CREATIVE BIOMOLECULES INC, S-3/A, 1996-06-27

CREATIVE BIOMOLECULES INC
S-3/A, 1996-06-27
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

Previous: TAURUS MUNICALIFORNIA HOLDINGS INC, NSAR-A, 1996-06-27

Next: DYNAGEN INC, 10-C, 1996-06-27

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996

REGISTRATION NO. 333-5477

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------

PRE-EFFECTIVE

AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CREATIVE BIOMOLECULES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)

94-2786743
(I.R.S. EMPLOYER IDENTIFICATION NO.)

45 SOUTH STREET, HOPKINTON, MASSACHUSETTS 01748 (508) 435-9001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

MICHAEL M. TARNOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CREATIVE BIOMOLECULES, INC.
45 SOUTH STREET, HOPKINTON, MA 01748
(508) 435-9001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

COPIES TO:

<TABLE>
<S> <C>
JONATHAN L. KRAVETZ, ESQ. MARK KESSEL, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. JI HOON HONG, ESQ.
ONE FINANCIAL CENTER, BOSTON, MA 02111 SHEARMAN & STERLING
(617) 542-6000 599 LEXINGTON AVENUE, NEW YORK, NY 10022
(212) 848-4000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment
plans, please check the following box: / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: /X/

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JUNE 27, 1996

PROSPECTUS
- ----------------

2,000,000 SHARES

LOGO

COMMON STOCK

All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Creative BioMolecules, Inc. ("Creative BioMolecules" or the "Company"). The
Company's Common Stock is quoted on the Nasdaq National Market under the symbol
CBMI. On June 24, 1996, the closing sale price of the Common Stock was $8.97 per
share. See "Price Range of Common Stock."

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

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.

(2) Before deducting expenses payable by the Company estimated at $500,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

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

The shares of Common Stock are offered by the Underwriters subject to prior
sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST COWEN & COMPANY

, 1996
<PAGE> 3

[GRAPHIC DEPICTING MORPHOGEN INDUCED TISSUE AND ORGAN FORMATION]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus or incorporated by reference.

THE COMPANY

Creative BioMolecules, Inc. ("Creative BioMolecules" or the "Company") is
developing products for the regeneration and restoration of human tissues and
organs based on morphogenic proteins identified and characterized by the
Company. The Company's lead morphogenic protein, OP-1, has been shown to induce
formation of several types of tissues including bone, cartilage, kidney, tooth
and brain. OP-1 is in the late stages of a pivotal trial for regeneration of
bone tissue in non-union fractures. Target patient accrual in the trial was
completed in January 1996. For orthopaedic applications of OP-1, the Company's
corporate partner is Stryker Corporation ("Stryker"), a leading surgical and
medical products company. The Company believes that Stryker will file an
application for Pre-Market Approval ("PMA") for an OP-1 bone regeneration
product by the end of 1997. Stryker is also undertaking clinical studies of OP-1
in acute fractures and other bone indications, as well as preclinical studies in
cartilage regeneration. In addition to the Stryker program, Creative
BioMolecules has proprietary programs in place to develop OP-1 product
candidates for kidney disorders, dental therapeutics, neurological disorders and
osteoporosis.

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

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

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

Kidney Disorders. Creative BioMolecules is developing OP-1 product
candidates for use in the treatment of renal failure, the primary cause of the
need for dialysis. The Company believes that there is a significant commercial
opportunity for therapies that could reduce, delay or even prevent the need for
dialysis. Studies have shown that OP-1 administration improves kidney function
in animal models of acute and chronic renal failure.

3
<PAGE> 5

Dental Therapeutics. The Company is developing an OP-1 product for dentin
regeneration that may offer an alternative to certain root canal procedures. In
a pilot clinical trial, the Company's OP-1 product induced statistically
significant dentin formation. The Company commenced a second pilot clinical
trial in September 1995 to evaluate this application further. The Company also
has an OP-1 product candidate in preclinical testing which it believes can
restore the periodontal tissues necessary to maintain tooth attachment when used
in conjunction with standard surgical treatments of periodontal disease. The
Company is seeking a collaborative partner to complete development of and to
commercialize these OP-1 product candidates. Certain indications within dental
therapeutics are the subject of negotiations to determine shared or assigned
rights with or to Stryker. The Company is in active discussions with Stryker to
agree on specific ownership details.

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

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

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,000,000 shares
Common Stock to be outstanding after the offering... 31,072,730 shares(1)
Use of proceeds..................................... For research and product development,
including preclinical and clinical
testing programs and for working
capital and general corporate purposes.
Nasdaq National Market symbol....................... CBMI
</TABLE>

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

(1) Based on the number of shares outstanding on June 20, 1996. Excludes
5,503,148 shares of Common Stock issuable upon exercise of options and
warrants outstanding as of June 20, 1996, which have a weighted average
exercise price of $3.78 per share.

The Company's executive offices are located at 45 South Street, Hopkinton,
Massachusetts 01748, and its telephone number is (508) 435-9001.

4
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS THREE
ENDED MONTHS
MARCH 31, ENDED YEARS ENDED SEPTEMBER 30,
------------------ DECEMBER 31, -----------------------------------------------------
1996 1995 1995(1) 1995 1994 1993 1992 1991
------- ------- ------------ ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
contracts.................. $ 1,056 $ 1,490 $ 971 $ 5,824 $ 3,652 $ 1,576 $ 4,469 $ 5,235
Manufacturing contracts...... 612 2,121 770 6,159 1,411 461 -- --
License fees and royalties... 102 -- 2 544 7 30 -- --
Product sales................ -- -- -- -- 16 35 56 77
Interest..................... 250 203 261 649 580 549 472 80
Other........................ 20 13 -- 53 141 3 5 6
------- ------- ------------ ------- -------- -------- ------- -------
Total revenues............. 2,040 3,827 2,004 13,229 5,807 2,654 5,002 5,398
------- ------- ------------ ------- -------- -------- ------- -------
Cost and expenses:
Research and development..... 3,833 2,777 3,194 11,688 17,680 12,898 7,489 5,805
Manufacturing contracts...... 478 1,708 715 5,330 1,389 439 -- --
Product sales................ -- -- -- -- 3 6 13 13
Marketing, general and
administrative............. 1,115 921 1,254 3,604 4,794 3,121 3,292 2,105
Interest..................... 55 51 61 229 200 209 200 207
------- ------- ------------ ------- -------- -------- ------- -------
Total costs and expenses... 5,481 5,457 5,224 20,851 24,066 16,673 10,994 8,130
------- ------- ------------ ------- -------- -------- ------- -------
Net loss....................... $(3,441) $(1,630) $ (3,220) $(7,622) $(18,259) $(14,019) $(5,992) $(2,732)
======= ======= ============= ======= ======== ======== ======= =======
Net loss per common share(2)... $ (0.12) $ (0.08) $ (0.11) $ (0.37) $ (0.95) $ (0.94) $ (0.55) $ (0.41)
======= ======= ============= ======= ======== ======== ======= =======
Weighted average number of
common and common equivalent
shares outstanding(2)........ 29,027 19,778 28,120 20,431 19,212 14,855 10,812 6,743
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities........................................... $17,516 $33,880
Working capital............................................................................ 18,442 34,806
Total assets............................................................................... 39,370 55,734
Capital lease obligations, less current portion............................................ 1,694 1,694
Accumulated deficit........................................................................ (72,639) (72,639)
Total stockholders' equity................................................................. 34,797 51,161
</TABLE>

- ------------------------------
(1) In January 1996, the Company changed its fiscal year end from September 30
to December 31, effective with the three month period ended December 31,
1995.
(2) For information concerning the calculation of net loss per share, see Note 1
of Notes to Consolidated Financial Statements.

(3) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $8.97 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

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

Except where otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting."

5
<PAGE> 7

RISK FACTORS

The following risk factors should be considered carefully in addition to
other information contained in this Prospectus before purchasing the Common
Stock offered hereby.

This Prospectus contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of the Company's plans
and objectives for future operations, assumptions underlying such plans and
objectives and other forward-looking statements included in "Prospectus
Summary -- The Company," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in the
Prospectus. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. Factors which could cause such results to differ materially from
those described in the forward-looking statements include those set forth in the
risk factors below.

EARLY STAGE OF DEVELOPMENT. Creative BioMolecules has not yet generated
revenues from the commercialization of its products, and there is substantial
uncertainty regarding the timing and amount of any such future revenues.
Although the Company cannot predict with accuracy the timing of marketing
approval for any products under development, the first such approval is not
expected for several years, and no significant product revenues or royalties
will be generated before such approval is obtained. There can also be no
assurance that the Company's products will be proven safe and effective in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable cost, be marketed successfully
or achieve customer acceptance. Moreover, there can be no assurance that
government health administration authorities, private health care providers or
other third party payors will accept the Company's products, even if the
Company's products prove to be safe and effective and are approved for marketing
by the FDA and other regulatory authorities.

