
         Lease dated October 24, 1988, as amended September 17, 1991 and January
         28, 1994, by and between the Registrant and WRC Properties, Inc. (Filed
         as Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the
         Period Ended September 30, 1994 (File No. 0-19910), and incorporated
         herein by reference.)

 10.19   Standard Form Industrial Lease, dated February 25, 1992, by and between
         the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.52 to Form
         S-1 Registration Statement (Registration No. 33-46200), or amendments
         thereto, and incorporated herein by reference.)
<PAGE>   57
Exhibit
  No.    Description
-------  -----------
 10.20   First Amendment, dated February 28, 1994, to Standard Form Industrial
         Lease dated February 25, 1992 by and between the Registrant and WRC
         Properties, Inc. (Filed as Exhibit 10.32 to Registrant's Annual Report
         on Form 10-K for the period ended September 30, 1995 (File No.
         0-19910), and incorporated herein by reference.)

 10.21   Second Amendment, dated September 20, 1994, to Standard Form Industrial
         Lease dated February 25, 1992, as amended February 28, 1994, by and
         between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.33
         to Registrant's Annual Report on Form 10-K for the period ended
         September 30, 1995 (File No. 0-19910), and incorporated herein by
         reference.)

 10.22   Asset Purchase Agreement, dated March 4, 1993, by and between the
         Registrant and Verax Corporation (the "Asset Purchase Agreement"),
         including Exhibits thereto and List of Schedules to Asset Purchase
         Agreement and to Exhibit A thereto. Any of such Schedules will be
         supplied upon request by the Commission. (Filed as Exhibit 2.1 and 2.2
         to the Registrant's Report on Form 8-K for March 15, 1993 Event (File
         No. 0-19910), and incorporated herein by reference.)

 10.23   Assumption Agreement, dated March 15, 1993, by and between the
         Registrant and Verax Corporation including Exhibits hereto. (Filed as
         Exhibit 10.56 to the Registrant's Quarterly Report on Form 10-Q for the
         period ended March 31, 1993 (File No. 0-19910), and incorporated herein
         by reference.)

 10.24   Indenture of Lease between Wilton L. Buskey and Carol Buskey and Verax
         Corporation, dated September 7, 1988 as amended through September 25,
         1992, (assumed by Registrant pursuant to Assumption Agreement, dated
         March 15, 1993, by and between the Registrant and Verax Corporation --
         see Exhibit 10.23 above). (Filed as Exhibit 10.57 to the Registrant's
         Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File
         No. 0-19910), and incorporated herein by reference.)

 10.25   Non-Disturbance and Attornment Agreement, dated as of September 7,
         1988, by and between Verax Corporation and First NH Bank [successor to
         First NH Bank of Lebanon] (assumed by Registrant pursuant to Assumption
         Agreement, dated March 15, 1993, by and between the registrant and
         Verax Corporation -- see Exhibit 10.23 above.) (Filed as Exhibit 10.58
         to the Registrant's Quarterly Report on Form 10-Q for the period ended
         March 31, 1993 (File No. 0-19910), and incorporated herein by
         reference.)

 10.26   Loan Agreement, dated as of September 7, 1988, by and between Verax
         Corporation and First NH Bank [successor to First NH Bank of Lebanon]
         (assumed by Registrant pursuant to Assumption Agreement, dated March
         15, 1993, by and between the Registrant and Verax Corporation -- see
         Exhibit 10.23 above.) (Filed as Exhibit 10.59 to the Registrant's
         Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File
         No. 0-19910), and incorporated herein by reference.)

 10.27   CBM Cross-License Agreement, dated as of November 26, 1993, between
         Enzon, Inc. and the Registrant. (Filed as Exhibit 10.42 to Registrant's
         Quarterly Report on Form 10-Q for the period ended December 31, 1993
         (File No. 0-19910), and incorporated herein by reference.)

 10.28   Enzon Cross-License Agreement, dated as of November 26, 1993, between
         Enzon, Inc. and the Registrant. (Filed as Exhibit 10.43 to Registrant's
         Quarterly Report on Form 10-Q for the period ended December 31, 1993
         (File No. 0-19910), and incorporated herein by reference.)
<PAGE>   58
Exhibit
  No.    Description
-------  -----------
 10.29   Exclusive Marketing Agreement, dated as of November 26, 1993, between
         Enzon, Inc. and the Registrant. (Filed as Exhibit 10.44 to Registrant's
         Quarterly Report on Form 10-Q for the period ended December 31, 1993
         (Filed No. 0-19910), and incorporated herein by reference.)

 10.30   Manufacturing Agreement, dated as of September 28, 1994, between
         Biogen, Inc. and the Registrant. (Filed as Exhibit 99.1 to Registrant's
         Report on Form 8-K for the September 30, 1994 Event (File No. 0-19910),
         and incorporated herein by reference.)

 10.31   Equipment Lease Agreement, dated as of September 28, 1994, between
         Biogen, Inc. and the Registrant. (Filed as Exhibit 99.2 to Registrant's
         Report on Form 8-K for the September 30, 1994 Event (File No. 0-19910),
         and incorporated herein by reference.)

 10.32   Security Agreement, dated as of September 28, 1994, between Biogen,
         Inc. and the Registrant. (Filed as Exhibit 99.3 to Registrant's Report
         on Form 8-K for the September 30, 1994 Event (File No. 0-19910), and
         incorporated herein by reference.)

