10-K

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                                  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, 1998

[ ]   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) 782-1100

        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.  [ ]

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 March 1,1999, was
approximately $68 million, based on the last sale price as reported on The
Nasdaq Stock Market.

As of March 1, 1999, the registrant had 34,579,116 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 1999 Annual Meeting of Stockholders. With the exception of the
portions of the 1998 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.


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PART I

ITEM 1. BUSINESS

SUMMARY

Creative BioMolecules, Inc. is a biopharmaceutical company focused on the
development of products for human tissue regeneration and repair. Our core
technologies are based on our understanding of the role that morphogenic
proteins play in human biology. These proteins are involved in the initiation
and regulation of the cellular events responsible for the formation of human
tissues and organs. Morphogenic proteins are involved in the formation and
repair of several types of tissues.

Our goal is to apply certain aspects of genetic engineering and our
understanding of cellular biology to the development and commercialization of
morphogenic proteins and related compounds to treat a wide array of medical
conditions. We have product candidates in development for several applications
including orthopaedic and dental reconstruction, treatment of kidney disease,
and treatment of stroke and other neurological disorders. Through our efforts to
patent and license our technology, we have a strong intellectual property
position covering morphogenic proteins as therapies. Our lead product candidate,
the OP-1 bone graft device, is in the final stages of development and
commercialization.

ORTHOPAEDIC RECONSTRUCTION AND DENTAL THERAPEUTICS. Creative BioMolecules and
Stryker Corporation ("Stryker"), a leading surgical and medical products
company, have had a long-term collaboration to develop Osteogenic Protein-1
("OP-1") for use in the repair or replacement of bone and joint tissue
("orthopaedic reconstruction") and for use in dental therapeutics. Prior to
November 1998, Creative BioMolecules was responsible for manufacturing OP-1
products for Stryker and conducting research for Stryker in the orthopaedic
reconstruction and dental fields. Stryker was responsible for clinical and
regulatory development and sales and marketing of OP-1 products in these fields.
Creative BioMolecules and Stryker restructured this agreement in November 1998
to provide Stryker with the exclusive rights to manufacture OP-1 products in
these fields. At this time Stryker acquired our commercial manufacturing
operations. As a result, Stryker now has the exclusive right to develop, market,
manufacture, and sell products based on osteogenic proteins for use in
orthopaedic reconstruction and dental therapeutics. In return, we will receive
increased royalties on such sales.

Stryker has completed a pivotal study of an OP-1 bone regeneration product
designed to induce new bone formation. This trial was conducted in 122 patients
with non-union fractures of the tibia, the major bone of the lower leg. The
objective of this trial was to demonstrate that treatment with the OP-1 device
could repair non-union fractures of the tibia as well as treatment with the
current gold standard of care, autograft. Autograft is a procedure which
involves removal of bone from the hip and implanting that bone at the fracture
site to induce healing. The results of the trial, as presented in March 1998,
demonstrated that the group of patents treated with the OP-1 bone regeneration
product had comparable clinical success to the autograft group without the need
for a second invasive procedure to harvest autograft bone. Stryker initiated a
Pre-Market Approval ("PMA") application in April 1998. The PMA application is
Stryker's formal request to the United States Food and Drug Administration
("FDA") for approval to market the product.

In addition to the pivotal trial in non-union fractures, Stryker has initiated
clinical studies in other bone graft indications. These studies include a 200
patient clinical trial in Canada to evaluate use of the OP-1 device to treat
fresh fractures, an 80 patient study in Australia to treat patients with
difficult to heal orthopaedic indications, and several pilot studies in Europe.



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Stryker is also developing an OP-1 product for the treatment of periodontal
disease. Completed preclinical studies indicate that an OP-1 product may restore
the periodontal tissues necessary to maintain tooth attachment when used in
conjunction with standard surgical treatments of periodontal disease. In 1998,
Stryker initiated enrollment for a clinical trial in the United States to test
an OP-1 device in the treatment of periodontal disease.

NEUROLOGICAL DISORDERS. Creative BioMolecules is developing morphogenic protein
therapies for neurological disorders, including stroke and Parkinson's disease.
In-vitro studies have shown that OP-1 enhances the survival of neurons and may
promote the establishment of new neuronal connections. In several preclinical
studies, OP-1 improved the rate and extent of motor function recovery in animal
models of stroke. Such positive results in preclinical studies of stroke have
been observed even if treatment with OP-1 is initiated up to three days after
the stroke. Additional preclinical studies are currently underway to demonstrate
the effectiveness of our proprietary proteins in treating other neurological
disorders, including traumatic brain injury, spinal cord injury and Parkinson's
disease.

KIDNEY DISORDERS. Creative BioMolecules is developing an OP-1 based therapy for
chronic renal failure, a condition characterized by the slow progressive loss of
kidney function ultimately resulting in the need for kidney transplantation or
dialysis. Chronic renal failure represents a substantial unmet medical need.
Preclinical studies have indicated that OP-1 administration improves kidney
function in animal models of both acute and chronic renal failure. In 1998, we
modified our existing partnership in renal therapy with Biogen, Inc., a leading
protein therapeutics company, to reacquire certain rights and reduce Biogen's
internal activities on this program. Biogen has funded all of the chronic renal
failure therapy development of the partnership through 1999.

OTHER PROGRAMS. In addition to our work with OP-1, we are conducting research
directed toward the development of new therapeutic applications for other
related morphogenic proteins in our proprietary portfolio. We also have a
program underway to develop and identify orally-active drug compounds that
either promote morphogenic protein expression or mimic the biological activities
of morphogenic proteins.

Creative BioMolecules is a Delaware corporation with principal offices at 45
South Street, Hopkinton, Massachusetts, USA, 01748. Our telephone number is
(508) 782-1100.

RISK FACTORS

RELIANCE ON COLLABORATIVE PARTNERS FOR FUNDING AND COMMERCIALIZATION OF OUR
PRODUCTS. Our success is highly dependent on whether our collaborative partners
are successful in meeting their obligations under our agreements with them. If
any such collaborative partners are unsuccessful, the negative impact on us may
be significant. For example, our partner, Stryker Corporation, through the
efforts of their wholly-owned subsidiary, Stryker Biotech, is responsible for
pursuing clinical trials, obtaining all regulatory and marketing approvals,
manufacturing on a commercial scale and taking all steps necessary to market and
sell OP-1 products for orthopaedic reconstruction and dental therapies.
Stryker's failure to pursue clinical trials vigorously, obtain regulatory
approvals, manufacture an adequate supply of material, or effectively market and
sell OP-1 products could have a material adverse effect on our financial
condition.

We expect to pursue discussions with other potential collaborative partners for
our other major programs, including neurological disorders, chronic kidney
failure, and other applications of morphogenic and other proteins. If executed,
we expect that these collaborations will also impose obligations on the
collaborative partner to provide research and development funding, pursue
clinical development and manufacturing, seek regulatory approval and pursue
marketing and sales. Although we will seek to include legally enforceable
diligence obligations and penalties in all collaborative agreements, there is an
inherent risk in relying on



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collaborative partners.

UNCERTAINTY AS TO OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS. We may develop and
commercialize certain products and technology without the assistance of
partners. Currently, we lack extensive clinical, regulatory, marketing and sales
experience. Prior to commercializing a product independently, we would have to
expand our expertise in these areas. It is possible, however, that we will not
be successful in pursuing these products ourselves.

RELIANCE ON OUR LEAD PRODUCT CANDIDATE, OP-1. Our lead product for orthopaedic
reconstruction and dental therapy utilizes the OP-1 protein. In addition, our
chronic renal failure program and our neurological program focusing on stroke
recovery are based on various forms of the OP-1 protein. Although we are
actively manufacturing preclinical quantities of other proprietary proteins in
order to develop them for therapeutic uses, we are heavily dependent on our lead
molecule. Because of this dependence, a failure in any one of these programs
involving the OP-1 protein may have an adverse effect on the other programs.

RELIANCE ON PRECLINICAL PROGRAMS. Our chronic renal failure program and
neurological program are in various stages of preclinical development. We are
conducting research, both independently and through our collaborators, focusing
on the use of morphogenic proteins in other therapeutic applications as well as
orally-active compounds that mimic or regulate morphogenic protein activity.
Such research, however, is at an early stage. We believe that the scientific
data in all of these programs are promising and warrants our continued
investment and development. Other than the use of the OP-1 protein for
orthopaedic reconstruction and dental therapeutics, we do not currently have any
products that are or have been clinically tested in humans. It is possible that
the preclinical efficacy demonstrated in the laboratory for these other
applications will not be repeated in humans. It is also possible that there may
be a significant period of time during which we do not have a product in
clinical stage development.

RELIANCE ON KEY MANAGEMENT PERSONNEL. Following the restructuring of our
relationship with Stryker in November 1998, Thomas J. Facklam, Vice President,
Product Development and Operations, Wayne E. Mayhew III, Vice President, Finance
and Chief Financial Officer, and Gregory F. Liposky, Vice President, Contract
Manufacturing, left Creative BioMolecules to pursue other interests. Their
responsibilities following the restructuring have been assigned to the remaining
officers. Our current senior management team is comprised of five officers,
including Michael Tarnow, President and CEO, Charles Cohen, PhD, Chief
Scientific Officer, Carl M. Cohen, PhD, Vice President, Research and
Development, Cheryl Lawton, General Counsel and Vice President, Administration,
and Steven Basta, Vice President, Finance and Business Development. All of these
officers have employment contracts which renew annually unless notice is given
to the contrary. The departure of one or more of these individuals may have a
material adverse effect on our management and strategic direction.

COMPETITION RELATING TO THE RESEARCH AND DEVELOPMENT OF MORPHOGENIC PROTEINS AND
OTHER THERAPIES. There is intense competition among companies, individuals and
academic and research institutions who are actively pursuing research in and the
development of morphogenic proteins and other therapies currently under
development by us. For example, we are aware that Genetics Institute ("GI"),
which was acquired by American Home Products in 1997, and GI's collaborative
partners are pursuing the development of bone morphogenetic proteins and have
initiated human clinical trials using a product similar to the OP-1 bone
regeneration product being commercialized by Stryker. In addition, bone
regeneration products based on non-protein technologies, such as autograft,
allograft and electrical stimulation devices, could compete effectively with the
OP-1 product. There are a number of biotechnology and pharmaceutical companies
pursuing the development of recombinant protein based products, as well as
traditional drug therapies for the treatment of renal and neurological
disorders. Although we have broad patent protection and significant expertise
and technical know-how in the field of morphogenic proteins, other entities and
competitive products may materially affect the revenue we derive from the sale
of our products as well as our fiscal condition.




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YEAR 2000: INFORMATION TECHNOLOGY USE. We rely on commercially available
computer applications to manage and monitor our accounting, research and
development and administrative functions. In addition, our suppliers and service
providers (including financial institutions) rely on computer applications, some
of which may contain software that may fail as a result of the upcoming change
in century, with respect to functions that materially affect their interactions
with us. We have taken steps to determine whether our internal computer systems
will fail or give erroneous results when referencing dates after December 31,
1999. We are currently assessing whether any of our suppliers or service
providers will be adversely affected by the upcoming change in century. Although
we are preparing a contingency plan, we do not currently have such a plan in
place for our operations if Year 2000 issues are not resolved in time or if such
issues go undetected. If our software or the software of our suppliers or
service providers fails or if we, or our service providers, fail to resolve such
issues in a timely manner, any such failure could have a material adverse impact
on our business, financial condition and results of our programs.

CONDITIONS AFFECTING THE BIOTECHNOLOGY INDUSTRY. The continuation of several
negative market conditions could continue to make it difficult for small
biotechnology companies to obtain access to private and/or public funding. These
negative market conditions include the recent highly publicized failure of
several biotech products to show efficacy in human clinical testing and the lack
of investor confidence in the overall performance of the biotech industry. Lack
of significant analyst coverage for small cap companies in the biotechnology
field may limit the general availability of third party information about small
biotechnology companies like us. This could, in turn, limit the amount of
funding available from investors. In addition, we do not yet know the extent to
which government will regulate the biotechnology field. These general economic
and market conditions could materially affect our ability to fund our programs
and expand our technology platform.

CONDITIONS AFFECTING CREATIVE BIOMOLECULES. We completed a $25 million
Convertible Preferred Stock financing, the Series 1998/A Preferred Stock, in May
1998 which may convert into shares of Common Stock. As of December 31, 1998,
investors have converted $1,586,000 principal amount of the Preferred Stock. Our
financial condition may be materially affected by dilution of our Common Stock
following further conversion of this financing or by a change in our cash
balance following repayment of all or a portion of the principal from this
financing.

UNCERTAINTY AS TO WHETHER WE WILL BE REIMBURSED FOR OUR PRODUCTS FROM
GOVERNMENT, PRIVATE HEALTH INSURERS AND OTHER ORGANIZATIONS. The availability of
reimbursement by governmental and other third party payers affects the market
for our pharmaceutical products. These third party payers continually attempt to
contain or reduce the costs of healthcare. In the United States and in certain
foreign jurisdictions there have been a number of legislative and regulatory
proposals to change the healthcare system, and further proposals are likely. We
could experience pricing pressure on our current and future products due to the
trend toward managed health care, the increasing influence of health maintenance
organizations, and additional legislative proposals. We may not be able to sell
our products profitably if reimbursement is unavailable or limited in scope. In
addition, we may not be able to market any products that we develop ourselves or
in conjunction with a partner at acceptable prices or receive commercial
acceptance in the markets that we expect to target.

OUR TECHNOLOGY

Creative BioMolecules has played a significant role in advancing the scientific
understanding of the process of tissue repair and regeneration. We have
established a technology platform based on the molecular and cellular events
responsible for tissue and organ development. Creative BioMolecules was the
first to identify and characterize certain morphogenic proteins that are key
regulators of tissue and organ formation in humans. These morphogenic proteins,
and our understanding of the biology related to the activity of these proteins,
provide the basis for the development of our proprietary therapeutic products.




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The role of morphogenic proteins in the formation, maintenance and repair of
many tissues has led us to believe that morphogenic proteins may provide
therapies to treat several types of acute injury or chronic disease. Our
research and that of our collaborators has indicated that morphogenic proteins
are significant in the formation of many tissues including bone, cartilage,
kidney, dental and brain tissues. OP-1, a morphogenic protein and our lead
product candidate, has been developed in a formulation with a collagen matrix to
induce bone formation. In human trials, this OP-1 and collagen device has
demonstrated the ability to repair bone defects in several hard-to-heal
orthopaedic indications. Additional clinical trials are currently underway to
evaluate this device in other indications, including the treatment of
periodontal disease and fresh fractures. Creative BioMolecules and its
collaborators are exploring the role of several other morphogenic proteins in
the development of tissues throughout the body. We have determined that several
of these proteins are important in neurological development and appear to
interact with neurons to promote certain biological functions of these neurons.
These findings form the basis of the therapies for stroke and other neurological
diseases we are developing. We have also determined that OP-1 is critical to the
normal development of the kidney and plays an important role in kidney function.
This knowledge may assist us in developing a chronic renal failure therapy based
on OP-1. We are similarly exploring the role of several of the morphogenic
proteins in tissues throughout the body to identify new product opportunities
for therapies based on these proteins.

In addition to identifying and characterizing several morphogenic proteins,
including OP-1, Creative BioMolecules and its collaborators have identified the
DNA sequences which regulate the expression of OP-1. We have also discovered the
cellular receptors to which OP-1 and other morphogenic proteins bind and through
which they act as well as the three-dimensional structure of OP-1. These
discoveries have enabled us 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 be the leader in the discovery and
development of therapeutics for tissue repair and regeneration based on the
biology of morphogenic proteins. Key elements of our continuing business
strategy include:

RECEIVING ROYALTIES FROM THE SALE OF OP-1 ORTHOPAEDIC AND DENTAL PRODUCTS BY
STRYKER. In November 1998, Creative BioMolecules and Stryker restructured their
long-term research and development agreement. Under the restructured agreement,
we will receive increased royalties on sales of Stryker's OP-1 products. Stryker
is seeking approval from regulatory authorities to market and sell the OP-1 bone
regeneration product in the United States and foreign markets. If approved,
Stryker will be responsible for worldwide commercialization and we will receive
royalties on such sales. We do not know whether Stryker can obtain such
regulatory approvals.

DEVELOPING MORPHOGENIC PROTEIN THERAPIES FOR STROKE AND OTHER NEUROLOGICAL
DISORDERS. Preclinical studies have demonstrated that the administration of OP-1
following stroke can improve the rate and extent of motor skills recovery. We
are currently conducting additional preclinical studies which are intended to
support the filing of an Investigational New Drug ("IND") application with the
FDA in order to enable us to initiate clinical trials for a new stroke therapy.
We are also evaluating morphogenic protein therapies designed to treat other
neurological disorders.

DEVELOPING OP-1 AS A THERAPY FOR RENAL DISEASE. Preclinical results have
demonstrated that OP-1 may be beneficial in protecting against kidney damage in
acute conditions and in slowing kidney function decline in chronic disease.
Based on these findings and with financial support from Biogen, we are
continuing the development of a therapy for the treatment of chronic renal
failure.



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CREATING NEW MORPHOGENIC PROTEIN THERAPIES. Creative BioMolecules has
proprietary rights covering several morphogenic proteins that may be involved in
the formation and repair of several tissues and organs. We are investigating the
role of these proteins in several new therapeutic indications.

DEVELOPING MOLECULAR THERAPEUTICS BASED ON MORPHOGEN BIOLOGY. We believe that
certain small compounds may be able to stimulate important biological responses
involved in the activity of morphogenic proteins. We further believe that since
such small compounds are more likely to lead to orally available therapies, they
could be attractive candidates for commercial development. We are developing
biochemical and cell-based screens based on the biology of morphogenic proteins
to enable us to screen chemistry libraries and identify small molecule
therapeutic candidates.

ESTABLISHING CORPORATE COLLABORATIONS. We may elect to establish corporate
collaborations to achieve several purposes. We hope that such collaborations
would allow us to strengthen our financial resources, broaden our pipeline of
programs, access complementary technologies, and gain development, manufacturing
and commercialization expertise.

ESTABLISHING ACADEMIC COLLABORATIONS. We utilize a large network of academic
collaborators to extend our expertise and knowledge about tissue formation and
morphogenic protein biology, to identify additional therapeutic uses for
morphogenic proteins, and to conduct preclinical studies of our therapies.

PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

Creative BioMolecules, alone or in conjunction with collaborators, is developing
several therapeutic products. The following table sets forth these programs:

PRODUCTS IN DEVELOPMENT



Potential Application                   Commercial Rights      Development Status(1)
- ---------------------                   -----------------      ---------------------
                                                         

ORTHOPAEDIC RECONSTRUCTION AND
DENTAL APPLICATIONS
  Non-Union Fractures, Tibia                   Stryker         U.S. Pivotal Trial Completed
                                                               Modular PMA initiated
  Non-Union Fractures, All Long Bones          Stryker         U.S. Treatment Study
  Fresh Fractures, Spinal Fusion and           Stryker         International Clinical Studies
     Other Bone Graft Indications(2)
  Periodontal Disease                          Stryker         Pilot Clinical Trial
  Cartilage Regeneration                       Stryker         Preclinical

KIDNEY DISORDERS
  Acute Renal Failure                   Creative BioMolecules  Preclinical
  Chronic Renal Failure(3)                     Biogen          Preclinical

NEUROLOGICAL DISORDERS
  Stroke                                Creative BioMolecules  Preclinical
  Other Neurological Disorders          Creative BioMolecules  Preclinical

OSTEOPOROSIS                            Creative BioMolecules  Preclinical



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(1) "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. "International Clinical Studies" vary in scope from a Pivotal Clinical
    Trial in 200 patients with fresh fractures to several physician sponsored
    feasibility investigations conducted among a small number of patients.
    "Pilot Clinical Trials" are feasibility investigations conducted under an
    IDE, that are intended to assess the initial safety and/or efficacy of a new
    medical device. "Preclinical" 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. See "- Regulatory Issues." In any case where more than one product
    formulation or composition may be developed, the status stated relates to
    the most advanced product in that field.

(2) Stryker has announced that it has initiated clinical studies for several
    orthopaedic reconstruction applications of OP-1. Preliminary data has been
    reported from some of the ongoing studies.

(3) Biogen has provided funding for chronic renal failure research conducted by
    us through 1999 and retains an option through the end of 1999 to obtain
    exclusive rights to the chronic renal failure therapy.

ORTHOPAEDIC RECONSTRUCTION AND DENTAL APPLICATIONS - STRYKER PRODUCTS IN
DEVELOPMENT

We have collaborated with Stryker, a leading specialty surgical and medical
products company, to develop and commercialize orthopaedic reconstruction and
dental therapy products. We modified our collaboration agreement with Stryker in
1998 to provide Stryker with exclusive rights to develop, manufacture and
commercialize OP-1 products in orthopaedic reconstruction and dental
applications, and to provide us with royalties on commercial sales of OP-1
products in this field. See "- Collaborative and Licensing Agreements - Stryker
Corporation."

ORTHOPAEDIC RECONSTRUCTION. 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. We believe that in
1995, there were more than 1.6 million procedures in the United States that may
have benefited from an OP-1 bone regeneration product, if it were available.
These procedures included repair of non-healing fractures (170,000), open
fracture reductions (440,000), spinal fusions (200,000), maxillofacial
reconstructions (220,000), prosthetic fixations (540,000), and gap fillings
(30,000). In addition, in 1995 there were 570,000 cartilage-related injuries in
the United States.

Creative BioMolecules and Stryker have generated substantial evidence that OP-1
is a potent stimulator of bone and cartilage formation. 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 has been shown to be 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 to facilitate new bone formation.
Autograft, the currently preferred grafting approach, involves two surgical
steps: a first 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, many patients experience complications resulting
from the graft harvesting step. A second approach involving allograft procedures
utilizes bone grafts or demineralized bone taken from cadavers. We believe that
the OP-1 bone regeneration product applied locally to the site of the defect
could be used as an alternative to many bone graft procedures, and may provide
reliable healing without the need for graft harvesting with its associated
complications.



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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. The randomized
prospective study included 122 patients at 18 different centers throughout the
United States. Patients included in the study had tibial non-union fractures for
at least nine months following initial injury without demonstrating progress
toward union for the previous three months. Such non-union fractures are often
caused by high-energy trauma, do not usually heal well, and generally require
repeated surgical interventions. The study was designed to evaluate whether
treatment with the OP-1 bone regeneration product is equivalent to autograft,
the current standard of treatment. The OP-1 bone regeneration product used in
this study consisted of a paste-like formulation that was applied locally at the
fracture site.

The results of the trial, presented in March 1998 at the American Academy of
Orthopaedic Surgeons, demonstrated that the OP-1 bone regeneration product had
comparable clinical success to autograft without the need for a second invasive
procedure to harvest autograft bone from the hip. The analysis of the data in
this trial showed statistical equivalence between OP-1 and autograft with
respect to the clinically important areas of weight-bearing and pain. In
addition, the data confirmed that there were comparable rates of re-operation
for the two groups of patients. Specifically, eleven of the 61 autograft
patients and ten of the 61 OP-1 patients have required re-operation to date.
Finally, the data showed a significant reduction in blood loss for the OP-1
patients as compared to the autograft patients and the elimination of certain
other complications associated with the harvest of autograft. Radiographic
evidence of healing did not meet the predicted target for either group and was
approximately 10% higher for the autograft group during the long-term follow-up
period.

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 has completed the selection of patients in this Open-Label
Trial.

Data presented at a scientific conference in November 1998 from an Australian
clinical experience involving 80 patients indicated good clinical and
radiological success with use of an OP-1 device to treat patients with
hard-to-heal orthopaedic indications. As reported by the presenting clinician,
41 (93%) of the 44 patients who had completed five months of follow-up showed
clinical or radiological improvement following OP-1 device treatment. Patients
enrolled in this study had a variety of orthopaedic indications including
non-union fractures, spinal fusions, revision arthroplasty, peri-prosthetic
fractures, bone defects, and arthrodeses.

Stryker has initiated a 200 patient clinical study in Canada to evaluate the use
of the OP-1 bone regeneration product for the treatment of fresh fractures.
Stryker has also initiated clinical studies in several European countries.
Stryker may initiate additional clinical trials to demonstrate the utility of
OP-1 based products in additional orthopaedic indications. Stryker and Creative
BioMolecules have also conducted preclinical studies indicating the potential
utility of OP-1 in the treatment of cartilage defects. We believe that Stryker's
goal is to market OP-1 products for a number of orthopaedic reconstruction
indications in major markets around the world.

Based on the results of the U.S. pivotal trial, other clinical and preclinical
data, and our development of a commercial scale manufacturing process and
facility, Stryker initiated a modular PMA application with the FDA in April 1998
for this OP-1 bone regeneration product. This application is still pending.

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 therapies. Based on data from the most recent American
Dental Association Survey of Services Rendered ("ADA Survey"), in 1995
approximately four million patients underwent periodontal surgery in the United
States for



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severe periodontal disease. We believe that many of these procedures would have
been candidates for treatment with an OP-1 periodontal product.

In 1998, Stryker initiated enrollment in a pilot clinical trial to treat
periodontal disease with an OP-1 device. This trial follows preclinical studies
which demonstrated that an OP-1 device was capable of regenerating the normal
tissue structures surrounding the tooth root.

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. Studies
conducted by our scientists and academic collaborators have shown that OP-1 is a
key morphogenic signal that initiates kidney formation at the earliest stages of
kidney development.

CHRONIC RENAL FAILURE. Chronic renal failure is characterized by a gradual and
progressive loss of kidney function. 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 that
requires dialysis or kidney transplantation. Aside from the substantial economic
costs associated with dialysis, quality of life is significantly impacted, 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, there were more than 300,000 patients on dialysis in 1995. We estimate
that these numbers are rising by 10% each year. In addition, there were more
than 700,000 patients with some degree of chronic renal failure in the United
States in 1995. We believe 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.

We are currently using financial support from Biogen to develop an OP-1-based
therapy to moderate or halt the progression of chronic renal failure. See "-
Collaborative and Licensing Agreements - Biogen, Inc." Creative BioMolecules 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. Additional preclinical studies are
currently underway. We hope to initiate human clinical investigation of an OP-1
product for the treatment of chronic renal failure once preclinical studies are
completed.

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 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.

Animal studies have been conducted by our scientists and collaborators to
determine if acute renal failure can be treated with systemic administration of
OP-1. Results of these studies indicate that an OP-1 product can reduce the
extent of injury to the kidneys and promote more rapid recovery of kidney
function in animal models of acute renal failure. Although clinical trials are
difficult to design in this indication, we are currently exploring potential
avenues for a therapy in acute renal failure.



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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 or the
loss of neuronal function. We have completed a number of cell-based studies
which indicate that OP-1 can promote neuron survival and can induce the
formation or development of dendrites, the structures on neurons which pick up
signals from other neurons. This dendrite formation effect of OP-1 may be an
important factor in maintaining or recovering function following neurological
injury or disease. Based on these findings, we have initiated a preclinical
investigation to study the use of OP-1 as a treatment for certain neurological
disorders. In addition to our research activities with OP-1, we are
investigating the effect of other proprietary proteins in the treatment of
disease and injury affecting the central nervous system. To compliment our
in-house proteins, we have licensed exclusive rights to GDF-1, a growth factor
with potential in the treatment of a number of nervous system 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 has estimated 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. We believe that there is a substantial commercial opportunity for a
protein-based therapy that could promote enhanced recovery from stroke.

Research by our academic collaborators has indicated that OP-1 can promote the
development of dendrites on neurons and thereby enhance the ability of neurons
to establish connections with adjacent neurons. This activity may enable the
brain to form new neuronal connections and may aid recovery following stroke. In
preclinical studies conducted by our collaborators at Massachusetts General
Hospital, animals treated with OP-1 showed a statistically significant
improvement in the rate and extent of motor skills recovery compared to
untreated animals when OP-1 was administered a full three days following the
stroke. 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.

We believe that OP-1 represents a potential significant advance in stroke
therapy. Most therapies in development or on the market for stroke are designed
to limit the damage caused to the brain tissue and must therefore be
administered within hours of the stroke's onset. In contrast, OP-1 appears to
enhance the body's natural regenerative processes to help the brain compensate
for areas damaged by the stroke. The ability to administer this agent three days
after a stroke may also provide a clinical advantage in design of trials and in
the care of patients. All of the data generated in our stroke therapy research
is derived from preclinical studies. The therapy has not yet been tested in
human clinical trials.

OTHER PROGRAMS IN DEVELOPMENT

OSTEOPOROSIS. Creative BioMolecules is engaged in preclinical studies to develop
therapeutic products for use in osteoporosis. 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. Most current therapies for osteoporosis are
thought to work by inhibiting further loss of bone tissue rather than
stimulating the formation of new bone. We believe that treatments that stimulate
bone formation may provide therapeutic advantages in some osteoporosis patients.
A morphogenic protein therapy, or a small molecule derived from the biology of
morphogenic proteins, may cause the body to rebuild the bone mass lost due to
osteoporosis or other metabolic bone diseases.



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NEW APPLICATIONS OF MORPHOGENIC PROTEINS. The morphogenic proteins to which
Creative BioMolecules has proprietary rights are involved in the development of
several tissues and mediate the activity of many cell types. We are actively
exploring the biology and activity of these proteins to identify new therapeutic
applications of our proteins. Among these potential applications in early
research are the treatment of inflammatory bowel disease, treatment of certain
vision impairments and other new product opportunities. These programs are in an
early state of research and require significant development work to determine
the therapeutic potential of such possible future products.

MOLECULAR THERAPEUTICS. In addition to identifying and characterizing OP-1 and
other morphogenic proteins, Creative BioMolecules also has identified the DNA
sequences which regulate the expression of OP-1, identified the cellular
receptors to which morphogenic proteins bind and through which they act, and
determined the three-dimensional structure of OP-1. We are currently seeking to
use this knowledge to format assays for screening to identify orally-active drug
compounds that either promote endogenous morphogenic protein expression or mimic
morphogenic protein biological activities. 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 us to develop a molecular therapeutics program that
seeks to identify the next generation of drug development candidates based on
morphogenic protein biology.

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 our scientists under this collaboration. In
exchange for research funding, future royalties and revenue from commercial
manufacturing, we developed OP-1 as a therapy for orthopaedic reconstruction and
cartilage regeneration, and supplied Stryker material for use in clinical
trials. In 1996, Creative BioMolecules and Stryker extended our OP-1
collaboration to include dental therapeutics. We have devoted significant time
and resources to developing and implementing the commercial scale process for
manufacturing the OP-1 bone regeneration product. In 1998, Stryker initiated the
process to seek FDA approval of the OP-1 bone regeneration product by filing a
modular Pre-Market Approval application.

On November 20, 1998, we restructured this long-term and successful research
collaboration in conjunction with the sale of our manufacturing rights and
assets to Stryker for approximately $20 million in cash and increased royalties
from future product sales. As a result, 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. We have also agreed not to
undertake any research, development or commercialization of any products in the
fields of orthopaedic reconstruction and dental therapeutics, on our own behalf
or for third parties, for the term of certain patents. We have 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, osteoporosis, and others. Stryker has agreed not
to undertake any research, development or commercialization of any products in
our field, on their own behalf or for third parties, for the term of those
patents. Both Creative BioMolecules 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.

In November 1998, as part of the sale of certain of our manufacturing rights and
assets to Stryker, we assigned certain patents and claims to Stryker related
primarily to protein manufacturing processes, and orthopaedic reconstruction and
dental therapeutics, subject to our retention of an exclusive license in our
field. In addition, 



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we granted Stryker an exclusive license under patents in our morphogen portfolio
for use in the fields of orthopaedic reconstruction and dental therapeutics.

BIOGEN, INC. In December 1996, we entered into a Research Collaboration and
License Agreement with Biogen to collaborate on the development of novel
therapeutics based on OP-1 for the treatment of renal disorders. The initial
focus of the collaboration was on advancing the development of OP-1 for the
treatment of acute and chronic renal failure. Under the agreement, we granted to
Biogen exclusive worldwide rights to manufacture, market and sell OP-1 for the
treatment of renal disease.

Creative BioMolecules and Biogen modified this agreement in 1998, as a result of
unanticipated difficulties in designing a clinical trial in acute renal failure
and a slower than expected development timeline for chronic renal disease. Under
our new agreement: 1) Biogen returned primary development responsibility for
chronic renal failure to Creative BioMolecules; 2) in consideration of continued
research funding through December 31, 1999, Biogen retained a one year option to
re-license OP-1 in this field; 3) we assumed all rights to acute renal failure;
and 4) other terms under the original agreement relating to milestone payments,
due diligence and the letter of credit may be revived if Biogen exercises its
option. If Biogen does not exercise its option, all rights to chronic renal
failure will return to us and we may pursue the therapy independently or through
collaborative partners, subject to our obligation to pay Biogen certain future
milestones and royalties. Simultaneously with the sale of our manufacturing
facility in Lebanon, New Hampshire, to Stryker, we assigned our protein
manufacturing contract and lease agreement with Biogen to Stryker.

GENETICS INSTITUTE. In July 1996, Creative BioMolecules, Stryker and Genetics
Institute, Inc., a wholly-owned subsidiary of American Home Products ("Genetics
Institute"), cross-licensed their worldwide patent rights to each other,
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 then
issued patents and pending patent applications, Creative BioMolecules and
Stryker have exclusive rights to OP-1, under both our own and Genetics
Institute's patents. Genetics Institute and Yamanouchi Pharmaceutical Company,
Ltd., its collaborative partner in the worldwide development of certain 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.