RELIANCE ON LEAD PRODUCT CANDIDATE. The Company's research and development
resources are primarily dedicated to its programs based on its proprietary
recombinant morphogenic protein, OP-1, the Company's lead product candidate for
several potential therapeutic indications. Clinical progress in the area of
orthopaedic reconstruction is within the control of Stryker, the Company's
collaborative partner. Significant delays in Stryker's clinical trials of OP-1,
unfavorable results in these trials, failure to obtain regulatory approval for
the commercialization of OP-1 products or failure to achieve market acceptance
of OP-1 would have a material adverse effect upon the Company. See
"-- Dependence on Efforts of Stryker and Other Collaborative Partners to
Commercialize Products."

CONTINUING OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
experienced significant operating losses since its inception and, as of March
31, 1996, had an accumulated deficit of approximately $72.6 million. The Company
expects its operating expenses to increase and its operating losses to continue
over the next several years as it expands its research and development, clinical
testing and manufacturing efforts. The Company's ability to achieve
profitability is dependent in large part on obtaining regulatory approvals for
its products and entering into agreements for product development and
commercialization. There can be no assurance that the Company will ever become
profitable.

UNCERTAINTIES RELATED TO COMPANY'S ABILITY TO RAISE ADDITIONAL NECESSARY
CAPITAL. The Company has spent and expects to continue to spend substantial
funds for continuation of the research and development of product candidates,
preclinical and clinical testing, the establishment of commercial-scale
manufacturing facilities, and filing, prosecuting and enforcing patent claims.
The Company may also require additional funds in order to acquire technologies
or products that complement the Company's efforts. To satisfy its capital
requirements, the Company may seek to raise funds in the public or private
capital markets or make collaborative arrangements with corporate partners or
from other sources. See "-- Reliance on Collaborative Arrangements as a Part of
the Company's Funding Strategy." No assurance can be given that such additional
funds will be available to the Company on

6
<PAGE> 8

acceptable terms, if at all. If adequate funds are not available from operations
or additional sources of financing, the Company's business will be materially
adversely affected and the Company may be required to delay, scale back or
eliminate one or more of its development programs or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise retain for itself. If additional funds
are raised by issuing equity securities, further substantial dilution to
existing stockholders may result. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

RELIANCE ON COLLABORATIVE ARRANGEMENTS AS A PART OF THE COMPANY'S FUNDING
STRATEGY. The Company has relied and plans to continue to rely on collaborative
arrangements with established health care companies to fund a portion of its
research and development. Pursuant to such arrangements, the Company seeks to
have collaborative partners provide capital in exchange for certain technology,
product, manufacturing and/or marketing rights related to the collaborative
research. There can be no assurance that the Company will be able to negotiate
additional acceptable collaborative arrangements or that any such collaborative
arrangements will succeed.

The Company's collaborative partner for orthopaedic reconstruction,
Stryker, has provided a substantial portion of the Company's revenues during
each of the past several years. The Company anticipates that a significant
portion of its research revenues for the next several years will be derived from
Stryker. However, continued funding from Stryker is dependent upon the Company
performing research and supplying material for preclinical and clinical testing
by Stryker.

In 1994, the Company signed a three-year manufacturing contract with
Biogen, Inc. ("Biogen") to produce several of Biogen's protein-based therapeutic
candidates in the Company's manufacturing facility in Lebanon, New Hampshire for
Biogen's use in its clinical trials. The Company anticipates that a significant
portion of its manufacturing revenues during the term of its manufacturing
contract with Biogen will be derived from such contract.

There can be no assurance that the Company will satisfy the requirements
for the receipt of payments from Stryker or Biogen. If the Company does not
receive anticipated payments from Stryker and Biogen and does not receive
adequate additional funds, the Company's business will be materially adversely
affected. See "-- Uncertainties Related to Company's Ability to Raise Additional
Necessary Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE ON EFFORTS OF STRYKER AND OTHER COLLABORATIVE PARTNERS TO
COMMERCIALIZE PRODUCTS. The Company's collaborative arrangement with Stryker
provides, and future arrangements between the Company and other collaborative
partners may provide, that the collaborative partner complete product
development, perform clinical trials, obtain regulatory approvals and market
products resulting from such collaboration. The Company does not control the
amount of resources or the schedule of product development in its collaboration
with Stryker and may not be able to control the efforts that any future
collaborative partners may devote to their respective programs with the Company.
The timing and amount of any future royalties and manufacturing revenues of the
Company with respect to product development pursuant to such collaborative
arrangements will therefore depend on the level of commitment, timing and
success of such collaborative partners' efforts. Should Stryker or any other
collaborative partner fail to develop and to commercialize marketable products
successfully, the Company's business would be materially adversely affected. See
"Business -- Collaborative and Licensing Agreements."

COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. The biotechnology and
pharmaceutical industries are rapidly evolving fields in which developments are
expected to continue at a rapid pace. Competitors of the Company in the United
States and abroad are numerous and include, among others, pharmaceutical and
biotechnology companies, universities and other research institutions. The
Company's success depends upon developing and maintaining a competitive position
in the development of products and technologies in its areas of focus.
Competition from other biotechnology and pharmaceu-

7
<PAGE> 9

tical companies is intense and is expected to increase as new products enter the
market and as new technologies are discovered and commercialized. The Company's
competitors may develop technologies and products that are more effective than
any which have been or are being developed by the Company, or that render the
Company's technologies or products obsolete or noncompetitive. Furthermore, the
Company's competitors may obtain patent protection or other intellectual
property rights that block the Company from developing its potential products,
or they may obtain regulatory approval for the commercialization of their
products more rapidly or for a wider array of indications than those obtained by
the Company. Finally, many of these competitors have substantially greater
research and development capabilities, clinical, manufacturing, regulatory and
marketing experience and financial and managerial resources than the Company.
See "Business -- Competition."

Other companies are engaged in the research and development of morphogenic
proteins for various applications. The Company is aware that Genetics Institute,
Inc. ("Genetics Institute"), a majority-owned subsidiary of American Home
Products Corporation, is pursuing the development of bone morphogenic proteins.
Genetics Institute has also entered into relationships with Yamanouchi
Pharmaceuticals Co., Ltd. and Sofamor Danek Group, Inc. covering development and
marketing of bone morphogenic proteins. The Company believes that other
biopharmaceutical companies also are developing recombinant human proteins,
primarily growth factors, for use in the local repair of orthopaedic and
skeletal defects and in other indications. A number of other companies are
pursuing traditional therapies that may compete with the Company's products,
including autografts, allografts and electrical stimulation devices for the
repair of orthopaedic and other skeletal defects.

LACK OF EXPERIENCE IN COMMERCIAL MANUFACTURING; UNCERTAINTY AS TO
TRANSITION TO COMMERCIAL PRODUCTION. The Company has not yet introduced any
products commercially and has never engaged in large-scale manufacturing. To be
successful, the Company's products must be manufactured in commercial
quantities, at acceptable costs and in compliance with regulatory requirements.
In March 1993, the Company acquired from Verax Corporation ("Verax") a
manufacturing facility in Lebanon, New Hampshire for production of the Company's
products for use in clinical studies and commercial sale. There can be no
assurance, however, that this facility will meet the Company's future needs or
those of its collaborative partners. In addition, manufacturing facilities must
be inspected and, in some cases, licensed by the FDA prior to the production of
commercial products and must be operated in compliance with current Good
Manufacturing Practices ("cGMP") for any products manufactured for either
clinical research or commerical use. No assurance can be given that the Company
will be able to make the transition to commercial production successfully. See
"Business -- Manufacturing" and "Business -- Regulatory Issues -- Facilities
Inspection."

LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE. The Company does not
have experience in marketing, sales or distribution of commercial products. To
market any of its products, the Company will need to develop a substantial
marketing and sales force or will have to arrange for third parties to market
and distribute its products. To the extent that the Company determines not to,
or is unable to, arrange third party distribution for its products, significant
additional expenditures, management resources and time will be required to
develop a sales force. There can be no assurance that the Company will be able
to establish such a sales force or be successful in gaining market acceptance
for its products.

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The biotechnology and
pharmaceutical industries place considerable emphasis on obtaining patent and
maintaining trade secret protection for new technologies, products and
processes, and the Company's success will depend, in part, on its ability to
obtain patent protection for its products and manufacturing processes, preserve
its trade secrets and operate without infringing the proprietary rights of third
parties. In addition to the Company's own patents and patent applications,
Stryker has exclusively and irrevocably licensed rights in certain patents and
patent applications to the Company. See "Business -- Collaborative and Licensing
Agreements -- Stryker Corporation."

8
<PAGE> 10

The Company expects to seek additional patents in the future, but there can
be no assurance as to the Company's success or timeliness in obtaining any such
patents or as to the breadth or degree of protection which any such patents may
afford the Company. The patent position of biotechnology and pharmaceutical
firms is often highly uncertain and usually involves complex legal and factual
questions. There is a substantial backlog of biotechnology patent applications
at the U.S. Patent and Trademark Office. No consistent policy has emerged
regarding the breadth of claims covered in biotechnology patents. Accordingly,
there can be no assurance that patent applications relating to the Company's
products or technology will result in patents being issued or that, if issued,
such patents will afford adequate protection to the Company, or that such
patents will not be challenged, invalidated or infringed. Furthermore, there can
be no assurance that others will not independently develop similar products and
processes, duplicate any of the Company's products or, if patents are issued to
the Company, design around such patents. In addition, the Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is adverse to the Company, the Company's business could be
materially adversely affected. To determine the priority of inventions, the
Company also may have to participate in interference proceedings declared by the
U.S. Patent and Trademark Office, which could result in substantial cost to the
Company.