 10.33   Form of Preferred Stock and Warrant Purchase Agreement, with Exhibits
         thereto, signed by the Registrant and the persons listed on the
         Schedule attached at the end of the Form of Preferred Stock and Warrant
         Purchase Agreement. (Filed as Exhibit 10.52 to Registrant's Quarterly
         Report on Form 10-Q for the Period Ended December 31, 1994 (File No.
         0-19910), and incorporated herein by reference.)

 10.34   Form of Warrant issued by the Registrant to the persons listed on the
         Schedule attached at the end of the Form of Warrant on various dates
         between December 23, 1994 and January 25, 1995. (Filed as Exhibit 10.53
         to Registrant's Quarterly Report on Form 10-Q for the Period Ended
         December 31, 1994 (File No. 0-19910), and incorporated herein by
         reference.)

 10.35   Cross-License Agreement, dated as of July 15, 1996, between the
         Registrant, Genetics Institute, Inc. and Stryker Corporation. (Filed as
         Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1996 of Genetics Institute, Inc. (File No.0-14587), filed
         with the Securities and Exchange Commission on November 6, 1996 and
         incorporated by reference herein.)

 10.36   Underwriting Agreement dated July 2, 1996 between the Registrant and
         Hambrecht & Quist LLC and Cowen & Company. (Filed as Exhibit 1.1 to
         Form S-3 Registration Statement (Registration No. 333-5477), or
         amendments thereto, and incorporated herein by reference.)

 10.37   Research Collaboration and License Agreement, dated December 9, 1996,
         between the Registrant and Biogen, Inc.

 10.38   Restricted Stock Purchase Agreement, dated December 9, 1996, between
         the Registrant and Biogen, Inc.

 10.39   1983 Incentive Stock Option Plan, amended as of September 11, 1984.
         (Filed as Exhibit 10.34 to Form S-1 Registration Statement
         (Registration No. 33-42159), or amendments thereto, and incorporated
         herein by reference.)

 10.40   1987 Stock Plan, as amended on December 7, 1994. (Filed as Exhibit to
         Registrant's Preliminary Proxy Statement for 1995 Annual Meeting of
         Stockholders (File No. 0-19910), and incorporated herein by reference.)
<PAGE>   59
Exhibit
  No.    Description
-------  -----------
 10.41   Employee Stock Purchase Plan, as amended on December 7, 1994. (Filed as
         Exhibit to Registrant's Preliminary Proxy Statement for 1995 Annual
         Meeting of Stockholders (File No. 0-19910), and incorporated herein by
         reference.)

 10.42   1992 Non-Employee Director Non-Qualified Stock Option Plan, as amended
         on March 20, 1996. (Filed as Exhibit 10.25 to Registrant's Quarterly
         Report on Form 10-Q for the period ended March 31, 1996 (File No.
         0-19910), and incorporated herein by reference.)

 10.43   Form of Employment Agreement with confidentiality provisions. (Filed as
         Exhibit 10.31 to Form S-1 Registration Statement (Registration No.
         33-42159), or amendments thereto, and incorporated herein by
         reference.)

 10.44   Employment Agreement, dated as of January 2, 1992, between Charles
         Cohen, Ph.D. and the Registrant. (Filed as Exhibit 10.47 to Form S-1
         Registration Statement (Registration No. 33-46200), or amendments
         thereto, and incorporated herein by reference.)

 10.45   Employment Agreement, dated February 25, 1992, between Wayne E. Mayhew
         III and the Registrant. (Filed as Exhibit 10.51 to Form S-1
         Registration Statement (Registration No. 33-46200), or amendments
         thereto, and incorporated herein by reference.)

 10.46   Employment Agreement, dated July 20, 1992, between Ronald D. Johnson,
         Ph.D., and the Registrant. (Filed as Exhibit 10.54 to Form S-1
         Registration Statement (Registration No. 33-46200), or amendments
         thereto, and incorporated herein by reference.)

 10.47   Executive Severance Agreement, dated December 1, 1993, between Gregory
         Liposky and the Registrant (assumed as part of the Registrant's
         acquisition of the manufacturing facility from Verax Corporation).
         (Filed as Exhibit 10.51 to Registrant's Annual Report on Form 10-K for
         the period ended September 30, 1995 (File No. 0-19910), and
         incorporated herein by reference.)

 10.48   Employment Agreement, dated July 17, 1995, between Michael M. Tarnow
         and the Registrant. (Filed as Exhibit 99.1 to Registrant's Report on
         Form 8-K for the August 31, 1995 Event (File No. 0-19910), and
         incorporated herein by reference.)

 10.49   Employment Agreement, dated May 21, 1996, between Thomas J. Facklam,
         Ph.D. and the Registrant. (Filed as Exhibit 99.2 to Registrant's Report
         on Form 8-K for the June 3, 1996 Event (File No. 0-19910), and
         incorporated herein by reference.

 21      Subsidiaries of the Registrant. (Filed as Exhibit 22 to Form S-1
         Registration Statement (Registration No. 33-42159), or amendments
         thereto, and incorporated herein by reference.)

 23.1    Independent Auditors' Consent

 27      Financial Data Schedule