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

ENZON CROSS-LICENSING AGREEMENT. We own 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) is a separate
technology developed by us, and to which we have retained rights, but which is
not currently being utilized in our morphogen development programs. Some of our
BABS(TM) technology is also covered by patents held by Enzon Corporation
("Enzon"). In December 1993, we signed cross-licensing and collaboration
agreements with Enzon which consolidate the two companies' intellectual property
rights and



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know-how covering BABS(TM) proteins. The parties have agreed to outlicense the
combined 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. We believe that consolidation of the
companies' respective positions relating to BABS(TM) proteins has created a
strong proprietary position in the use and manufacture of these novel proteins.

MANUFACTURING

Creative BioMolecules has significant manufacturing experience in the scale-up
and production of recombinant proteins, including OP-1. This manufacturing
experience prepares us to move forward with our broad morphogenic proteins
programs. We have produced a number of protein candidates by bacterial
fermentation as well as by mammalian cell culture techniques in the laboratory,
scaled-up both of these production processes, and produced clinical grade
recombinant proteins. We currently operate a pilot scale manufacturing facility
in Hopkinton, Massachusetts that is sufficient to manufacture OP-1 and other
related proteins for preclinical and early stage clinical development for use
outside the fields of orthopaedic reconstruction and dental therapeutics.

COMPETITION

The therapeutic products under development by Creative BioMolecules 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 biopharma-
ceutical companies, specialized biotechnology firms, universities and other
research institutions. Many of these companies have extensive financial,
marketing and human resources which may result in significant competition.
Others have extensive experience in undertaking clinical trials, in obtaining
regulatory approval to market products and in manufacturing on a large scale
which may enhance their competitive position.

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

We are aware of a number of companies that are engaged in the research and
development of morphogenic proteins for the repair of bone and cartilage. We are
aware that Genetics Institute, acquired in 1997 by American Home Products, and
its collaborative partners are pursuing the development of bone morphogenetic
proteins and have initiated 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. Other companies may attempt to develop
products incorporating proteins purified from bone, which may include bone
morphogenetic proteins, for orthopaedic applications. In addition, we believe
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 and gene therapies for the repair of bone
and cartilage defects that may compete with our products.

We believe that potential dental or periodontal products initiated by Creative
BioMolecules and developed by Stryker will compete primarily with traditional
therapies and therapies incorporating other morphogenic proteins or growth
factors. Genetics Institute is also pursuing the development of bone
morphogenetic proteins for the repair of dental and periodontal tissue.



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Several biotechnology and pharmaceutical companies are developing recombinant
protein based products for the treatment of renal and neurological disorders. In
the field of renal failure, companies are evaluating several different products
in human clinical studies for acute renal failure, some of which may also be
under review preclinically for chronic renal failure. We are 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 area of stroke therapy, there are several companies engaged in
preclinical and clinical studies with recombinant protein based and more
traditional small molecule products.

A number of biotechnology and pharmaceutical companies are pursuing the
development of other recombinant growth factors and hormones for the treatment
of osteoporosis. We believe that only a limited number of companies are seeking
to develop morphogenic proteins for the treatment of osteoporosis. However, many
major pharmaceutical companies are pursuing the development of traditional drug
therapies for the treatment of osteoporosis. Certain therapies approved or in
development for osteoporosis have demonstrated efficacy at slowing the loss of
bone mineral density and improving clinical outcomes for patients. Such
therapies provide alternatives to the treatment of osteoporosis that would
compete with any osteoporosis products developed by us.

In addition to competing with pharmaceutical and biotechnology companies, our
products and technologies will also compete with those developed by academic
institutions, government agencies and other public organizations conducting
research. Any of these organizations may discover new therapies, seek patent
protection or establish collaborative arrangements for product research which
are competitive with our products and technologies.

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
we or our collaborative partners can complete preclinical and clinical testing,
obtain regulatory approvals, and supply commercial quantities of the product is
expected to have an important impact on our 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. If any research and development by others renders any
of our products obsolete or noncompetitive, then our potential for success and
profitability may be limited.

PATENTS AND PROPRIETARY RIGHTS

Creative BioMolecules pursues a policy of obtaining broad patent protection for
patentable subject matter relating to our proprietary technology platform in
tissue repair and regeneration. As of March 2, 1999, we owned or had rights to
72 issued patents and 79 pending patent applications in the United States, and
owned or had rights to 57 issued foreign patents and 156 foreign patent
applications. These patents and patent applications cover compositions of
matter, fields of uses, screening, and methods of production as well as patents
relating to our morphogenic protein technology, BABS(TM), and interdomain
linker technology.

Certain patents and patent applications relating to morphogenic proteins,
including OP-1, are owned by Stryker and have been licensed exclusively to us
for use in all indications other than orthopaedic reconstruction and dental
therapeutics. 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.



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MORPHOGENIC PROTEIN TECHNOLOGY. Within our patent estate covering morphogenic
protein technology, we own or have rights to 44 issued and 74 pending
applications in the United States, and 37 issued and 133 pending foreign
applications, which contain claims to novel therapies and processes, as well as
numerous 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 worldwide,
royalty-free, cross licenses to each other in the bone morphogenetic/
osteogenetic protein family. This agreement reduces the threat of potential
litigation to our individual and joint efforts with Stryker to commercialize
OP-1.

In November 1998, Creative BioMolecules and Stryker entered into a cross-license
agreement under which we assigned ownership of certain manufacturing and other
patents to Stryker relating primarily to the OP-1 bone regeneration and dental
therapeutics products. We retained an irrevocable, exclusive license to these
patents for all uses outside the fields of orthopaedic reconstruction and dental
therapeutics. We also granted to Stryker a license to certain patents in our
morphogen portfolio for use exclusively in the fields of orthopaedic
reconstruction and dental therapeutics.

Our success will depend in part on our ability to obtain marketing exclusivity
for our products for a period of time sufficient to establish a market position
and achieve an adequate return on our investment in product development. We
believe that protection of our 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. U.S. patents issued
from applications filed on or after June 8, 1995, have a term of 20 years from
the earliest filing date. 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. Certain patents relating
to OP-1 owned by Stryker and licensed to us will begin expiring in 2005.

Although we pursue patent protection for our technology, 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,
we also rely upon trade secrets, know-how and continuing technological
advancement to develop and maintain our competitive position. Disclosure of our
know-how is generally protected under confidentiality agreements. We do not
know, however, whether all our 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 our 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. The field of
biotechnology is developing rapidly. Because many patent applications have been
filed in this field in recent years, we can not predict the scope that courts
will give to the claims of patents issued from such applications and the nature
of these claims. 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. We believe that 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 our proprietary rights
under our patents. It is possible that Patent and Trademark Office interference
proceedings will occur with respect to a number of our patent applications or
issued



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patents. It is also likely that subject matter patented by others will be
required by us to research, develop, or commercialize at least some of our
products. If we are unable to obtain licenses under any such patent rights of
others on acceptable terms then we may have to limit or terminate the
development of some or all of our products.

REGULATORY ISSUES

Regulation by governmental agencies in the United States and other countries is
a significant factor in the clinical evaluation and licensing of our potential
products as well as in the development and research of new products. All of our
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 the Public Health Service Act as a biological, to be marketed in the
United States. Regardless of the classification assigned to our 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. Seeking and obtaining
regulatory approval for a new therapeutic or diagnostic product is likely to
take several years and will require the expenditure of substantial resources.

Products developed through genetic engineering, such as ours, 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"). We believe
that our activities comply 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 we do not foresee that it will have, a material effect on our
competitive position or cash flow. 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 us or our potential competitors.

On November 21, 1997, the FDA Modernization Act of 1997 ("FDAMA") was enacted
into law. In addition to reauthorizing the collection of user fees for
prescription drugs, FDAMA changed the FD&C Act in numerous ways. Because some
provisions of FDAMA require the FDA to develop further regulations, or are
unclear, it is not possible for us to predict the overall effect of FDAMA on us
or our potential competitors.

PHARMACEUTICAL AND BIOLOGICAL PRODUCTS. We expect that certain of our 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. Preclinical tests must typically meet the FDA's good laboratory
practices regulations if they are to be used for the purpose of an application
to the agency. Upon completion of preclinical testing, an IND application must
be filed with the FDA. The application must include the following distinct sets
of information:

1) Information on the composition of the product including pharmacology and
   toxicology;
2) Chemistry, manufacturing, and control information;
3) Results of all the preclinical safety and efficacy investigations including
   in vivo and in vitro studies;
4) Information on any previous human experience with the product;
5) A clinical design and protocol;



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6) Information on the investigators;
7) The necessary agreements among parties involved in the testing; and,
8) 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.

1) 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.
2) Phase II clinical trials involve testing for efficacy, determination of
   optimal dosage and identification of possible side effects in a larger
   patient group.
3) Phase III clinical trials consist of additional testing for efficacy and
   safety with an expanded patient group.

Currently, FDA requires the filing of new information 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 Biologics License Application ("BLA") can be filed, depending upon
whether the product is designated as a drug or a biological, respectively. The
FDA normally requires at least two adequate and well-controlled clinical trials
for product approval. 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 or BLA. If so approved, the product may then be
marketed.

DEVICES. We expect that certain of our 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 the following distinct sets of information:

1) Identifying information on the sponsor;
2) Complete reports of prior investigations of the device;
3) Summary of the investigational plan (or the complete plan);
4) Description of the methods, facilities, and controls used for manufacturing,
   processing, packing, storage, and installation of the device;
5) Example investigator agreements;
6) List of investigators;
7) Certifications concerning investigators and Investigational Review Boards;
8) Copies of labeling; and,
9) Materials relating to environmental impact and informed consent.



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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 one or more larger pivotal safety and effectiveness studies.
Upon successful completion of the clinical testing and compilation of the data,
a PMA application can be filed. This application consists of the following:

1)  Indications for use;
2)  Product description;
3)  Discussion of alternatives to use of the device;
4)  Marketing history (worldwide);
5)  Review of clinical studies and results;
6)  Methods, facilities and controls (as in an IDE);
7)  Non-clinical data;
8)  If only one clinical study is used, a justification of that approach;
9)  Identification and bibliography of any information relevant to the safety
    and effectiveness of the device;
10) Product samples;
11) Product labeling; and,
12) 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 us to recover some of
the costs of research, development and manufacture of qualified products before
commercial marketing begins. We may seek Treatment IND status for qualified
products, although the decision whether to grant such status lies with the FDA.

FDAMA codifies many of the FDA's previous treatment IND regulations. In
addition, it creates new authority for expanded access to investigational
therapies for serious diseases, if the request is performed through a physician,
the product shows sufficient evidence of safety and efficacy, and provision of
the product would not interfere with ongoing clinical research.

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

In addition to existing FDA regulations, FDAMA added new "fast track" authority
allowing FDA to expedite the approval of drugs for serious or life-threatening
conditions. Requirements for fast track drugs are similar 



                                       18
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to those for accelerated approval, including FDA authority to require
post-clinical studies, presubmission of promotional materials, and enhanced NDA
withdrawal authority.

USER FEES. FDAMA amended existing laws to continue FDA authorization to charge
user fees for prescription drug products. The purpose of the user fee provisions
of FDAMA is to reduce the time that FDA takes to act on completed applications.
Under an informal letter arrangement, FDA has committed to act on priority
applications within 6 months, regular applications within 12 months (reducing to
10 months over the next 5 years), manufacturing supplements within 6 months
(reducing to 4 months over the next 5 years), and resubmissions with relatively
minor new information within 6 months (reducing to 2 months over the next 5
years). The user fee provisions of FDAMA contemplate that the fees will be used
to fund additional resources at FDA to enable it to meet these informal review
deadlines. However, the law itself does not impose an affirmative obligation on
FDA to meet these deadlines or any overall approval goals. Some companies may
receive an exemption from user fees, either because they qualify as small
businesses, because their products are used for rare diseases or conditions, or
because they meet other technical exceptions contained in the law. FDAMA
continues FDA authority to grant waivers to protect the public health, if fees
would exceed costs, on equitable grounds, or for small businesses. Because FDAMA
changed the existing waiver provisions of the previous user fee law, it is not
clear whether existing FDA draft guidances on waiver criteria apply or will have
to be redrafted. We may seek exceptions or waivers for our products as
appropriate, although given the current uncertainty of the law, we can not
predict whether such exceptions or waivers will be granted. The user fee
provisions of the FD&C Act, as modified by FDAMA, do not currently apply to
medical devices.

FACILITIES INSPECTION. In addition to product approval prior to marketing, we
must also obtain FDA approval of the facility in which our products will be
manufactured. In the case of a pharmaceutical or a device, we must be in
compliance with cGMP requirements. The FDA may inspect our facilities to
determine such compliance as part of the overall NDA, BLA, or PMA approval.
Since any NDA, BLA or PMA approved by the FDA is both site and process specific,
any material change in our 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.

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

OTHER. 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. We
may choose to conduct such exports of our products prior to obtaining FDA
marketing approval in the United States.

In addition, we are 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 certain other local, state or federal
regulation. From time to time, other federal agencies and congressional
committees have indicated an interest in implementing further regulation of



                                       19
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biotechnology applications. We are not able to predict whether any such
regulations will be adopted or whether, if adopted, such regulations will
adversely affect our business.

EMPLOYEES

Concurrent with the sale of manufacturing to Stryker in November 1998, we
underwent a corporate reorganization to position us as an efficient and
aggressive research and development company. Currently, we have 71 full-time
employees, 28 of whom hold PhD or MD degrees. We consider our relations with
our employees to be good and, apart from the recent restructuring, have
experienced a low rate of employee turnover. None of our employees are covered
by a collective bargaining agreement. We have entered into confidentiality
agreements with all of our employees.

ITEM 2. DESCRIPTION OF PROPERTY

Creative BioMolecules currently leases an aggregate of 35,400 square feet in two
adjacent 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. Our Hopkinton facilities house research and development
laboratories, small scale production suites, and corporate offices. Both leases
expire in 2001. In addition, we currently lease 10,500 square feet of office
space in Boston, Massachusetts for administrative offices. The lease expires in
2002.

We believe that our existing facilities are adequate for our near term needs. We
expect that additional facilities may be required to meet future needs.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which we are a party or of
which any of our 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, 1998, to a vote of Creative BioMolecules' security holders.




                                       20
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PART II

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

MARKET INFORMATION

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



                                                                High      Low
                                                               -----     -----
                                                                   
1998
    4th Quarter............................................... $3.81     $1.75
    3rd Quarter...............................................  5.00      2.31
    2nd Quarter...............................................  8.75      4.13
    1st Quarter............................................... 11.00      7.63

1997
    4th Quarter............................................... 11.63      6.63
    3rd Quarter............................................... 11.13      5.88
    2nd Quarter............................................... 10.13      6.88
    1st Quarter............................................... 13.38      7.50


STOCKHOLDERS

As of March 1, 1999, we had approximately 368 stockholders of record of our
Common Stock and eight stockholders of record of our Series 1998/A Preferred
Stock.

DIVIDENDS

We have never paid any dividends on our Common Stock and we do not intend to pay
any dividends on our Common Stock in the foreseeable future. We intend to retain
earnings, if any, for the development of our business.

RECENT SALES OF UNREGISTERED SECURITIES

During the fourth quarter of 1998, Creative BioMolecules, Inc. issued a total of
522,436 shares of Common Stock. We issued the shares of Common Stock in
connection with the conversion of 539 shares of Series 1998/A Preferred Stock by
the holders of such stock. We issued the shares of Common Stock at conversion
prices ranging from $1.92 to $2.19 per share. The aggregate conversion price was
$1,071,665. We issued the shares of Common Stock without registration under
Section 4(2) of the Securities Act of 1933, as amended. We did not use any
underwriters in the transaction.




                                       21
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated financial data set forth below with respect
to the consolidated statements of operations for the years ended December 31,
1998, 1997 and 1996, and with respect to the consolidated balance sheets as of
December 31, 1998 and 1997, from the consolidated financial statements that have
been audited by Deloitte & Touche LLP, independent auditors. The consolidated
financial statements are included elsewhere in this Form 10-K. We derived the
consolidated statements of operations data for the three months ended December
31, 1995, and the years ended September 30, 1995 and 1994 and the consolidated
balance sheets data as of December 31, 1996 and 1995 and September 30, 1995 and
1994, from audited consolidated financial statements not included in this Form
10-K. You should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in this Form
10-K.



                                                                                            THREE
                                                               YEARS ENDED                  MONTHS           YEARS ENDED
                                                               DECEMBER 31,                 ENDED           SEPTEMBER 30,
                                                   -----------------------------------   DECEMBER 31,   ---------------------
                                                      1998         1997         1996       1995(1)        1995         1994
                                                   ----------    --------     --------   ------------   --------     --------
                                                                         (In thousands, except per share amounts)
                                                                                                   
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Research and development contracts               $  10,419     $ 12,693     $  5,548     $    971     $  5,824     $  3,652
  Manufacturing contracts                                             394        4,486          770        6,159        1,411
  License fees and royalties                              10                    11,122            2          544            7
  Product sales                                                                                                            16
  Interest                                             2,184        2,331        1,174          261          649          580
  Other                                                   12           15           22                        53          141
                                                   ---------     --------     --------     --------     --------     --------
    Total revenues                                    12,625       15,433       22,352        2,004       13,229        5,807
                                                   ---------     --------     --------     --------     --------     --------
Costs and expenses:
  Research and development                            24,856       25,122       15,651        3,194       11,688       17,680
  Cost of manufacturing contracts                                     274        3,823          715        5,330        1,389
  Cost of product sales                                                                                                     3
  General and administrative                           7,475        6,473        4,901        1,254        3,604        4,794
  Sale of manufacturing operations                     1,362
  Interest                                               327          216          217           61          229          200
                                                   ---------     --------     --------     --------     --------     --------
    Total costs and expenses                          34,020       32,085       24,592        5,224       20,851       24,066
                                                   ---------     --------     --------     --------     --------     --------
Net loss                                             (21,395)     (16,652)      (2,240)      (3,220)      (7,622)     (18,259)
Accretion on Series 1998/A Preferred Stock              (987)
                                                   ---------     --------     --------     --------     --------     --------
Net loss applicable to common stockholders         $ (22,382)    $(16,652)    $ (2,240)    $ (3,220)    $ (7,622)    $(18,259)
                                                   =========     ========     ========     ========     ========     ========
Basic and diluted loss per common share(2)         $   (0.66)    $  (0.50)    $  (0.07)    $  (0.11)    $  (0.37)    $  (0.95)
                                                   =========     ========     ========     ========     ========     ========
Common shares for basic and diluted loss
computation(2)                                        33,672       33,078       30,062       28,120       20,431       19,212
                                                   =========     ========     ========     ========     ========     ========





                                                                       DECEMBER 31,                         SEPTEMBER 30,
                                                   --------------------------------------------------   ---------------------
                                                      1998         1997         1996         1995         1995         1994
                                                   ----------    --------     --------   ------------   --------     --------
                                                                                 (In thousands)
                                                                                                   
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
 marketable securities                             $  57,935     $ 30,598     $ 50,075     $ 20,002     $ 10,486     $  5,423
Working capital                                       49,613       32,381       48,174       21,743       11,651        4,927
Total assets                                          66,164       59,038       73,819       41,341       32,192       27,470
Capital lease obligations, less current portion          713        2,005        1,651        1,711        1,713        1,750
Accumulated deficit                                 (110,472)     (88,090)     (71,438)     (69,198)     (65,978)     (58,356)
Total stockholders' equity                            33,105       52,709       67,261       37,829       28,269       22,807



- --------------
(1) In January 1996, we changed our 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 basic and diluted loss per common share.




                                       22
   24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

To date, we have derived most of our revenues from research and development
payments and license fees under agreements with collaborative partners. In 1996,
we also derived a significant portion of our revenues from contract
manufacturing. We anticipate that over the next several years we will derive
most of our revenues from agreements with collaborative partners, including
possible royalty revenues from Stryker. We have never been profitable and expect
to incur additional operating losses in 1999. Results beyond 1999 will depend
largely on the timing and magnitude of royalty payments from Stryker if the OP-1
device is approved for commercial sale. We may incur continued losses in future
years.

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

Under the research portion of our collaboration with Stryker, prior to its
restructuring in November 1998, we supplied OP-1 products to Stryker for
clinical trials and other uses, provided manufacturing regulatory support and
performed research work pursuant to work plans we both established periodically.
In November 1998, we sold our OP-1 manufacturing rights and facilities to
Stryker. In fiscal 1999, we will focus internal research efforts on developing
new tissue regeneration therapies in non-bone applications.

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

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

Prior to the restructuring of our collaborations with Stryker and Biogen, our
manufacturing contracts provided for technical collaboration and manufacturing
for third parties at our manufacturing facility in Lebanon, New Hampshire and at
our research facility in Hopkinton, Massachusetts. Beginning in January 1995, we
were a party to a manufacturing contract with Biogen (the "Manufacturing
Contract") to produce several of Biogen's protein-based therapeutic candidates.
As part of the sale to Stryker of our manufacturing facility, Stryker assumed
our obligations under the Manufacturing Contract.

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



                                       23
   25
RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1997

Our revenues in the year ended December 31, 1998 were $12,625,000. Our revenues
in the year ended December 31, 1997 were $15,433,000. Research and development
contract revenues decreased 18% from $12,693,000 in 1997 to $10,419,000 in 1998.
The decrease in research and development contract revenues from 1997 to 1998
primarily is a result of a decrease in our research activity under the research
collaboration with Biogen, partially offset by an increase in research and
development contract revenues from the supply of OP-1 to Stryker. We anticipate
that research and development contract revenues in the year ending December 31,
1999, will be substantially less than the year ended December 31, 1998, because
we sold the manufacturing operations to Stryker. We do not anticipate
significant research and development contract revenues from Stryker in the year
ending December 31, 1999.

License fees and royalties revenues in the year ended December 31, 1998 include
$10,000 in revenue from licensing patent rights and know-how associated with
certain protein technology which is not central to our business.

Interest revenues decreased 6% from $2,331,000 in 1997 to $2,184,000 in 1998
because we had higher average balances in cash and marketable securities in 1997
than we had in 1998. In December 1996, under the Biogen Research Agreement and a
Restricted Stock Purchase Agreement, Biogen paid to us a $10,000,000 license fee
and made an $18,000,000 equity investment in our Common Stock. In May 1998, we
sold 25,000 shares of Series 1998/A Preferred Stock. Net proceeds to us, after
deducting fees and other expenses of the offering, were approximately
$23,618,000. In addition, we received approximately $20,000,000 in the fourth
quarter of 1998 from the sale of our OP-1 manufacturing related assets to
Stryker.

Our total costs and expenses, consisting primarily of research and development
expenses, increased 6% from $32,085,000 in the year ended December 31, 1997, to
$34,020,000 in the year ended December 31,1998. Research and development
expenses decreased 1% from $25,122,000 in 1997 to $24,856,000 in 1998. Our
research and development expenses for 1998 are slightly less than 1997 due to
the sale of our OP-1 manufacturing rights and facilities to Stryker in November
1998 and the elimination of manufacturing and facility-related expenses. We
anticipate that research and development expenses in 1999 will be substantially
less than in 1998, due to the sale of the manufacturing facilities to Stryker
and the elimination of manufacturing and facility-related expenses. During 1998,
our research and development expenses included the following activities:

- - Work in preparation for the filing of a PMA application and work in prepa-
  ration for the FDA regulatory review of Stryker's bone graft substitute
  product;
- - Manufacturing of OP-1 and OP-1 devices;
- - Research into renal disease therapy as part of the Biogen collaboration; and
- - Research into neurological disease therapies and other indications proprietary
  to us.

Stryker initiated a modular PMA filing for the bone graft substitute product
following a 122 patient pivotal trial in the treatment of tibial non-union
fractures which was presented at the American Academy of Orthopaedic Surgeons in
March 1998. In connection with the FDA review of the manufacturing module, we
completed revalidating certain manufacturing processes in 1998 and Stryker has
stated that it is working to complete the submission of the modular PMA to the
FDA. We used the manufacturing facility in Lebanon, New Hampshire in 1998 for
the production of OP-1 for use by Stryker and us. We reported the costs
associated with such production of OP-1 as research and development expenses.

General and administrative expenses increased 15% from $6,473,000 in 1997 to
$7,475,000 in 1998. The increase primarily is due to approximately $600,000 in
increased costs associated with additions to our legal and administrative staff
and from increases in external legal and other consulting costs and from costs
associated with our administrative office.




                                       24
   26
In November 1998, we sold our OP-1 manufacturing rights and facilities to
Stryker. We expect that the sale will provide us with increased royalties on
Stryker products, if approved for commercial sale, in lieu of the manufacturing
revenue anticipated under the prior agreement. Proceeds and expenses associated
with this transaction included the following:


                                                      
Total proceeds                                           $ 19,530,000
Less:
  Net book value of manufacturing related assets           18,929,000
  Employee termination costs                                1,438,000
  Legal, accounting and consulting costs                      525,000
                                                         ------------
Loss on sale of manufacturing operations                 $ (1,362,000)
                                                         ============


We recorded a charge of $1,362,000 in the quarter ended December 31, 1998, in
connection with this transaction.

Interest expense increased 51% from $216,000 in 1997 to $327,000 in 1998. The
increase in interest expense is due to an increase in our obligations under an
equipment lease agreement. As part of the sale to Stryker of the manufacturing
related assets, Stryker assumed $710,000 of our obligations under equipment
lease agreements and $1,727,000 of our obligations under a facility capital
lease.

As a result of the foregoing, we incurred a net loss of $21,395,000 in the year
ended December 31, 1998, compared to a net loss of $16,652,000 in the year ended
December 31, 1997.

Accretion on Series 1998/A Preferred Stock for the year ended December 31, 1998,
includes $733,000, calculated at the rate of 5% per annum of the stated value of
the outstanding Series 1998/A Preferred Stock from May 27, 1998 and $254,000 of
accretion of issuance costs related to the sale of Series 1998/A Preferred
Stock. We are accreting the Series 1998/A Preferred Stock up to its conversion
value.

In computing the net loss applicable to common stockholders for the year ended
December 31, 1998, accretion of the Series 1998/A Preferred Stock mentioned
above is included.

YEARS ENDED DECEMBER 31, 1997 AND 1996 

Our revenues in the year ended December 31, 1997 were $15,433,000. Our revenues
in the year ended December 31, 1996 were $22,352,000. Research and development
contract revenues increased 129% from $5,548,000 in 1996 to $12,693,000 in 1997.
The increase in research and development contract revenues from 1996 to 1997
primarily is a result of research activity under the research collaboration with
Biogen including revenue from the supply of OP-1 to Biogen pursuant to the
Biogen Research Agreement.

Manufacturing contract revenues in 1996 reflect manufacturing for Biogen, under
the Manufacturing Contract, conducted at the Company's manufacturing facility in
Lebanon, New Hampshire. Manufacturing contract revenues in 1997 reflect
manufacturing for Biogen, under a Service Agreement separate from the Biogen
Research Agreement and Manufacturing Contract, conducted at the Company's
research facility in Hopkinton, Massachusetts.

License fees and royalties revenues in 1996 include:

- - a $10,000,000 license fee from Biogen as part of our research collaboration to
  develop products for the treatment of renal disorders;
- - $500,000 from Stryker for our licensing to Stryker of certain patent rights
  and know-how in the dental field; and
- - $622,000 for licensing patent rights and know-how associated with certain
  protein technology which is not central to our business.



                                       25
   27
Interest revenues increased 99% from $1,174,000 in 1996 to $2,331,000 in 1997.
Interest revenue increased because we had higher average balances in cash and
marketable securities in 1997 than we had in 1996. In December 1996, under the
Biogen Research Agreement and a Restricted Stock Purchase Agreement, Biogen paid
to us a $10,000,000 license fee and made an $18,000,000 equity investment in our
Common Stock.

Our total costs and expenses, consisting primarily of research and development
expenses, increased 30% from $24,592,000 in the year ended December 31, 1996 to
$32,085,000 in the year ended December 31, 1997. Research and development
expenses increased 61% from $15,651,000 in 1996 to $25,122,000 in 1997. From
1996 to 1997, we expanded our research and development activities to include the
following:

- - Work in preparation for the filing of a PMA application and work in
  preparation for the FDA regulatory review of Stryker's bone graft substitute
  product;
- - Research into renal disease therapy as part of the Biogen collaboration; and
- - Research into neurological disease therapies and other indications proprietary
  to us.

In addition, in 1997 we used the manufacturing facility in Lebanon, New
Hampshire for the production of OP-1 for use by Stryker, Biogen and us. We
reported the costs associated with such production of OP-1 as research and
development expenses.

Cost of manufacturing contracts consists of the costs associated with our
manufacturing activities for Biogen, discussed under manufacturing contract
revenues above.

General and administrative expenses increased 32% from $4,901,000 in 1996 to
$6,473,000 in 1997. The increase primarily is due to increased costs associated
with additions to our legal, corporate communications, business development and
other administrative staff.

As a result of the foregoing, we incurred a net loss of $16,652,000 in the year
ended December 31, 1997, compared to a net loss of $2,240,000 in the year ended
December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, our principal sources of liquidity consisted of cash, cash
equivalents and marketable securities of $57,935,000 and $309,000 remaining on
an equipment lease line, as discussed further below. We have financed our
operations primarily through placements of equity securities, revenues received
under agreements with collaborative partners, and more recently, manufacturing
contracts and the sale of our OP-1 manufacturing rights and facilities to
Stryker.

We reduced our investment in property, plant and equipment to $7,702,000 at
December 31, 1998 from $31,378,000 at December 31, 1997, as a result of the
sale of our manufacturing facilities to Stryker. We currently plan to spend
approximately $1,500,000 in the year ending December 31, 1999 in leasehold
improvements and equipment purchases to upgrade our research and development
capabilities. In October 1997, we entered into a master lease agreement to
provide for the lease financing of up to $2,000,000 of laboratory and office
equipment. At December 31, 1998, $309,000 is available under this lease
commitment.

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

The Series 1998/A Preferred Stock is convertible into the number of shares of
our Common Stock, equal to the stated value plus accretion of 5% per annum
divided by the then applicable Conversion Price. The Conversion Price is equal
to the average of the five lowest closing bid prices of the Common Stock during
the twenty consecutive trading days immediately preceding the conversion date.
From May 1998 through May 1999, the Conversion Price may not exceed $10.00. From
June 1999 through January 2000, the Conversion Price may not exceed $11.00.
There are certain limits on the number of shares of Series 1998/A Preferred
Stock that Investors may convert per month from May 1998 through January 2000
and no investor will be permitted at



                                       26
   28
any time to convert an amount of shares of Series 1998/A Preferred Stock which
would result in such Investor owning more than 4.9% of the then outstanding
Common Stock. The maximum total number of shares issuable upon conversion of the
Series 1998/A Preferred Stock is 6,701,170.

The Series 1998/A Preferred Stock is subject to redemption for cash at varying
percentages of the stated value plus accretion of 5% per annum. We may redeem
all or a portion of the Series 1998/A Preferred Stock under certain conditions
summarized below:

- - At a redemption percentage of 115% of the stated value; or
- - At a redemption percentage of 105% of the stated value if the market price of
  the Common Stock falls below certain thresholds.

We may also redeem the Series 1998/A Preferred Stock at redemption percentages
ranging from 130% to 135% in connection with certain acquisitions of Creative
BioMolecules, Inc.

We may be required to redeem all or a portion of the Series 1998/A Preferred
Stock under certain conditions listed below:

- - At a redemption percentage of 110% of the stated value upon the occurrence of
  certain events described in the Certificate of Designations for the Series
  1998/A Preferred Stock; or
- - At a redemption percentage of 100% of the stated value if the market price of
  the Common Stock falls below certain thresholds.

If we are required to redeem all or a portion of the outstanding Series 1998/A
Preferred Stock, such redemption may significantly reduce our available cash.

Any shares of Series 1998/A Preferred Stock not converted into Common Stock by
May 2001 will convert into Common Stock at the then effective Conversion Price.
During the six month period ended December 31, 1998, holders of Series 1998/A
Preferred Stock elected to convert 1,586 shares of Series 1998/A Preferred Stock
into 732,370 shares of Common Stock. We are investigating the possibility of
restructuring the Series 1998/A Preferred Stock. Such a restructuring may
require us to redeem some portion of the Series 1998/A Preferred Stock and thus
may reduce our available cash.

In November 1998, we sold our OP-1 manufacturing rights and facilities to
Stryker for total proceeds of $19,530,000. We expect that the sale will provide
us with increased royalties on Stryker products, if approved for commercial
sale, in lieu of the manufacturing revenues anticipated under the prior
agreement. We will pay approximately $903,000 of accrued costs, principally
representing future cash outlays for employee termination costs, in the year
ending December 31, 1999. In prior years, we received significant revenue from
Stryker for research support and the supply of OP-1. As a result of the sale of
our OP-1 manufacturing rights and facilities to Stryker, we anticipate
significantly reduced research funding in the year ending December 31, 1999.