The Company also has rights in two U.S. patents issued to Stryker
containing claims which are in interference with Genetics Institute's patent
application containing claims directed to Bone Morphogenetic Protein-2
("BMP-2"), Genetics Institute's lead morphogenic protein. The Administrative Law
Judge presiding over the interference has issued a ruling that the Genetics
Institute pending claims to osteogenic recombinant human BMP-2 protein are
unpatentable to Genetics Institute. The decision is subject to review at a final
hearing in the U.S. Patent and Trademark Office and thereafter can be appealed.
There can be no assurance that the decision ultimately will be upheld. Were the
decision to be reversed, the likelihood that the Company could maintain its
right to exclude third parties from exploiting BMP-2 in the United States would
be reduced.

The Company also has rights in a European patent issued to Stryker with
claims to the use of BMP-2 as a bone forming protein. The Company anticipates
that Genetics Institute will oppose the patent, as permitted under European
patent practice. There can be no assurance as to the outcome of such an
opposition. If the claims to the use of BMP-2 are lost in the opposition, the
Company's ability to exclude third parties from exploiting BMP-2 in Europe would
be diminished.

PATENT INFRINGEMENT RISK. The Company may be subject to claims that it
infringes the patents of others. Competitors of the Company may obtain patents
claiming products or processes that are necessary for or useful to the
development, use or manufacture of the Company's products. Such competitors
could bring legal actions against the Company claiming infringement and seeking
damages and injunctive relief. The Company may be required to obtain licenses
from others to continue to develop, manufacture or market its products or may be
required to cease those activities. There can be no assurance that the Company
will obtain such licenses on acceptable terms, if at all. There can be no
assurance that the Company's current and proposed future activities in the field
of morphogenic proteins will not be challenged in the future in the United
States or abroad, that the Company necessarily will prevail in any such
challenge, that patents have not issued or will not issue containing claims
which may materially constrain the proposed activities of the Company, or that
the Company will not become involved in costly, time-consuming litigation or
interference proceedings regarding patents in the field of morphogenic proteins,
including actions brought to challenge or invalidate the Company's own patent
rights. See "Business -- Patents and Proprietary Rights."

9
<PAGE> 11

however, that the U.S. Patent and Trademark Office will declare an interference
or that the Company necessarily would prevail in any interference proceeding.
Were an interference to be lost, and if a license were not available from
Genetics Institute, the Company might be required to alter its manufacturing
techniques, thereby likely delaying FDA approval of its products, or might be
required to engage in costly litigation. There can be no assurance that the
Company necessarily would prevail in such a litigation.

Genetics Institute or another competitor also could obtain patents which
could materially constrain the Company's ability to exploit its morphogenic
technology in a country outside the United States if a license were not
available.

POTENTIAL INABILITY TO PROTECT UNPATENTED TECHNOLOGY. The Company also
seeks to protect its proprietary technology, including technology which may not
be patented or patentable, in part by confidentiality agreements and, in certain
cases, inventors' rights agreements with its collaborators, advisors, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise be disclosed to, or discovered
by, competitors. See "Business -- Patents and Proprietary Rights."

NO ASSURANCE OF FDA APPROVAL; COMPREHENSIVE GOVERNMENT REGULATION. The
production and marketing of products developed through the Company's
technologies and its ongoing research and development activities are subject to
regulation by numerous federal, state and local governmental authorities in the
United States and by similar regulatory agencies in other countries where the
Company or any collaborative partner may be testing or intend to test and market
products which have yet to be developed. All of the Company's products require
governmental approvals for commercialization which have not yet been obtained.
Clinical trials and manufacturing of many of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. The regulatory process, which
includes preclinical testing and clinical trials of each potential product to
establish its safety and efficacy, can take many years and require the
expenditure of substantial resources. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approvals. In addition, delays or rejections
may be encountered based upon changes in regulatory policy for product approval
during the period of product development and regulatory review. There can be no
assurance that, even after such time and expenditures, regulatory approvals will
be obtained for any products developed utilizing the Company's technologies.
Moreover, if regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which it may be marketed. Further,
even if such regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review, and discovery of previously
unknown problems with a product or manufacturer may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. Regulatory approval of product prices is required in many countries
outside the United States, and various cost containment measures have been
proposed in the United States. There can be no assurance that such regulatory
limitations will not prevent the Company and its collaborative partners from
realizing an adequate return on their investment in product development. Both
the legislative and executive branches of the federal government are considering
reforms to the FDA and its regulatory processes and authority. The effect of
these reforms, if enacted, on the Company or its products cannot be predicted.
See "Business -- Regulatory Issues" and "-- Dependence on Efforts of Stryker and
Other Collaborative Partners to Commercialize Products."

USE AND DISPOSAL OF HAZARDOUS MATERIALS. The Company is subject to numerous
environmental and safety laws and regulations, including those governing the
controlled use and disposal of hazardous materials such as radioactive
compounds, toxins and other chemicals used in the Company's research,
development and manufacturing activities. Any violation of, and the cost of
compliance with, these regulations could adversely impact the Company's
operations. While the Company believes that its safety procedures relating to
the handling and disposing of such materials comply with applicable regulatory
standards, the risk of accidental contamination or injury from these materials
cannot be

10
<PAGE> 12

completely eliminated. If such an accident were to occur, the Company could be
held liable for any resulting damages and any such liability could exceed the
resources of the Company. See "Business -- Regulatory Issues."

DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part
upon Michael M. Tarnow, its President and Chief Executive Officer, and Charles
Cohen, Ph.D., its Chief Scientific Officer. The loss of the services of either
of these key employees could have a material adverse effect on the Company. The
Company is also dependent on certain key management and scientific personnel,
the loss of whose services could significantly impede the achievement of its
development objectives. The Company's continued expansion in areas and
activities requiring additional expertise will necessitate the recruitment of
additional management and scientific personnel. There can be no assurance that
the Company will be able to attract and retain such personnel on acceptable
terms, given the competition for such personnel among numerous pharmaceutical
and biotechnology companies, government entities and research and academic
institutions.

DEPENDENCE ON ACADEMIC COLLABORATORS. The Company has relationships with
academic collaborators who investigate the potential utility of the Company's
proprietary technology for various therapeutic applications. The Company's
academic collaborators are not employees of the Company. The Company has limited
control over their activities, and only limited amounts of their time are
dedicated to the Company's projects. The Company's academic collaborators may
have relationships with other commercial entities, some of which compete with
the Company. Although the precise nature of each relationship varies, the
academic collaborators and their primary affiliated institutions generally sign
agreements which provide for confidentiality of the Company's proprietary
technology and results of studies. There can be no assurance, however, that the
Company will be able to maintain the confidentiality of its technology or study
results in connection with every collaboration, and dissemination of such
technology or study results could have an adverse effect on the Company's
business. Also, the Company seeks to obtain exclusive rights to license
developments that may result from these studies. However, there can be no
assurance that such licenses will be available on acceptable terms, if at all.

UNCERTAINTY OF REIMBURSEMENT. The ability of the Company and its
collaborative partners to commercialize the Company's products successfully may
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and there can be no assurance that adequate
third-party coverage will be available to enable the Company or its
collaborative partners to maintain price levels sufficient to realize an
appropriate return on its investment in product development. Legislation and
regulations affecting the pricing of pharmaceuticals may change before any of
the Company's proposed products are approved for commercialization. Adoption of
such legislation could further limit reimbursement for medical products and
services.

PRODUCT LIABILITY AND INSURANCE. The testing, marketing and sale of health
care products entail an inherent risk of allegations of product liability, and
there can be no assurance that product liability claims will not be asserted
against the Company. The Company currently maintains product liability insurance
at a level which the Company believes is consistent with industry practice.
However, such existing coverage may not be adequate as the Company continues to
pursue clinical testing of its potential products or seeks to commercialize
products. In addition, there can be no assurance that the Company will be able
to maintain or increase its current insurance coverage in the future on
acceptable terms or that any claims against the Company will not exceed the
amount of such coverage.

VOLATILITY OF STOCK PRICE. The market prices for securities of
biotechnology companies have been volatile. The market price for the Company's
Common Stock has fluctuated significantly since public trading commenced in
1992, and it is likely that the market price will continue to fluctuate in the
future. Announcements of technological innovations or new commercial products by
the Company or

11
<PAGE> 13

its competitors, developments concerning proprietary rights, including patents
and litigation matters, publicity regarding actual or potential clinical trial
and medical results relating to products under development by the Company or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the safety of biotechnology products and
economic and other external factors may have a significant impact on the
Company's business and on the market price of the Common Stock. In addition, the
Company has experienced and expects to continue to experience significant
fluctuations in its quarterly operating results, due primarily to the timing of
revenue received under its manufacturing contract with Biogen. The Company
believes that fluctuations in quarterly results may cause the market price of
its Common Stock to fluctuate substantially. See "Price Range of Common Stock"
and "Business -- Collaborative and Licensing Arrangements."

SHARES ELIGIBLE FOR FUTURE SALE. Substantially all of the Company's shares
are eligible for sale in the public market. Sales of substantial amounts of
Common Stock in the public market after this offering could adversely affect the
market price of the Common Stock. The Company and its officers, directors and
certain stockholders holding 9,206,487 shares of Common Stock, representing
approximately 30% of the aggregate outstanding shares of Common Stock after the
offering, have agreed not to sell any shares of Common Stock for a period of 90
days after the date of this Prospectus. Hambrecht & Quist may, in its
discretion, permit such sales during such period without public announcement. As
of June 20, 1996, there were options outstanding to purchase 4,355,548 shares of
Common Stock (including 2,367,757 options held by the officers and directors
described above) with an average exercise price of $4.16 per share, and warrants
to purchase 1,147,600 shares of Common Stock (including 811,629 warrants held by
certain stockholders described above) with an average exercise price of $2.43
per share. Additional shares may also become available for sale in the public
market from time to time in the future. Exercise of such options and warrants
would dilute the percentage ownership of existing holders of Common Stock and
the sale of such shares could have a significant adverse effect on the market
price of the Common Stock. See "Capitalization" and "Principal Stockholders."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock in
this offering will experience immediate and substantial dilution of net tangible
book value per share. Based on the net tangible book value of the Common Stock
at March 31, 1996 and a public offering price of $8.97, dilution in net tangible
book value for purchasers in the Offering would be $7.42 per share. To the
extent outstanding options and warrants to purchase the Company's Common Stock
are exercised, there will be further dilution. See "Dilution." If the Company
raises additional funds by issuing equity securities, greater dilution to
purchasers of shares of Common Stock in this offering may occur. See "--
Uncertainties Related to Company's Ability to Raise Additional Necessary
Capital."

ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends on the
Common Stock since inception and does not anticipate paying cash dividends in
the foreseeable future.

ANTI-TAKEOVER PROVISIONS. The Board of Directors has the authority to issue
shares of preferred stock with rights and preferences, including dividend and
liquidation rights, senior to those of the Common Stock without further action
by the stockholders of the Company. In addition, the Company's Restated
Certificate of Incorporation and Restated By-Laws contain certain provisions
that could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit future prices that certain investors
might be willing to pay for shares of Common Stock. These provisions, which
include classification of the Board of Directors, could also make it more
difficult for stockholders to change the management of the Company or to effect
certain transactions. Certain provisions of Delaware and Massachusetts corporate
law also may have the effect of deterring a hostile takeover or delaying or
preventing changes in control or management of the Company.

12
<PAGE> 14

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the
2,000,000 shares of Common Stock offered hereby, at an assumed offering price of
$8.97 per share, and after deducting the underwriting discount and estimated
offering expenses payable by the Company, are estimated to be $16.3 million
($18.8 million if the Underwriters' over-allotment option is exercised in full).
See "Underwriting."

The Company intends to use the net proceeds of this offering to fund
research and product development, including ongoing development of the Company's
technology, preclinical and clinical testing and to provide for other costs
associated with the Company's product development programs. Proceeds of this
offering may also be used to acquire companies, assets or products that
complement the business of the Company, although there are no understandings,
commitments or agreements with respect to any such acquisitions as of the date
hereof.

Pending application of the proceeds as described above, the Company plans
to invest such proceeds in investment-grade, interest-bearing obligations.
Because of the Company's significant long-term capital requirements, it may seek
to raise additional funds when conditions are favorable, even if it does not
have an immediate need for such capital at such time.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on Nasdaq National Market under the
symbol CBMI. The following table sets forth for the calendar quarter periods
indicated the high and low sale prices for the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1996
2nd Quarter (through June 20, 1996)................ $10.88 $7.56
1st Quarter........................................ 13.00 6.88
1995
4th Quarter........................................ 7.00 4.50
3rd Quarter........................................ 6.25 2.50
2nd Quarter........................................ 3.13 1.69
1st Quarter........................................ 3.25 1.50
1994
4th Quarter........................................ 3.88 1.38
3rd Quarter........................................ 4.88 2.50
2nd Quarter........................................ 8.25 2.75
1st Quarter........................................ 11.25 8.00
</TABLE>

On June 24, 1996, the closing sale price of the Company's Common Stock was
$8.97 per share. As of June 20, 1996, there were approximately 290 stockholders
of record of the Company's Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.

13
<PAGE> 15

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to give effect to the receipt by the Company of
the net proceeds from the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed offering price of $8.97 per share:

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion....................... $ 1,694 $ 1,694
-------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, no
shares issued and outstanding as adjusted........................ -- --
Common stock, $.01 par value; 50,000,000 shares authorized,
29,069,505 shares issued, 31,069,505 shares issued and
outstanding, as adjusted(1)...................................... 291 311
Additional paid-in capital.......................................... 107,145 123,489
Accumulated deficit................................................. (72,639) (72,639)
-------- -----------
Total stockholders' equity............................................ 34,797 51,161
-------- -----------
Total capitalization.................................................. $ 36,491 $ 52,855
======== =========
</TABLE>

- ------------------------------
(1) Excludes, as of March 31, 1996, (i) 4,251,566 shares of Common Stock
issuable upon exercise of options outstanding under the Stock Plans at a
weighted average exercise price of $4.02 per share and (ii) 1,147,600 shares
of Common Stock issuable upon exercise of warrants at a weighted average
exercise price of $2.43 per share.

DILUTION

The net tangible book value of the Company as of March 31, 1996 was $31.8
million, or $1.09 per share of Common Stock. "Net tangible book value"
represents the amount of total tangible assets less total liabilities. Without
taking into account any other changes in the net tangible book value after March
31, 1996, other than to give effect to the receipt by the Company of the net
proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby at
an assumed offering price of $8.97 per share, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been approximately $48.1
million or $1.55 per share. This represents an immediate increase in net
tangible book value of $.46 per share to existing stockholders and an immediate
dilution of $7.42 per share to persons purchasing shares at the public offering
price ("New Investors"). The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $8.97
Net tangible book value per share before offering............ $1.09
Increase per share attributable to New Investors............. .46
-----
Pro forma net tangible book value per share after the
offering..................................................... 1.55
-----
Dilution of net tangible book value per share to New $7.42
Investors.................................................... =====
</TABLE>

All the above computations exclude 5,399,166 shares of Common Stock
issuable upon exercise of stock options and warrants outstanding as of March 31,
1996, with a weighted average exercise price of $3.68. To the extent these
options or warrants are exercised at a price per share below the public offering
price of this offering, there will be further dilution to New Investors. See
Notes 6 and 7 of Notes to Consolidated Financial Statements.

14
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of operations for the three months ended
December 31, 1995 and for each of the three years in the period ended September
30, 1995, and with respect to the consolidated balance sheets as of December 31,
1995 and September 30, 1995 and 1994, are derived from the consolidated
financial statements that have been audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Prospectus. The
consolidated statement of operations data for the years ended September 30, 1992
and 1991, and the consolidated balance sheet data as of September 30, 1993, 1992
and 1991 are derived from audited consolidated financial statements not included
herein. The unaudited consolidated statement of operations data for the three
months ended March 31, 1996 and 1995 and the unaudited consolidated balance
sheet data as of March 31, 1996 are derived from unaudited consolidated
financial statements included elsewhere in this Prospectus. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considered necessary for a fair
presentation of its financial position and the results of its operations for
these periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1996. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes included herein.