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

We anticipate that our existing capital resources should enable us to maintain
our current and planned operations through 2001, assuming we are not required to
redeem all or a portion of the outstanding Series 1998/A Preferred Stock. We
expect to incur substantial additional research and development and other costs,
including costs related to preclinical studies and clinical trials. Our ability
to continue funding planned operations is dependent upon our ability to generate
sufficient cash flow from royalties on Stryker products, if approved for
commercial sale, from collaborative arrangements and from additional funds
through equity or debt financings, or from other sources of financing, as may be
required. We are seeking additional collaborative arrangements and also expect
to raise funds through one or more financing transactions, if



                                       27
   29
conditions permit. Over the longer term, because of our significant long-term
capital requirements, we intend to raise funds when conditions are favorable,
even if we do not have an immediate need for additional capital at such time. If
Stryker products are not approved for commercial sale and we do not receive
royalties from Stryker and substantial additional funding is not available, our
business will be materially and adversely affected.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which the
Company will be required to adopt effective January 1, 2000. SFAS No. 133
establishes standards for reporting and accounting for derivative instruments,
and conforms the requirements for treatment of hedging activities across the
different types of exposures hedged. The Company has not yet completed its
evaluation of SFAS No. 133, and is therefore unable to disclose the impact
adoption will have on its consolidated financial position or results of
operations.

YEAR 2000 COMPLIANCE

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

We have developed a plan to address the Year 2000 issues. In 1998, we conducted
a review of our computer systems to identify those areas that could be affected
by the Year 2000 issue. We also completed implementation of a new financial
accounting system that the vendor designed to properly process transactions
which could be impacted by the Year 2000 problem. We presently believe that,
with routine upgrades to existing hardware and software systems, the Year 2000
problem will not pose significant operational problems.

We also are communicating with our significant suppliers and customers to
determine the progress such suppliers and customers are making in remediating
their own Year 2000 issues. We are requiring that such significant suppliers and
customers certify that those products and services that are used in our
operations are Year 2000 compliant. If such upgrades are not made, are not
completed timely, or if any of our suppliers or customers do not successfully
deal with the Year 2000 issue, the Year 2000 issue could have a material impact
on our operations. We could experience delays in receiving or sending our
products that would increase our costs and that could cause us to lose business
and even customers and could subject us to claims for damages. Problems with the
Year 2000 issue could also result in delays in invoicing our customers or in us
receiving payments from them. In addition, our research and development efforts,
which rely on the storage and retrieval of electronic information, could be
interrupted resulting in the loss of current collaborations, and the impairment
of our ability to enter into new collaborations. The severity of these possible
problems would depend on the nature of the problem and how quickly it could be
corrected or an alternative implemented, which is unknown at this time. In the
extreme, such problems could bring our operations to a standstill.

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



                                       28
   30
material to date. Both direct and indirect costs of addressing the Year 2000
issue will be charged to earnings as incurred.

To date, our Year 2000 remediation costs have not been material to our financial
position or results of operations and we believe that future costs to complete
such remediation will not be material to our financial position or results of
operations. We expect to complete the remediation of our Year 2000 issues by the
end of the second fiscal quarter of 1999. We have not yet developed a
contingency plan to address any unresolved Year 2000 issues but presently intend
to develop a contingency plan before the end of the second fiscal quarter of
1999. Some risks of the Year 2000 issue, however, are beyond our control and the
control of our suppliers and customers. For example, no preparations or
contingency plan will protect us from a downturn in economic activity caused by
the possible ripple effect throughout the entire economy caused by the year 2000
issue.

CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS

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

- - Our reliance on current and prospective collaborative partners to supply funds
  for research and development and to commercialize our products;
- - Uncertainty as to timing of and our ability to commercialize our products;
- - Our reliance on our lead product candidate and our lack of control over the
  clinical progress of several applications for our products, which are
  controlled by our collaborative partners;
- - Our reliance on programs in various stages of preclinical development and
  early stage research;
- - Our reliance on key management personnel;
- - Intense competition related to the research and development of morphogenic and
  other proteins for various applications and therapies and the possibility that
  others may discover or develop, and we may not be able to gain rights with
  respect to, the technology necessary to commercialize our products;
- - Our lack of development, commercial manufacturing, marketing and sales
  experience and the risk that any products that we develop may not be able to
  be marketed at acceptable prices or receive commercial acceptance in the
  markets that we expect to target;
- - Uncertainty regarding the effect on our operations of the Year 2000 issue;
- - Uncertainty related to market conditions affecting the biotechnology industry;
- - Uncertainty as to the extent of future government regulation of our business;
- - Uncertainty related to the Series 1998/A Preferred Stock; and
- - Uncertainty as to whether there will exist adequate reimbursement for our
  products from government, private health insurers and other organizations.

As a result, our future development and commercialization efforts involve a high
degree of risk. For further information, refer to the more specific risks and
uncertainties described in "Risk Factors" and throughout this annual report on
Form 10-K.




                                       29
   31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




                                       30
   32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                      PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                           NUMBER
- ------------------------------------------                           ------

Creative BioMolecules, Inc. and Subsidiary:

    Financial Statements:

       Independent Auditors' Report..................................  32

       Consolidated Balance Sheets...................................  33

       Consolidated Statements of Operations.........................  34

       Consolidated Statements of Comprehensive Loss.................  34

       Consolidated Statements of Stockholders' Equity...............  35

       Consolidated Statements of Cash Flows.........................  36

       Notes to Consolidated Financial Statements....................  37




                                       31
   33
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, 1998 and 1997, and the
related consolidated statements of operations, comprehensive loss,
stockholders'equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 26, 1999




                                       32
   34
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------


                                                                              December 31,
                                                                      ------------------------------
                                                                           1998             1997
                                                                      -------------     ------------
                                                                                  
ASSETS
- ------
CURRENT ASSETS:
  Cash and cash equivalents                                           $  17,738,044     $  2,158,909
  Marketable securities                                                  40,197,407       28,438,841
  Accounts receivable                                                       669,232        4,572,518
  Inventory                                                                  28,733        1,249,330
  Prepaid expenses and other                                                272,168          284,649
                                                                      -------------     ------------
    Total current assets                                                 58,905,584       36,704,247
                                                                      -------------     ------------

PROPERTY, PLANT AND EQUIPMENT - net                                       1,925,602       17,245,338
                                                                      -------------     ------------

OTHER ASSETS:
  Notes receivable - officers                                               116,668          273,334
  Patents and licensed technology - net                                     375,000          417,070
  Deferred patent application costs - net                                 4,732,629        4,220,080
  Deposits and other                                                        108,574          177,930
                                                                      -------------     ------------
     Total other assets                                                   5,332,871        5,088,414
                                                                      -------------     ------------
TOTAL                                                                 $  66,164,057     $ 59,037,999
                                                                      =============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
  Lease obligations - current portion                                 $     165,934     $    124,575
  Accounts payable                                                        1,621,417        2,311,710
  Accrued liabilities                                                     2,508,161          575,171
  Accrued compensation                                                    1,335,692        1,312,274
  Deferred revenue                                                        3,661,279
                                                                      -------------     ------------
     Total current liabilities                                            9,292,483        4,323,730
                                                                      -------------     ------------

LEASE OBLIGATIONS                                                           713,459        2,004,927
                                                                      -------------     ------------

COMMITMENTS (Notes 7 and 12)

SERIES 1998/A PREFERRED STOCK, $.01 par value 23,414 shares
issued and outstanding at December 31, 1998, liquidation
preference of $24,113,598 at December 31, 1998                           23,052,787
                                                                      -------------     ------------

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
23,414 and none issued and outstanding at December 31, 1998 and
1997, respectively Common Stock, $.01 par value, 100,000,000 shares
authorized, 34,457,469 shares and 33,392,582 shares issued and
outstanding at December 31, 1998 and 1997, respectively                     344,575          333,926
  Additional paid-in capital                                            143,127,113      140,465,512
  Accumulated other comprehensive income                                    105,461
  Accumulated deficit                                                  (110,471,821)     (88,090,096)
                                                                      -------------     ------------
     Total stockholders' equity                                          33,105,328       52,709,342
                                                                      -------------     ------------
TOTAL                                                                 $  66,164,057     $ 59,037,999
                                                                      =============     ============


See notes to consolidated financial statements




                                       33
   35
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------



                                                          Years Ended December 31,
                                                -------------------------------------------
                                                    1998            1997           1996
                                                ------------    ------------    -----------
                                                                       
REVENUES:
  Research and development contracts            $ 10,419,071    $ 12,692,475    $ 5,547,976
  Manufacturing contracts                                           393,926       4,485,531
  License fees and royalties                          10,000                     11,122,584
  Interest                                         2,183,472       2,330,743      1,174,219
  Other                                               12,391          15,615         21,900
                                                ------------    ------------    -----------
     Total revenues                               12,624,934      15,432,759     22,352,210
                                                ------------    ------------    -----------

COSTS AND EXPENSES:
  Research and development                        24,856,147      25,122,039     15,650,986
  Cost of manufacturing contracts                                    273,757      3,823,442
  General and administrative                       7,474,372       6,472,821      4,900,823
  Sale of manufacturing operations                 1,362,249
  Interest                                           327,304         215,815        216,906
                                                ------------    ------------    -----------
     Total costs and expenses                     34,020,072      32,084,432     24,592,157
                                                ------------    ------------    -----------

NET LOSS                                         (21,395,138)    (16,651,673)    (2,239,947)
                                                ------------    ------------    -----------

ACCRETION ON SERIES 1998/A
PREFERRED STOCK                                     (986,587)
                                                ------------    ------------    -----------

NET LOSS APPPLICABLE TO COMMON
STOCKHOLDERS                                    $(22,381,725)   $(16,651,673)   $(2,239,947)
                                                ============    ============    ===========

BASIC AND DILUTED LOSS PER COMMON SHARE         $      (0.66)   $      (0.50)   $     (0.07)
                                                ============    ============    ===========

COMMON SHARES FOR BASIC

AND DILUTED LOSS COMPUTATION                      33,672,105      33,078,120     30,062,334
                                                ============    ============    ===========

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
- ---------------------------------------------
NET LOSS                                        $(21,395,138)   $(16,651,673)   $(2,239,947)

UNREALIZED GAIN ON MARKETABLE SECURITIES             105,461
                                                ------------    ------------    -----------

COMPREHENSIVE LOSS                              $(21,289,677)   $(16,651,673)   $(2,239,947)
                                                ============    ============    ===========



See notes to consolidated financial statements




                                       34
   36
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------



                                                                                                         Accumulated
                                          Common Stock       Common        Additional                       Other
                                   ---------------------      Stock          Paid-in      Accumulated   Comprehensive
                                     Shares      Amount      Payable         Capital        Deficit         Income         Total
                                   ----------   --------   -----------    ------------   -------------  -------------  ------------
                                                                                                  
BALANCE, JANUARY 1, 1996           28,894,996   $288,950   $ 1,736,586    $105,001,625   $ (69,198,476)    $      0    $ 37,828,685

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)       2,000,000     20,000                    12,696,744                                   12,716,744
Issuance of Common Stock in
 connection with research
 collaboration                      1,542,680     15,427                    17,984,573                                   18,000,000
Stock based compensation                                                        17,000                                       17,000
Other issuances of Common Stock       331,877      3,319                       935,274                                      938,593
Net loss                                                                                    (2,239,947)                  (2,239,947)
                                   ----------   --------   -----------    ------------   -------------     --------    ------------

BALANCE, DECEMBER 31, 1996         32,769,553    327,696             0     138,371,802     (71,438,423)           0      67,261,075

Stock based compensation                                                       254,350                                      254,350
Other issuances of Common Stock       623,029      6,230                     1,839,360                                    1,845,590
Net loss                                                                                   (16,651,673)                 (16,651,673)
                                   ----------   --------   -----------    ------------   -------------     --------    ------------

BALANCE, DECEMBER 31, 1997         33,392,582    333,926             0     140,465,512     (88,090,096)           0      52,709,342

Conversions of Series 1998/A
 Preferred Stock into Common Stock    732,370      7,324                     1,544,842                                    1,552,166
Stock based compensation               48,000        480                       321,520                                      322,000
Other issuances of Common Stock       284,517      2,845                       795,239                                      798,084
Unrealized gain on marketable
 securities                                                                                                 105,461         105,461
Accretion on Series 1998/A
 Preferred Stock                                                                              (986,587)                    (986,587)
Net loss                                                                                   (21,395,138)                 (21,395,138)
                                   ----------   --------   -----------    ------------   -------------     --------    ------------

BALANCE, DECEMBER 31, 1998         34,457,469   $344,575   $         0    $143,127,113   $(110,471,821)    $105,461    $ 33,105,328
                                   ==========   ========   ===========    ============   =============     ========    ============


  See notes to consolidate financial statements




                                       35
   37

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



                                                                   1998            1997            1996
                                                               ------------    ------------    ------------
                                                                                      

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                       $(21,395,138)   $(16,651,673)   $ (2,239,947)
                                                               ------------    ------------    ------------
Adjustments to reconcile net loss to net cash used:
  Gain on disposal of manufacturing related assets                 (600,839)
  Depreciation and amortization                                   2,485,753       2,103,906       2,423,002
  Compensation expense                                              371,999         254,350          35,249
  Deferred patent and application costs                                             188,055
  Increase (decrease) in cash from:
    Accounts receivable                                           3,903,286      (3,117,822)      1,345,673
    Inventory and prepaid expenses                                 (104,428)         16,821        (839,405)
    Accounts payable and accrued liabilities                      1,266,115        (653,619)      3,151,969
    Deferred contract revenue                                     3,661,279
                                                               ------------    ------------    ------------
     Total adjustments                                           10,983,165      (1,208,309)      6,116,488
                                                               ------------    ------------    ------------

    Net cash provided by (used  for) operating activities       (10,411,973)    (17,859,982)      3,876,541
                                                               ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities                               (30,021,298)    (28,254,756)    (17,362,723)
Sale of marketable securities                                    18,368,193      11,642,181      13,620,727
Expenditures for property, plant and equipment                   (2,849,288)     (2,810,611)     (3,778,278)
Expenditures for patents                                         (1,120,609)     (1,131,303)     (1,191,591)
Note receivable from officer                                        (10,000)        (40,000)       (350,000)
Repayment of note receivable from officer                           116,667         116,666
Decrease (increase) in deposits and other                            12,549         113,020         (32,477)
Proceeds from sale of manufacturing related assets               17,092,322
                                                               ------------    ------------    ------------
    Net cash provided by (used for) for investing activities      1,588,536     (20,364,803)     (9,094,342)
                                                               ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
  Series 1998/A Preferred Stock                                  25,000,000
  Public placement of Common Stock                                                               14,000,000
  Private placement of Common Stock                                                              18,000,000
  Common Stock - other                                              798,084       1,880,590         880,698
Costs of raising equity                                          (1,381,634)        (35,000)     (1,283,236)
Increase in obligations under capital leases                        193,524         346,766
Repayments of obligations under capital leases                     (207,402)        (57,650)        (48,452)
                                                               ------------    ------------    ------------
    Net cash provided by financing activities                    24,402,572       2,134,706      31,549,010
                                                               ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                             15,579,135     (36,090,079)     26,331,209

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR                                                 2,158,909      38,248,988      11,917,779
                                                               ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                         $ 17,738,044    $  2,158,909    $ 38,248,988
                                                               ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under
 capital lease obligations                                     $  1,089,164    $    135,361
                                                               ============    ============

Capital leases assumed by buyer in connection
with sale of manufacturing operations                          $  2,437,802
                                                               ============

Conversion of Series 1998/A Preferred Stock                    $  1,552,166
                                                               ============



See notes to consolidated financial statements




                                       36
   38
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, Inc. ("the Company") is a
           discovery and development company focused on proprietary
           protein-based therapeutics for human tissue regeneration and
           restoration. The Company's therapeutics are based on proteins that
           act as signals in initiating and regulating the cellular events
           involved in tissue regeneration and organ formation.

           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. Such estimates include
           collectability of receivables, carrying value of property and
           equipment, intangible assets and certain liabilities. Actual results
           may differ from such estimates.

           RECLASSIFICATIONS - Certain amounts in prior years have been
           reclassified to conform to the current year presentation.

           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 or sales of products. 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 provided for technical
           collaboration and manufacturing for third parties. Revenue was earned
           and recognized based upon work performed. The Company sold its
           manufacturing facilities to Stryker Corporation in November 1998
           (Note 2).

           During the years ended December 31, 1998, 1997 and 1996, total
           revenues from major customers as a percent of total revenues of the
           Company were as follows:

                                       Years Ended December 31,
                                     ----------------------------
           Customer                  1998        1997        1996
           --------                  ----        ----        ----

           Biogen, Inc.               28%         50%         65%
           Stryker Corporation        55%         34%         27%

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




                                       37
   39
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


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

           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 have been
           designated as "available for sale" and are stated at market value
           with any unrealized holding gains or losses included as a component
           of stockholders' equity.

           The Company's marketable securities portfolio included approximately
           $40,197,000 and $25,415,000 in corporate bonds and notes as of
           December 31, 1998 and 1997, respectively, and approximately
           $3,024,000 in United States Government and agency instruments as of
           December 31, 1997, all with maturities ranging from one to
           twenty-nine months.

           For the years ended December 31, 1998, 1997 and 1996, gross realized
           gains and losses were not material. In computing gross realized gains
           and losses, the Company computes the cost of its investments on a
           specific identification basis. Such cost includes the direct cost to
           acquire the securities, adjusted for the amortization of premiums or
           accretion of discounts. At December 31, 1998, gross unrealized gains
           and losses were $126,000 and $21,000, respectively. At December 31,
           1997, 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.

           The estimated fair value of cash, accounts and notes 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. The carrying amounts of the Company's
           lease obligations also approximate fair value (Note 7).

           INVENTORY - Inventory consists principally of raw materials and
           laboratory supplies. Inventories are stated at the lower of cost
           (First-in, First-out) 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 twenty-five years) or the remaining terms of the
           leases. Effective January 1, 1997, the Company revised its estimate
           of the useful life of its manufacturing facility in Lebanon, New
           Hampshire from sixteen to twenty-five years. The effect of this
           change in estimate was a $320,000 reduction in amortization expense
           for the year ended December 31, 1997. The Company believes that the
           revised life more closely reflected the number of years of economic
           benefit expected to be received from this facility. The Company,
           however, sold its manufacturing facilities to Stryker in November
           1998 (Note 2).




                                       38
   40
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

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

           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 $669,000 and $493,000 at
           December 31, 1998 and 1997, 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.

           BASIC AND DILUTED LOSS PER COMMON SHARE - Basic loss per common share
           is computed after giving effect to accretion on Series 1998/A
           Preferred Stock using the weighted average number of common shares
           outstanding during each year. Diluted loss per common share reflects
           the effect of the Company's outstanding options and warrants, except
           where such items would be anti-dilutive. In 1998, 1997 and 1996, the
           effect of stock options and warrants was anti-dilutive and,
           therefore, not included in the computation of diluted loss per share.

           STOCK-BASED COMPENSATION - The Company's stock options and purchase
           plans are accounted for under APB No. 25 ("APB 25"), "Accounting for
           Stock Issued to Employees" (Note 9).

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

           In June 1998, the FASB released Statement of Financial Accounting
           Standards No. 133, "Accounting for Derivative Instruments and Hedging
           Activities," which the Company will be required to adopt effective
           January 1, 2000. SFAS No. 133 establishes standards for reporting and
           accounting for derivative instruments, and conforms the requirements
           for treatment of hedging activities across the different types of
           exposures hedged. The Company has not yet completed its evaluation of
           SFAS No. 133, and is, therefore unable to disclose the impact
           adoption will have on its consolidated financial position or results
           of operations.




                                       39
   41
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

2.         SALE OF MANUFACTURING OPERATIONS

           In November 1998, the Company sold its OP-1 manufacturing rights and
           facilities to Stryker. The transaction is expected to provide the
           Company with increased royalties on Stryker products, if approved for
           commercial sale, in lieu of the manufacturing revenue anticipated
           under the prior agreement.

           Proceeds and expenses associated with this transaction included the
           following:

           Total proceeds                                      $19,530,124
           Less:
             Net book value of manufacturing related assets     18,929,283
             Employee termination costs                          1,437,974
             Legal, accounting and consulting costs                525,116
                                                               -----------
           Loss on sale of manufacturing operations            $(1,362,249)
                                                               ===========

           As a result, the Company recorded a charge of $1,362,249 in the
           quarter ended December 31, 1998. Approximately $903,000 of accrued
           costs, principally representing future cash outlays for employee
           termination costs, remains to be paid in the year ending December 31,
           1999.

3.         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 based on OP-1 for the treatment of renal
           disorders. The initial focus of the collaboration was 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 non-refundable $10,000,000 license fee in 1996 and made an
           $18,000,000 equity investment (Note 10) each of which were recorded
           in the quarter ended December 31, 1996. In addition, the agreement
           provided for $10,500,000 in research funding over a three-year period
           ending December 31, 1999, of which $7,500,000 has been recognized
           through December 31, 1998. In December 1998, Biogen and the Company
           signed an Amendment Agreement and Biogen paid $3,000,000 in research
           support for the year ending December 31, 1999. The $3,000,000 is
           recorded as deferred revenue in the Consolidated Balance Sheet. Under
           the Amendment Agreement, the Company will assume primary
           responsibility for the development of the Company's morphogenic
           protein, OP-1, for the treatment of renal disorders and Biogen will
           retain an option through 1999 to resume responsibility for
           development of OP-1 as a therapy for chronic renal failure. The
           Company will assume all rights and responsibilities, independent of
           Biogen, for the development of acute renal failure therapies.




                                       40
   42
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

4.         NOTES RECEIVABLE - OFFICERS

           In July 1997, the Company loaned $40,000 to an officer of the
           Company. The loan was evidenced by a fully secured promissory note
           bearing interest at the annual rate of 6.65%. Twenty-five percent of
           the principal and accrued interest was forgiven on February 7, 1998
           and then an equal portion of the principal sum and accrued interest
           was to have been forgiven monthly over the remaining term of
           thirty-six months, provided the officer was employed by the Company.
           In July 1998, the Company loaned an additional $10,000 to the
           officer. In December 1998, as part of a severance agreement, the
           Company agreed to forgive the remaining principal of $31,700 plus
           accrued interest.

           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.

5.         PROPERTY, PLANT AND EQUIPMENT

           Property, plant and equipment consisted of the following:



                                                           December 31,
                                                   ----------------------------
                                                       1998            1997
                                                   -----------     ------------
                                                             
  Land                                             $               $    352,000
  Building                                                            1,500,000
  Laboratory equipment and furniture                 4,954,427        8,978,922
  Leasehold improvements                               572,319       17,553,847
  Office furniture and equipment                     2,174,991        2,992,847
                                                   -----------     ------------
                                                     7,701,737       31,377,616
  Less accumulated depreciation and amortization    (5,776,135)     (14,132,278)
                                                   -----------     ------------
  Total                                            $ 1,925,602     $ 17,245,338
                                                   ===========     ============



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



                                                           December 31,
                                                   ----------------------------
                                                       1998            1997
                                                   -----------     ------------
                                                             
  Land                                             $               $    352,000
  Building                                                            1,500,000
  Laboratory equipment and furniture                   913,176          393,767
  Office furniture and equipment                       312,024          135,361
                                                   -----------     ------------
                                                     1,225,200        2,381,128
  Less accumulated amortization                       (201,094)        (506,671)
                                                   -----------     ------------
  Total                                            $ 1,024,106     $  1,874,457
                                                   ===========     ============










                                       41
   43
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

6.       ACCRUED LIABILITIES

         Accrued liabilities consisted of the following:



                                                   December 31,
                                            -------------------------
                                                1998           1997
                                             ----------      --------
                                                       
         Severance and related costs         $  903,330      $
         Research collaboration costs         1,332,291       241,486
         Other                                  272,540       333,685
                                             ----------      --------
         Total                               $2,508,161      $575,171
                                             ==========      ========


7.       LEASE OBLIGATIONS

         In October 1997, the Company entered into a master lease agreement to
         provide for the lease financing for up to $2,000,000 of laboratory
         and office equipment. At December 31, 1998, approximately $309,000 is
         available under this lease agreement.

         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 $1,037,000,
         $775,000, and $566,000 for the years ended December 31, 1998, 1997
         and 1996, respectively.

         Future minimum lease obligations at December 31, 1998, were as
         follows:



                 Year Ending December 31,              Capital        Operating
       --------------------------------------------  ----------      ----------
                                                               
       1999                                          $  278,038      $  998,269
       2000                                             278,038         991,498
       2001                                             278,038         683,247
       2002                                             256,570         270,683
       2003                                              63,825           8,399
       Thereafter
                                                     ----------      ----------
       Total minimum lease payments                   1,154,509      $2,952,096
       Less amount representing interest                275,116      ==========
                                                     ----------      
       Present value of net minimum lease payments      879,393
       Less current portion                             165,934
                                                     ----------
      Long-term obligations under capital leases     $  713,459
                                                     ==========







                                       42
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CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

8.         SERIES 1998/A PREFERRED STOCK

           On May 27, 1998 (the "Issue Date"), the Company completed a private
           placement with three institutional investors (the "Investors") for
           the sale of 25,000 shares of Series 1998/A Preferred Stock, $.01 par
           value per share (the "Series 1998/A Preferred Stock"), with a stated
           value of $1,000 per share resulting in gross proceeds of $25,000,000.
           Issuance costs totaled approximately $1,382,000 (offset against the
           Series 1998/A Preferred Stock proceeds in the accompanying balance
           sheet at December 31, 1998). Accretion of the issuance costs will be
           recorded on the interest method from Issue Date through May 2001. The
           Series 1998/A Preferred Stock places certain restrictions on the
           Company's ability to incur additional debt.

           The Series 1998/A Preferred Stock is convertible into the number of
           shares of the Company's Common Stock, $.01 par value per share (the
           "Common Stock") equal to the stated value plus accretion of 5% per
           annum divided by the then applicable conversion price. The conversion
           price is equal to the average of the five lowest closing bid prices
           of the Common Stock during the twenty consecutive trading days
           immediately preceding the conversion date (the "Conversion Price").
           From the Issue Date through May 1999, the Conversion Price may not
           exceed $10.00. From June 1999 through January 2000, the Conversion
           Price may not exceed $11.00. The Investors are subject to certain
           limits on the number of shares of Series 1998/A Preferred Stock that
           they can convert per month from the Issue Date through January 2000
           and no Investor will be permitted at any time to convert an amount of
           shares of Series 1998/A Preferred Stock which would result in such
           Investor owning more than 4.9% of the then outstanding Common Stock.

           The Series 1998/A Preferred Stock is subject to redemption at varying
           percentages of the stated value plus accretion of 5% per annum. The
           Company may redeem all or a portion of the Series 1998/A Preferred
           Stock (i) at a redemption percentage of 115% of the stated value or
           (ii) if the market price of the Common Stock falls below certain
           thresholds, at a redemption percentage of 105% of the stated value.
           The Company may also redeem the Series 1998/A Preferred Stock in
           connection with certain acquisitions of the Company at redemption
           percentages ranging from 130% to 135% of the stated value. Upon the
           occurrence of certain events described in the Certificate of
           Designations, the Company may be required to redeem the Series 1998/A
           Preferred Stock at a redemption percentage of 110% of the stated
           value. If the market price of the Common Stock falls below certain
           thresholds, the Company may be required to redeem a portion of the
           outstanding Series 1998/A Preferred Stock at a redemption percentage
           of 100% of the stated value. Any shares of Series 1998/A Preferred
           Stock not converted into Common Stock by May 2001 will convert into
           Common Stock at the then effective Conversion Price. During the six
           month period ended December 31, 1998, holders of Series 1998/A
           Preferred Stock elected to convert 1,586 shares of Series 1998/A
           Preferred Stock into 732,370 shares of Common Stock. The maximum
           amount of Common Stock which can be issued upon conversion of the
           Series 1998/A Preferred stock is contractually limited to 6,701,170
           shares.




                                       43
   45
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

9.         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 6,800,000 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. At
           December 31, 1998, 1,535,355 shares were available for grant under
           the 1987 Plan.

           In April 1998, the Board of Directors adopted and in June 1998, the
           stockholders of the Company approved the 1998 Stock Plan ("1998
           Plan") which permits the granting of incentive and non-qualified
           stock options. The number of shares of Common Stock subject to the
           1998 Plan is 3,000,000. At December 31, 1998, 2,708,250 shares were
           available for grant under the 1998 Plan.

           Both the 1987 Plan and the 1998 Plan permit 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. 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.

           DIRECTOR PLAN - The 1992 Non-Employee Director Non-Qualified Stock
           Option Plan ("Director Plan") provides for the granting of options to
           purchase up to an aggregate of 300,000 shares of Common Stock to
           non-employee directors. At December 31, 1998, 90,000 shares were
           available for grant under the Director Plan.




                                       44
   46
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

9.         STOCK PLANS (CONTINUED)

           Activity under the stock option and director plans is summarized as
           follows:



                                                                                                       Weighted
                                                                                                       Average
                                                                                      Number        Exercise Price
                                                                                     of Shares         Per Share
                                                                                    ----------      --------------
                                                                                              
           Outstanding, January 1, 1996                                              3,759,560           $3.08
           Granted                                                                   1,142,100            7.95
           Exercised                                                                  (259,218)            .90
           Canceled                                                                   (152,035)           5.00
                                                                                     ---------
           Outstanding, December 31, 1996                                            4,490,407            4.29
           (1,956,557 exercisable at a weighted average price of $3.59 per share)
          
           Granted                                                                     964,500            8.72
           Exercised                                                                  (301,176)           3.42
           Canceled                                                                   (137,384)           6.61
                                                                                     ---------
           Outstanding, December 31, 1997                                            5,016,347            5.13
           (2,593,897 exercisable at a weighted average price of $4.04 per share)
          
           Granted                                                                   1,393,650            4.70
           Exercised                                                                  (211,923)           2.04
           Canceled                                                                   (431,679)           7.78
                                                                                     ---------
           Outstanding, December 31, 1998                                            5,766,395            4.94
                                                                                     =========           
          (3,505,894 exercisable at a weighted average price of $4.53 per share)


           The table below summarizes options outstanding and exercisable at
           December 31, 1998:



                                    Options Outstanding            Options Exercisable
                            ----------------------------------   ------------------------
                                         Weighted
                                         Average      Weighted   Exercisable    Weighted
                                        Remaining     Average       As of        Average
              Range of      Number of   Contractual   Exercise   December 31,    Exercise
           Exercise Price     Options        Life      Price         1998          Price
           --------------   ---------   -----------   --------   ------------   ---------
                                                                 
           $0.35 - $2.25    1,798,644       5.7        $1.97      1,171,144       $1.85
           $2.26 - $4.50    1,350,332       6.4         2.86      1,067,332        2.86
           $4.51 - $6.75      476,000       7.3         5.48        194,100        5.51
           $6.76 - $9.00    1,064,419       7.1         7.73        374,218        7.83
           Over $9.00       1,077,000       6.3         9.53        699,100        9.53
                            ---------       ---        -----      ---------       -----
           Total            5,766,395       6.4        $4.94      3,505,894       $4.53
                            =========       ===        =====      =========       =====






                                       45
   47
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

9.         STOCK PLANS (CONTINUED)

           EMPLOYEE STOCK PURCHASE PLAN - The Employee Stock Purchase Plan
           permits eligible employees to purchase Common Stock of the Company up
           to an aggregate of 750,000 shares. During the year ended December 31,
           1998, 105,815 shares were issued under this plan at prices of $3.90
           and $2.90 per share; during the year ended December 31, 1997, 62,950
           shares were issued under this plan at prices of $6.08 and $5.84 per
           share; and 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.
           In June 1998, the stockholders of the Company voted to amend the
           Employee Stock Purchase Plan to increase by 250,000 from 500,000 to
           750,000 the aggregate number of shares of Common Stock which may be
           purchased by eligible employees.

           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 25 and its related
           interpretations. Accordingly, no compensation expense has been
           recognized in the consolidated financial statements at the date of
           grant for employee stock option arrangements. In 1998, the Company
           recorded a charge of $205,000 related to a change in the vesting
           terms of stock option agreements in connection with the sale of
           manufacturing operations.

           SFAS 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 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,
           94% in 1998, 71% in 1997, and 84% in 1996; risk free interest rates,
           4.7% in 1998, 5.4% in 1997 and 5% in 1996; 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.
           The weighted average fair value of options granted was $3.49, $5.11
           and $5.16 in 1998, 1997 and 1996, respectively. If the computed fair
           values of the 1998, 1997 and 1996 awards had been amortized to
           expense over the vesting period of the awards, pro forma net loss
           would have been $25,466,000 or a net loss of $0.79 per share (basic
           and diluted) for the year ended December 31, 1998, $19,892,000 or a
           net loss of $0.60 per share (basic and diluted) for the year ended
           December 31, 1997 and $3,811,000 or a net loss of $0.13 per share
           (basic and diluted) for the year ended December 31, 1996. Because the
           SFAS 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.

           The Company also granted stock options to non-employee consultants in
           1997 and 1996. These options were valued based on the fair value of
           the services received. Total compensation expense recognized related
           to these options was $254,000 and $17,000 in 1997 and 1996,
           respectively. The Company did not grant stock options to non-employee
           consultants in 1998.



                                       46
   48
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

10.        STOCKHOLDERS' EQUITY

           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 3), 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.

           WARRANTS - In connection with a private placement offering in 1994
           and 1995, the Company sold 1,130,000 warrants, each to purchase one
           share of Common Stock. Each warrant is exercisable for a period of
           five years from the date of issuance at an exercise price of $2.385.
           At December 31, 1998, warrants to purchase 841,596 shares of Common
           Stock are outstanding.

11.        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, 1998, the Company had available net
           operating loss carryforwards of approximately $100,500,000 for income
           tax purposes. In addition, the Company had approximately $1,600,000
           of unused investment and research and development tax credits. These
           net operating loss and tax credit carryforwards will expire at
           various dates between 1999 and 2014.

           The components of deferred income taxes at December 31, 1998 and 1997
           were primarily deferred tax assets of approximately $34,100,000 and
           $27,100,000, respectively, of net operating loss carryforwards and
           approximately $1,600,000 and $1,500,000, 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, 1998 and 1997 do not satisfy the
           realization criteria set forth in SFAS No. 109 and has recorded a
           valuation allowance for the entire net asset.

12.        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 $23,000,
           $37,000 and $25,000 for the years ended December 31, 1998, 1997 and
           1996, respectively.

13.        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 $286,000, $250,000
           and $202,000 for the years ended December 31, 1998, 1997 and 1996,
           respectively.




                                       47
   49
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 1999
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 1999 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 1999 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 1999 Annual Meeting of
Stockholders.




                                       48
   50
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

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

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

Item 14(b)  REPORTS ON FORM 8-K

            Current Report on Form 8-K, dated October 13, 1998, for the October
            5, 1998 Event, relating to Registrant's press release announcing
            that it will modify its partnership with Biogen, Inc. for the
            development of therapies for the treatment of kidney failure.

            Current Report on Form 8-K, dated October 21, 1998, for the October
            16, 1998 Event, relating to Registrant's press release announcing
            the sale of its OP-1 manufacturing rights and facilities to Stryker
            Corporation, the Company's partner in orthopaedic and dental
            reconstruction.

Item 14(c)  EXHIBITS

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

            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.)

            3.3     Certificate of Designations of the Series 1998/A Preferred
                    Stock. (Filed as Exhibit 3.3 to Registrant's Report on Form
                    8-K for the May 27, 1998 Event (File No. 0-19910), 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.)




                                       49
   51
            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.
                    (Filed as Exhibit 10.4 to Registrant's Annual Report on Form
                    10-K for the period ended December 31, 1996 (File No.
                    0-19910), and incorporated herein by reference.)

            #10.5   Second Amended and Restated Research, Development and Supply
                    Agreement, As Amended, dated as of May 17, 1991, between the
                    Registrant and Stryker Corporation ("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 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.)

            10.8    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.)

            #10.9   Amendment Agreement, dated October 31, 1996, between the
                    Registrant and Stryker Corporation. (Filed as Exhibit 10.11
                    to Registrant's Annual Report on Form 10-K for the period
                    ended December 31, 1996 (File No. 0-19910), and incorporated
                    herein by reference.)

            #10.10  Master Restructuring Agreement, dated as of October 15,
                    1998, between the Registrant and Stryker Corporation.

            #10.11  Asset Purchase Agreement, dated as of October 15, 1998,
                    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.)




                                       50
   52
            10.13   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.)

            10.14   Real Estate Standard Form Industrial Lease, dated as of
                    October 24, 1988, as amended September 17, 1991, by and
                    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.)

            10.15   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.)

            10.16   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.)

            10.17   Fourth Amendment, dated April 10, 1997, to Standard Form
                    Industrial Lease dated October 24, 1988, as amended
                    September 17, 1991, January 28, 1994 and September 20, 1994,
                    by and between the Registrant and WRC Properties, Inc.
                    (Filed as Exhibit 10.53 to Registrant's Quarterly Report on
                    Form 10-Q for the period ended June 30, 1997 (File No.
                    0-19910), and incorporated herein by reference.)

            10.18   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.)

            10.19   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.)

            10.20   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.)

            10.21   Third Amendment, dated April 10, 1997, to Standard Form
                    Industrial Lease dated February 25, 1992, as amended
                    February 28, 1994 and September 20, 1994, by and between the
                    Registrant and WRC Properties, Inc. (Filed as Exhibit 10.54
                    to Registrant's Quarterly Report on Form 10-Q for the period
                    ended June 30, 1997 (File No. 0-19910), and incorporated
                    herein by reference.)



                                       51
   53
            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.)

            #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.)



                                       52
   54
            #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 period 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. (Filed as
                    Exhibit 10.37 to Registrant's Annual Report on Form 10-K for
                    the period ended December 31, 1996 (File No. 0-19910), and
                    incorporated herein by reference.)

            10.38   Amendment Agreement, dated December 30, 1998, by and between
                    the Registrant and Biogen, Inc.

            10.39   Restricted Stock Purchase Agreement, dated December 9, 1996,
                    between the Registrant and Biogen, Inc. (Filed as Exhibit
                    10.38 to Registrant's Annual Report on Form 10-K for the
                    period ended December 31, 1996 (File No. 0-19910), and
                    incorporated herein by reference.)

            10.40   Lease, dated April 10, 1997, by and between the Registrant
                    and The Prudential Insurance Company of America. (Filed as
                    Exhibit 10.55 to Registrant's Quarterly Report on Form 10-Q
                    for the period ended June 30, 1997 (File No. 0-19910), and
                    incorporated herein by reference.)



                                       53
   55
            10.41   First Amendment, dated August 10, 1998, to Lease dated April
                    10, 1997, between the Registrant and The Prudential
                    Insurance Company of America. (Filed as Exhibit 10.56 to
                    Registrant's Quarterly Report on Form 10-Q for the period
                    ended September 30, 1998 (File No. 0-19910), and
                    incorporated herein by reference.)

            10.42   Lease Agreement, dated May 15, 1998, between the Registrant
                    and Storm Meadows, Inc. (Filed as Exhibit 10.55 to
                    Registrant's Quarterly Report on Form 10-Q for the period
                    ended June 30, 1998 (File No. 0-19910), and incorporated
                    herein by reference.)

            10.43   Master Lease Agreement, dated October 6, 1997, by and
                    between the Registrant and FINOVA Technology Finance, Inc.
                    (Filed as Exhibit 10.38 to Registrant's Annual Report on
                    Form 10K for the period ended December 31, 1997 (File No.
                    0-19910), and incorporated herein by reference.)

            10.44   Form of Subscription Agreement dated May 29, 1998. (Filed as
                    Exhibit 10.54 to Registrant's Report on Form 8-K for the May
                    27, 1998 Event (File No. 0-19910), and incorporated herein
                    by reference.)

            *10.45  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.)

            *10.46  1987 Stock Plan, as amended on May 20, 1997. (Filed as
                    Exhibit 10.52 to Registrant's Quarterly Report on Form 10-Q
                    for the period ended June 30, 1997 (File No. 0-19910), and
                    incorporated herein by reference.)

            *10.47  Employee Stock Purchase Plan, as amended on April 16, 1998.
                    (Filed as Exhibit 10.41 to Registrant's Quarterly Report on
                    Form 10-Q for the period ended June 30, 1998 (File No.
                    0-19910), and incorporated herein by reference.)

            *10.48  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.)

            10.49   1998 Stock Plan. (Filed as Exhibit to Registrant's
                    Preliminary Proxy Statement for 1998 Annual Meeting of
                    Stockholders (File No. 0-19910), and incorporated herein by
                    reference.)

            *10.50  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.)

            *10.51  Employment Agreement, dated as of January 2, 1992, between
                    Charles Cohen, PhD 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.)

            *10.52  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.)




                                       54
   56
            *10.53  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.)

            *10.54  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.)

            *10.55  Employment Agreement, dated May 21, 1996, between Thomas J.
                    Facklam, PhD 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.)

            *10.56  $350,000 Promissory Note, dated September 6, 1996, from
                    Michael Tarnow to the Registrant. (Filed as Exhibit 10.56 to
                    Registrant's Quarterly Report on Form 10-Q for the period
                    ended September 30, 1997 (File No. 0-19910), and
                    incorporated herein by reference.)

            *10.57  Employment Agreement, dated January 13, 1997, between Cheryl
                    K. Lawton and the Registrant. (Filed as Exhibit 10.50 to
                    Registrant's Quarterly Report on Form 10-Q for the period
                    ended March 31, 1997 (File No. 0-19910), and incorporated
                    herein by reference.)

            *10.58  Employment Agreement, dated February 18, 1997, between
                    Steven L. Basta and the Registrant. (Filed as Exhibit 10.51
                    to Registrant's Quarterly Report on Form 10-Q for the period
                    ended March 31, 1997 (File No. 0-19910), and incorporated
                    herein by reference.)

            *10.59  $40,000 Promissory Note, dated July 11, 1997, from Gregory
                    F. Liposky to the Registrant. (Filed as Exhibit 10.52 to
                    Registrants Annual Report on Form 10-K for the period ended
                    December 31, 1997 (File No. 0-19910), and incorporated
                    herein by reference.)

            *10.60  Employment Agreement, dated September 17, 1997, between Carl
                    M. Cohen, PhD, and the Registrant. (Filed as Exhibit 10.53
                    to Registrants Annual Report on Form 10-K for the period
                    ended December 31, 1997 (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.




                                       55
   57
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 certain confidential information deleted.











                                       56
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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 30, 1999.

CREATIVE BIOMOLECULES, INC.

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

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.



SIGNATURE                      CAPACITY                                                DATE
- ---------                      --------                                                ----
                                                                                 

/s/ Brian H. Dovey             Chairman of the Board and Director                      March 30, 1999
- --------------------------
Brian H. Dovey


/s/ Michael M. Tarnow          President and Chief Executive Officer                   March 30, 1999
- --------------------------     and Director (principal executive officer)
Michael M. Tarnow


/s/ Charles Cohen, PhD         Chief Scientific Officer and Director                   March 30, 1999
- --------------------------
Charles Cohen, PhD


/s/ Steven L. Basta            Vice President, Finance and Business Development        March 30, 1999
- --------------------------     Treasurer (principal financial officer)
Steven L. Basta


/s/ Charles R. Carelli         Director of Accounting (principal accounting officer)   March 30, 1999
- --------------------------
Charles R. Carelli


/s/ Jeremy L. Curnock Cook     Director                                                March 30, 1999
- --------------------------
Jeremy L. Curnock Cook


/s/ Martyn D. Greenacre        Director                                                March 30, 1999
- --------------------------
Martyn D. Greenacre


/s/ Arthur J. Hale, MD         Director                                                March 30, 1999
- --------------------------
Arthur J. Hale, MD


/s/ Suzanne D. Jaffe           Director                                                March 30, 1999
- --------------------------
Suzanne D. Jaffe


/s/ Michael Rosenblatt, MD     Director                                                March 30, 1999
- --------------------------
Michael Rosenblatt, MD


/s/ James R. Tobin             Director                                                March 30, 1999
- --------------------------
James R. Tobin

EX-10.10

   1
         CREATIVE BIOMOLECULES, INC. HAS OMITTED FROM THIS EXHIBIT 10.10 
PORTIONS OF THE AGREEMENT FOR WHICH CREATIVE BIOMOLECULES, INC. HAS REQUESTED 
CONFIDENTIAL TREATMENT FROM THE SECURITIES AND EXCHANGE COMMISSION. THE 
PORTIONS OF THE AGREEMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 
ARE MARKED WITH X'S IN BRACKETS AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN FILED 
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

                                                                  EXHIBIT 10.10


         MASTER RESTRUCTURING AGREEMENT, dated as of October 15, 1998, between
CREATIVE BIOMOLECULES, INC., a Delaware corporation ("CREATIVE"), and STRYKER
CORPORATION, a Michigan corporation ("STRYKER"),

                              W I T N E S S E T H :


         WHEREAS, Creative and Stryker are parties to a Second Amended and
Restated Research, Development and Supply Agreement, dated as of May 17, 1991,
as further amended to the date hereof (the "SECOND AMENDED AGREEMENT");

         WHEREAS, Creative and Stryker have been engaged in a dispute concerning
the ownership of certain patents and patent applications, which dispute is
currently the subject of an arbitration proceeding before the Commercial
Arbitration Tribunal of the American Arbitration Association (Case No.
13-133-00980-97, the "ARBITRATION");

         WHEREAS, Creative and Stryker have agreed to restructure certain terms
of their collaboration under the Second Amended Agreement and, in connection
therewith, have agreed to settle the disputed matters subject to the Arbitration
and have agreed that Creative will transfer Manufacturing Rights and certain
related assets and technology to Stryker, all on the terms and subject to the
conditions set forth herein and in the Related Agreements (as defined herein);
and

         WHEREAS, Creative and Stryker have agreed that this Agreement, together
with the Related Agreements, shall supersede and replace the Second Amended
Agreement in its entirety;

         NOW, THEREFORE in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Related Agreements, the
parties hereto hereby agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

         Section 1.1 DEFINITION OF CERTAIN TERMS. The terms defined in this
SECTION 1.1, whenever used in this Agreement, shall have the respective meanings
indicated below for all purposes of this Agreement. All references herein to a
Section, Article, Exhibit or Schedule are to a Section, Article, Exhibit or
Schedule of or to this Agreement, unless otherwise indicated.

   2

         "AFFILIATE": of a specified Person means a Person that directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified Person or a member of such specified
Person's immediate family. "CONTROL" (including the terms "CONTROLLED BY" and
"UNDER COMMON CONTROL WITH") means the ownership of fifty-one percent (51%) or
more of the voting common stock, partnership interests, joint venture interests
or other equity, as the case may be, of a Person.

         "AGREEMENT": means this Master Restructuring Agreement (including the
Exhibits and the Schedules), as the same from time to time may be amended or
supplemented.

         "APPLICABLE LAW": means any and all applicable provisions of any and
all (i) constitutions, treaties, statutes, laws (including the common law),
rules, regulations, ordinances, codes or orders of any Governmental Authority,
(ii) Governmental Approvals, and (iii) orders, decisions, injunctions,
judgments, awards and decrees of or agreements with any Governmental Authority.

         "ASSET PURCHASE AGREEMENT": means the agreement, dated as of the date
hereof, between Creative and Stryker Sales Corporation relating to the transfer
and sale of the Assets to Stryker Sales Corporation and the assumption of the
Assumed Liabilities by Stryker Sales Corporation.

         "ASSETS": has the meaning set forth in the Asset Purchase Agreement.

         "ASSIGNED AGREEMENTS": has the meaning set forth in the Asset Purchase
Agreement.

         "ASSIGNED PATENT RIGHTS": means the patents and patent applications
listed on Schedule 1 to the Creative License Agreement, and all worldwide
counterparts and registrations, continuations, divisions, reissues, extensions
or supplementary protection certificates, continuations-in-part or additions
(but only to the extent such continuations-in-part or additions claim inventions
disclosed as required by 35 U.S.C. ss.112 (CIPs) or the applicable laws
(additions) in the parent application thereof as listed in said Schedule 1) with
respect thereto, and all patents issuing therefrom.

         "ASSUMED LIABILITIES": has the meaning set forth in the Asset Purchase
Agreement.

         "BIOLOGICAL MATERIALS": means any biological materials, assays,
substances or reagents, including without limitation transformed or transfected
cells (including any

                                       2
   3

cell expressing an OP Product or an analog, mutation or heterodimer thereof
conceived, made, developed or reduced to practice as part of the Research
Project), cell lines, DNA sequences, vectors, host cells, proteins, antibodies
and any fragments or subcellular components thereof.

         "BONE DISEASE FIELD": means the prevention or treatment of
Osteoporosis, Osteomalacia and Paget's Disease other than (i) by the local
application of OP Products and OP Devices in an insoluble formulation directly
on bone or joint tissue for local, as opposed to general or systemic, effect and
(ii) the treatment of fractures regardless of whether they result from
Osteoporosis, Osteomalacia and Paget's Disease.

         "BOOKS AND RECORDS": has the meaning set forth in the Asset Purchase
Agreement.

         "CLOSING": has the meaning set forth in SECTION 5.1.

         "CLOSING DATE": has the meaning set forth in SECTION 5.1.

         "CONSENT": means any consent, approval, authorization, waiver, permit,
grant, franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice to,
any Person, including any Governmental Authority.

         "CREATIVE FIELD": means all uses and applications other than the
Stryker Field. The Creative Field includes, without limitation, the Bone Disease
Field.

         "CREATIVE INDEMNITEES": has the meaning set forth in SECTION 8.2.

         "CREATIVE LICENSE AGREEMENT": means the agreement, to be dated as of
the Closing Date, in the form attached hereto as Exhibit 4.7.

         "CREATIVE MANUFACTURING KNOW-HOW": means all inventions, know-how,
Biological Materials, designs, trade secrets, copyrights, processes, formulas,
techniques, discoveries, ideas and the like that, as of the Closing Date, are
owned by Creative or as to which Creative has acquired rights which it has the
right to license hereunder, that are necessary or useful in the manufacture of
OP Products or OP Devices.

         "CREATIVE ROYALTY BEARING OP PRODUCTS": means OP Products or devices
formulated from OP Products that are within issued or pending claims of the
Assigned Patent Rights as those claims exist on the Closing Date.

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   4

         "CREATIVE THRESHOLD AMOUNT": has the meaning set forth in SECTION 8.1.

         "EXCLUDED ASSETS": has the meaning set forth in the Asset Purchase
Agreement.

         "EXCLUDED LIABILITIES": has the meaning set forth in the Asset Purchase
Agreement.

         "FDA": means the United States Food and Drug Administration or any
successor thereto.

         "GOVERNMENTAL APPROVAL": means any Consent of any Governmental
Authority.

         "GOVERNMENTAL AUTHORITY": means any nation or government, any state or
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government (including any government authority, agency, department, board,
commission or instrumentality of the United States, any State of the United
States or any political subdivision thereof), or any tribunal or arbitrator(s)
of competent jurisdiction, or any self-regulatory organization.

         "HOPKINTON FACILITY": has the meaning provided in SECTION 6.2(c).

         "HSR ACT": means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

         "HUMAN RESOURCES AGREEMENT": means the agreement, to be dated as of the
Closing Date, between Stryker Sales Corporation and Creative, in the form set
forth in Exhibit 4.16 hereof.

         "INCLUDE", "INCLUDES", "INCLUDED" and "INCLUDING": shall be construed
as if followed by the phrase "without being limited to".

         "INDEMNIFIED PARTY": has the meaning set forth in SECTION 8.3.

         "INDEMNIFYING PARTY": has the meaning set forth in SECTION 8.3.

         "KNOWLEDGE": an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter. A Person (other than an individual) will be deemed to have
"Knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any time served, as


                                       4
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a director or officer (or in any similar capacity) of such Person or as a senior
manager of such Person, and the plant manager and the individuals having primary
responsibility for environmental and health and safety and employee relations
matters at each facility, has, or at any time had, Knowledge of such fact or
other matter; provided, however, that in the case of an individual who is not an
officer or director, such individual's knowledge will only be attributed in his
or her area of responsibility.

         "LEASED REAL PROPERTY": has the meaning set forth in the Asset Purchase
Agreement.

         "LIENS" AND "PERMITTED LIENS": have the meanings set forth in the Asset
Purchase Agreement.

         "LOSSES": has the meaning set forth in SECTION 8.1.

         "MANUFACTURING OPERATIONS": has the meaning set forth in the Asset
Purchase Agreement.

         "NOTICE": has the meaning set forth in SECTION 9.3.

         "OP": means proteins (or the active sites thereof) or polypeptides or
combinations of proteins and polypeptides which produce an osteogenic effect.

         "OP DEVICES": means the combination of OP Products with suitably
biocompatible and biodegradable carriers.

         "OP PRODUCTS": means OP and polyclonal or monoclonal antibodies of OP
and specific inhibitors or inhibitory activities of the osteogenic effect of OP,
which inhibitors or inhibitory activities were found and identified as such in
the course of the Research Project.

         "PATENT ASSIGNMENT AGREEMENT": means the agreement, to be dated as of
the Closing Date, in the form attached hereto as Exhibit 4.5, pursuant to which
Creative assigns certain patent rights to Stryker.

         "PATENT RIGHTS LICENSED TO STRYKER": has the meaning set forth in
SECTION 4.6.

         "PERSON": means any natural person, firm, partnership, association,
corporation, company, limited liability company, trust, business trust,
Governmental Authority or other entity.

         "RELATED AGREEMENTS": means the Asset Purchase Agreement, the Creative
License Agreement, the Patent

                                       5

   6

Assignment Agreement, the Stryker License Agreement, the Human Resources
Agreement, the Releases and the Assumption Agreement.

         "RELEASES": has the meaning set forth in SECTION 4.4.

         "RESEARCH PROJECT": means the Research Project as defined in the Second
Amended Agreement.

         "ROYALTY PERIOD": means the period commencing with the Closing Date and
ending on the date on which there are no longer any issued or pending claims in
the Assigned Patent Rights; PROVIDED, HOWEVER, that the voluntary abandonment of
issued claims or pending claims (other than following rejection thereof by the
applicable patent office and the failure of reasonable efforts to overcome such
rejection) by either party without the prior written consent of the other shall
be disregarded for purposes of determining whether issued or pending claims
remain in the Assigned Patent Rights.

         "STRYKER FIELD": means the field of (i) treatment, repair or
replacement of bone and joint tissue, including, without limitation, meniscus
and articular cartilage and ligaments and tendons, but excluding the Bone
Disease Field, and (ii) treatment, repair or replacement of the tooth, dentin,
alveolar bone, cementum, enamel, gingiva (to the extent, but only to the extent,
the gingiva functions as part of the apparatus holding the tooth to the jaw)
and/or periodontal ligament, but excluding the treatment of Oral Ulcerations (as
defined below) or any other disease or disorder of the tissues of the mouth not
involving the tooth, dentin, bone (including alveolar bone), cementum, enamel,
gingiva (to the extent, but only to the extent, the gingiva functions as part of
the apparatus holding the tooth to the jaw), ligament (including the periodontal
ligament), tendon and/or cartilage.

     As used herein, "ORAL ULCERATIONS" means the formation of lesions on the
surface of skin lining the oral cavity caused by loss of tissue but does not
include Periodontal Disease (as defined below) or any other disease or disorder
involving the tooth, dentin, bone (including alveolar bone), cementum, enamel,
gingiva (to the extent, but only to the extent, the gingiva functions as part of
the apparatus holding the tooth to the jaw), ligament (including the periodontal
ligament), tendon and/or cartilage.

     As used herein, "PERIODONTAL DISEASE" means degeneration of the apparatus
holding the tooth to the jaw involving damage to any or all of the gingiva (to
the extent, but only to the extent, the gingiva functions as

                                       6


   7

part of the apparatus holding the tooth to the jaw), alveolar bone, cementum,
enamel and periodontal ligament.

         "STRYKER INDEMNITEES": has the meaning set forth in SECTION 8.1.

         "STRYKER LICENSE AGREEMENT": means the agreement, to be dated as of the
Closing Date, in the form attached hereto as Exhibit 4.6.

         "STRYKER MANUFACTURING KNOW-HOW": means all inventions, know-how,
Biological Materials, designs, trade secrets, copyrights, processes, formulas,
techniques, discoveries, ideas and the like that, as of the Closing Date, are
owned by Stryker or as to which Stryker has acquired rights which it has the
right to license hereunder, that are necessary or useful in the manufacture of
OP Products or OP Devices.

         "STRYKER ROYALTY BEARING OP PRODUCTS": means OP Products or OP Devices
that are within issued or pending claims of the Assigned Patent Rights or the
Patent Rights Licensed to Stryker as those claims exist on the Closing Date,
after amendment of certain claims in the Patent Rights Licensed to Stryker
pursuant to SECTION 4.9 hereof.

         "STRYKER THRESHOLD AMOUNT": has the meaning set forth in SECTION 8.2.


                                   ARTICLE II
                   REPRESENTATIONS AND WARRANTIES OF CREATIVE

                  Creative represents and warrants to Stryker as follows:

         Section 2.1 CORPORATE STATUS. (a) Creative is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Creative has full corporate power and authority to carry on the
Manufacturing Operations and to own or lease and to operate the properties and
assets of the Manufacturing Operations as and in the places where the
Manufacturing Operations are conducted and such properties and assets are owned,
leased or operated.

         (b) Creative is duly qualified or licensed to do business and is in
good standing in the Commonwealth of Massachusetts and the State of New
Hampshire.

         Section 2.2 AUTHORIZATION, ETC. Creative has the full legal right,
power and authority (i) to execute and deliver this Agreement and the Related
Agreements, and (ii) subject to obtaining the required Consents identified in

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SCHEDULE 2.5 to this Agreement and in the Related Agreements, to perform fully
its obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. This Agreement and the Related Agreements, and
the consummation of the transactions contemplated hereby and thereby, have been
duly authorized by all requisite corporate (including board of directors and
shareholder) action of Creative. Creative has duly executed and delivered this
Agreement and the Related Agreements. Each of this Agreement and the Related
Agreements has been duly executed and delivered by Creative and is a legal,
valid and binding obligation of Creative, enforceable against it in accordance
with its terms, except as such enforceability may be limited by bankruptcy and
other similar laws and general principles of equity.

         Section 2.3 NO CONFLICTS, ETC. The execution, delivery and performance
by Creative of this Agreement and the Related Agreements, and the consummation
of the transactions contemplated hereby and thereby, upon the obtaining of the
required Consents do not and will not conflict with or result in a violation of
or a default under (with or without the giving of notice or the lapse of time or
both), or result in the acceleration of or give rise to any right of any other
party to terminate, modify or cancel, or result in the loss of any rights,
privileges, options or alternatives of Creative under, or result in the creation
of any Lien on any of the properties or assets of Creative (including the
Assets) under (i) the Restated Certificate of Incorporation, as amended, or
Restated By-Laws of Creative, (ii) any Applicable Law applicable to Creative or
any of its properties or assets (including the Assets), or (iii) any Contract or
other agreement or instrument applicable to Creative or any of its properties or
assets (including the Assets).

         Section 2.4 LITIGATION. There is no action, claim, suit or proceeding
pending, or to Creative's Knowledge threatened, by or against or affecting
Creative in connection with or relating to the transactions contemplated by this
Agreement and the Related Agreements or any action taken or to be taken in
connection herewith or the consummation of the transactions contemplated hereby
and thereby or that, if decided adversely, would impair Stryker's ability to use
the Assets.

         Section 2.5 CONSENTS. Except as referred to on SCHEDULE 2.5, no Consent
of any Governmental Authority having jurisdiction over Creative is required to
be obtained by Creative in order to authorize the execution and delivery by
Creative of this Agreement or any Related Agreement or the performance by
Creative of the terms hereof or thereof and the consummation of the transactions
contemplated hereby

                                       8
   9
or thereby except for filings and consents required pursuant to the HSR Act.

         Section 2.6 DISCLOSURE. No representation or warranty of Creative in
this Agreement or in any Related Agreement or in any certificate or instrument
delivered by Creative in accordance with the terms hereof or thereof contains
any untrue statement of a material fact or omits any statement of a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading.


                                   ARTICLE III
                    REPRESENTATIONS AND WARRANTIES OF STRYKER

         Stryker represents and warrants to Creative as follows:

         Section 3.1 CORPORATE STATUS. Stryker is a corporation duly organized,
validly existing and in good standing under the laws of the State of Michigan.
Stryker has full corporate power and authority to carry on the Manufacturing
Operations and to own or lease and to operate the properties and assets of the
Manufacturing Operations as and in the places where the Manufacturing Operations
are conducted and such properties and assets are owned, leased or operated.

         (b) Stryker Sales Corporation is duly qualified or licensed to do
business and is in good standing in the Commonwealth of Massachusetts and the
State of New Hampshire.

         Section 3.2 AUTHORIZATION, ETC. Stryker has the corporate power and
authority to execute and deliver this Agreement and the Related Agreements, to
perform fully its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by
Stryker of this Agreement and the Related Agreements, and the consummation of
the transactions contemplated hereby and thereby, have been duly authorized by
all requisite corporate action of Stryker. Stryker has duly executed and
delivered this Agreement and the Related Agreements. This Agreement and the
Related Agreements are legal, valid and binding obligations of Stryker,
enforceable against it in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity.

         Section 3.3 NO CONFLICTS, ETC. The execution, delivery and performance
by Stryker of this Agreement and the Related Agreements, and the consummation of
the transactions contemplated hereby and thereby, do not and

                                       9
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will not conflict with or result in a violation of or a default under (with or
without the giving of notice or the lapse of time or both), or result in the
acceleration of or give rise to any right of any other party to terminate,
modify or cancel, or result in the loss of any rights, privileges, options or
alternatives of Stryker under, or result in the creation of any Lien on any of
the properties or assets of Stryker under (i) the Restated Certificate of
Incorporation or By-Laws of Stryker, (ii) any Applicable Law applicable to
Stryker or any of its properties or assets, or (iii) any contract, agreement or
other instrument applicable to Stryker or any of its properties or assets.

         Section 3.4 LITIGATION. There is no action, claim, suit or proceeding
pending, or to Stryker's Knowledge threatened, by or against or affecting
Stryker in connection with or relating to the transactions contemplated by this
Agreement and the Related Agreements or any action taken or to be taken in
connection herewith or therewith or the consummation of the transactions
contemplated hereby and thereby.

         Section 3.5 CONSENTS. No Consent of any Governmental Authority having
jurisdiction over Stryker is required to be obtained by Stryker in order to
authorize the execution and delivery by Stryker of this Agreement or any Related
Agreement or the performance by Stryker of the terms hereof and thereof and the
consummation of the transactions contemplated hereby or thereby except for
filings and consents required pursuant to the HSR Act.

         Section 3.6 DISCLOSURE. No representation or warranty of Stryker in
this Agreement or in any Related Agreement or in any certificate or instrument
delivered by Stryker in accordance with the terms hereof or thereof contains any
untrue statement of a material fact or omits any statement of a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances in which they were made, not misleading.


                                   ARTICLE IV
                                      TERMS

         Section 4.1 TERMINATION OF SECOND AMENDED AGREEMENT. Creative and
Stryker agree that the Second Amended Agreement shall be terminated effective as
of the Closing Date and that the provisions thereof shall cease to have any
effect as of the Closing Date, except that the assignment by Creative to Stryker
of the Present Patents and Applications and certain patents and applications
listed in Schedule I to the Amendment Agreement dated October 31, 1996 between
Creative and Stryker, which were prosecuted in Stryker's name during the period
from May 17, 1991 to

                                       10
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October 31, 1996 as described in Section 1.4 B of the Second Amended Agreement, 
and the license by Stryker to Creative of the inventions claimed in all of such 
patents and applications, pursuant to the Irrevocable License Agreement, dated 
May 17, 1991, as superseded by the Creative License Agreement executed pursuant 
to this Agreement, are hereby confirmed in all respects.

         Section 4.2 COMPLETION OF CURRENT SCOPE OF WORK AND WIND-DOWN OF
RESEARCH PROJECT. Creative and Stryker agree that the Current Scope[s] of Work
(as defined in the Second Amended Agreement), as most recently extended by an
amendment agreement dated April 30, 1998, shall be extended through, and
terminate as of, the close of business on the day immediately preceding the date
hereof, and Stryker shall continue to pay Creative for Creative's continued
performance of those certain Current Scope[s] of Work and certain other services
through the Closing Date, pursuant to the payment terms set forth in the
extended Current Scope[s] of Work approved by the parties by letter agreement
dated as of the date hereof. Creative shall deliver to Stryker within 30 days
after the Closing Date a final written report describing in reasonable detail
the results of the Research Project subsequent to the results reported under
date of September 25, 1998. Any inventions and improvements conceived, made,
developed or reduced to practice as part of the Current Scope[s] of Work will be
governed by the provisions of the Second Amended Agreement and any patent
applications and patents issuing therefrom disclosing such inventions and
improvements and all worldwide counterparts and registrations, continuations,
divisions, reissues, extensions or supplementary protection certificates,
continuations-in-part or additions (but only to the extent such
continuations-in-part or additions claim inventions disclosed as required by 35
U.S.C. ss.112 (CIPs) or the applicable laws (additions) in the parent
application thereof shall be deemed to be Assigned Patent Rights.

         Section 4.3 ADDITIONAL CREATIVE SERVICES. Creative and Stryker
acknowledge that they may enter into future agreements with respect to
additional services to be provided by Creative to Stryker after the Closing
Date. With respect to Stryker's PMA filing, Creative agrees that it shall
provide additional consulting services to Stryker, as may reasonably be
requested from time to time, at a rate of compensation consistent with industry
standards to be determined at the time such services are rendered; provided,
however, that Creative shall only be required to provide such services to the
extent that the same can be provided by persons employed by Creative at the time
such services are to be rendered. In addition, for the period from the Closing
Date until thirty (30) days after the Closing Date Creative shall reasonably
make available to Stryker employees remaining in Creative's process development
group


                                       11

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to discuss with Stryker the Creative Manufacturing Know-How, on reasonable
notice and at times that do not materially interfere with the performance of
their normal duties.

         Section 4.4 TERMINATION OF ARBITRATION. Creative and Stryker agree that
the Arbitration shall be terminated as of the Closing Date, each party to bear
its own costs and expenses, and that immediately following the Closing Date they
shall jointly notify the American Arbitration Association and the arbitrator,
the Hon. James F. Davis, of such fact. In connection therewith, Creative and
Stryker each agree to execute a release in favor of the other in the form of
Exhibits 4.4A and 4.4B attached hereto, respectively (the "RELEASES").