<CAPTION>
THREE
THREE MONTHS ENDED MONTHS
MARCH 31, ENDED YEARS ENDED SEPTEMBER 30,
------------------ DECEMBER 31, -------------------------------------------------------
1996 1995 1995(1) 1995 1994 1993 1992 1991
------- ------- ------------ -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Research and development
contracts..................... $ 1,056 $ 1,490 $ 971 $ 5,824 $ 3,652 $ 1,576 $ 4,469 $ 5,235
Manufacturing contracts......... 612 2,121 770 6,159 1,411 461 -- --
License fees and royalties...... 102 -- 2 544 7 30 -- --
Product sales................... -- -- -- -- 16 35 56 77
Interest........................ 250 203 261 649 580 549 472 80
Other........................... 20 13 -- 53 141 3 5 6
------- ------- -------- -------- -------- -------- -------- -------
Total revenues................ 2,040 3,827 2,004 13,229 5,807 2,654 5,002 5,398
------- ------- -------- -------- -------- -------- -------- -------
Cost and expenses:
Research and development........ 3,833 2,777 3,194 11,688 17,680 12,898 7,489 5,805
Manufacturing contracts......... 478 1,708 715 5,330 1,389 439 -- --
Product sales................... -- -- -- -- 3 6 13 13
Marketing, general and
administrative................ 1,115 921 1,254 3,604 4,794 3,121 3,292 2,105
Interest........................ 55 51 61 229 200 209 200 207
------- ------- -------- -------- -------- -------- -------- -------
Total costs and expenses...... 5,481 5,457 5,224 20,851 24,066 16,673 10,994 8,130
------- ------- -------- -------- -------- -------- -------- -------
Net loss.......................... $(3,441) $(1,630) $ (3,220) $ (7,622) $(18,259) $(14,019) $ (5,992) $(2,732)
======= ======= ======== ======== ======== ======== ======== =======
Net loss per common share(2)...... $ (0.12) $ (0.08) $ (0.11) $ (0.37) $ (0.95) $ (0.94) $ (0.55) $ (0.41)
======= ======= ======== ======== ======== ======== ======== =======
Weighted average number of common
and common equivalent shares
outstanding(2).................. 29,027 19,778 28,120 20,431 19,212 14,855 10,812 6,743
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------------------------------
MARCH 31, 1996 1995 1995 1994 1993 1992 1991
-------------- ------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities......................... $ 17,516 $ 20,002 $ 10,486 $ 5,423 $ 25,255 $ 6,739 $ 496
Working capital (deficiency)......... 18,442 21,743 11,651 4,927 23,940 5,015 (1,435)
Total assets......................... 39,370 41,341 32,192 27,470 45,326 12,235 4,542
Capital lease obligations, less
current portion.................... 1,694 1,711 1,713 1,750 1,798 216 764
Accumulated deficit.................. (72,639) (69,198) (65,978) (58,356) (40,098) (26,079) (16,979)
Total stockholders' equity........... 34,797 37,829 28,269 22,807 40,675 9,676 1,365

<FN>
- ------------------------------
(1) In January 1996, the Company changed its fiscal year end from September 30
to December 31, effective with the three month period ended December 31,
1995.
(2) For information concerning the calculation of net loss per share, see Note 1
of Notes to Consolidated Financial Statements.
</TABLE>

15
<PAGE> 17

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

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related Notes contained elsewhere in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."

GENERAL

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

The Company's research agreements with collaborative partners have
typically provided for the partial or complete funding of research and
development for specified projects and royalties payable to the Company in
exchange for licenses to market the resulting products. The Company is presently
a party to one major research collaboration with Stryker to develop products for
orthopaedic reconstruction. Under the research portion of the collaboration with
Stryker, the Company supplies an OP-1 product to Stryker for clinical trials and
other uses, provides clinical support and performs research work pursuant to
work plans established periodically by the two companies. The current work plan
establishes research objectives and funding through April 1998. Although the
Company is seeking and in the future may seek to enter into collaborative
arrangements with respect to certain other projects, there can be no assurance
that the Company will be able to obtain such agreements on acceptable terms or
that the costs required to complete the projects will not exceed the funding
available for such projects from the collaborative partners.

The Company's manufacturing contracts provide for technical collaboration
and manufacturing for third parties at the Company's manufacturing facility in
Lebanon, New Hampshire. The Company is presently a party to a manufacturing
contract with Biogen to produce several of Biogen's protein-based therapeutic
candidates through December 1997 for use in Biogen's clinical trials. The
Company agreed to provide Biogen with all available cell culture and bacterial
fermentation capacity within the manufacturing facility, and Biogen agreed to
pay the Company's costs associated with such capacity, for approximately six
months in each of the three years beginning in January 1995. Although the
Company is seeking additional manufacturing contracts for available cell culture
and bacterial fermentation capacity, there can be no assurance that the Company
will be able to obtain such contracts on acceptable terms or at all.

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

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

16
<PAGE> 18

RESULTS OF OPERATIONS

Three months ended March 31, 1996 and 1995. The Company's total revenues
for the three month periods ended March 31, 1996 and 1995 were $2,040,000 and
$3,827,000, respectively. Research and development contract revenues decreased
29% to $1,056,000 for the three month period ended March 31, 1996 from
$1,490,000 for the three month period ended March 31, 1995. This decrease was
primarily due to fluctuations in research activities for Stryker. The Company
anticipates that research and development contract revenues for each of the
remaining quarters of 1996 will be higher than the three months ended March 31,
1996 due to increases in funding from Stryker beginning in May 1996.
Manufacturing contract revenues decreased 71% to $612,000 for the three month
period ended March 31, 1996 from $2,121,000 for the three month period ended
March 31, 1995. Manufacturing contract revenues reflect manufacturing
principally for Biogen conducted at the Company's manufacturing facility in
Lebanon, New Hampshire. The Company anticipates that manufacturing contract
revenues for each of the remaining quarters of 1996 will be significantly higher
than the three months ended March 31, 1996 due to the resumption of production
for Biogen in May 1996. License fees and royalties of $102,000 for the three
month period ended March 31, 1996 resulted from licensing patent rights and
know-how associated with certain protein technology which is not central to the
Company's business. Interest revenue increased 23% to $250,000 for the three
month period ended March 31, 1996 from $203,000 for the three month period ended
March 31, 1995. The increase is due to an increase in average funds available
for investment resulting from a self-managed public offering in October 1995 of
3,000,000 shares of common stock at a price of $4.25 per share.

The Company's total costs and expenses for the three month periods ended
March 31, 1996 and 1995 were $5,481,000 and $5,457,000, respectively. Research
and development expenses increased 38% to $3,833,000 for the three month period
ended March 31, 1996 from $2,777,000 for the three month period ended March 31,
1995. In September 1995, the Company commenced a second pilot clinical trial to
evaluate further an OP-1 product for dentin regeneration. The costs of such
trial began to be incurred in September 1995 and are expected to continue
through the three month period ending September 30, 1996. Also contributing to
the increase in costs is an increase in research and development expenses at the
Company's manufacturing facility in Lebanon, New Hampshire. For the three month
period ended March 31, 1996 the facility was primarily used for development
activities of the Company; therefore, facility operating costs related to
development activities were reported as research and development expenses. For
the three month period ended March 31, 1995, the facility was primarily used for
contract manufacturing for Biogen; therefore, facility operating costs were
reported as manufacturing contract expenses. The Company anticipates that
research and development expenses at the Company's manufacturing facility in
Lebanon, New Hampshire will decrease for each of the remaining quarters in 1996
and manufacturing contract expenses will increase. The Company expects the
decrease in research and development expenses at the Company's manufacturing
facility will be more than offset by an increase in research and development
expenses at the Company's research facility. The Company plans to expand its
research and development staff. Labor and laboratory supply and service costs
will increase as additional personnel are hired. Furthermore, the Company plans
to increase expenditures on academic collaborations and subcontracted research
related to technology and product development.

Manufacturing contract expenses includes the costs associated with
manufacturing for third-parties conducted at the Company's manufacturing
facility in Lebanon, New Hampshire. Manufacturing contract expenses decreased
72% to $478,000 for the three month period ended March 31, 1996 from $1,708,000
for the three month period ended March 31, 1995. The decrease is primarily due
to the reduction in contract manufacturing for Biogen. The Company manufactured
for Biogen from January 1995 through December 1995 and commenced production for
Biogen's 1996 requirements in May 1996.

Marketing, general and administrative expenses increased 21% to $1,115,000
for the three month period ended March 31, 1996 from $921,000 for the three
month period ended March 31, 1995. The increase is primarily due to increases in
staffing and recruiting costs. The Company anticipates that marketing, general
and administrative expenses will continue at amounts higher than the prior year.

17
<PAGE> 19

As a result of the foregoing, the Company's net loss increased 111% to
$3,441,000 for the three months ended March 31, 1996 compared to $1,630,000 for
the three months ended March 31, 1995.

Years Ended September 30, 1995, 1994 and 1993. The Company's revenues in
the years ended September 30, 1995, 1994 and 1993 were $13,229,000, $5,807,000
and $2,654,000, respectively. Research and development contract revenues
increased 132% from $1,576,000 in the year ended September 30, 1993 to
$3,652,000 in the year ended September 30, 1994 and increased 59% to $5,824,000
in the year ended September 30, 1995. These increases were primarily due to
greater research funding from Stryker. Manufacturing contract revenues reflect
manufacturing, principally for Biogen beginning in the year ended September 30,
1995, performed at the Company's manufacturing facility in Lebanon, New
Hampshire. Product sales are sales of proteins to the research market. The
Company does not anticipate significant product sales, if any, in fiscal 1996.
License fees and royalties revenue include revenue from licensing patent rights
and know-how associated with certain protein technology which is not central to
the Company's business. Interest increased 6% from $549,000 in the year ended
September 30, 1993 to $580,000 in the year ended September 30, 1994 and
increased 12% to $649,000 in the year ended September 30, 1995. The increase
from the year ended September 30, 1993 to the year ended September 30, 1994 was
due to the increased cash balances resulting from a private placement of the
Company's Common Stock in September 1993 and interest from a $1,763,286
stockholder note receivable. The increase from the year ended September 30, 1994
to the year ended September 30, 1995 was due to increased cash balances
resulting from a private placement of the Company's Series 1994/A Preferred
Stock during the year ended September 30, 1995. Other revenue in the years ended
September 30, 1995 and 1994 was primarily due to non-recurring gains from the
sale of certain manufacturing equipment.