         Section 4.5 ASSIGNMENT OF PATENT RIGHTS TO STRYKER. Creative agrees to
execute and deliver to Stryker on the Closing Date the Patent Assignment
Agreement in the form of Exhibit 4.5 attached hereto in order to effectuate the
assignment to Stryker of Creative's entire right, title and interest in and to
the inventions and improvements claimed in the U.S., foreign and PCT
applications and patents issuing therefrom that are listed in Schedule A to the
Patent Assignment Agreement and all worldwide counterparts and registrations,
continuations, divisions, reissues, extensions or supplementary protection
certificates, continuations-in-part or additions (but only to the extent such
continuations-in-part or additions claim inventions disclosed as required by 35
U.S.C. ss.112 (CIPs) or the applicable laws (additions) in the parent
application thereof as listed in said Schedule A with respect thereto). On the
Closing Date Stryker will pay to Creative a sum equal to the total expense
incurred by Creative relating to the prosecution, but not to the preparation or
filing of the patent applications, or the applications for the patents listed on
Schedule A of the Patent Assignment Agreement.

         Section 4.6 LICENSE OF PATENT RIGHTS AND CREATIVE MANUFACTURING
KNOW-HOW TO STRYKER. Creative agrees to execute and deliver to Stryker on the
Closing Date the Stryker License Agreement which shall grant to Stryker (i) an
irrevocable, exclusive, worldwide license, with the unrestricted right to grant
sublicenses, to all of the U.S., foreign and PCT applications and patents
issuing therefrom that are listed in Schedule 1 to the Stryker License Agreement
and all worldwide counterparts and registrations, continuations, divisions,
reissues, extensions or supplementary protection certificates,
continuations-in-part or additions (but only to the extent such
continuations-in-part or additions claim inventions disclosed as required by 35
U.S.C. ss.112 (CIPs) or the applicable laws (additions) in the parent
application thereof as listed in said Schedule 1 with respect thereto) and all
patents issuing therefrom (the "PATENT RIGHTS LICENSED TO STRYKER"), solely for
the


                                       12
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manufacture, use, importation and sale of OP Products and OP Devices in the
Stryker Field, which grant shall be exclusive, even as to Creative, with respect
to the Stryker Field, and (ii) an irrevocable, non-exclusive, worldwide license,
with the unrestricted right to grant sublicenses, under all Creative
Manufacturing Know-How, solely for use (A) in the manufacture of OP Products and
OP Devices for use in the Stryker Field, (B) in the manufacture of OP Products
and OP Devices for Creative, and (C) in the manufacture of proteins or
polypeptides (or combinations of proteins or polypeptides) other than OP.
Notwithstanding the foregoing, Creative hereby retains for itself the right to
use OP Products and OP Devices as research and development tools for the
development of other products and devices for use in the Creative Field. Nothing
in this Agreement or in the Stryker License Agreement shall preclude Creative
from engaging in the development, production and sale of products and devices in
the Creative Field. If during the period commencing on the date hereof and
continuing for a period of three months thereafter Creative files any patent
applications with claims that cover any OP Product or OP Device with application
or use in the Stryker Field or any application with claims that cover any use,
formulation or method with application or use in the Stryker Field, or if
Creative subsequently amends any patent applications filed during such three
month period or filed at any time prior to the date hereof to include claims
that cover any OP Product or OP Device with application or use in the Stryker
Field or any claims that cover any use, formulation or method with application
or use in the Stryker Field, such patent applications and any resulting patents
shall be deemed to be Patent Rights Licensed to Stryker for the purposes of this
Agreement, and the parties shall execute any assignments, amendments to this
Agreement or the Related Agreements or other documents necessary to reflect such
fact.

         Section 4.7 LICENSE OF PATENT RIGHTS AND STRYKER MANUFACTURING KNOW-HOW
TO CREATIVE. Stryker agrees to execute and deliver to Creative on the Closing
Date the Creative License Agreement which shall grant to Creative (i) an
irrevocable, exclusive, worldwide license, with the unrestricted right to grant
sublicenses, to all of the Assigned Patent Rights for all uses and applications
of all inventions claimed therein, except for the manufacture, use, importation
and sale of OP Products and OP Devices for use in the Stryker Field, which grant
shall be exclusive, even as to Stryker, with respect to the Creative Field, and
(ii) an irrevocable, non-exclusive, worldwide license, with the unrestricted
right to grant sublicenses, under all Stryker Manufacturing Know-How, solely for
use (A) in the manufacture of OP, OP Products or products or devices formulated
with OP for use in the Creative Field, and (B) in the manufacture of proteins or
polypeptides (or combination of proteins or polypeptides) other than OP.
Notwithstanding

                                       13
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the foregoing, Stryker hereby retains for itself the right to use OP Products
and OP Devices as research and development tools for the development of other
products and devices for use in the Stryker Field. Nothing in this Agreement or
in the Creative License Agreement shall preclude Stryker from engaging in the
development, production and sale of products and devices in the Stryker Field.

         Section 4.8 FUTURE PATENTS. (a) Exclusive of any future patent rights
covered by SECTIONS 4.2 and 4.6, in the event a patent is issued to Creative in
the future, which patent is based upon an application not presently included in
the Assigned Patent Rights and the Patent Rights Licensed to Stryker, with
claims that cover any product or device with application or use in the Stryker
Field or any application with claims that cover any use, formulation or method
with application or use in the Stryker Field, at Stryker's request Creative will
discuss with Stryker the grant of a license to Stryker under such claims in the
Stryker Field. Any such license will be separate from the present licenses and
ownership rights, with separate terms and conditions. Creative has no obligation
to grant such a license and is free to decline to do so in its sole discretion.

         (b) In the event a patent is issued to Stryker in the future, which
patent is based upon an application not presently included in the Assigned
Patent Rights, with claims that cover any product or device with application or
use in the Creative Field or any application with claims that cover any use,
formulation or method with application or use in the Creative Field, at
Creative's request Stryker will discuss with Creative the grant of a license to
Creative under such claims in the Creative Field. Any such license will be
separate from the present licenses and ownership rights, with separate terms and
conditions. Stryker has no obligation to grant such a license and is free to
decline to do so in its sole discretion.

         Section 4.9 AMENDMENT OF CERTAIN PATENT APPLICATIONS. Creative shall,
within a reasonable time after the Closing Date, (i) file a divisional
application separating out claims that both parties agree pertain to the Stryker
Field contained in [XXXXX] (ii) file an amendment to claims [XXXXX] to clarify
that [XXXXX] and (iii) file an amendment to the claims in [XXXXX] such that they
do not cover the Stryker Field. In the event any patent issues from [XXXXX],
U.S. Serial Number 08/396,684 (Filed March 1, 1995), [XXXXX], U.S. Serial Number
08/271,556 (Filed July 7, 1994), or [XXXXX], U.S. Serial Number 08/643,763
(Filed May 6, 1996), that does not have a terminal disclaimer with respect to a
patent owned by Creative, then Creative will assign such patent to Stryker and
the parties

                                       14
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shall execute any assignments, amendments to this Agreement or the Related
Agreements or other documents necessary to reflect such fact. In the event that
any patent application owned by Creative is required to be terminally disclaimed
with respect to any patent assigned to Stryker pursuant to this SECTION 4.9,
then Stryker will reassign such patent to Creative and it will be treated as a
part of the Patent Rights Licensed to Stryker. In such a case the parties shall
execute any assignments, amendments to this Agreement or the Related Agreements
or other documents necessary to reflect such fact.

         Section 4.10 ENFORCEMENT OF PATENTS BY STRYKER. If any claims issue
from the patent applications identified as being part of cases [XXXXX] on
Schedule 1 to the Stryker License Agreement and all worldwide counterparts and
registrations, continuations, divisions, reissues, extensions or supplementary
protection certificates, continuations-in-part or additions (but only to the
extent such continuations-in-part or additions claim inventions disclosed as
required by 35 U.S.C. ss.112 (CIPs) or the applicable laws (additions) in the
parent application thereof) with respect thereto, and all patents issuing
therefrom which would be infringed by the manufacture, use, sale or import of
any product or device specifically for use or application in the Stryker Field,
to the fullest extent permitted by law Creative hereby grants to Stryker the
right to bring an infringement action, the right to obtain an injunction and the
right to collect damages under such claim(s) against any third party that is
manufacturing, using, selling or importing an infringing product specifically
for use or application in the Stryker Field. Creative shall not oppose joinder
as a party in such infringement action, provided that Stryker has taken all
reasonable practicable steps to pursue the infringement action without joining
Creative, and the Court or tribunal before which the infringement action is
pending has ruled that Creative is a necessary and indispensable party to such
action. Creative shall be entitled to representation by counsel of its choice in
any such action in which it has been joined as a party. Stryker agrees that it
will pay Creative for all reasonable costs, including without limitation
attorney's fees, incurred by Creative related to the infringement action.
Stryker agrees that it will not enter into any settlement agreement or consent
judgment or other like agreement relating to disposition of any infringement
action in which Creative has been joined as a party, in whole or in part,
without Creative's express prior written consent, which consent shall not be
unreasonably withheld. Nothing in this SECTION 4.10 shall constitute a waiver of
any of Creative's rights in such infringement action, including waiver of any
objections in discovery or at trial. Further, nothing in this SECTION 4.10

                                       15
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shall preclude Creative from asserting any claim or defense on its own behalf.

         Section 4.11 DEVELOPMENT AND COMMERCIALIZATION OF OP PRODUCTS AND OP
DEVICES. (a) Stryker shall continue to have sole responsibility for testing and
commercialization of OP Products and OP Devices in the Stryker Field. Stryker
agrees that it will employ such reasonable efforts as are necessary to
diligently pursue clinical testing of OP Products and OP Devices in the Stryker
Field and the filing of an application with the FDA and the regulatory
authorities in other major markets, to market the OP Products and OP Devices in
the Stryker Field in the United States and other major markets and to diligently
pursue commercial introduction upon approval to market from the FDA and the
regulatory authorities in other major markets.

         (b) In the event Stryker determines not to develop or market any OP
Product or OP Device in the Stryker Field in any market otherwise than based on
its assessment of the impact of sales in such market on sales in other markets,
Stryker shall notify Creative of such determination and shall negotiate in good
faith the grant of rights to Creative to sell such OP Product or OP Device in
such market.

         (c) If either party learns or otherwise becomes aware of the existence
of a "serious adverse event" (as defined in applicable FDA regulations) in
clinical trials or in the marketplace with respect to OP, any OP Product, any OP
Device or any device or product formulated with OP, such party shall notify the
other of the occurrence of such event within 24 hours after such party learns or
becomes aware of such event.

         Section 4.12 PATENT PROSECUTION. (a) Creative and Stryker agree that
the prosecution of all Assigned Patent Rights will be in Stryker's name and at
Stryker's expense.

         (b) Issues that arise in the course of the prosecution of any patent
applications described in subsection (a) above will be jointly decided by
Stryker and Creative.

         (c) Creative will maintain research records for all research pertaining
to the Assigned Patent Rights and reasonably related to regulatory filings of
Stryker and all Biological Materials transferred to Stryker, including the
design history file and the PMA, as are reasonable and customary for companies
in Creative's industry, and Creative will grant to Stryker and Stryker's
representatives such access to such research records as is reasonably necessary

                                       16
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for Stryker to protect its rights and prosecute patent rights, make submissions
to regulatory agencies and continue research commenced by Creative under the
Second Amended Agreement as set forth above, provided that any person given such
access shall execute an appropriate confidentiality agreement if requested to do
so by Creative.

         (d) Creative hereby agrees that Stryker will have the right to consult
with Creative on the prosecution of [XXXXX] and that Creative will give
substantial consideration to all input received from Stryker and will use all
reasonable efforts to obtain the broadest coverage practicable in the Stryker
Field under any patent issued on such applications.

         Section 4.13 ROYALTIES PAYABLE BY CREATIVE. For any and all of the
rights granted to it hereunder: (a) Creative hereby agrees to pay to Stryker, in
U.S. dollars, quarterly royalties (the "CREATIVE ROYALTY PAYMENTS") equal to (i)
[XXXXX] of Creative's Net Sales during the Royalty Period of Creative Royalty
Bearing OP Products or (ii) [XXXXX] of any royalties received by Creative from
any third party (a "CREATIVE THIRD PARTY SELLER") with respect to such third
party's Net Sales during the Royalty Period of Creative Royalty Bearing OP
Products; PROVIDED, HOWEVER, that the amount required to be paid by Creative to
Stryker shall in no event exceed [XXXXX] of such Creative Third Party Seller's
Net Sales of such products, and PROVIDED FURTHER, HOWEVER, that, in the event
that Creative grants rights to a Creative Third Party Seller as sublicensee or
otherwise under the Creative License Agreement, Stryker shall be entitled to
receive from Creative an amount not less than [XXXXX] of such Creative Third
Party Seller's Net Sales of such products, regardless of the amount of payments
that Creative is entitled to receive from such Creative Third Party Seller or
the characterization thereof. "NET SALES" for purposes of this SECTION 4.13
shall mean revenue derived by Creative or any sublicensee from the sale of
Creative Royalty Bearing OP Products (including, without limitation, sales by
Creative to any Creative Third Party Seller), less discounts allowed,
transportation charges, insurance, credits for claims or allowances, returns,
and taxes or other governmental charges levied on or measured by such sales and
included in the billing price, whether absorbed by Creative, third parties or
their customers. For Creative Royalty Bearing OP Products (collectively, the "OP
COMPONENT") that are sold in combination with another product, if both the OP
Component and such other product have established market prices, Net Sales shall
be calculated by multiplying Net Sales of the combination product by the
fraction A/(A+B) where A is the sales price of the OP Component in the
combination when sold separately and B is the sales price of the other product
in the combination when sold separately. If one or both of the OP


                                       17

   18
Component and the other product do not have an established market price, Net
Sales shall include only that portion of the sales price of the combination
product that is determined by good faith negotiation between Stryker and
Creative to represent the value of the OP Component. In such negotiation, the
parties shall take into account the list price of either the OP Component or the
other product, if there be one, or of similar products, and the market share of
the combination product. The allocation of the sales price of the combination
product shall be subject to renegotiation upon the request of either party at
two year intervals. The method of allocation of the sales price of a combination
product set forth in the four preceding sentences is referred to herein as the
"ALLOCATION METHOD." Notwithstanding anything in the foregoing to the contrary,
no payments shall be required to be made by Creative to Stryker in respect of
the[XXXXX]of Creative Royalty Payments, calculated in the manner provided
herein, that would otherwise be required to be paid hereunder.

         (b) Creative agrees that it will furnish to Stryker a copy of the
relevant provisions of any agreement with any Creative Third Party Seller
pursuant to which royalties or other payments may be received by Creative in
respect of any Creative Third Party Seller's sales of Creative Royalty Bearing
OP Products or in respect of rights granted to any Creative Third Party Seller
as sublicensee or otherwise under the Creative License Agreement. Creative
further agrees that Creative Royalty Payments shall be paid to Stryker quarterly
within thirty (30) days after the end of each calendar quarter and that Creative
will, within such 30-day period, furnish to Stryker a quarterly royalty report,
setting forth, on a country-by-country basis, Net Sales of each Creative Royalty
Bearing OP Product and the calculation of the Creative Royalty Payments due with
respect thereto. Creative further agrees, at Stryker's request and expense, to
cause its independent certified public accounting firm to deliver a certificate
to Stryker within ninety (90) days after the end of each annual audit period
setting forth the amount of Creative Royalty Payments that should have been paid
to Stryker for such year pursuant to this SECTION 4.13.

         (c) Creative shall keep complete and accurate records in sufficient
detail to enable the royalties payable hereunder to be determined. Upon the
written request of Stryker and not more than once in each calendar year,
Creative shall permit an independent certified public accounting firm of
nationally recognized standing selected by Stryker and reasonably acceptable to
Creative, at Stryker's expense, to have access during normal business hours to
such of the records of Creative as may be reasonably necessary to verify the
accuracy of the royalty reports hereunder for any year ending not more than
twenty-

                                       18
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four (24) months prior to the date of such request and no later than forty-five
(45) days after written request is made. The accounting firm shall disclose to
Stryker only whether the royalty reports are correct or incorrect and the
specific details concerning any discrepancies. No other information shall be
provided to Stryker.

         (d) If such accounting firm correctly concludes that additional
royalties were owed during such period, Creative shall pay the additional
royalties, together with interest accrued from the date such royalty was due at
an annual rate (based on a 360-day year) equal to the lesser of [XXXXX] or the
highest rate permitted by applicable law within thirty (30) days after the date
Stryker delivers to Creative such accounting firm's written report so
concluding. Creative shall receive a credit for any overpayment of royalties.
The fees charged by such accounting firm shall be paid by Stryker, except
Creative shall pay such fees in the event that the additional royalties owed by
Creative for the period in question vary from royalties paid by five percent
(5%) or greater.

         (e) Creative shall include in each agreement to sell Creative Royalty
Bearing OP Products and in each sublicense granted by it pursuant to the
Creative License Agreement a provision requiring the sublicensee to make reports
to Creative, to keep and maintain records of sales made pursuant to such
agreement or sublicense and to grant access to such records by Stryker's
independent accountant to the same extent required of Creative under this
Agreement. Upon the expiration of twenty-four (24) months following the end of
any year, the calculation of royalties payable with respect to such year shall
be binding and conclusive upon Stryker, and Creative and its sublicensees shall
be released from any liability or accountability with respect to royalties for
such year.

         (f) Stryker shall treat all financial information subject to review
under this SECTION 4.13 or under any sublicense or other agreement in accordance
with the confidentiality provisions of this Agreement, and shall, at Creative's
request, cause its accounting firm to enter into an acceptable confidentiality
agreement with Creative obligating it to retain all such financial information
in confidence pursuant to such confidentiality agreement.

         (g) If at any time, any jurisdiction in which Creative or any
sublicensee has Net Sales requires the withholding of income taxes or other
taxes imposed upon payments set forth in this SECTION 4.13, Creative shall make
such withholding payments as required and subtract such withholding payments
from the payments set forth in this SECTION 4.13, or if applicable, Stryker will
promptly reimburse Creative or its designee(s) for the amount of such


                                       19
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payments. Creative shall provide Stryker with documentation of such withholding
and payment in a manner that is satisfactory for purposes of such taxing
authority. Any withholdings paid when due hereunder shall be for the account of
Stryker and shall not be included in the calculation of Net Sales. Stryker shall
be liable for any deficiency, and any fine, assessment or penalty imposed by any
taxing authority for any deficiency in the amount of any such withholding or the
failure to make such withholding payment, which obligation shall survive the
termination of the Agreement for a time period no less than the applicable
statute of limitations. If Creative is required to pay any such deficiency, or
any fine, assessment or penalty for any such deficiency, Stryker shall promptly
reimburse Creative for such payments, which shall not be included in the
calculation of Net Sales.

         (h) For the purpose of computing Net Sales of Creative or any
sublicensees sold in a currency other than United States Dollars, such currency
shall be converted into United States Dollars in accordance with the commercial
rate of exchange for purchasing U.S. Dollars with such currency as reported by
Citibank, N.A. for the last business day of the calendar quarter for which the
relevant royalty payment is to be made.

         Section 4.14 ROYALTIES PAYABLE BY STRYKER. For any and all of the
rights granted to it hereunder: (a) Stryker shall pay to Creative, in U.S.
dollars, quarterly royalties ("STRYKER ROYALTY PAYMENTS") equal to (i) [XXXXX]
of Stryker's Net Sales during the Royalty Period of Stryker Royalty Bearing OP
Products, and (ii) [XXXXX]of any royalties and other licensing or sublicensing
payments received by Stryker from any third party (a "STRYKER THIRD PARTY
SELLER") with respect to the grant of a license or sublicense to such party or
with respect to such Stryker Third Party Seller's Net Sales during the Royalty
Period of Stryker Royalty Bearing OP Products. If Market Sales for any calendar
year exceed [XXXXX] the rate of the Stryker Royalty Payment for the entire year
shall be [XXXXX] and, if Stryker's Market Sales for any calendar year exceed
[XXXXX], the rate for the entire year shall be [XXXXX]. For each quarter in
which Stryker Royalty Payments are due, the royalty rate shall be calculated by
annualizing Stryker's Market Sales for such quarter based on a 365-day year, and
any royalty payment shortfall or royalty overpayment as a result of a higher or
lower rate, as the case may be, being applicable for the entire year shall be
paid with or deducted from the royalty payment for the fourth quarter of the
year, with any remaining amount of royalty overpayment being credited against
royalties due for the following quarter. If a Stryker Royalty Payment is due for
less than a full calendar year, either with respect to the beginning or end of
the Royalty Period, the royalty rate shall be


                                       20
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determined by annualizing Stryker's Market Sales for such period based on a
365-day year. "NET SALES" for purposes of this SECTION 4.14 shall mean revenue
derived by Stryker or any licensee or sublicensee from the sale of Stryker
Royalty Bearing OP Products (including, without limitation, sales by Stryker to
any Stryker Third Party Seller), less discounts allowed, transportation charges,
insurance, credits for claims or allowances, returns, and taxes or other
governmental charges levied on or measured by sales and included in the billing
price, whether absorbed by Stryker or the customer; PROVIDED, HOWEVER, that if
the Stryker Royalty Bearing OP Product is sold in combination with another
product, Net Sales shall be determined under the same methodology as the
Allocation Method. "MARKET Sales" for purposes of this SECTION 4.14 shall mean
(i) Stryker's Net Sales of Stryker Royalty Bearing OP Products to Persons other
than Stryker Third Party Sellers, plus (ii) the Net Sales of all Stryker Third
Party Sellers of Stryker Royalty Bearing OP Products.

         (b) Stryker agrees that it will furnish to Creative a copy of the
relevant provisions of any agreement with any Stryker Third Party Seller
pursuant to which royalties or other payments may be received by Stryker in
respect of sales of OP Products and OP Devices by a Stryker Third Party Seller
as licensee, sublicensee or otherwise. Stryker further agrees that Stryker
Royalty Payments shall be made to Creative quarterly within thirty (30) days
after the end of each calendar quarter and that Stryker will, within such 30-day
period, furnish to Creative a quarterly royalty report, setting forth, on a
country-by-country basis, Net Sales of each Stryker Royalty Bearing OP Product
and the calculation of the Stryker Royalty Payments due with respect thereto.
Stryker further agrees, at Creative's request and expense, to cause its
independent certified public accounting firm to deliver a certificate to
Creative within ninety (90) days after the end of each annual audit period
setting forth the amount of Stryker Royalty Payments that should have been made
to Creative for such year pursuant to this SECTION 4.14.

         (c) Stryker shall keep complete and accurate records in sufficient
detail to enable the royalties payable hereunder to be determined. Upon the
written request of Creative and not more than once in each calendar year,
Stryker shall permit an independent certified public accounting firm of
nationally recognized standing selected by Creative and reasonably acceptable to
Stryker, at Creative's expense, to have access during normal business hours to
such of the records of Stryker as may be reasonably necessary to verify the
accuracy of the royalty reports hereunder for any year ending not more than
twenty-four (24) months prior to the date of such request and no later than
forty-five (45) days after written request is made. The

                                       21
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accounting firm shall disclose to Creative only whether the royalty reports are
correct or incorrect and the specific details concerning any discrepancies. No
other information shall be provided to Creative.

         (d) If such accounting firm correctly concludes that additional
royalties were owed during such period, Stryker shall pay the additional
royalties, together with interest accrued from the date such royalty was due at
an annual rate (based on a 360-day year) equal to the lesser of [XXXXX] or the
highest rate permitted by applicable law within thirty (30) days after the date
Creative delivers to Stryker such accounting firm's written report so
concluding. Stryker shall receive a credit for any overpayment of royalties. The
fees charged by such accounting firm shall be paid by Creative, except Stryker
shall pay such fees in the event that the additional royalties owed by Stryker
for the period in question vary from royalties paid by five percent (5%) or
greater.

         (e) Stryker shall include in each agreement to sell Stryker Royalty
Bearing OP Products and in each license or sublicense granted by it relating to
OP Products and OP Devices a provision requiring the licensee or sublicensee to
make reports to Stryker, to keep and maintain records of sales made pursuant to
such agreement, license or sublicense and to grant access to such records by
Creative's independent accountant to the same extent required of Stryker under
this Agreement. Upon the expiration of twenty-four (24) months following the end
of any year, the calculation of royalties payable with respect to such year
shall be binding and conclusive upon Creative, and Stryker and its licensees and
sublicensees shall be released from any liability or accountability with respect
to royalties for such year.

         (f) Creative shall treat all financial information subject to review
under this SECTION 4.14 or under any license or sublicense agreement in
accordance with the confidentiality provisions of this Agreement, and shall, at
Stryker's request, cause its accounting firm to enter into an acceptable
confidentiality agreement with Stryker obligating it to retain all such
financial information in confidence pursuant to such confidentiality agreement.

         (g) If at any time, any jurisdiction in which Stryker or any licensee
or sublicensee has Net Sales requires the withholding of income taxes or other
taxes imposed upon payments set forth in this SECTION 4.14, Stryker shall make
such withholding payments as required and subtract such withholding payments
from the payments set forth in this SECTION 4.14, or if applicable, Creative
will promptly reimburse Stryker or its designee(s) for the amount of such
payments. Stryker shall provide Creative with


                                       22
   23

documentation of such withholding and payment in a manner that is satisfactory
for purposes of such taxing authority. Any withholdings paid when due hereunder
shall be for the account of Creative and shall not be included in the
calculation of Net Sales. Creative shall be liable for any deficiency, and any
fine, assessment or penalty imposed by any taxing authority for any deficiency
in the amount of any such withholding or the failure to make such withholding
payment, which obligation shall survive the termination of the Agreement for a
time period no less than the applicable statute of limitations. If Stryker is
required to pay any such deficiency, or any fine, assessment or penalty for any
such deficiency, Creative shall promptly reimburse Stryker for such payments,
which shall not be included in the calculation of Net Sales.

         (h) For the purpose of computing Stryker's Net Sales sold in a currency
other than United States Dollars, such currency shall be converted into United
States Dollars in accordance with the commercial rate of exchange for purchasing
U.S. Dollars with such currency as reported by Citibank, N.A. for the last
business day of the calendar quarter for which the relevant royalty payment is
to be made.

         Section 4.15 ASSET TRANSFER. Creative agrees to sell, assign and
transfer to Stryker, and Stryker agrees to purchase or acquire from Creative, on
the Closing Date Creative's leasehold interests in the Leased Real Property and
all of its right, title and interest in and to the Assets, in each case on the
terms and subject to the conditions set forth in the Asset Purchase Agreement.

         Section 4.16 HUMAN RESOURCES AGREEMENT. Creative and Stryker agree to
execute and deliver, the Human Resources Agreement.

         Section 4.17 FUTURE SUPPLY. Stryker agrees that, prior to June 30,
1999, Stryker shall manufacture for Creative 15 grams of OP-1, which OP-1 shall
be manufactured in accordance with specifications identical to those applied to
the OP-1 delivered to Stryker hereunder. Creative may decrease the amount of
OP-1 to be supplied hereunder on or before March 31, 1999. Such OP-1 shall be
delivered to Creative at a time or times selected by Creative during the period
from June 30, 1999 through and including December 31, 1999, and shall be sold to
Creative at a price of [XXXXX] per milligram.

         Section 4.18 FURTHER ASSURANCES. Each of Creative and Stryker agrees
that, following the Closing, it shall, from time to time, execute and deliver
such additional instruments, documents, conveyances, assignments, assumptions or
assurances and take such other actions as

                                       23
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shall be necessary, or otherwise reasonably requested by the other party, to
confirm and assure the rights and obligations provided for in this Agreement and
the Related Agreements and render effective the consummation of the transactions
contemplated hereby and thereby.

         Section 4.19 ADDITIONAL AGREEMENTS. (a) In order to assure the value to
Stryker of the assets purchased by Stryker pursuant to the Asset Purchase
Agreement and the patents assigned to Stryker and the licenses granted to
Stryker pursuant to this Agreement, Creative agrees that it will not, and will
cause its Affiliates not to, directly or indirectly (i) develop any product or
device specifically for use or application in the Stryker Field or manufacture,
import, market or sell any product or device for use or application in the
Stryker Field anywhere in the world during the Royalty Period, (ii) conduct
research for or with a third party with respect to any product or device
specifically for use or application in the Stryker Field anywhere in the world
during the Royalty Period, or (iii) grant a license or transfer any right, title
or interest of Creative to any third party under any patent or patent
application or under any know-how, including all inventions, know-how, designs,
trade secrets, copyrights, processes, formulas, techniques, discoveries, ideas
and the like, or with respect to any Biological Material owned or co-owned by
Creative or under which Creative has any right, title or interest giving such
third party licensee or transferee the right to make, import, use or sell any
product or device for use or application in the Stryker Field anywhere in the
world during the Royalty Period.

         (b) In order to assure the value to Creative of the licenses granted to
Creative pursuant to this Agreement, Stryker agrees that it will not, and will
cause its Affiliates not to, directly or indirectly (i) develop any product or
device specifically for use or application in the Creative Field or manufacture,
import, market or sell any product or device for use or application in the
Creative Field anywhere in the world during the Royalty Period, (ii) conduct
research for or with a third party with respect to any product or device
specifically for use or application in the Creative Field anywhere in the world
during the Royalty Period, or (iii) grant a license or transfer any right, title
or interest of Stryker to any third party under any patent or patent application
or under any know-how, including all inventions, know-how, designs, trade
secrets, copyrights, processes, formulas, techniques, discoveries, ideas and the
like, or with respect to any Biological Material owned or co-owned by Stryker or
under which Stryker has any right, title or interest giving such third party
licensee or transferee the right to make, import, use or sell any product or
device for use or application in the

                                       24
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Creative Field anywhere in the world during the Royalty Period.

         (c) In the event of an acquisition (as defined in subparagraph (d)
below) of either Creative or Stryker by another Person, the prohibitions of
subparagraphs (a) and (b), respectively, shall not apply to any activities of
such Person except to prohibit the use by such Person, directly or indirectly,
of any right, title or interest transferred or licensed pursuant to this
Agreement or the Related Agreements to the party being acquired or any other
intellectual property or know-how of the party being acquired or to utilize the
persons who were scientific employees of the party being acquired at or at any
time within the six months preceding the time of the acquisition to pursue the
activities prohibited by subparagraphs (a) or (b) hereof.

         (d) As used in subparagraph (c) above, an "acquisition" shall mean a
transaction or series of transactions, pursuant to which Creative or Stryker, as
the case may be, shall consolidate or merge with another entity, or convey or
sell to another entity all or substantially all of its stock, assets or
business, unless the stockholders of Creative or Stryker, as the case may be,
immediately prior to such transaction or series of transactions own a majority
of the equity securities of the merged, consolidated or acquiring entity after
the transaction or series of transactions.

         (e) In the event that either party hereto alleges that the other party
has violated the provisions of subsection (a)or (b) (as the case may be), such
party shall notify the alleged violator (the "ALLEGED VIOLATOR"). The Alleged
Violator may elect to cure the alleged violation. In addition, either party may
commence arbitration to determine whether there is a violation. Royalties
payable hereunder to the Alleged Violator will continue to accrue and be payable
during the first 90 days following notice of the alleged violation. After the
90th day, such royalties will cease to be payable (although royalties accruing
during the 90 days will be paid when due, even if the due date is after the 90
days) irrespective of whether arbitration has been commenced or its status until
resolution of the arbitration or cure. Any arbitration commenced pursuant to
this subsection (e) will be conducted in accordance with the provisions of
subsection (f) below. If the arbitrators finds no violation, back royalties will
be payable from the 90th day after the notice (when such royalties were
suspended) forward and shall be payable at such time as the arbitrator may
determine and the arbitrator may award such other remedy or remedies as
appropriate. If the arbitrator finds there was a violation, the arbitrator shall
determine damages resulting from the violation and an appropriate

                                       25

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remedy, commensurate with the nature and severity of the violation and the
damage to the other party, which may include injunctive relief, monetary damages
(against which any royalties withheld during the arbitration shall be applied),
or a reduction of royalties payable to the party which has been found to have
violated subsection (a) or (b) (as the case may be). Notwithstanding the
foregoing, in the event an alleged violation of a non-material nature results
from actions or activities of third parties which are beyond the reasonable
control of the Alleged Violator and once notified, the Alleged Violator uses its
reasonable efforts to cause the alleged violation to cease, then royalties shall
continue to be payable until resolution of the arbitration or cure. For purposes
of this SECTION 4.19, a violation will be deemed cured if the activities
constituting the violation cease on an ongoing basis, whether or not prior
violating activities are remedied. (For example, if sale of a particular product
is determined to be a violation, the violation will be deemed cured if the
violating party ceases to sell the product. Products previously sold to end
users do not have to be recovered, but products sold to distributors must be
recovered.)

         (f) Any arbitration commenced pursuant to subsection (e) above will be
conducted in accordance with the following rules:

                  (1) In the event that either party ( the "COMPLAINING PARTY")
         notifies the other (the "DEFENDING PARTY") in writing that it believes
         that the Defending Party is in violation of subsection (a) or (b) (as
         the case may be), and in that notification states with reasonable
         particularity the nature of such alleged violation, the parties will
         then cooperate in an expedited arbitration proceeding in which the
         merits of such allegation are determined.

                  (2) Immediately upon receipt of the above-mentioned
         notification, the parties will confer and seek to agree upon a single
         arbitrator who is available to hear and decide the merits of the
         alleged violation within the time frame set forth herein. If such
         agreement is not reached within five (5) days of said notification, the
         parties will, on the first business day following the expiration of
         such five (5) days, jointly request in writing, sent immediately by
         facsimile, that the New York office of the American Arbitration
         Association ("AAA") select an arbitrator within five (5) days who the
         AAA believes, in its sole discretion, is qualified and sufficiently
         available to decide the matters in issue and to do so within the time
         frame set forth herein. If either party fails to join in such joint
         request the other party shall have the

                                       26


   27
         right to make such request on behalf of both parties.

                  (3) Within ten (10) days following the designation of the
         arbitrator, the Complaining Party shall serve, by immediate facsimile,
         upon the Defending Party and the arbitrator, its factual and legal
         submission, together with all documents it wishes to be considered by
         the arbitrator, in support of its claim that the Defending Party is in
         violation of subsection (a) or (b).

                  (4) Within twenty (20) days following the service of the
         submission referred to in sub-subsection (3) above, the Defending Party
         shall serve, by immediate facsimile, upon the Complaining Party, its
         factual and legal submission together with all documents it wishes to
         be considered by the arbitrator, in opposition to the Complaining
         Party's allegations.

                  (5) Within five (5) days after service of the Defending
         Party's submission, either party may request from the other party any
         specifically identified document in the other party's possession which
         the requesting party believes is relevant and important for the
         arbitrator to consider in deciding the case. Within five (5) days of
         receiving such request, the other party shall either provide the
         requested documents or notify the requesting party and arbitrator that
         it opposes the request or some part thereof, in which case the
         arbitrator shall hold a conference call with the parties within five
         (5) days, hear the parties' arguments, and decide, under the general
         principles followed in AAA proceedings, within two (2) days, what
         documents must be provided. Within two (2) days after such decision by
         the arbitrator, all documents required to be produced shall be
         delivered to the requesting party. In the event of a party's failure to
         make timely production of documents pursuant to the arbitrator's
         ruling, the arbitrator shall have discretion to disallow the claim or
         defense of that party or to extend for an appropriate time the period
         in which that party shall be precluded from withholding royalties or
         other payments.

                  (6) Within ten (10) days after production of all documents by
         the parties as provided for herein, the arbitrator shall request, by
         facsimile to the parties, any further factual or legal information from
         the parties he/she believes to be necessary to decide the matters in
         issue. The parties shall provide such information to the arbitrator and
         to each other within

                                       27
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         ten (10) days of said request.

                  (7) Within thirty (30) days of the completion of document
         production, the arbitrator shall hold a hearing at a location of the
         arbitrator's choosing in New York City. The length of such hearing, the
         number of witnesses, the number of documents to be considered, and all
         other aspects of such hearing shall be determined by the arbitrator
         such that such hearing does not last for more than ten (10) days,
         including weekends.

                  (8) Within three (3) days after the close of the hearing,
         either party may submit to the arbitrator, with service upon the other,
         further written arguments based upon evidence heard at the hearing.

                  (9) Within thirty three (33) days after the close of the
         hearing, the arbitrator shall render her/his written decision, sent by
         facsimile to the parties, on all issues submitted for decision. The
         arbitrator shall state briefly the facts and reasons for such decision.

                  (10) Within ten (10) days after receiving the decision, either
         party may submit a request to the arbitrator, with service by facsimile
         on the other party, for reconsideration of the decision, setting forth
         all factual and legal arguments in support of such request. Within five
         (5) days thereafter, the other party may submit to the arbitrator, with
         service by facsimile on the other party, an opposition or other
         response to the request.

                  (11) Within fifteen (15) days after receipt of any such
         requests for reconsideration and responses thereto, the arbitrator
         shall render her/his decision as to such request and a final ruling on
         the merits of all claims heard in the arbitration. This decision will
         be final and binding upon the parties as to all issues decided in the
         arbitration, subject only to judicial review under the Federal
         Arbitration Act.

                  (12) The parties shall pay promptly and in equal shares all
         expenses of the arbitration as assessed by the arbitrator and/or the
         AAA.

                  (13) In addition to the specific powers and responsibilities
         set forth herein, the arbitrator shall have all powers and discretion
         customarily exercised in arbitrations under the Commercial Rules of the
         AAA.

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         (g) If either party hereto wishes to have an interpretation as to
whether a particular action or proposed action would violate subsection (a) or
(b), such party may commence an arbitration to determine whether such action
would constitute a violation. Any arbitration commenced pursuant to this
subsection (g) will be conducted in accordance with the following rules:

                  (1) In the event a Complaining Party wishes to obtain a
         declaratory ruling in arbitration as to whether a particular action or
         proposed action would violate subsection (a) or (b), the Complaining
         Party shall notify the Defending Party and in that notification state
         with reasonable particularity the nature of the issue raised and the
         declaratory ruling sought, and the parties will then cooperate in an
         expedited arbitration proceeding in which the merits of such
         declaratory relief are determined.

                  (2) Immediately upon receipt of the above-mentioned
         notification, the parties will confer and seek to agree upon a single
         arbitrator who is available to hear and decide the merits of the
         declaratory relief requested within the time frame set forth herein. If
         such agreement is not reached within five (5) days of said
         notification, the parties will, on the first business day following the
         expiration of such five (5) days, jointly request in writing, sent
         immediately by facsimile, that the New York office of the AAA select an
         arbitrator within five (5) days who the AAA believes, in its sole
         discretion, is qualified and sufficiently available to decide the
         matters in issue and to do so within the time frame set forth herein.
         If either party fails to join in such joint request the other party
         shall have the right to make such request on behalf of both parties.

                  (3) Within ten (10) days following the designation of the
         arbitrator, the Complaining Party shall serve, by immediate facsimile,
         upon the Defending Party and the arbitrator, its factual and legal
         submission, together with all documents it wishes to be considered by
         the arbitrator, in support of the declaratory relief requested.

                  (4) Within fifteen (15) days following the service of the
         submission referred to in sub-subsection (3) above, the Defending Party
         shall serve, by immediate facsimile, upon the Complaining Party, its
         factual and legal submission together with all documents it wishes to
         be considered by the arbitrator, in opposition to the Complaining
         Party's allegations.

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   30
                  (5) Within ten (10) days of the service of the Defending
         Party's submission, the arbitrator shall hold a hearing at a location
         of the arbitrator's choosing in New York City. The length of such
         hearing, the number of witnesses, the number of documents to be
         considered, and all other aspects of such hearing shall be determined
         by the arbitrator such that such hearing does not last for more than
         ten (10) days, including weekends.

                  (6) Within three (3) days after the close of the hearing,
         either party may submit to the arbitrator, with service upon the other,
         further written arguments based upon evidence heard at the hearing.

                  (7) Within sixteen (16) days after the close of the hearing,
         the arbitrator shall render her/his written decision, sent by facsimile
         to the parties, on all issues submitted for decision. The arbitrator
         shall state briefly the facts and reasons for such decision.


                  (8) Within three (3) days after receiving the decision, either
         party may submit a request to the arbitrator, with service by facsimile
         on the other party, for reconsideration of the decision, setting forth
         all factual and legal arguments in support of such request. Within
         three (3) days thereafter, the other party may submit to the
         arbitrator, with service by facsimile on the other party, an opposition
         or other response to the request.

                  (9) Within ten (10) days after receipt of any such requests
         for reconsideration and responses thereto, the arbitrator shall render
         her/his decision as to such request and a final ruling on the merits of
         all claims heard in the arbitration. This decision will be final and
         binding upon the parties as to all issues decided in the arbitration,
         subject only to judicial review under the Federal Arbitration Act.

                  (10) The parties shall pay promptly and in equal shares all
         expenses of the arbitration as assessed by the arbitrator and/or the
         AAA.

                  (11) In addition to the specific powers and responsibilities
         set forth herein, the arbitrator shall have all powers and discretion
         customarily exercised in arbitrations under the Commercial Rules of the
         AAA.
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         Section 4.20 CONFIDENTIALITY. As a result of entering into the Second
Amended Agreement, this Agreement and the Related Agreements and the performance
of the obligations hereunder and thereunder, each party has had, and will have
access to information of the other party which the other party considers to be
proprietary and confidential. Each party agrees that any and all such
information which it has obtained or will in the future obtain will be held
confidential and shall not be disclosed to any third party nor used by a party
at any time for its own individual advantage, without the prior written consent
of the other. Each party agrees that it shall take all reasonable steps
necessary to ensure the confidential treatment herein agreed to. Notwithstanding
the above, however, these obligations of confidential treatment shall not apply
to information which:

                  (i) is known to the receiving party at the time of disclosure
         and can be documented as such by contemporaneous written documents;

                  (ii) is in the public domain at the time of disclosure;

                  (iii) is required by statute, regulation, rule of any stock
         exchange or Governmental Authority or a court of law to be disclosed
         (except that, if a party is so required to disclose any confidential
         information, the other party hereto shall, prior to disclosure thereof,
         be given notice of such requirement and an opportunity to contest such
         disclosure);

                  (iv) after disclosure enters the public domain through no
         positive action or omission on the part of the receiving party; or

                  (v) lawfully comes into the possession of the receiving party
         from a source independent of the disclosing party.

                  Section 4.21 DRUG MASTER FILE. Stryker agrees to file a Drug
Master File with the FDA following the Closing, which Drug Master File shall
cover OP-1 as manufactured by Stryker. Stryker acknowledges that Creative shall
have access to review and inspect such Drug Master File as filed with the FDA,
and Creative agrees to provide notice to Stryker on each occasion that Creative
accesses the Drug Master File.

                  Section 4.22 REPRESENTATION. Except as set forth in SCHEDULE
4.22, Creative represents to Stryker that the Assigned Patent Rights and Patent
Rights Licensed to Stryker constitute all U.S., foreign and PCT applications and
patents in which Creative ever had any right, title and

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interest that disclose inventions and improvements related to products or
devices that have use or application in the Stryker Field or related to any use,
formulation or method with application or use in the Stryker Field that have
been filed or issued as of the date hereof.

         Section 4.23 BEST EFFORTS. Each of Creative and Stryker shall use its
best efforts to cause all of the conditions to the obligations of the other to
consummate the transactions contemplated hereby and by the Related Agreements to
be met as soon as practicable after the date of this Agreement.


                                    ARTICLE V
                                   THE CLOSING

         Section 5.1 PLACE AND DATE. The closing of the transactions
contemplated by this Agreement and the Related Agreements (the "CLOSING") shall
take place on November 20, 1998, provided that all of the Government Approvals
and Consents referred to in subsections (c) and (g) of SECTION 6.2 have been
obtained or the requirement therefor has been waived and that all other closing
conditions set forth in Article VI have been satisfied or waived, at the offices
of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., located at One Financial
Center, Boston, Massachusetts, or such other time and place upon which the
parties may agree; provided, however, that the Closing may be postponed by
either Stryker or Creative in order to obtain any Consents required to be
obtained prior to the Closing. If the Closing is postponed, Stryker and Creative
will agree on the Purchase Price (as defined in SECTION 3.2 of the Asset
Purchase Agreement) and the Purchase Price will not be subject to change except
for adjustment as a result of the post closing audit pursuant to SECTION 3.5 of
the Asset Purchase Agreement. The day on which the Closing actually occurs is
herein sometimes referred to as the "CLOSING DATE".


                                   ARTICLE VI
                              CONDITIONS PRECEDENT

         Section 6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The obligations of
the parties to consummate the transactions contemplated hereby and by the
Related Agreements shall be subject to the fulfillment on or prior to the
Closing Date of the following conditions:

         (a) NO INJUNCTION, ETC. Consummation of the transactions contemplated
hereby shall not have been restrained, enjoined or otherwise prohibited by any
Applicable Law, including any order, injunction, decree or

                                       32
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judgment of any court or other Governmental Authority. No court or other
Governmental Authority shall have determined that any Applicable Law makes
illegal the consummation of the transactions contemplated hereby, and no
proceeding with respect to the application of any such Applicable Law to such
effect shall be pending.

         (b) HSR ACT. The statutory waiting period during which consummation of
the transactions contemplated by this Agreement is prohibited by the HSR Act
shall have expired or been terminated.

         Section 6.2 CONDITIONS TO OBLIGATIONS OF STRYKER. The obligations of
Stryker to consummate the transactions contemplated hereby and by the Related
Agreements shall be subject to the fulfillment (or waiver by Stryker) on or
prior to the Closing Date of the following additional conditions:

         (a) REPRESENTATIONS; PERFORMANCE. Each of the representations and
warranties of Creative contained in this Agreement and any Related Agreement
that is qualified as to materiality shall be true and correct and each such
representation and warranty that is not so qualified shall be true and correct
in all material respects in each case on the date hereof and at and as of the
Closing Date as though made on and as of the Closing Date. Creative shall have
duly performed and complied in all material respects with all agreements and
conditions required by this Agreement and the Related Agreements to be performed
or complied with by it prior to or on the Closing Date. Creative shall have
delivered to Stryker a certificate, dated the Closing Date and signed by its
duly authorized officer, to the foregoing effect.

         (b) NO MATERIAL ADVERSE CHANGE. There shall not have occurred any
physical loss or damage to any material amount of the Assets (whether or not
covered by insurance).

         (c) CONSENTS. (i) Creative shall have obtained and shall have delivered
to Stryker copies of (A) all Governmental Approvals required to be obtained by
Creative in connection with the execution and delivery of this Agreement and the
Related Agreements and the consummation of the transactions contemplated hereby
and thereby, (B) all Consents necessary to be obtained in order to consummate
the sale and transfer of the Assets pursuant to the Asset Purchase Agreement and
the consummation of the other transactions contemplated hereby and listed on
SCHEDULE 2.5, and (C) the Consent of each landlord under each Lease (other than
the lease for Creative's facility in Hopkinton, Massachusetts), substantially in
the form of SCHEDULE 6.2 (c-1), and of the lessor under each Equipment Lease,
substantially in the form of SCHEDULE 6.2 (c-2),to the


                                       33
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assignment thereof to Stryker, and a statement from such landlord or lessor to
the effect that all rents and other charges under such landlord's or lessor's
Lease or Equipment Lease have been paid to the Closing Date and that Creative,
as tenant under such Lease or Equipment Lease, is not in default under any of
the provisions thereof, each such Governmental Approval and Consent to be
reasonably satisfactory to Stryker, and (ii) (A) Stryker shall have entered into
a lease with the landlord of Creative's facility at 35 South Street in
Hopkinton, Massachusetts (the "HOPKINTON FACILITY"), (B) such landlord shall
have released Creative for all future liability under the premises subject to
Stryker's lease at 35 South Street, Hopkinton, Massachusetts, (C) Creative's
lease for a portion of the premises at 35 South Street, Hopkinton, Massachusetts
(the "RETAINED FACILITY") shall continue in effect, and (D) Stryker and Creative
shall have entered into a mutually satisfactory Facility Sharing Agreement for
35 South Street, Hopkinton, Massachusetts providing for the sharing of
utilities, waste disposal and other common items and providing for Creative to
vacate a portion of the Retained Facility by April 30, 1999.

         (d) CORPORATE PROCEEDINGS. All corporate and other proceedings of
Creative in connection with this Agreement and the Related Agreements and the
transactions contemplated hereby and thereby, and all documents and instruments
incident thereto, shall be reasonably satisfactory in form and substance to
Stryker and its counsel, and Stryker and its counsel shall have received all
such documents and instruments, or copies thereof, certified if requested, as
may be reasonably requested.

         (e) TRANSFER DOCUMENTS. Creative shall have delivered to Stryker at the
Closing all documents, certificates and agreements necessary to transfer to
Stryker title to the Assets, free and clear of any and all Liens thereon, other
than Permitted Liens, which documents, certificates and agreements shall each be
in form and substance reasonably satisfactory to Stryker, including:

                  (i) a bill of sale, assignment and general conveyance, dated
         the Closing Date, with respect to the Assets;

                  (ii) assignments of all Assigned Agreements and any other
         agreements and instruments constituting Assets, dated the Closing Date,
         assigning to Stryker all of Creative's right, title and interest
         therein and thereto;

                  (iii) an assignment of lease other than the lease for
         Creative's facility in Hopkinton,

                                       34
   35
         Massachusetts, dated the Closing Date, with respect to each Lease; and

                  (iv) a non-disturbance agreement from each mortgagee of each
         parcel of Leased Real Property, other than the lease for Creative's
         facility in Hopkinton, Massachusetts, encumbered by one or more
         existing mortgages.

         (f) UCC RELEASES. Creative shall have obtained, releases of all
financing statements filed against Creative as a debtor under the Uniform
Commercial Code of any jurisdiction (other than any such financing statements
filed in respect of Permitted Liens) in respect of the Assets.

         (g) ENVIRONMENTAL MATTERS. Creative shall have: (i) complied with all
requirements of Creative under Environmental Laws to provide notice, obtain
Governmental Approval and take any other action necessary to lawfully consummate
the transactions contemplated by this Agreement and the Related Agreements, (ii)
obtained and provided Stryker with executed copies of all Consents which, by
law, Creative can obtain, and as are currently required under Environmental Laws
in connection with the transfer of the Manufacturing Operations and the Assets,
(iii) cooperated fully with Stryker and taken all actions necessary to
transfer/assign all transferable/assignable environmental Consents relating to
the Manufacturing Operations and the Assets to Stryker in its own name, and (iv)
cooperated fully with Stryker in Stryker's efforts to obtain all
non-transferable/non-assignable environmental Consents necessary to conduct the
Manufacturing Operations as currently conducted by Creative in compliance with
Environmental Laws in Stryker's own name ab initio. Stryker shall have received
Phase I environmental assessments of the Assets and the Hopkinton Facility and,
if commenced within two (2) weeks after the date of this Agreement or such later
date that Stryker's environmental consultant is provided access to the Assets
and the Hopkinton Facility for such purpose, Phase II reports prepared by
Stryker's environmental consultant, which reports shall be reasonably
satisfactory to Stryker. Stryker shall have obtained in Stryker's own name ab
initio all non-transferable/non-assignable environmental Consents necessary to
conduct the Manufacturing Operations as currently conducted by Creative.

         (h) OPINION OF COUNSEL TO CREATIVE. Stryker shall have received an
opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to
Creative, dated as of the Closing Date, in form and substance reasonably
satisfactory to Stryker and its counsel.

         Section 6.3 CONDITIONS TO OBLIGATIONS OF CREATIVE. The obligation of
Creative to consummate the

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transactions contemplated hereby and by the Related Agreements shall be subject
to the fulfillment (or waiver by Creative), on or prior to the Closing Date, of
the following additional conditions:

         (a) REPRESENTATIONS; PERFORMANCE. Each of the representations and
warranties of Stryker contained in this Agreement and any Related Agreement that
is qualified as to materiality shall be true and correct and each such
representation and warranty that is not so qualified shall be true and correct
in all material respects in each case on the date hereof and at and as of the
Closing Date as though made on and as of the Closing Date. Stryker shall have
duly performed and complied in all material respects with all agreements and
conditions required by this Agreement and the Related Agreements to be performed
or complied with by it prior to or on the Closing Date. Stryker shall have
delivered to Creative a certificate, dated the Closing Date and signed by its
duly authorized officer, to the foregoing effect.

         (b) ASSUMPTION AGREEMENT. Creative shall have received from Stryker an
Assumption Agreement, in form and substance reasonably satisfactory to Creative,
under which Stryker shall have assumed the Assumed Liabilities.

         (c) CORPORATE PROCEEDINGS. All corporate proceedings of Stryker in
connection with this Agreement and the Related Agreements and the transactions
contemplated hereby and thereby, and all documents and instruments incident
thereto, shall be reasonably satisfactory in form and substance to Creative, and
its counsel, and Creative and its counsel shall have received all such documents
and instruments, or copies thereof, certified if requested, as may be reasonably
requested.

         (d) OPINION OF COUNSEL TO STRYKER. Creative shall have received an
opinion of Whitman Breed Abbott & Morgan LLP, counsel to Stryker, dated as of
the Closing Date, in form and substance reasonably satisfactory to Creative and
its counsel.

         (e) CONSENTS. Stryker shall have obtained and shall have delivered to
Creative copies of (i) all Governmental Approvals required to be obtained by
Stryker in connection with the execution and delivery of this Agreement and the
Related Agreements and the consummation of the transactions contemplated hereby
and thereby, (ii) all Consents necessary to be obtained by it in order to
consummate the sale and transfer of the Assets and the assumption of the Assumed
Liabilities pursuant to the Asset Purchase Agreement and the consummation of the
other transactions contemplated hereby and thereby.

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                                   ARTICLE VII
                                   TERMINATION

         Section 7.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:

         (a) by the written agreement of Stryker and Creative; or

         (b) by either Creative or Stryker by written notice to the other party
if the transactions contemplated hereby shall not have been consummated pursuant
hereto by 5:00 p.m. Eastern time on December 15, 1998, unless such failure has
been caused by the breach of this Agreement by the party seeking such
termination or such date shall be extended by the mutual written consent of
Creative and Stryker.

                  Section 7.2 EFFECT OF TERMINATION. If this Agreement is
terminated pursuant to the provisions of SECTION 7.1, then this Agreement shall
become void and have no effect, without any liability to any Person in respect
hereof or of the transactions contemplated hereby on the part of any party
hereto, or any of its directors, officers, employees, agents, consultants,
representatives, advisers, stockholders or Affiliates.


                                  ARTICLE VIII
                                 INDEMNIFICATION

         Section 8.1 BY CREATIVE. Subject to the terms and conditions of this
ARTICLE VIII, Creative covenants and agrees to defend, indemnify and hold
harmless Stryker and its officers, directors, employees, agents, advisers,
representatives and Affiliates (collectively, the "STRYKER INDEMNITEES"), from
and against, and pay or reimburse the Stryker Indemnitees for, any and all
claims, liabilities, obligations, losses, fines, expenses, costs, proceedings,
deficiencies or damages (whether absolute, accrued, conditional or otherwise and
whether or not resulting from third party claims), including reasonable
out-of-pocket expenses, court costs, expert witness fees and reasonable
attorneys' fees and expenses incurred in the investigation or defense of any of
the same or in asserting any of their respective rights hereunder (collectively,
"LOSSES"), resulting from or arising out of:

         (a) any misrepresentation or breach of any warranty of Creative made or
contained in this Agreement or any Related Agreement; PROVIDED, HOWEVER, that no
claim for indemnification under this clause (a) may be made after the first
anniversary of the Closing Date, except that any claim for misrepresentation or
breach of warranty under SECTIONS

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4.4 and 4.7 of the Asset Purchase Agreement and SECTION 2.1(c) of the Human
Resources Agreement may be made no later than a date 30 days from and after the
expiration of the period of the applicable statute of limitations;

         (b) any failure of Creative to perform any covenant or agreement made
or contained in this Agreement or any Related Agreement or fulfill any
obligation in respect thereof;

         (c) any and all of the Excluded Liabilities;

         (d) directly or indirectly from the use by any Person of any OP Product
or OP Device manufactured by Creative and furnished to Stryker, which OP Product
or OP Device failed to meet specification at the time of delivery to Stryker; or

         (e) directly or indirectly from the use by any Person of an OP Product
manufactured by Stryker and furnished to Creative which OP Product met
specification at the time of delivery to Creative.

         Notwithstanding the foregoing, Creative shall not be liable for any
Losses resulting from or arising out of any misrepresentation or breach of any
warranty relating to Environmental Laws (or compliance therewith), including
without limitation, the provisions of SECTION 4.7 of the Asset Purchase
Agreement, or any Environmental Liabilities and Costs which, in either case,
relate to conditions or events not caused by Creative unless such Losses arise
from the assertion of a claim by a third party or governmental agency or from
remediation or corrective action otherwise required by law.

         Creative shall not be required to indemnify the Stryker Indemnitees
with respect to any claim or claims for indemnification resulting from or
arising out of matters described in this SECTION 8.1 unless and until the
aggregate amount of all claims against Creative exceeds [XXXXX] ("CREATIVE'S
THRESHOLD AMOUNT"), in which case Creative shall only be required to indemnify
the Stryker Indemnitees for the amount by which such claims exceed Creative's
Threshold Amount. Claims thereafter may be asserted regardless of amount.
Creative's maximum liability to the Stryker Indemnitees under this SECTION 8.1
shall not exceed [XXXXX]

         Section 8.2 BY STRYKER. Subject to the terms and conditions of this
ARTICLE VIII, Stryker covenants and agrees to defend, indemnify and hold
harmless Creative and its officers, directors, employees, agents, advisers,
representatives and Affiliates (collectively, the "CREATIVE INDEMNITEES"), from
and against, and pay or reimburse the

                                       38
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Creative Indemnitees for, any and all Losses resulting from or arising out of:

         (a) any misrepresentation or breach of warranty of Stryker made or
contained in this Agreement; PROVIDED, however, that no claim for
indemnification under this clause (a) may be made after the first anniversary of
the Closing Date;

         (b) any failure of Stryker to perform any covenant or agreement made or
contained in this Agreement or fulfill any other obligation in respect thereof;

         (c) the Assumed Liabilities (it being understood and agreed by the
parties hereto that the definition of Assumed Liabilities shall not, for all
purposes of this Agreement (including this SECTION 8.2), be in any way affected
or expanded by virtue of or by reason of any assignment agreement, assumption
agreement or consent agreement entered into on or after the Closing Date with
respect to any particular Assigned Agreement);

         (d) directly or indirectly from the use by any Person of any OP Product
manufactured by Stryker and furnished to Creative, which OP Product failed to
meet specification at the time of delivery to Creative; or

         (e) directly or indirectly from the use by any Person of any OP Product
or OP Device manufactured by Creative and furnished to Stryker which OP Product
or OP Device met specification at the time of delivery to Stryker.

         Stryker shall not be required to indemnify the Creative Indemnitees
with respect to any claim for indemnification resulting from or arising out of
matters described in this SECTION 8.2 unless and until the aggregate amount of
all claims against Stryker exceeds [XXXXX] ("STRYKER'S THRESHOLD AMOUNT"), in
which case Stryker shall only be required to indemnify the Creative Indemnitees
for the amount by which such claims exceed the Stryker's Threshold Amount.
Stryker's maximum liability to the Creative Indemnitees under this SECTION 8.2
shall not exceed [XXXXX]

         Section 8.3 INDEMNIFICATION PROCEDURES. In the case of any claim
asserted by a third party against a party entitled to indemnification under this
Agreement (the "INDEMNIFIED PARTY"), notice shall be given by the Indemnified
Party to the party required to provide indemnification (the "INDEMNIFYING
PARTY") as soon as practicable after such Indemnified Party has actual Knowledge
of any claim as to which indemnity may be sought, and the Indemnified Party
shall permit the Indemnifying Party (at the expense of such Indemnifying Party)
to assume
                                       39
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the defense of any third party claim or any litigation with a third party
resulting therefrom; PROVIDED, HOWEVER, that (a) the counsel for the
Indemnifying Party who shall conduct the defense of such claim or litigation
shall be subject to the approval of the Indemnified Party (which approval shall
not be unreasonably withheld or delayed), (b) the Indemnified Party may
participate in such defense at such Indemnified Party's expense (which shall not
be subject to reimbursement hereunder except as provided below), and (c) the
omission by any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its indemnification obligation under this
Agreement except and only to the extent that such Indemnifying Party is actually
and materially damaged as a result of such failure to give notice. Except with
the prior written consent of the Indemnified Party, no Indemnifying Party, in
the defense of any such claim or litigation, shall consent to entry of any
judgment or enter into any settlement that provides for injunctive or other
nonmonetary relief affecting the Indemnified Party or that does not include as
an unconditional term thereof the giving by each claimant or plaintiff to such
Indemnified Party of a general release from any and all liability with respect
to such claim or litigation. If the Indemnified Party shall in good faith
determine that the conduct of the defense of any claim subject to
indemnification hereunder or any proposed settlement of any such claim by the
Indemnifying Party might be expected to affect adversely the Indemnified Party's
tax liability or the ability of the Indemnified Party to conduct its business,
or that the Indemnified Party may have available to it one or more defenses or
counterclaims that are inconsistent with one or more of those that may be
available to the Indemnifying Party in respect of such claim or any litigation
relating thereto, the Indemnified Party shall have the right at all times to
take over and assume control over the defense, settlement, negotiations or
litigation relating to any such claim at the sole cost of the Indemnifying
Party; PROVIDED, HOWEVER, that if the Indemnified Party does so take over and
assume control, the Indemnified Party shall not settle such claim or litigation
without the prior written consent of the Indemnifying Party, such consent not to
be unreasonably withheld or delayed. If the Indemnifying Party does not accept
the defense of any matter as above provided, the Indemnified Party shall have
the full right to defend against any such claim or demand at the sole cost of
the Indemnifying Party and shall be entitled to settle or agree to pay in full
such claim or demand. In any event, the Indemnifying Party and the Indemnified
Party shall reasonably cooperate in the defense of any claim or litigation
subject to this ARTICLE VIII and the records of each shall be reasonably
available to the other with respect to such defense.

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         Section 8.4 EXPIRATION OF REPRESENTATIONS AND WARRANTIES, ETC. All
representations and warranties contained in this Agreement and any Related
Agreement shall survive the Closing for a period of one (1) year; PROVIDED,
HOWEVER, that the representations and warranties stated in SECTIONS 4.4 and 4.7
of the Asset Purchase Agreement and SECTION 2.1(c) of the Human Resources
Agreement shall survive the Closing until 30 days after expiration of the
applicable statute of limitations. The right to indemnification or other remedy
based on such representations and warranties will not be affected by any
investigation conducted with respect to, or any knowledge acquired (or capable
of being acquired) at any time whether before or after the execution and
delivery of this Agreement or the Closing Date, with respect to, the accuracy or
inaccuracy of or compliance with any such representation or warranty. The waiver
of any condition based on the accuracy of any representation or warranty will
not affect the right to indemnification or other remedy based on such
representation or warranty.

         Section 8.5 EXCLUSIVE REMEDY. Absent fraud or criminal activity, the
indemnifications provided for in this ARTICLE VIII shall be the sole and
exclusive post-Closing remedies available to either party against the other
party for any claims under or based upon this Agreement.


                                   ARTICLE IX
                                  MISCELLANEOUS

         Section 9.1 EXPENSES. Except to the extent otherwise provided hereby,
Creative, on the one hand, and Stryker, on the other hand, shall bear their
respective expenses, costs and fees (including fees of any counsel, accountants
and other advisors) in connection with the transactions contemplated hereby,
including the preparation, execution and delivery of this Agreement and the
Related Agreements and compliance herewith and therewith, whether or not the
transactions contemplated hereby and thereby shall be consummated.

         Section 9.2 SEVERABILITY. If any provision of this Agreement or any
Related Agreement, including any phrase, sentence, clause, Section or subsection
is inoperative or unenforceable for any reason, such circumstances shall not
have the effect of rendering the provision in question inoperative or
unenforceable in any other case or circumstance, or of rendering any other
provision or provisions herein or therein contained invalid, inoperative, or
unenforceable to any extent whatsoever.

         Section 9.3 NOTICES. All notices, requests, demands, approvals,
consents, waivers and other
                                       41

   42
communications required or permitted to be given under this Agreement or any
Related Agreement (each, a "NOTICE") shall be in writing and shall be (a)
delivered personally, (b) mailed by first-class, registered or certified mail,
return receipt requested, postage prepaid, (c) sent by next-day or overnight
mail or delivery, or (d) sent by facsimile transmission, provided that the
original copy thereof also is sent by pre-paid, first class certified or
registered mail.

                           (i)      if to Stryker, to:

                                    Stryker Corporation
                                    2725 Fairfield Road
                                    Kalamazoo, MI  49003
                                    Attention:  John W. Brown
                                    Facsimile:  (616) 385-0030

                                    with a copy to:

                                    Whitman Breed Abbott & Morgan LLP
                                    200 Park Avenue
                                    New York, NY  10166
                                    Attention:  John H. Denne, Esq.
                                    Facsimile:  (212) 351-3131

                           (ii)     if to Creative, to:

                                    Creative Biomolecules, Inc.
                                    101 Huntington Avenue
                                    Suite 2400
                                    Boston, Massachusetts  02199
                                    Attention:  Michael M. Tarnow
                                    Facsimile:  (617) 912-2900

                                    with a copy to:

                                    Mintz, Levin, Cohn, Ferris,
                                      Glovsky and Popeo, P.C.
                                    One Financial Center
                                    Boston, Massachusetts  02210
                                    Attention:  Jeffrey M. Wiesen, Esq.
                                    Facsimile:  (617) 542-2241

or, in each case, at such other address as may be specified in a Notice to the
other party hereto. All Notices shall be deemed effective and given upon receipt
or refusal of receipt.

         Section 9.4 BOOKS AND RECORDS. From and after the Closing and until the
sixth anniversary thereof, (a) Creative agrees to grant to Stryker, upon
reasonable notice and during normal business hours, reasonable access to (and
the right to copy) any tax, accounting and other records

                                       42


   43
pertaining to the Manufacturing Operations and existing on the Closing Date that
are included in the Excluded Assets, for any reasonable purpose of Stryker, and
(b) Stryker agrees to grant to Creative, upon reasonable notice and during
normal business hours, reasonable access to (and the right to copy) any Books
and Records included in the Assets that pertain to the operation of the
Manufacturing Operations on or prior to the Closing Date for any Tax or
accounting matters involving Creative.

         Section 9.5 LIABILITY FOR TRANSFER TAXES. Creative and Stryker shall
each be responsible for and pay in a timely manner fifty percent (50%) of all
sales, use, value added, documentary, stamp, gross receipts, registration,
transfer, conveyance, excise, recording, license and other similar Taxes and
fees ("TRANSFER TAXES"), arising out of or in connection with or attributable to
the transactions effected pursuant to this Agreement. Each party hereto shall
prepare and timely file all Tax Returns required to be filed in respect of
Transfer Taxes that are the primary responsibility of such party under
applicable law; PROVIDED, HOWEVER, that such party's preparation of any such Tax
Returns shall be subject to the other party's approval, which approval shall not
be withheld or delayed unreasonably.