The Company's total costs and expenses, consisting primarily of research
and development expenses, increased 44% from $16,673,000 in the year ended
September 30, 1993 to $24,066,000 in the year ended September 30, 1994 and
decreased 13% to $20,851,000 in the year ended September 30, 1995.

Research and development expenses increased 37% from $12,898,000 in the
year ended September 30, 1993 to $17,680,000 in the year ended September 30,
1994 and decreased 34% to $11,688,000 in the year ended September 30, 1995.
Research and development expenses for the year ended September 30, 1993 included
$2,267,000 of operating expenses of the manufacturing facility from the date of
acquisition of the facility in March 1993. In addition, in mid-1993, the Company
received approval from the FDA to initiate human clinical investigation for the
OP-1 dentin regeneration product. The expenses related to the initial pilot
clinical trial began in the fourth quarter of the year ended September 30, 1993
and were completed in the year ended September 30, 1994. Research and
development expenses for the year ended September 30, 1994 included $4,813,000
of operating expenses of the manufacturing facility. The increase from the year
ended September 30, 1993 to the year ended September 30, 1994 also was due to
increases in staffing and recruiting costs as the Company continued to expand
its research, product development, manufacturing and quality control/quality
assurance staffs. Increased purchases of laboratory supplies and services, as
well as the Company's expenditures on academic collaborations and subcontracted
research related to technology and product development, also contributed to the
increase in expenses.

Substantially all of the cost of operating the manufacturing facility from
January 1995 through mid-September 1995 is reported as manufacturing contract
expenses, contributing to the decrease in research and development expenses from
the year ended September 30, 1994 to the year ended September 30, 1995. From the
date of acquisition of the manufacturing facility in March 1993 through December
1994, the facility was primarily used for development activities by the Company
and therefore the facility operating costs related to such development
activities were reported as research and development expenses for such periods.
As discussed below, commencing in January 1995, facility operating costs were
recorded as manufacturing contract expenses. The decrease in research and
development expenses from the year ended September 30, 1994 to the year ended
September 30, 1995

18
<PAGE> 20

also was due to a 20% staff reduction in the Company's Massachusetts operations
implemented in September 1994 and a corresponding reduction in purchases of
laboratory supplies and services.

Manufacturing contract expenses include the costs associated with the
manufacturing for third parties conducted at the Company's manufacturing
facility in Lebanon, New Hampshire. Manufacturing contract expenses increased
significantly in the year ended September 30, 1995, as the Company began
production for Biogen in January 1995.

Marketing, general and administrative expenses increased 54% from
$3,121,000 in the year ended September 30, 1993 to $4,794,000 in the year ended
September 30, 1994 and decreased 25% to $3,604,000 in the year ended September
30, 1995. The increase from the year ended September 30, 1993 to the year ended
September 30, 1994 was primarily due to increases in staffing and recruiting
costs as the Company built its administrative and corporate development
organization. Increased purchases of supplies and services contributed to the
increase in expenses. The increase also was due to costs incurred in marketing
the Company's contract manufacturing services and costs incurred to meet the
Company's reporting and other obligations as a public company. The decrease from
the year ended September 30, 1994 to the year ended September 30, 1995 was due
to a 20% staff reduction in the Company's Massachusetts operations implemented
in September 1994 and a corresponding reduction in purchases of supplies and
services and a reduction in recruiting and relocation expenses.

Interest expense decreased 4% from $209,000 in the year ended September 30,
1993 to $200,000 in the year ended September 30, 1994 and increased 15% to
$229,000 in the year ended September 30, 1995. The decrease from the year ended
September 30, 1993 to the year ended September 30, 1994 was due to the repayment
of obligations under capital leases. The increase from the year ended September
30, 1994 to the year ended September 30, 1995 was due to an increase in interest
rates on capital lease obligations, partially offset by the repayment of
obligations under capital leases.

As a result of the foregoing, the Company incurred a net loss of $7,622,000
in the year ended September 30, 1995 compared to a net loss of $18,259,000 in
the year ended September 30, 1994 and a net loss of $14,019,000 in the year
ended September 30, 1993.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1996, the Company's principal sources of liquidity consisted
of cash and cash equivalents of $14,322,000 and marketable securities of
$3,194,000. The Company has financed its operations since inception primarily
through placements of equity securities, revenues received under agreements with
collaborative partners and, more recently, manufacturing contracts. Since
inception, sales of equity securities have raised approximately $99,469,000 in
gross proceeds, including approximately $12,750,000 in a self-managed public
offering completed in October 1995, and the Company has earned approximately
$59,348,000 in gross revenues.

The Company increased its investment in property, plant and equipment to
$25,115,000 at March 31, 1996 from $24,680,000 at December 31, 1995, $24,633,000
at September 30, 1995 and $24,187,000 at September 30, 1994. The Company plans
to spend approximately $3.2 million in the year ending December 31, 1996 on
leasehold improvements and equipment purchases to increase the capacity and
flexibility in operating the manufacturing facility and approximately $1 million
on equipment purchases and leasehold improvements to expand the Company's
research, development and manufacturing capabilities. In addition, as part of a
manufacturing contract with Biogen, Biogen financed the construction of
leasehold improvements to the Company's manufacturing facility at an estimated
total cost of $2.9 million and is installing and financing certain equipment
with an estimated total cost of $2.4 million for the Company, as discussed
further below.

The Company's collaborative agreements with Stryker provide for research
payments to the Company and royalty payments to the nonseller from sales of any
OP-1 products. The Company also has the exclusive right to supply Stryker's
worldwide commercial requirements for OP-1 products for use in orthopaedic
reconstruction. Under the research portion of the collaboration, the Company

19
<PAGE> 21

supplies OP-1 products to Stryker for clinical trials and other uses and
provides clinical support and performs research work pursuant to work plans
established periodically by the two companies. In May 1996, the Company and
Stryker agreed to extend the research portion of the collaboration for two years
through April 1998. The Company estimates that the contract extension will
provide approximately $12 million of revenue to the Company over the two year
period.

In September 1994, the Company signed a three-year manufacturing contract
with Biogen to produce in the Company's manufacturing facility in Lebanon, New
Hampshire several of Biogen's protein-based therapeutic candidates for use in
Biogen's clinical trials. The contract covers the period from January 1995
through December 1997. The Company expects to realize up to $18 million in
manufacturing contract revenue from Biogen during the three-year period, of
which approximately $7.6 million had been recognized through March 1996. To
enable the Company to meet its obligations under the manufacturing contract,
Biogen financed the construction of a 7,000 square foot addition to the present
facility for cGMP production using bacterial fermentation at an estimated total
cost of $2.9 million (original estimated total cost was $2.5 million). The
Company agreed to reimburse Biogen for the construction costs and leasehold
improvements at the end of the contract term at an amount equal to Biogen's
construction costs less $300,000 and less all accumulated depreciation. The
reimbursement to Biogen is expected to be no more than $2.2 million. Biogen also
agreed to lease equipment having a total cost currently estimated at $2.4
million (original estimated total cost was $1.5 million) to the Company for the
operation of such portion of the facility and for cGMP production using
bacterial fermentation by the Company as provided in an equipment lease
agreement. The Company has the option to purchase the equipment at the end of
the lease term for an amount equal to its then fair market value or for such
other amount as negotiated by the parties. Biogen plans to install the equipment
and prepare the bacterial facility for operation.

The Company anticipates that its existing capital resources, together with
the proceeds of the offering and related interest earned thereon should enable
it to maintain its current and planned operations through 1998. The Company
expects to incur substantial additional research and development and other
costs, including costs related to preclinical studies and clinical trials. The
Company's ability to continue funding its planned operations beyond late 1998 is
dependent upon its ability to generate sufficient cash flow from collaborative
arrangements and manufacturing contracts, and to obtain additional funds through
equity or debt financings, or from other sources of financing, as may be
required. The Company is seeking additional collaborative arrangements and
expects to raise funds through one or more financing transactions, as conditions
permit, and is investigating the feasibility of raising capital through the
sale/leaseback or debt financing of some of its capital assets. Over the longer
term, because of the Company's significant long-term capital requirements, the
Company intends to raise funds when conditions are favorable, even if it does
not have an immediate need for additional capital at such time. If substantial
additional funding is not available, the Company's business will be materially
and adversely affected.

20
<PAGE> 22

BUSINESS

OVERVIEW

Creative BioMolecules is developing products for the regeneration and
restoration of human tissues and organs based on morphogenic proteins identified
and characterized by the Company. The Company's lead morphogenic protein, OP-1,
has been shown to induce formation of several types of tissues including bone,
cartilage, kidney, tooth and brain. OP-1 is in the late stages of a pivotal
trial for regeneration of bone tissue in non-union fractures. Target patient
accrual in the trial was completed in January 1996. For orthopaedic applications
of OP-1, the Company's corporate partner is Stryker Corporation ("Stryker"), a
leading surgical and medical products company. The Company believes that Stryker
will file an application for Pre-Market Approval ("PMA") for an OP-1 bone
regeneration product by the end of 1997. Stryker is also undertaking clinical
studies of OP-1 in acute fractures and other bone indications, as well as
preclinical studies in cartilage regeneration. In addition to the Stryker
program, Creative BioMolecules has proprietary programs in place to develop OP-1
product candidates for kidney disorders, dental therapeutics, neurological
disorders and osteoporosis.