         Section 9.6 HEADINGS. The headings contained in this Agreement and the
Related Agreements are for purposes of convenience only and shall not affect the
meaning or interpretation hereof or thereof.

         Section 9.7 ENTIRE AGREEMENT. This Agreement and the Related Agreements
(including the Schedules and Exhibits hereto and thereto) constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter hereof and
thereof.

         Section 9.8 COUNTERPARTS. This Agreement and the Related Agreements may
be executed (including by facsimile transmission) with counterpart signature
pages or in several counterparts, each of which shall be deemed an original and
all of which shall together constitute one and the same instrument.

         Section 9.9 GOVERNING LAW; ARBITRATION. This Agreement and the Related
Agreements shall be governed in all respects, including as to validity,
interpretation and effect, by the internal laws of the State of Delaware without
giving effect to the conflict of laws rules thereof. At the request of either
party, any controversy or claim arising out of or relating to this Agreement
shall be settled by arbitration in New York, New York in accordance with the
then current Arbitration Rules of the American

                                       43
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Arbitration Association, and judgment upon the award rendered by the
Arbitrator(s) shall be binding on the parties and may be entered by either party
in the court or forum, state or federal, having jurisdiction.

         Section 9.10 BULK SALES. Stryker hereby waives compliance by Creative
with the provisions of the bulk sales laws of any jurisdiction. Creative shall
indemnify and hold harmless Stryker and the other Stryker Indemnitees from and
against any and all Losses resulting from or arising out of any noncompliance or
alleged noncompliance by Stryker or Creative with such bulk sales laws.

         Section 9.11 BINDING EFFECT. This Agreement and the Related Agreements
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.

         Section 9.12 ASSIGNMENT. This Agreement and the Related Agreements
shall not be assignable or otherwise transferable by either party hereto without
the prior written consent of the other party hereto; PROVIDED, HOWEVER, that
Creative may assign this Agreement to any Subsidiary or Affiliate, to any
successor by merger or consolidation or sale of all or substantially all of
Creative's assets, or to any Person to which Creative assigns the Creative
License Agreement, and Stryker may assign this Agreement to any Subsidiary or
Affiliate, to any successor by merger or consolidation or sale of all or
substantially all of Stryker's assets, or to any Person to which Stryker assigns
the Stryker License Agreement (it being understood and agreed that no such
assignment pursuant to this proviso shall relieve such party of any of its
obligations hereunder or under any Related Agreement). This Agreement shall be
binding upon and shall inure to the benefit of Creative and Stryker and their
respective successors and assigns.

         Section 9.13 NO THIRD PARTY BENEFICIARIES. Except as provided in
ARTICLE VIII with respect to indemnification of the Indemnified Parties
hereunder, nothing in this Agreement or any Related Agreement shall confer any
rights upon any Person other than the parties hereto and their respective
successors and permitted assigns.

         Section 9.14 AMENDMENT; WAIVERS, ETC. No discharge of this Agreement or
any Related Agreement, and no waiver hereunder or thereunder, shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the discharge or waiver is sought. Any such waiver shall
constitute a waiver only with respect to the specific matter described in such
writing and shall in no way impair the rights of the party granting such

                                       44
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waiver in any other respect or at any other time. Neither the waiver by any of
the parties hereto or thereto of a breach of or a default under any of the
provisions of this Agreement or any Related Agreement, nor the failure by any of
the parties, on one or more occasions, to enforce any of the provisions of this
Agreement or any Related Agreement or to exercise any right or privilege
hereunder or thereunder, shall be construed as a waiver of any other breach or
default of a similar nature, or as a waiver of any of such provisions, rights or
privileges hereunder or thereunder. No amendment or modification of this
Agreement or any Related Agreement shall be effective unless in a writing signed
by Stryker and Creative.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       45
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         IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

                                               STRYKER CORPORATION



                                               By: /s/ JOHN W. Brown 
                                                   -----------------------------
                                                   Name: John W. Brown
                                                   Title: Chairman,
                                                          President and
                                                          Chief Executive
                                                          Officer


                                               By: /s/ James E. Kemler
                                                   ----------------------------
                                                   Name: James E. Kemler
                                                   Title: President,
                                                          Stryker Biotech


                                               CREATIVE BIOMOLECULES, INC.



                                               By: /s/ Michael M. Tarnow
                                                   -----------------------------
                                                   Name: Michael M. Tarnow
                                                   Title: President and
                                                          Chief Executive
                                                          Officer


                                               By: /s/ Brian H. Dovey
                                                   -----------------------------
                                                   Name: Brian H. Dovey
                                                   Title: Chairman of the
                                                          Board of Directors



                                       46

EX-10.11

   1
         CREATIVE BIOMOLECULES, INC. HAS OMITTED FROM THIS EXHIBIT 10.11 
PORTIONS OF THE AGREEMENT FOR WHICH CREATIVE BIOMOLECULES, INC. HAS REQUESTED 
CONFIDENTIAL TREATMENT FROM THE SECURITIES AND EXCHANGE COMMISSION. THE 
PORTIONS OF THE AGREEMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 
ARE MARKED WITH X'S IN BRACKETS AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN FILED 
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

                                                                   EXHIBIT 10.11





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

                            ASSET PURCHASE AGREEMENT

                                     between


                            STRYKER SALES CORPORATION

                                    as Buyer


                                       and


                          CREATIVE BIOMOLECULES, INC.,


                                    as Seller


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


                          Dated as of October 15, 1998




   2
                               TABLE OF CONTENTS
 


                                                                               PAGE
                                                                               ----
                                                                             

ARTICLE I DEFINITIONS........................................................... 1

   Section 1.1 DEFINITION OF CERTAIN TERMS...................................... 1

ARTICLE II SALE AND PURCHASE OF THE ASSETS...................................... 6

   Section 2.1 ASSETS........................................................... 6
   Section 2.2 EXCLUDED ASSETS.................................................. 7
   Section 2.3 ASSUMPTION OF LIABILITIES........................................ 7
   Section 2.4 EXCLUDED LIABILITIES............................................. 7
   Section 2.5 CONSENT OF THIRD PARTIES......................................... 9

ARTICLE III TERMS OF PURCHASE................................................... 9

   Section 3.1 OPEN INVOICE AMOUNT.............................................. 9
   Section 3.2 PURCHASE PRICE................................................... 9
   Section 3.3 ESTIMATED AMOUNTS................................................10
   Section 3.4 ADJUSTMENT SCHEDULES.............................................10
   Section 3.5 ALLOCATION OF PURCHASE PRICE.....................................10

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CREATIVE...........................11

   Section 4.1 LEASED PROPERTY..................................................11
   Section 4.2 TANGIBLE ASSETS: EQUIPMENT.......................................11
   Section 4.3 OUTSTANDING COMMITMENTS..........................................11
   Section 4.4 TAXES............................................................12
   Section 4.5 COMPLIANCE WITH LAWS; GOVERNMENTAL APPROVALS AND CONSENTS........12
   Section 4.6 INTELLECTUAL PROPERTY............................................13
   Section 4.7 ENVIRONMENTAL MATTERS............................................13
   Section 4.8 LITIGATION.......................................................14
   Section 4.9 MORTGAGES........................................................15
   Section 4.10 YEAR 2000.......................................................15
   Section 4.11 INVENTORIES.....................................................15

ARTICLE V COVENANTS AND AGREEMENTS..............................................15

   Section 5.1 COVENANTS AND AGREEMENTS OF CREATIVE.............................15
   Section 5.2 COVENANTS AND AGREEMENTS OF STRYKER..............................18



                                       i

   3

         ASSET PURCHASE AGREEMENT dated as of October 15, 1998, between Stryker
Sales Corporation, a Michigan corporation ("STRYKER"), and Creative
BioMolecules, Inc., a Delaware corporation ("CREATIVE").


                                R E C I T A L S:
                                - - - - - - - -

         WHEREAS, Stryker wishes to purchase or acquire from Creative, and
Creative wishes to sell, assign and transfer to Stryker, Creative's leasehold
interest in manufacturing facilities and certain other assets utilized by
Creative for the manufacture of OP-1 (as defined herein) and other
genetically-engineered products for use in humans, all for the purchase price
and upon the terms and subject to the conditions hereinafter set forth.

         NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties made herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:


                                    ARTICLE I
                                   DEFINITIONS

         Section 1.1 DEFINITION OF CERTAIN TERMS. The terms defined in this
SECTION 1.1, whenever used in this Agreement, shall have the respective meanings
indicated below for all purposes of this Agreement. Capitalized terms used in
this Agreement and not otherwise defined herein shall have the meanings ascribed
to such terms in the Master Restructuring Agreement (as defined below). All
references herein to a Section, Article, or Schedule are to a Section, Article,
or Schedule of or to this Agreement, unless otherwise indicated.

         "ADJUSTMENT SCHEDULE": has the meaning set forth in SECTION 3.4.

         "AGREEMENT": means this Asset Purchase Agreement (including the
Schedules), as the same from time to time may be amended, supplemented or
waived.

         "ASSETS": has the meaning set forth in SECTION 2.1.

         "ASSIGNED AGREEMENTS": has the meaning set forth in SECTION 4.3.

         "ASSUMED LIABILITIES": has the meaning set forth in SECTION 2.3.

         "BOOKS AND RECORDS": means the following books and records: manuals,
production data, manufacturing and quality control records and procedures,
master records, OP-1 batch records, SOPs, Biological Material validation
reports, material specifications, assay development and validation reports,
process development reports, equipment specifications and validation reports,
including the IQ,OQ and PQ (regardless of the media in which stored), in each
case relating to or used in the Manufacturing Operations.

         "CLOSING": has the meaning set forth in the Master Restructuring
Agreement. 
                                       1

   4

         "CLOSING DATE": has the meaning set forth in the Master Restructuring
Agreement. 

         "CODE": means the Internal Revenue Code of 1986, as amended.

         "CONTRACTS": has the meaning set forth in SECTION 2.3.

         "DETERMINATION DATE": has the meaning set forth in SECTION 3.2.

         "ENVIRONMENTAL LAWS": means common law and any and all Applicable Laws
relating to the environment, environmental or occupational health, or safety, or
to any emission, discharge, treatment, manufacturing, generation, processing,
storage, holding, handling, investigation, monitoring, cleanup, abatement,
existence, Release, threatened Release, arranging for the disposal or
transportation of or any other activity or circumstance involving any Hazardous
Substances.

         "ENVIRONMENTAL LIABILITIES AND COSTS": means any and all losses or
liabilities attributable to Creative or its period of ownership/operation of the
Manufacturing Operations, the Hopkinton Facility or the Leased Property imposed
by, under or pursuant to Environmental Laws, including by virtue of contract,
agreement, order, successor or affiliate liability or operation of law, based
on, arising out of or otherwise in respect of (i) the ownership or operation by
Creative of the Manufacturing Operations, the Hopkinton Facility or the Leased
Real Property, (ii) the environmental conditions resulting from the activities
of Creative or existing on the Closing Date on, under, above, or about the
Hopkinton Facility or the Leased Real Property, (iii) any emission, discharge,
treatment, manufacturing, generation, processing, storage, holding,
investigation, monitoring, cleanup, abatement, existence, Release, threatened
Release, disposal, transportation, arranging for the disposal or transportation
or any other activity or circumstances involving any Hazardous Substance by or
as a result of the activities of Creative, or (iv) the recognized environmental
conditions set forth in the Harding Lawson Associates Phase I environmental
assessment reports or any Phase II reports obtained by Stryker.

         "EQUIPMENT LEASE": has the meaning set forth in SECTION 2.1.

         "ERISA": means the Employee Retirement Income Security Act of 1974, as
amended. 

         "EXCLUDED ASSETS": has the meaning set forth in SECTION 2.2.

         "EXCLUDED LIABILITIES": has the meaning set forth in SECTION 2.4.

         "EXISTING MORTGAGE": has the meaning set forth in SECTION 4.9.

         "GAAP": means United States generally accepted accounting principles.

                                       2
   5

         "HAZARDOUS SUBSTANCE": means, collectively, any contaminant; pollutant;
toxic, radioactive or hazardous waste, chemical, substance, material and
constituent; asbestos; polychlorinated biphenyls (PCBs); paint containing lead
or mercury; urea formaldehyde; natural or liquified gas; flammable; explosive;
corrosive; medical and infectious waste; and, fuel oil, gasoline or other
petroleum product, all as defined under Environmental Laws.

         "HUMAN RESOURCES AGREEMENT": means the agreement so titled, dated as of
the Closing Date, between Creative and Stryker.

         "INCLUDE", "INCLUDES", "INCLUDED" and "INCLUDING": shall be construed
as if followed by the phrase "without being limited to".

         "INVENTORIES": has the meaning set forth in SECTION 2.1(d).

         "IRS": means the Internal Revenue Service.

         "LEASED REAL PROPERTY": means all space leased pursuant to the Leases.

         "LEASES": means the real property leases described on SCHEDULE 4.1.

         "LIEN": means any mortgage, pledge, hypothecation, right of others,
claim, security interest, encumbrance, lease, sublease, license, occupancy
agreement, adverse claim or interest, easement, covenant, encroachment, burden,
title defect, title retention agreement, voting trust agreement, interest,
equity, option, lien, right of first refusal, charge or other restriction or
limitation.

         "MATERIAL ADVERSE EFFECT": means any event, circumstance, occurrence,
fact, condition, change or effect that is materially adverse to the business,
operations, results of operations, financial condition, properties, assets or
liabilities of the present Manufacturing Operations.

         "MANUFACTURING OPERATIONS": means the manufacturing activities
presently or previously conducted by Creative in the Leased Real Property or the
Hopkinton Facility.

         "MASTER RESTRUCTURING AGREEMENT": means the agreement so titled, dated
as of the date hereof, between Creative and Stryker Corporation.

         "NET BOOK VALUE": means (i) the original cost less accumulated
depreciation of the property, plant and equipment included in the Assets as of
July 31, 1998, which shall be determined by taking the value thereof reflected
in Creative's audited financial statements as of December 31, 1997, adding
thereto any additions to the property, plant and equipment included in the
Assets since December 31, 1997 and subtracting depreciation through July 31,
1998 on such property, plant and equipment from December 31, 1997 or the
acquisition date, as the case may be; plus (ii) the original cost of additional
property, plant and equipment added from July 31, 1998 through the Closing Date
less accumulated depreciation thereon through the Closing Date; plus (iii) the
stated value of all Assets other than property, plant and equipment included in
(i) and

                                       3
   6
(ii) above as of the Closing Date as reflected in Creative's accounting records
as of the Closing Date; less (iv) the amount of the following Assumed
Liabilities as of the Closing Date as reflected in Creative's accounting records
as of such date: (a) the lease and related agreements described in paragraph 2
of SCHEDULE 2.3, and (b) the equipment lease with FINOVA Technology Finance,
Inc. described in paragraph 2 of SCHEDULE 2.1(c). All of the foregoing shall be
determined in accordance with generally accepted accounting principles, applied
on a basis consistent with Creative's audited financial statements as of
December 31, 1997. The sum of clauses (i), (ii) and (iii) above is sometimes
referred to herein as the "ASSET BOOK VALUE" and the amount of the liabilities
described in clauses (a) and (b) of clause (iv) as of any date is sometimes
referred to as the "BALANCE SHEET LIABILITIES" as of that date.

         "OPEN INVOICE AMOUNT": shall have the meaning set forth in SECTION 3.1.

         "PAYMENT AMOUNT": has the meaning set forth in SECTION 3.2.

         "PERMITTED LIENS": means (i) the Existing Mortgage, (ii) Liens for
Taxes not yet due and payable, (iii) mechanics, carriers, workers, repairers and
other statutory liens incurred in the ordinary course of business consistent
with past practice relating to obligations as to which there is no default on
the part of Creative, (iv) contract rights of third parties to Contracts, or (v)
Liens that, individually and in the aggregate, do not and would not materially
detract from the value of any of the property or assets of the present
Manufacturing Operations or materially interfere with the use thereof as
currently used or contemplated to be used or otherwise.

         "PROCEEDINGS": has the meaning set forth in SECTION 4.6(d).

         "PURCHASE PRICE": has the meaning set forth in SECTION 3.2.

         "RELEASE": means any releasing, disposing, discharging, injecting,
spilling, leaking, leaching, pumping, dumping, emitting, escaping, emptying,
seeping, dispersal, migration, transporting, placing and the like, including the
moving of any materials through, into or upon, any land, soil, surface water,
ground water or air, or otherwise entering into the environment.

         "SELLER EMPLOYEE BENEFIT ARRANGEMENT": has the meaning set forth in the
Human Resources Agreement.

         "TAXES": means any federal, state, provincial, local or foreign income,
alternative, minimum, accumulated earnings, personal holding company, franchise,
capital stock, net worth, capital, profits, windfall profits, gross receipts,
value added, sales, use, goods and services, excise, customs duties, transfer,
conveyance, mortgage, registration, stamp, documentary, recording, premium,
severance, environmental (including taxes under Section 59A of the Code), real
property, personal property, ad valorem, intangibles, rent, occupancy, license,
occupational, employment, unemployment insurance, social security, disability,
workers' compensation, payroll, health care, withholding, estimated or other
similar

                                       4
   7

tax, duty or other governmental charge or assessment or deficiencies thereof,
and including any interest, penalties or additions to tax attributable to the
foregoing.

         "TAX RETURN": means any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.

                                       5

   8



                                   ARTICLE II
                         SALE AND PURCHASE OF THE ASSETS

         Section 2.1 ASSETS. Subject to and upon the terms and conditions set
forth in this Agreement and the Master Restructuring Agreement, at the Closing,
Creative shall sell, transfer, set over, convey, assign and deliver to Stryker,
and Stryker shall purchase and acquire from Creative, all right, title and
interest of Creative in and to the properties, assets and rights of every
nature, kind and description, tangible and intangible (including goodwill),
whether real, personal or mixed, whether accrued, contingent or otherwise and
whether now existing or hereinafter acquired (other than the Excluded Assets) as
set forth below that relate to and are used in the present Manufacturing
Operations as the same may exist on the Closing Date (collectively, the
"ASSETS"):

         (a) the Leased Real Property;

         (b) the fixed assets and other tangible personal property that are
listed on SCHEDULE 2.1(b);

         (c) the equipment lease agreements listed on SCHEDULE 2.1(c) hereto
(the "EQUIPMENT LEASES") and all equipment subject thereto.

         (d) all inventories of raw materials, work in process, finished
products, goods, spare parts, replacement and component parts, and office and
other supplies (whether on hand, in-transit or on order) existing on the Closing
Date that relate to the present Manufacturing Operations listed on SCHEDULE
2.1(d) (collectively, the "INVENTORIES");

         (e) reasonable quantities of Biological Materials that are in
Creative's control and that are useful in repeating the work performed by
Creative during the Research Project, including but not limited to those listed
on SCHEDULE 2.1(e);

         (f) all rights under all Contracts;

         (g) all credits, prepaid expenses, deferred charges, advance payments,
security deposits and prepaid items that relate to the present Manufacturing
Operations;

         (h) all Books and Records;

         (i) to the extent their transfer is permitted by law, all Governmental
Approvals, including all applications therefor; and

         (j) all guarantees, warranties, indemnities and similar rights in favor
of Creative with respect to the Assets.

         Subject to the terms and conditions hereof, at the Closing, the Assets
shall be transferred or otherwise conveyed to Stryker free and clear of all
Liens excepting only Permitted Liens.

                                       6
   9

         Section 2.2 EXCLUDED ASSETS. Creative shall retain and not transfer,
and Stryker shall not purchase or acquire, or have any ownership claim or other
right (except as otherwise set forth in this Agreement) in respect of, any
and/or all of the assets of Creative other than the Assets (collectively, the
"EXCLUDED ASSETS"), including:

         (a) all rights to causes of action, lawsuits, claims and demands of any
nature available to or being pursued by Creative with respect to the Excluded
Assets or the Excluded Liabilities;

         (b) all right, title and interest of the Creative in and to prepaid
Taxes of the Manufacturing Operations, and any claims for any refund, rebate or
abatement with respect to Taxes of the Manufacturing Operations or the Leased
Real Property for any period or portion thereof through the Closing Date and any
interest payable with respect thereto;

         (c) the tax and accounting books of Creative and records of Creative
relating solely to executory contracts not assumed by Stryker; and

         (d) the assets listed on SCHEDULE 2.2.

         Section 2.3 ASSUMPTION OF LIABILITIES. Stryker agrees that on and as of
the Closing Date, Stryker shall assume and agree to discharge promptly (i) all
of Creative's obligations, other than Excluded Liabilities, arising after the
Closing Date under the Leases, the Equipment Leases and the other contracts
listed on SCHEDULE 2.3 (the "CONTRACTS"), (ii) the liabilities of Creative
arising after the Closing Date under all purchase orders with respect to the
present Manufacturing Operations entered into in the ordinary course of business
before the Closing Date, (iii) the guarantor obligations of Creative on the
mortgage on the facilities located in Lebanon, N.H., (iv) the obligations of
Creative under the Manufacturing Agreement between Biogen, Inc. and Creative
dated as of September 28, 1994, including up to $2.9 million for the payment to
Biogen, Inc. of money spent for leasehold improvements as provided in Section
3.3(m) thereof, (v) the obligations of Creative under the Equipment Lease
Agreement dated September 28, 1994 between Biogen, Inc. and Creative, (vi) the
obligations of Creative set forth on SCHEDULE 2.3 to deliver manufacturing
records to third parties, (vii) the obligation set forth on SCHEDULE 2.3 to
maintain any and all records relating to the manufacturing and production of
recombinant human proteins, and (viii) the liabilities, other than Excluded
Liabilities, incurred by Creative in the ordinary course of business during the
period between the date hereof and the Closing Date in connection with the
operation of the present Manufacturing Operations (collectively, the "ASSUMED
LIABILITIES").

         Section 2.4 EXCLUDED LIABILITIES. Other than for the Assumed
Liabilities, Stryker shall not be responsible for any other debts, claims,
commitments, liabilities or obligations of Creative or the Manufacturing
Operations (collectively, the "EXCLUDED LIABILITIES"). Without limiting the
generality of the foregoing, Excluded Liabilities include any and all debts,
claims, commitments, liabilities or obligations of Creative or the Manufacturing
Operations relating to or arising out of any of the following provided that, in
each case, such

                                       7

   10

debt, claim, commitment, liability or obligation does not arise as a result of
any action or failure to act by or on behalf of Stryker:

         (a) except as expressly assumed by Stryker pursuant to the Human
Resources Agreement, (i) any liability, obligation or commitment relating to or
arising out of any Seller Employee Benefit Arrangement, including any
sponsorship, administration or contribution obligation of any Person under any
Seller Employee Benefit Arrangement or termination of any Seller Employee
Benefit Arrangement, or (ii) the termination of employment of any employee of
Creative;

         (b) any cause of action or judicial or administrative action, suit,
proceeding or investigation, pending or threatened on the Closing Date, relating
to periods on or prior to the Closing Date;

         (c) any failure or alleged failure to comply with, or any violation or
alleged violation of, (i) any law, rule, regulation, statute, ordinance, permit,
judgment, injunction, order, decree, license or other Applicable Law or
Governmental Approval applicable to the Manufacturing Operations or the Assets,
or (ii) any Contract, in each case which failure or violation occurred or was
alleged to have occurred prior to the Closing Date;

         (d) any infringement or alleged infringement of the rights of any other
Person arising out of the use of any intellectual property in connection with
the Manufacturing Operations prior to the Closing Date;

         (e) any liability for any Taxes imposed on Creative or the 
Manufacturing Operations attributable to Creative or the Manufacturing 
Operations on or before the Closing Date;

         (f) the Excluded Assets;

         (g) all Environmental Liabilities and Costs (whether or not currently
known, discoverable or regulated by currently Applicable Law) arising from,
relating to, in respect of or incurred in connection with conditions or events
caused by Creative or occurring on or prior to the Closing Date;

         (h) any rights of any other Person relating to the Manufacturing
Technology or the Intellectual Property pursuant to any license, sublicense or
agreement required to be disclosed and not so disclosed; or

         (i) any claim, litigation, action or proceeding, whether or not now
pending or threatened, whether known or unknown, relating to the Manufacturing
Operations or the Assets to the extent based on or arising out of or based upon
product liability with respect to products manufactured or sold by Creative
prior to the Closing.

                                       8

   11

         Section 2.5 CONSENT OF THIRD PARTIES. Notwithstanding anything to the
contrary contained herein, this Agreement shall not constitute an agreement to
assign or transfer any Governmental Approval, instrument, contract, commitment,
order, license, lease, permit or other agreement or arrangement or any claim,
right or benefit arising thereunder or resulting therefrom if an assignment or
transfer or an attempt to make such an assignment or transfer without the
consent or approval of a third party (or without the novation thereof) would
constitute a breach or violation thereof or affect adversely the rights of
Stryker or Creative thereunder; and any transfer or assignment to Stryker by
Creative of any interest under any such Governmental Approval, instrument,
contract, commitment, order, license, lease, permit or other agreement or
arrangement that requires novation or the consent or approval of a third party
shall be made subject to such novation, consent or approval being obtained. If
any such novation, consent or approval is not obtained on or prior to the
Closing Date, then Creative shall (a) continue to use all reasonable efforts to
obtain any such novation, consent or approval after the Closing Date until such
time as such novation, consent or approval has been obtained without any third
party cost to Stryker, (b) hold such Governmental Approval, instrument,
contract, commitment, order, license, lease, permit or other agreement or
arrangement on behalf of Stryker, (c) cooperate with Stryker in any lawful
arrangement to provide that Stryker shall receive the benefits under any such
Governmental Approval, instrument, contract, commitment, order, license, lease
or permit or other agreement or arrangement, including performance by Creative,
as agent, and (d) enforce and perform for the account of Stryker any rights of
Creative arising from such Government Approval, instrument, contract,
commitment, order, license, lease, permit or other agreement or arrangement;
PROVIDED, HOWEVER, that Stryker shall pay or satisfy the corresponding
obligations and liabilities for the enjoyment of such benefit to the extent
Stryker would have been responsible therefor if such novation, consent or
approval had been obtained. Nothing in this SECTION 2.5 shall be deemed a waiver
by Stryker of its right to receive an effective assignment of all the Assets.


                                   ARTICLE III
                                TERMS OF PURCHASE

         Section 3.1 OPEN INVOICE AMOUNT. Upon the signing of this Agreement,
Stryker agrees to pay to Creative by wire transfer of immediately available
funds an amount equal to the full amount of outstanding invoices to Stryker in
the amount of $1,432,509, less invoices numbered 570, 571, 572 and 579 totaling
$213,837, which amount Stryker agrees to pay in full upon release of the product
covered by such invoices (the "OPEN INVOICE AMOUNT").

         Section 3.2 PURCHASE PRICE. On the terms and subject to the conditions
set forth in this Agreement and the Master Restructuring Agreement, Stryker
agrees to pay to Creative for the Assets an amount equal to the Net Book Value
of the Assets (the "PURCHASE PRICE"). For purposes hereof, the purchase price
for bulk OP-1 set forth in SCHEDULE 2.1(d) shall be [XXXXX] per milligram. On
the Closing Date, if all conditions to closing set forth herein or in the Master
Restructuring Agreement have been satisfied, Stryker agrees to pay to Creative,
by wire transfer of immediately available funds: (i) $18,958,000 (which is the
estimated Purchase Price as of the date hereof) (the "PAYMENT AMOUNT"), which
Payment

                                       9
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Amount shall be subject to adjustment as provided for in SECTION 3.4, plus (ii)
$431,804 with respect to patent prosecution costs through August 31, 1998 plus
any additional patent prosecution costs from September 1, 1998 to the Closing
Date pursuant to SECTION 4.5 of the Master Restructuring Agreement (the "PATENT
EXPENSES"), plus (iii) payments for performance of the Current Scopes of Work
through the Closing Date pursuant to SECTION 4.3 of the Master Restructuring
Agreement, to the extent not previously paid (the "RESEARCH EXPENSES").

         Section 3.3 ESTIMATED AMOUNTS. Two (2) business days prior to the
Closing Date, Creative shall deliver to Stryker a schedule containing an
estimate of the value as of the Closing Date of (i) the Assets other than
property, plant and equipment reflected in Creative's accounting records, (ii)
the value as of the Closing Date of additions to property, plant and equipment
from July 31, 1998 through the Closing Date, (iii) the Patent Expenses, and (iv)
the Research Expenses.

         Section 3.4 ADJUSTMENT SCHEDULES.

         (a) During the thirty (30) day period prior to the Closing Date,
Creative and Stryker shall conduct an audit (the "AUDIT") of the Assets, it
being understood that additions to property, plant and equipment through the
Closing Date and the Assets other than property, plant and equipment as of the
Closing Date may involve estimates at this stage. To the extent that the Audit
indicates (i) the actual Net Book Value (as defined in SECTION 1.1) of the
Assets is not equal to $18,958,000 or (ii) actual Assets in existence are
different from those provided in SECTION 2.1, appropriate changes shall be made
to SCHEDULE 2.1 and included on a schedule of adjustments to the Purchase Price
(the "ADJUSTMENT SCHEDULE"). If, in conducting the Audit, it is determined that
additional Assets are required in order to insure that the representations in
SECTION 4.2 are true and current as of the Closing Date, SCHEDULE 2.1 shall be
amended at the Closing Date to reflect such additional Assets and the Adjustment
Schedule will reflect such Assets. Within ten (10) business days after the
Closing Date, Creative shall deliver to Stryker the Adjustment Schedule together
with a schedule in reasonable detail setting forth the calculation of the actual
Net Book Value and Purchase Price. The difference between the Purchase Price and
the Payment Amount shall be promptly paid by the appropriate party to the other.

         (b) During the thirty (30) day period following the Closing Date,
Stryker and Creative shall conduct an inventory of the Assets as of the Closing
Date whose value was determined in the Audit, and an audit of those Assets whose
value was estimated as of the Closing Date, and adjusted pursuant to SECTION 3.4
(a), and shall calculate the Net Book Value thereof in accordance with the
definition in SECTION 1.1. If such inventory and audit reveals a difference from
the value of the Assets as of the Closing Date as determined by the Audit, such
difference shall be promptly paid by the appropriate party to the other.

         Section 3.5 ALLOCATION OF PURCHASE PRICE. The parties agree to allocate
the aggregate of the Purchase Price and the Assumed Liabilities among the Assets
in accordance with Section 1060 of the Code as mutually agreed to by the parties
within 180 days following the Closing Date. All such mutually agreed to
allocations shall be used by each party in

                                       10
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preparing any filings required pursuant to Section 1060 of the Code or any
similar provisions of state or local law and all relevant income and franchise
tax returns. Neither Stryker nor Creative will take any position before any
taxing authority or in any judicial proceeding that is inconsistent with such
mutually agreed to allocations without the prior consent of the other party. The
parties shall in good faith exercise reasonable efforts to support such reported
allocations in any audit proceedings initiated by any taxing authority.


                                   ARTICLE IV
                   REPRESENTATIONS AND WARRANTIES OF CREATIVE

         Creative represents and warrants to Stryker as follows:

         Section 4.1 LEASED PROPERTY. SCHEDULE 4.1 contains a true, complete and
correct list of all leases with respect to real property at which any of the
present Manufacturing Operations are presently conducted, setting forth the
address, landlord and tenant for each such lease. The operation or maintenance
of the plants, buildings and improvements leased by Creative as now operated and
maintained, and, to the Knowledge of Creative, the plants, buildings and
improvements leased by Creative, do not (i) contravene any zoning or building or
other requirement of Applicable Law or (ii) violate any covenant, agreement or
restriction, the effect of which materially interferes with or prevents the
continued use of such properties for the purposes for which they are now being
used, or would materially affect the value thereof. All of the plants,
buildings, improvements and equipment leased by Creative or used in the present
Manufacturing Operations are in good operating condition and in a state of
reasonable maintenance and repair to the extent necessary for the efficient
operation of the present Manufacturing Operations. There exists no pending or,
to the Knowledge of Creative, threatened, condemnation, eminent domain or
similar proceeding with respect to, or which could affect, any Leased Real
Property, including the plants, buildings or improvements thereon.

         Section 4.2 TANGIBLE ASSETS: EQUIPMENT. Other than the equipment
subject to the Equipment Leases and as described on SCHEDULE 4.2, Creative has
good and marketable title to all of the Assets (real, personal and mixed), free
and clear of any Lien. The Assets include all assets currently utilized in the
present Manufacturing Operations. The Assets and the equipment subject to the
Equipment Leases are adequate and usable for the purposes for which they are
currently used and, subject to ordinary wear and tear, have been properly
maintained and are in good working order.

         Section 4.3 OUTSTANDING COMMITMENTS. Creative has delivered or made
available to Stryker true, correct and complete copies of all of the Leases,
Equipment Leases and Contracts (as used in this Section, collectively, the
"ASSIGNED AGREEMENTS"). Each Assigned Agreement is a legal, valid, binding and
enforceable obligation of Creative and, to the Knowledge of Creative, of the
other party or parties thereto. Except as set forth on SCHEDULE 4.3(a), Creative
has paid in full all amounts due as of the date hereof under each Assigned
Agreement and, as of the Closing Date, will have satisfied in full all of its
liabilities

                                       11
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and obligations thereunder due in the ordinary course of business before the
Closing. All of the Assigned Agreements are in full force and effect and have
not been modified or amended, in writing or otherwise. Creative and each other
party thereto have performed all the obligations required to be performed by
them to date, have received no notice of default and are not in default (with
due notice or lapse of time or both) under any Assigned Agreement. Creative has
no Knowledge of any breach or anticipated breach by the other party to any
Assigned Agreement. None of the Assigned Agreements have been terminated, no
notice has been given by any party thereto of any alleged default by any party
thereunder, and Creative is not aware of any intention or right of any party to
declare a default by another party to any Assigned Agreement. None of the
Assigned Agreements have been assigned, mortgaged or hypothecated by Creative.
There exists no actual or, to the Knowledge of Creative, threatened termination,
cancellation or limitation of the business relationship of Creative with any
party to any Assigned Agreement. Except as set forth in SCHEDULE 4.3(b), no
Consent of any third party is required under any Assigned Agreement as a result
of or in connection with the execution, delivery and performance of this
Agreement or the Protocol Agreement or the consummation of the transactions
contemplated hereby or thereby.

         Section 4.4 TAXES. Except as set forth in SCHEDULE 4.4, (i) all real
estate taxes that have accrued and been payable as of the date hereof for which
Creative is liable under the Leases have been paid, (ii) Creative has not taken
or failed to take any action that could create any tax lien on the present
Manufacturing Operations or any of the Assets, and (iii) Creative has received
no notice of any pending or threatened reassessment of the present Manufacturing
Operations and, to Creative's Knowledge, the transfer of the present
Manufacturing Operations to Stryker will not result in any such reassessment.
All deposits required by law to be made by Creative with respect to employees'
withholding taxes for the Transferred Employees have been duly made, and as of
the Closing Date, all such deposits will have been made.

         Section 4.5 COMPLIANCE WITH LAWS; GOVERNMENTAL APPROVALS AND CONSENTS.
(a) Except as disclosed in SCHEDULE 4.5(a), Creative has complied in all
respects with all Applicable Laws applicable to the present Manufacturing
Operations or the Assets, except for such violations which would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect. Creative is not subject to any judgment, order, writ, injunction, or
decree that would have a Material Adverse Effect, individually or in the
aggregate, on the present Manufacturing Operations or any of the Assets.
Creative is not aware of any existing or proposed law, rule, regulation or
order, whether Federal, State, or local, that would prohibit or materially
restrict Stryker from, or otherwise materially adversely affect Stryker in,
conducting the present Manufacturing Operations.

         (b) SCHEDULE 4.5(b) sets forth all Governmental Approvals and other
Consents necessary for, or otherwise material to, the conduct of the present
Manufacturing Operations as conducted by Creative, each of which will be duly
and validly transferred to Stryker except as set forth in SCHEDULE 4.5(b).
Except as set forth in SCHEDULE 4.5(b), all such Governmental Approvals and
Consents have been duly obtained and are in full force and effect. Creative is
in compliance in all material respects with each of such Governmental Approvals
and Consents held by it with respect to the Assets and the present Manufacturing
Operations
                                       12
   15

and has not received any notice that any Government Authority intends to cancel
or terminate any of the Government Approvals or that valid grounds for such
cancellation or termination exist.

         Section 4.6 INTELLECTUAL PROPERTY. To Creative's Knowledge, all of the
issued patents owned by Creative as of the date hereof are valid, and all
pending applications for patents or trademarks have been prosecuted in good
faith as required by law and are in good standing. Creative is not, nor will the
consummation of the transactions contemplated by this Agreement result in
Creative being, in default under any license, contract, or other agreement,
which default would have a material adverse impact on Stryker's ability to use
the intellectual property to conduct the present Manufacturing Operations,
including without limitation performing its obligations under the Contracts.
Creative has no notice that any of its issued manufacturing patents are involved
in any interference or opposition proceeding, and Creative has received no
written notice that any such proceeding will hereafter be commenced. To
Creative's Knowledge Creative has not, in the conduct of the present
Manufacturing Operations, including without limitation performing its
obligations under the Contracts, infringed upon the intellectual property rights
of any third party, nor has it received notice of any such infringement. No
contract, agreement or understanding with any party exists that would impede or
prevent the assignment to Stryker of the entire right, title and interest of
Creative in and to the Assigned Patent Rights.

         Section 4.7 ENVIRONMENTAL MATTERS.

         (a) COMPLIANCE WITH ENVIRONMENTAL LAW. Creative is and has been in
compliance in all material respects with all applicable Environmental Laws and
environmental permits pertaining to any of the properties, including the Leased
Real Property, and assets of the Manufacturing Operations and the past and
current use by Creative thereof. Creative now holds all permits, licenses,
approvals, consents, registrations, and other authorizations that are required
to operate the Manufacturing Operations in compliance with Environmental Laws
and the same have been provided to Stryker and are listed on SCHEDULE 4.7(a).
Creative is not in receipt of any unresolved notice of violation of any
applicable Environmental Law or environmental permit relating to any of the
Assets and, to the Knowledge of Creative, no notice of violation is currently
pending or threatened. Notices of violations received by Creative within the
prior three years and which have now been resolved are listed on SCHEDULE 4.7(a)
and copies of the same have been provided to Stryker.

         (b) OTHER ENVIRONMENTAL MATTERS. To the Knowledge of Creative, Creative
has not caused or taken any action that resulted in, and Creative is not subject
to, any liability or obligation on the part of Creative, relating to (i) the
environmental conditions on, under, or about the Leased Real Property or any
other property at any time owned, leased, operated or used by Creative,
including the air, soil and groundwater conditions at such properties, or (ii)
the use, management, handling, transport, manufacture, generation, storage,
treatment, disposal or arranging for treatment or disposal, threatened Release
or Release of any Hazardous Substances by or on behalf of Creative.


                                       13
   16

         (c) NO HAZARDOUS SUBSTANCES. No Hazardous Substances, including those
disclosed on SCHEDULE 4.7(c), have been released, treated, stored or disposed of
by Creative (or, to the Knowledge of Creative, any other Person) at, on, or
under any Leased Real Property, which are required by applicable Environmental
Laws currently in effect to be reported, investigated, monitored or remediated
by Creative or any other Person, where the cost of such activities, individually
or in the aggregate, would have a Material Adverse Effect.

         (d) NO PROCEEDINGS. Except as disclosed on SCHEDULE 4.7(d), Creative
has not received notice or other communication concerning any alleged liability
for Environmental Liabilities and Costs, including in connection with any Leased
Real Property or in connection with any of the current properties and assets of
the Manufacturing Operations or the past or current use by Creative thereof,
which has not been resolved and is therefore likely to give rise to liability;
and, to Creative's Knowledge, there exists no writ, injunction, decree, order,
judgment, lawsuit, claim, proceeding, citation, directive, or summons
(collectively referred to as "PROCEEDINGS"), pending or threatened against
Creative or which could give rise to liability to Creative, relating to any
environmental matters with respect to any Leased Real Property or Manufacturing
Operations, except for such Proceedings that, individually or in the aggregate,
would not have a Material Adverse Effect.

         (e) Including as disclosed in SCHEDULE 4.7(e), there never has been
pending or threatened against Creative with respect to the Manufacturing
Operations or the Leased Real Property or the Assets, any civil, criminal or
administrative action, suit, summons, citation, complaint, claim, notice,
demand, request, judgment, order, lien, proceeding, hearing, study, inquiry or
investigation (collectively, "ACTIONS") based on or related to Environmental
Laws or the presence, manufacture, generation, refining, processing,
distribution, use, sale, treatment, recycling, receipt, storage, disposal,
transport, arranging for transportation, treatment or disposal, or handling of,
or the emission, discharge, Release or threatened Release into the environment
of, or any other activity involving, any Hazardous Substances, except for such
Actions that, individually or in the aggregate, would not have a Material
Adverse Effect.

         (f) Except as disclosed on SCHEDULE 4.7(f), to the knowledge of
Creative, there are no underground storage tanks, impoundments, lagoons or
similar facilities at any of the Leased Real Property.

         (g) Each of the representations and warranties is based on Creative's
appropriate inquiry of Creative's consultants, managers and employees in charge
of environmental matters.

         (h) Creative has furnished to Stryker copies of all manifests in its
possession which it has received in connection with the provision of waste
disposal, treatment and storage services.

         Section 4.8 LITIGATION There is no claim, suit, action, governmental
investigation, litigation, arbitration or legal or administrative proceeding of
any kind pending or, to the Knowledge of Creative, threatened against Creative
or affecting the Assets that, if

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decided adversely, could delay or prevent the consummation of the transactions
contemplated hereby or impair Stryker's ability to use the Assets.

         Section 4.9 MORTGAGES. If any parcel of Leased Real Property is
encumbered by one or more existing mortgages (each, an "EXISTING MORTGAGE"), no
written notice has been received by Creative from the mortgagee(s) asserting
that a default or breach exists thereunder or under any note or other obligation
secured thereby which remains uncured. Creative knows of no default, or event
which with notice or the passage of time will constitute a default, under the
Existing Mortgage(s) or under any note or other obligation secured thereby which
has occurred and is continuing.


         Section 4.10 YEAR 2000. To the Knowledge of Creative, except as listed
on SCHEDULE 4.10 hereof, all Creative's computer-based systems, including its
information data bases, accounting systems and data processing systems, that are
included in the Assets will not be adversely affected by, and will continue to
operate in the same manner as such systems currently operate, notwithstanding
Year 2000. To the Knowledge of Creative, except as listed on SCHEDULE 4.10
hereof, all of the Assets that use computer software will not be adversely
affected by, and will continue to operate, in the same manner as such systems
currently operate notwithstanding Year 2000. As used herein the term "Year 2000"
means the occurrence of the Year 2000 A.D. or other calendar dates occurring
after December 31, 1999.


         Section 4.11 INVENTORIES. The finished and released bulk OP-1 in the
Inventories meets the specifications set forth in the applicable Device, Matrix
and OP-1 Certificates of Analysis (as defined in the Second Amended Agreement).
The raw materials and work-in-process and bulk OP-1 not yet released included in
the Inventories meet Creative's currently approved material specifications.
Stryker may elect not to purchase any lot of raw material valued at more than
$10,000 included in the Inventories as of the date hereof that has an expiration
date less than one year from the date hereof.


                                    ARTICLE V
                            COVENANTS AND AGREEMENTS

         Section 5.1 COVENANTS AND AGREEMENTS OF CREATIVE.

         (a) CONDUCT OF PRESENT MANUFACTURING OPERATIONS. From the date hereof
to the Closing Date, except as otherwise expressly permitted by this Agreement
or as otherwise consented to by Stryker in writing, Creative shall:

                           (i) carry on the present Manufacturing Operations in
         the ordinary course of business consistent with past practice and in
         substantially the same manner as heretofore conducted; use all
         reasonable best efforts to maintain the Assets in good operating
         condition and repair and take all steps reasonably necessary to
         maintain the intangible assets of Creative related to the present
         Manufacturing Operations;

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   18

                         (ii) not grant (or commit to grant) any increase in
         the compensation (including incentive or bonus compensation) of any
         employee employed in the present Manufacturing Operations or institute,
         adopt or amend (or commit to institute, adopt or amend) any
         compensation or benefit plan, policy, program or arrangement or
         collective bargaining agreement (except as required by law) applicable
         to any employee employed in the present Manufacturing Operations;

                           (iii) not enter into any new employment agreement or
         collective bargaining agreement or commitment (including any commitment
         to pay retirement or other benefits) to or with any of the employees
         employed in the present Manufacturing Operations (except as required by
         law);

                           (iv) not cancel or waive any material claim or right
         associated with the Assets, or sell, transfer, distribute or otherwise
         dispose of any of the Assets other than the consumption of inventory or
         sale of finished goods in the ordinary course of business;

                           (v) shall not do any act or omit to do any act or
         permit any act or omission to act that will cause a material breach or
         default in Stryker's obligations under any of the Assumed Liabilities;

                           (vi) not (A) create any Liens on the Assets or the
         present Manufacturing Operations except for Permitted Liens, or (B)
         make any modifications of or changes in or terminate any existing
         Contract or Equipment Lease; and

                           (vii) take any action (or omit to take any action)
         that would be inconsistent with the representations and warranties of
         Creative hereunder or that would cause any of the representations and
         warranties of Creative hereunder to become untrue in any material
         respect.

         (b) ACCESS AND INFORMATION. From the date hereof to the Closing Date,
Creative shall (and shall cause its accountants, counsel, consultants, employees
and agents to) give Stryker and its accountants, counsel, consultants, employees
and agents, reasonable access during normal business hours upon reasonable
advance notice to, and make available for review and/or photocopying, all
documents, records, reports and other information relating to the Assets and the
present Manufacturing Operations and covering environmental, regulatory and
compliance matters, as Stryker shall from time to time reasonably request. In
addition, from the date hereof to the Closing Date, Creative shall permit
Stryker and its accountants, counsel, consultants, employees and agents,
reasonable access to such personnel of Creative during normal business hours as
may be necessary to Stryker in its review of the properties, assets and business
affairs of the present Manufacturing Operations and the above-mentioned
documents, records and information. From the date hereof to the Closing Date,
Stryker and Stryker's agents shall have the right, upon giving reasonable
advance notice to enter upon and inspect the Leased Real Property, including
physical inspection of the surface and sub-surface


                                       16
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land and all improvements and the major components thereof, including heating,
plumbing, air conditioning, electrical equipment and wiring and roof.

                  (c) MAINTENANCE OF PROPERTIES. Creative, at all times prior to
the Closing Date, shall: (i) maintain the Assets in the condition and state of
repair normally maintained by Creative in the conduct of the present
Manufacturing Operations; (ii) comply in all material respects with all
contractual obligations applicable to the Assets or the present Manufacturing
Operations; and (iii) comply in all material respects with all Applicable Laws.

         (d) FURTHER ACTIONS. As promptly as practicable, Creative will:

                           (i) use commercially reasonable efforts to take all
         actions and to do all things reasonably necessary to consummate the
         transactions contemplated hereby by the Closing Date;


                           (ii) file or supply, or cause to be filed or
         supplied, all applications, notifications and information required to
         be filed or supplied by Creative pursuant to Applicable Law in
         connection with this Agreement, the sale and transfer of the Assets
         pursuant to this Agreement and the consummation of the other
         transactions contemplated hereby;

                           (iii) use all reasonable efforts to obtain, or cause
         to be obtained, all Consents (including all Governmental Approvals and
         any Consents required under any Contract) necessary to be obtained by
         Creative in order to consummate the sale and transfer of the Assets
         pursuant to the Agreement and the consummation of the other
         transactions contemplated hereby; and

                           (iv) coordinate and cooperate with Stryker in
         exchanging such information and supplying such assistance as may be
         reasonably requested by Stryker in connection with any filings and
         other actions contemplated by SECTION 5.2.

         (e) PERFORMANCE OF CONTRACTS. With respect to each Contract,
Governmental Approval, Lease and Equipment Lease, Creative shall duly perform
and comply in all material respects with all covenants, agreements and
conditions required thereby to be performed or complied with by it prior to or
on the Closing Date.

         (f) INSURANCE. Until the Closing, Creative shall maintain in full force
and effect in respect of the present Manufacturing Operations the existing
insurance covering the present Manufacturing Operations, subject to normal
variations required by ordinary operations of the present Manufacturing
Operations. Creative shall cooperate with Stryker in order to afford Stryker on
the Closing Date the full benefit of all insurance policies and all rights
thereunder (including rights to causes of action, lawsuits, claims and demands,
rights of recovery and set-off) covering the present Manufacturing Operations,
and proceeds under or with respect to such insurance policies, for periods prior
to the Closing to the extent that the claims thereunder relate to any of the
Assets or the Assumed Liabilities.

                                       17
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         (g) ENVIRONMENTAL AUDIT. At Stryker's request, Creative has permitted
Stryker to conduct Phase I Environmental Site Assessments and Property Condition
Surveys of the Leased Real Property. Stryker acknowledges that it has inspected
such Leased Real Property. Stryker has not conducted a Phase II assessment but
is entitled to do so as set forth in SECTION 6.2(g) of the Master Restructuring
Agreement.

         (h) CREATIVE'S COOPERATION REGARDING PERMITS. In accordance with
SECTION 6.2(g) of the Master Restructuring Agreement, until Closing, Creative
shall fully cooperate with Stryker in Stryker's attempts to obtain those
permits, licenses, authorizations and other certifications required under
Environmental Laws for Stryker's conduct of the Manufacturing Operations in
compliance with Environmental Laws.

         Section 5.2 COVENANTS AND AGREEMENTS OF STRYKER.

         (a) ACCESS AND INFORMATION. Commencing on the Closing Date, Stryker 
shall (and shall cause its accountants, counsel, consultants, employees and 
agents to) give Creative and its accountants, counsel, consultants, employees 
and agents, reasonable access during normal business hours upon reasonable 
advance notice to, and make available for review and/or photocopying, all 
documents, records, reports and other information relating to the Assets and 
the Transferred Employees and covering environmental, regulatory and compliance
matters, as Creative shall from time to time reasonably request. Stryker will
promptly provide to Creative copies of all reports generated in connection with
Stryker's Environmental Audit.

         (b) FURTHER ACTIONS. As promptly as practicable, Stryker will:

                  (i) use commercially reasonable efforts to take all actions
         and to do all things necessary, proper or advisable to consummate the
         transactions contemplated hereby by the Closing Date;

                  (ii) file or supply, or cause to be filed or supplied, all
         applications, notifications and information required to be filed or
         supplied by Stryker pursuant to Applicable Law in connection with this
         Agreement, Stryker's acquisition of the Assets pursuant to this
         Agreement and the consummation of the other transactions contemplated
         hereby;

                  (iii) use all reasonable efforts to obtain, or cause to be
         obtained, all Consents (including all Governmental Approvals and any
         Consents required under any Contract) necessary to be obtained by
         Stryker in order to consummate the sale and transfer of the Assets
         pursuant to the Agreement and the consummation of the other
         transactions contemplated hereby; and

                  (iv) coordinate and cooperate with Creative in exchanging such
         information and supplying such reasonable assistance as may be
         reasonably requested by Creative in connection with any filings and
         other actions contemplated by SECTION 5.1.

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         (c) For a period of two months following the Closing, Stryker will
provide Creative and its representatives and agents access, upon reasonable
notice, to the Leased Real Property for the purpose of reviewing and copying the
Books and Records.




                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




                                       19


   22



         IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.


                                         STRYKER SALES CORPORATION



                                         By: /s/ John W.Brown
                                            -----------------------------------
                                            Name: John W. Brown
                                            Title: Chairman


                                         CREATIVE BIOMOLECULES, INC.



                                         By: /s/ Michael M. Tarnow
                                            -----------------------------------
                                            Name: Michael M. Tarnow
                                            Title: President and Chief Executive
                                                   Officer


                                         By: /s/ Brian H. Dovey
                                            ------------------------------------
                                            Name:    Brian H. Dovey
                                            Title: Chairman of the Board

                         GUARANTY OF STRYKER CORPORATION

         Stryker Corporation, a Michigan corporation, hereby fully and
unconditionally guarantees all obligations of Stryker Sales Corporation under
the foregoing agreement. The liability of Stryker Corporation shall be direct
and primary, as fully as if Stryker Corporation were a party to the Agreement in
place of Stryker Sales Corporation.

                                         STRYKER CORPORATION



                                         By: /s/ John W. Brown
                                            -----------------------------------
                                            Name: John W. Brown
                                            Title: Chairman, President and
                                                   Chief Executive Officer


                                       20

EX-10.38

   1
         CREATIVE BIOMOLECULES, INC. HAS OMITTED FROM THIS EXHIBIT 10.38 
PORTIONS OF THE AGREEMENT FOR WHICH CREATIVE BIOMOLECULES, INC. HAS REQUESTED 
CONFIDENTIAL TREATMENT FROM THE SECURITIES AND EXCHANGE COMMISSION. THE 
PORTIONS OF THE AGREEMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 
ARE MARKED WITH X'S IN BRACKETS AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN FILED 
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

                                                                  EXHIBIT 10.38

                               AMENDMENT AGREEMENT

         This Amendment Agreement is made and entered into this 30th day of
December 1998 (the "Effective Date"), by and between Biogen, Inc. ("Biogen") and
Creative BioMolecules, Inc. ("CBM").

         WHEREAS, Biogen and CBM are parties to a Research Collaboration and
License Agreement dated as of December 9, 1996 (the "License Agreement"); and

         WHEREAS, the parties desire to amend the License Agreement as set forth
herein.

         NOW, THEREFORE, in consideration of the mutual promises and other good
and valuable consideration, the parties agree as follows:

1. DEFINITIONS. All capitalized terms used in this Amendment Agreement that are
defined in the License Agreement have the same meanings as those set forth in
the License Agreement unless otherwise defined in this Amendment Agreement.

2. RETURN OF RIGHTS IN ACUTE RENAL FAILURE.

(a) DEFINITION OF FIELD. The definition of the term "FIELD" in Section 1.16 of
the License Agreement is amended to delete the words "acute and" in the first
line of said Section. Accordingly, except as set forth in paragraph (b) below,
all rights granted by CBM to Biogen under the License Agreement with respect to
the OP-1 PROTEIN in all acute forms of renal failure and renal disorder will
revert to CBM.

(b) ROYALTIES ON SALES BY CBM IN ACUTE RENAL FAILURE. In consideration of the
voluntary termination of rights by Biogen in acute renal failure and the
contribution Biogen has made to development of the OP-1 PROTEIN in such
indication, CBM agrees to pay to Biogen a royalty equal to [XXXXX] of NET SALES
by CBM, its AFFILIATES and SUBLICENSEES (with all references to BIOGEN in the
definition of NET SALES changed for this purpose to be references to CBM) of any
product which is or includes the soluble form of the OP-1 PROTEIN indicated for
use in acute forms of renal failure, renal disease and renal disorder (the
"Acute Product"), provided that the royalty to be paid by CBM to Biogen on sales
of the Acute Product by SUBLICENSEES will not exceed [XXXXX] of the net royalty
income received by CBM on such sales after all other required CBM royalty
obligations with respect to such sale have been satisfied. The royalty payable
by CBM under the preceding sentence with respect to sales of the Acute Product
will be paid, on a country by country basis, for the longer of (i) the life of
any CBM PATENT RIGHTS covering such product in the country where sold or (ii)
until the date which is the [XXXXX] anniversary of the date of approval of the
Acute Product by the United States Food and Drug Administration. No royalty will
be due or payable by CBM on sales of the mature form of the OP-1 PROTEIN in
acute renal failure or in any other acute indication. CBM will make payments,
report royalties, maintain records and permit audits for royalties due on sales
of the Acute Product in the same manner as set forth for Biogen in Sections
10.5, 10.6 and 10.7 of the License Agreement.

3. CHRONIC RENAL FAILURE -- DEVELOPMENT AND OPTIOn.

(a) ASSUMPTION OF DEVELOPMENT BY CBM. The parties agree that, subject to the
option granted to Biogen under paragraph 3(b) below (the "Option"), CBM will
assume all responsibility for development of the OP-1 PROTEIN in chronic renal
failure and other chronic renal diseases and disorders. Unless and until Biogen
exercises its Option, (i) Biogen's obligations under the License Agreement
related to development and



   2

commercialization of the OP-1 PROTEIN, including but not limited to its
obligations under Section 5 of the License Agreement, will cease to apply, and
(ii) CBM will have sole discretion to determine the manner in which development
of the OP- 1 PROTEIN is to be conducted and will use reasonable efforts to
pursue OP-1 PROTEIN therapies in chronic renal failure and other chronic renal
diseases and disorders. Notwithstanding the foregoing and anything in this
Amendment Agreement to the contrary, Biogen may, but will not be obligated to,
provide input into the design and implementation of the CBM chronic renal
disease program. Except as otherwise expressly set forth in this Amendment
Agreement, CBM will have no obligation to Biogen under the License Agreement or
this Amendment Agreement with respect to the development of OP-1 PROTEIN.

(b) OPTION. During the period commencing on the Effective Date of this Amendment
Agreement and ending on December 31, 1999 (the "Option Period"), Biogen will
have the option to resume development responsibilities with respect to the OP-1
PROTEIN in chronic renal failure and other chronic renal diseases and disorders,
including responsibility for regulatory and commercial activities, under the
terms of the License Agreement, as modified by this Amendment Agreement. In the
event Biogen desires to exercise its option, it will provide written notice to
CBM no later than the end of the Option Period.

(c) TERMINATION OF AGREEMENT. In the event Biogen does not elect, prior to the
end of the Option Period, to exercise its Option then the License Agreement will
terminate on December 31, 1999. Sections 2(b), 4(b), 6 and 9(b), 9(c) and 9(d)
of this Amendment Agreement and Sections 2.1(b), 2.1(c), 6, 12, 15.9, 16.3 and
16.7 of the License Agreement will survive termination of the License Agreement.

(d) STATUS REPORTS. CBM will provide to Biogen, on a quarterly basis, a written
report describing the status and results of CBM's development work related to
uses of the OP-1 PROTEIN in chronic renal disease.

4. PAYMENTS.

(a) RESEARCH FUNDING. Biogen will continue to make the payments specified under
Section 8.3 of the License Agreement. The amount of payments due and payable
under the preceding sentence consists of [XXXXX] for the remainder of 1998 and
[XXXXX] for 1999.

         Notwithstanding the payment schedule contained in Section 8.3, the
total amount of [XXXXX] (the "Research Funding") will be payable by Biogen by
wire transfer on or about December 30, 1998.

(b) PATENT COSTS. Notwithstanding anything to the contrary in the License
Agreement, CBM will pay all Patent Costs that are currently outstanding which
relate to work performed after July 1998, including invoices from August 1998
through the Effective Date, and will be responsible for all ongoing Patent Costs
unless and until Biogen exercises its Option.

(c) OTHER AMOUNTS. Except as set forth in paragraph (a), no further payments are
or will be due or payable by Biogen to CBM under the License Agreement or this
Amendment Agreement, unless and until Biogen exercises its Option.

5. TECHNICAL SUPPORT. Biogen will, as soon as practical after the Effective
Date, use reasonable efforts to transfer to CBM all of the OP-1 PROTEIN-related
know-how and technology received from CBM and to disclose to CBM all BIOGEN OP-1
TECHNOLOGY and BIOGEN OP-1 PATENTS. Biogen will make its

   3

personnel reasonably available during the Option Period to support CBM's
development of renal disease therapies through the transfer and release of
technology, data, materials and know-how.

6. SUPPLY OF MATERIAL. Biogen will provide to CBM all of Biogen's existing
supply of mature and soluble OP-1 PROTEIN (the "Material"), [XXXXX] for use by
CBM solely for development work in the field of renal therapy. In the event CBM
desires to use any of the Material outside of renal therapy development work,
CBM will promptly reimburse Biogen for such Material, [XXXXX]. At Biogen's
request, CBM shall report to Biogen, in writing, on the amount and nature of
uses of the Material.

7. PHASE I MILESTONE/PENALTY. Biogen's obligation under Section 10.3(b) of the
License Agreement to pay a [XXXXX] milestone in the event Biogen fails to
initiate a Phase I clinical trial by the end of the [XXXXX] is terminated, and
Section 10.3(b) of the License Agreement is deleted in its entirety. In the
event Biogen exercises its Option, Biogen will, in lieu of the Phase I
commencement milestone set forth in Section 10.3(a) of the License Agreement,
pay to CBM the sum of [XXXXX] upon exercise of the Option.

8. SMALL MOLECULE LOAN. Biogen's obligation to loan funds to CBM for small
molecule research under Section 3 of the License Agreement will terminate unless
and until Biogen exercises its Option. In the event Biogen exercises its Option
the provisions of Section 3 will be deemed to be amended to the extent necessary
to implement the following changes:

(i) The total amount that Biogen will be obligated to make available by loan or
loans under Section 3 of the License Agreement will be $10,000,000 which will
become the Maximum Amount.

(ii) The available funds may be drawn upon by CBM over the two-year period
commencing on the date of exercise of the Option.

(iii) The CBM cash and marketable securities level under which Biogen will have
no obligation to make loans available will be changed to $10,000,000.

(iv) Biogen rights under Section 3.1(b) of the License Agreement will apply only
in the event Biogen exercises its Option and CBM draws upon funding that is then
available under Section 3.

9. COMMERCIALIZATION OF OP-1 IN CHRONIC RENAL FAILURE BY CBM OR THIRD PARTY.

(a) IDENTIFICATION OF CORPORATE PARTNERS. During the Option Period,
representatives from CBM and Biogen will work together to identify and pursue
potential corporate partners interested in acquiring rights to the OP-1 PROTEIN
technology for chronic renal failure and other chronic renal diseases and
disorders ("Chronic Renal Indications"). If CBM identifies a potential corporate
partner during the Option Period and so notifies Biogen, Biogen will be
required, within ten (10) days of such notice, to either exercise or waive its
Option in order to permit negotiations and licensing by CBM of the OP-1 PROTEIN
technology to such potential partner.

(b) AMOUNTS PAYABLE TO BIOGEN -- Third Party Income. Upon signing of an
agreement with a third party for development or commercialization of the OP-1
PROTEIN in any Chronic Renal Indication, CBM will pay to Biogen [XXXXX] of the
license fees and milestones paid to CBM by such third party up to a maximum
total payment by CBM to Biogen of [XXXXX] In addition, CBM will pay to Biogen
[XXXXX] of the net royalties received by CBM from any third party on sales of a
product that is or includes the OP-1 PROTEIN and is indicated for use in a
Chronic Renal Indication (a "Chronic Product") after all other

   4

required CBM royalty obligations have been satisfied. Except for the right to
share in fees and royalties as set forth in this Section and in paragraph (c)
below, Biogen will have no further rights to the OP-1 PROTEIN technology if CBM
enters into a license agreement granting a third party rights to develop such
technology in Chronic Renal Indication.

(c) ROYALTY ON SALES BY CBM. In the event Biogen does not exercise its Option,
CBM will pay Biogen a royalty equal to [XXXXX] of NET SALES (with all references
to BIOGEN in the definition of NET SALES changed to be references to CBM) by CBM
and its AFFILIATES of any Chronic Product. The royalty payable by CBM under the
preceding sentence with respect to Chronic Products will be paid, on a country
by country basis, for the longer of (i) the life of any CBM PATENT RIGHTS
covering such product in the country where sold or (ii) until the date which is
the [XXXXX] anniversary of the date of approval of the Chronic Product by the
United States Food and Drug Administration.

(d) ROYALTY TERMS. CBM will make payments, report royalties, maintain records
and permit audits for royalties due on sales of the Chronic Product in the same
manner as set forth for Biogen in Sections 10.5, 10.6 and 10.7 of the License
Agreement.

(e) BIOGEN'S CONTRIBUTION. The amounts payable to Biogen under this Section on
sales of Chronic Products are in consideration of the contribution Biogen has
made to development of the OP- 1 PROTEIN in Chronic Renal Indications.

10. OTHER TERMS OF THE AGREEMENT. During the Option Period, the only rights and
obligations that either party will have to the other will be those contained in
this Amendment Agreement and those contained in the Sections 2.1(b), 2.1(c), 6,
12, 15.9, 16.3 and 16.7 of the License Agreement. In the event Biogen exercises
its Option the remaining terms of the Agreement will then come into full force
and effect, as modified by this Amendment Agreement.

         IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date set forth above.

CREATIVE BIOMOLECULES, INC.             BIOGEN, INC.

By: /s/ Cheryl K. Lawton                By: /s/ James C. Mullen
    -------------------------------         --------------------------------

Name: Cheryl K. Lawton                  Name: James C. Mullen
      -----------------------------           ------------------------------

Title: General Counsel and              Title: Vice President, International
       ----------------------------            -----------------------------  
       V.P. Administration
       ----------------------------

EX-23.1

   1
                                                                    EXHIBIT 23.1



INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
33-68084, 33-83276, 33-91150 and 333-58219 on Form S-3 and Registration
Statement Nos. 33-56706, 33-61884, 33-80945, 333-36171, 333-36175 and 333-69463
on Form S-8 of Creative BioMolecules, Inc. of our report dated February 26,
1999, appearing in the Annual Report on Form 10-K of Creative BioMolecules, Inc.
for the year ended December 31, 1998.



/s/ Deloitte & Touche LLP



Boston, Massachusetts
March 29, 1999

EX-27

 

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.

 
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<EXCHANGE-RATE>                                      1
<CASH>                                      17,738,044
<SECURITIES>                                40,197,407
<RECEIVABLES>                                  669,232
<ALLOWANCES>                                         0
<INVENTORY>                                     28,733
<CURRENT-ASSETS>                            58,905,584
<PP&E>                                       7,701,737
<DEPRECIATION>                             (5,776,135)
<TOTAL-ASSETS>                              66,164,057
<CURRENT-LIABILITIES>                        9,292,483
<BONDS>                                        713,459
<PREFERRED-MANDATORY>                       23,052,787
<PREFERRED>                                          0
<COMMON>                                       344,575
<OTHER-SE>                                  32,760,753
<TOTAL-LIABILITY-AND-EQUITY>                66,164,057
<SALES>                                              0
<TOTAL-REVENUES>                            12,624,934
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                            24,856,147
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             327,304
<INCOME-PRETAX>                           (21,395,138)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                       (21,395,138)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                              (21,395,138)
<EPS-PRIMARY>                                   (0.66)
<EPS-DILUTED>                                   (0.66)