SCIENTIFIC BACKGROUND

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

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

THE COMPANY'S TECHNOLOGY

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

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

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

21
<PAGE> 23

[GRAPHIC DEPICTING MORPHOGEN INDUCED TISSUE AND ORGAN FORMATION.]

22
<PAGE> 24

BUSINESS STRATEGY

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

* Securing Marketing Approval for OP-1 in Orthopaedic Reconstruction. The
Company's first priority is to support Stryker in obtaining marketing
approval of the OP-1 bone regeneration product for use in the United
States and foreign markets. The Company has focused its manufacturing,
quality control and quality assurance efforts on generating the
manufacturing related data for the PMA application to be filed by
Stryker, and preparing the Company's manufacturing facility for FDA
inspection and approval.

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

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

* Developing a Small Molecule Program. The Company believes it may be able
to stimulate the same regeneration results induced by morphogenic
proteins via activation of various steps in the cascade of tissue
formation with small, orally-active compounds. The Company has been able
to develop biochemical and cell-based screens that mimic discrete points
within the tissue formation cascade to enable the identification of small
molecule candidates.

* Accessing New Technologies/Establishing Academic Collaborations. The
Company has utilized a large network of academic collaborators to gain
knowledge of new technologies, to identify additional uses for
morphogenic proteins and to extend research on existing indications.
These collaborators, who are located around the world, help leverage the
Company's resources.

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

Implementation of the Company's strategy is subject to numerous risks and
uncertainties. See "Risk Factors."

23
<PAGE> 25

PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

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

OP-1 PRODUCTS UNDER DEVELOPMENT

<TABLE>
<CAPTION>
COMMERCIAL U.S. REGULATORY
POTENTIAL APPLICATION RIGHTS CLASSIFICATION(1) STATUS(2)
- ------------------------------ ----------- ----------------- ------------------------------
<S> <C> <C> <C>
ORTHOPAEDIC RECONSTRUCTION: Stryker(3) Device
Non-Union Fractures -- Tibia U.S. Pivotal Clinical Trial;
patient accrual completed
Non-Union Fractures -- All
long bones U.S. Treatment Study
Other Bone Indications(4) European Clinical Studies
Cartilage Regeneration Preclinical Studies
KIDNEY DISORDERS: Company Biologic
Acute Renal Failure Preclinical Studies
Chronic Renal Failure Preclinical Studies
DENTAL THERAPEUTICS(5): Company Device
Dentin Regeneration U.S. Pilot Clinical Trial
Periodontal Disease Preclinical Studies
NEUROLOGICAL DISORDERS: Company Biologic
Stroke Preclinical Studies
Parkinson's Disease Preclinical Studies
OSTEOPOROSIS Company Drug Research
</TABLE>

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

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

(2) "Pivotal Clinical Trials" are investigations conducted under an
Investigational Device Exemption ("IDE"), intended to be used as the primary
supporting documentation for regulatory approval of a new medical device.
"Treatment Study" denotes an open label study pursuant to a supplement to an
IDE. "European Clinical Studies" are physician sponsored feasibility
investigations conducted among a small number of patients. "Pilot Clinical
Trials" are feasibility investigations conducted under an IDE, that are
intended to assess the initial safety and/or efficacy of a new medical
device. "Preclinical Studies" denotes the collection and analysis of data
from multiple studies in animals relating to toxicity and/or efficacy in
preparation for an Investigational New Drug ("IND") or IDE application
filing. "Research" denotes all investigative activities with respect to
product candidates prior to initiation of Preclinical Studies. See "--
Regulatory Issues."

(3) Stryker's commercial rights are limited to marketing and sale of OP-1
orthopaedic reconstruction products. The Company will receive royalties on
any sales of such products by Stryker and has retained the exclusive right
to supply Stryker's worldwide commercial requirements for such products.

(4) Stryker has indicated that it has initiated clinical studies for acute
fractures, spinal fusions, talocalcaneal (foot) fractures and fibula (a long
bone of the leg) defects.

(5) The Company is seeking a collaborative partner to complete development of
and to commercialize its OP-1 dental therapeutic product candidates. Certain
indications within dental therapeutics are the subject of negotiations to
determine shared or assigned rights with or to Stryker. The Company is in
active discussions with Stryker to agree on specific ownership details. See
"-- Collaborative and Licensing Agreements."

24
<PAGE> 26

Orthopaedic Reconstruction Programs

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

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

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

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

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

Stryker is conducting a pivotal clinical trial under an IDE to evaluate the
use of an OP-1 bone regeneration product as a bone graft substitute. This
clinical trial focuses on regeneration of bone tissue in non-union fractures in
the tibia, a long bone in the leg. Non-union fractures are fractures which have
failed to heal for a period of at least nine months. The trial was designed to
compare the safety and efficacy of the OP-1 bone regeneration product candidate
with autograft procedures in the treatment of non-union fractures. The OP-1 bone
regeneration product used in this trial consists of a paste-like formulation
that is applied locally at the site of defect. The trial is being conducted at a
number of specialized orthopaedic hospitals and trauma centers in the United
States. Target patient accrual in the trial was completed in January 1996. In
accordance with the protocol of this trial,

25
<PAGE> 27

patients are followed for nine months after treatment to assess bone
regeneration. The endpoints of the trial are clinical outcome and a blinded
panel radiographic assessment of healing. The Company believes that Stryker will
file a PMA application for this OP-1 bone regeneration product by the end of
1997.

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

In addition to the U.S. pivotal trial and its supplemental treatment arm,
Stryker initiated clinical studies in several European countries, under
physician sponsorship, in acute fractures (fractures requiring surgery),
talocalcaneal (foot) fractures and fibula (a long bone of the leg) defects.
Treatment in these European studies is expected to be completed in 1996. Stryker
is expected to initiate further clinical testing of OP-1 bone regeneration
products in a number of countries for an increasing array of orthopaedic
reconstruction indications. The Company believes that Stryker's goal is to sell
OP-1 bone regeneration products for a number of orthopaedic reconstruction
indications in major markets around the world.

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

The Company believes that OP-1 can be used to stimulate the regeneration of
articular cartilage. Initial animal studies show that OP-1 induces cartilage
formation in surgically prepared defects. In addition, data presented at the
American College of Surgeons last year reported that in an animal model, an OP-1
formulation successfully regenerated a joint comprised of both bone and
cartilage tissues. The Company with Stryker is expanding its preclinical program
to evaluate locally applied OP-1 in the treatment of both cartilage defects and
combination bone-cartilage defects in animal studies.

Kidney Disorders

Kidney disorders, particularly various types of renal failure, are a large
and growing health care problem. Billions of dollars are spent annually in the
United States on the treatment of renal failure patients. Despite these
expenditures, mortality rates remain high and quality of life low. Recent
research has indicated that kidneys which recover from acute renal failure may
be doing so by repeating some of those morphogenic processes that were initially
involved in kidney development. Studies conducted by the Company's scientists
and its collaborators have shown that OP-1 is a key morphogenic signal that
initiates kidney formation at the earliest stages of kidney development.
Creative BioMolecules is developing an OP-1 product to moderate or halt the
progression of renal failure.

Acute Renal Failure. Acute renal failure is the rapid and sudden loss of
the kidneys' ability to perform their essential functions and is often
associated with multiple organ failure and a high mortality rate. The primary
causes of acute renal failure are interruptions of blood flow (often as a result
of certain surgical procedures or cardiac arrest), trauma and certain
medications with toxic side effects to the kidneys. Based on data from the
National Center for Health Statistics and other sources, Creative BioMolecules
estimates that there were 250,000 diagnosed cases of acute renal failure in the
United States in 1995. Currently, there are no therapies that prevent, improve
recovery or reduce the extent of kidney injury from acute renal failure. The
Company believes that there is a substantial

26
<PAGE> 28

commercial opportunity for a therapy that could prevent, facilitate recovery or
reduce the extent of kidney injury in acute renal failure.

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

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

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

Dental Therapeutics

Dental medicine has few therapeutics to treat the hard and soft tissues
which comprise the tooth and its associated attachment structures. Creative
BioMolecules is developing regenerative therapies to treat these tissues. The
Company is evaluating OP-1 products for dentin regeneration as an alternative to
certain root canal procedures and to treat periodontal disease. The Company is
seeking a collaborative partner to complete development of and to commercialize
these OP-1 product candidates.

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

A pilot clinical trial completed in 1994 in the United States with an OP-1
product showed statistically significant evidence of dentin formation. The trial
was conducted under an IDE and involved placement of an OP-1 product onto an
exposed pulp which was then sealed with standard dental filling material. The
Company believes that there could have been greater dentin formation with a
higher dosage, better control of bacterial penetration, use of more
biocompatible dental filling materials, and standardization of procedures by
investigators. The Company initiated a second pilot

27
<PAGE> 29

clinical trial in September 1995 to evaluate OP-1's safety and activity in
dentin formation further, including tests of a range of OP-1 concentrations and
different filling materials.

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. The Company's projections based on data from
the most recent ADA Survey indicate that in 1995 approximately four million
patients underwent periodontal surgery in the United States for severe
periodontal disease. The Company believes that most of these procedures would
have been candidates for treatment with an OP-1 periodontal product.

The Company has evaluated several candidates to treat periodontal disease,
including an OP-1 product candidate and a Platelet-Derived Growth Factor
("PDGF") product candidate. Both product candidates showed periodontal tissue
regeneration in animal tissue models of the disease. The Company is continuing
development of OP-1 rather than PDGF primarily because of the Company's
extensive research and manufacturing knowledge regarding OP-1.

Neurological Disorders

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

Stroke. Strokes occur when blood flow to the brain is interrupted by a
clogged or burst artery. The interruption deprives the brain of blood and
oxygen, and causes neurons to die. Stroke is the third leading cause of death in
the United States and the number one cause of adult disability. The National
Stroke Association estimates that there are 550,000 strokes every year in the
United States and that three million Americans are permanently disabled because
of stroke. There are currently no therapeutics available to aid the recovery
from stroke. The Company believes that there is a substantial commercial
opportunity for a therapeutic that could promote enhanced recovery from stroke.

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

Parkinson's Disease. Parkinson's disease is a progressive neurological
condition characterized by tremor, muscular rigidity, and slowness of movement.
The disease is caused by the gradual loss of function and eventual death of the
neurons which control the coordination of voluntary movement. While the disease
may not become incapacitating for many years it is inevitably fatal. Current
therapies offer a temporary palliative effect, but, for reasons not well
understood, these therapies become ineffective after several years. The National
Institute of Neurological Disorders and Stroke estimates that more than 500,000
people in the United States are affected by Parkinson's Disease at any one time,
and that 50,000 people in the United States are diagnosed with Parkinsons's
Disease each year. The Company believes that a therapy that promotes the
survival of the neurons which degenerate in Parkinson's Disease could have
substantial commercial potential.

28
<PAGE> 30

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

Osteoporosis

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

Small Molecule Program

In addition to identifying and characterizing the OP-1 protein, Creative
BioMolecules also has identified the DNA sequences which regulate the expression
of OP-1, has identified the cellular receptors to which OP-1 binds and through
which it acts and has determined the three-dimensional structure of OP-1. The
Company is seeking to use these recent discoveries to identify orally-active
drug compounds that either promote endogenous morphogenic protein expression or
mimic morphogenic protein biological activities. For instance, the DNA sequences
that regulate OP-1 expression and the receptors which bind OP-1 are being
formatted into assays to screen and identify small molecules that increase OP-1
synthesis or mimic OP-1 action. In addition, the information that relates to the
three-dimensional structure of OP-1 can be used to aid the rational design or
modification of small molecule drug candidates. These assays and information
have enabled the Company to develop a small molecule program that seeks to
identify the next generation of drug development candidates based on morphogenic
protein biology.

COLLABORATIVE AND LICENSING AGREEMENTS

Stryker Corporation. Creative BioMolecules entered into a collaboration
with Stryker Corporation in 1985 to identify and develop bone-inducing proteins.
OP-1 was first isolated and characterized by the Company's scientists through
research funded by Stryker. The Company will receive royalty payments based on
Stryker's worldwide commercial sales of OP-1 products for use in orthopaedic
reconstruction and manufacturing revenue for supply of Stryker's product
requirements for such sales. The Company is currently supplying an OP-1 bone
regeneration product to Stryker for use in clinical trials as part of the
research program. The Company is conducting research on additional indications
for OP-1 in orthopaedic reconstruction including cartilage regeneration. The
Company's agreement with Stryker Corporation provides for research funding to
the Company for this work. The current work plan establishes research objectives
and funding through April 30, 1998.

Stryker has exclusive rights to develop, market and sell products
incorporating bone and cartilage-inducing proteins developed under the research
program, including OP-1, for use in the field of orthopaedic reconstruction. The
Company has also agreed not to undertake research to develop bone and
cartilage-inducing proteins for use in orthopaedic reconstruction, on its own
behalf or for third parties, for five years after conclusion of the research
program. The Company has the exclusive and irrevocable right to develop, market
and sell products incorporating morphogenic proteins developed under the
research program, including OP-1, for all uses and applications other than
orthopaedic reconstruction such as renal failure, certain dental disorders,
neurological diseases, metabolic bone disorders, and others. Certain indications
within dental therapeutics are the subject of negotiations to

29
<PAGE> 31

determine shared or assigned rights with or to Stryker. The Company is in active
discussions with Stryker to agree on specific ownership details. Both the
Company and Stryker have the right to grant licenses to third parties in their
respective fields, and each is obligated to pay royalties to the other on its
sales of such products and to share royalties received from licensees. The
Company has been responsible for preclinical studies of OP-1 products, and
Stryker and the Company are each responsible for clinical studies in their
respective fields. The Company has the exclusive right to supply OP-1 products
to Stryker for worldwide commercial sales in the field of orthopaedic
reconstruction. See "-- Patents and Proprietary Rights."

Biogen, Inc. In September 1994, the Company signed a three-year
manufacturing contract with Biogen to produce several of Biogen's protein-based
therapeutic candidates in the Company's manufacturing facility in Lebanon, New
Hampshire for Biogen's use in its clinical trials. The contract covers the
period from January 1995 through December 1997. The Company expects to realize
up to $18 million in manufacturing contract revenue from Biogen during the
three-year period, of which approximately $7.6 million had been recognized as of
March 31, 1996. To enable the Company to meet its obligations under the
manufacturing contract, Biogen financed the construction of a building addition
and leasehold improvements to add bacterial fermentation capacity to the
Company's manufacturing facility and financed the costs of the construction at
an estimated total cost of $2.9 million. The Company agreed to reimburse Biogen
for the costs of the addition and improvements at the end of the contract term
at an amount equal to Biogen's construction costs less $300,000 and less all
accumulated depreciation. The reimbursement to Biogen is expected to be no more
than $2.2 million. Biogen also is installing and financing certain manufacturing
equipment with an estimated total cost of $2.4 million, as provided in an
equipment lease agreement. The Company has the option to purchase the equipment
at the end of the lease term for an amount equal to its then fair market value
or for such other amount as negotiated by the parties.

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

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

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

PruTech Research and Development Partnership. In December 1986, the Company
granted to entities associated with Prudential Securities Incorporated (PruTech
Research and Development Partnership III and PruTech Product Development
Partnership; collectively, the "PruTech Entities") a license to use certain
technology developed by the Company relating to Epidermal Growth Factor

30
<PAGE> 32

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

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

MANUFACTURING

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

In September 1994, the Company signed a three-year manufacturing contract
with Biogen to produce in the manufacturing facility several of Biogen's
protein-based therapeutic candidates for Biogen's use in its clinical trials. To
enable the Company to meet its obligations under the manufacturing contract,
Biogen financed the construction of a 7,000 square foot addition to the present
facility for cGMP production using bacterial fermentation and agreed to lease
equipment to the Company for the operation of such portion of the facility. See
"-- Collaborative and Licensing Agreements -- Biogen, Inc." The Company believes
that the acquisition and expansion of this manufacturing facility will
significantly enhance its ability to produce qualified products for clinical
trials and commercialization of OP-1.

COMPETITION

The potential therapeutic products which Creative BioMolecules is
developing will compete with existing and new products being developed by others
for treatment of the same indications. Competition in the development of human
therapeutics is particularly intense and includes many large pharmaceutical and
biopharmaceutical companies, specialized biotechnology firms, universities and

31
<PAGE> 33

other research institutions. Certain of these companies have extensive
financial, marketing and human resources which may result in significant
competition. Many pharmaceutical companies have extensive experience in
undertaking clinical trials, in obtaining regulatory approval to market products
and in manufacturing on a large scale. Other biopharmaceutical companies may
also have more resources and experience in these areas than the Company. Several
pharmaceutical companies have entered or expanded their presence in the
biotechnology field by acquiring specialized biotechnology companies, thus
providing additional resources to the acquired companies which may allow them to
become more competitive.

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

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

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

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

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

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

The Company believes that in addition to a product's patent position,
efficacy and price, the timing of a product's introduction may be a major factor
in determining eventual commercial success and profitability. Early entry may
have important advantages in gaining product acceptance and

32
<PAGE> 34

market share. Accordingly, the relative speed with which the Company can
complete preclinical and clinical testing, obtain regulatory approvals, and
supply commercial quantities of the product is expected to have an important
impact on the Company's competitive position, both in the United States and
abroad. Other companies may succeed in developing similar products that are
introduced earlier, are more effective, or are produced and marketed more
effectively. There can be no assurance that research and development by others
will not render any of the Company's products obsolete or noncompetitive.

PATENTS AND PROPRIETARY RIGHTS

Creative BioMolecules pursues a policy of obtaining patent protection for
patentable subject matter in its proprietary technology. As of June 20, 1996,
the Company owned or had rights to 37 issued patents and 77 pending patent
applications in the United States. The Company also owned or had rights to
approximately 28 issued foreign patents and 125 foreign patent applications
pending in Europe, Japan and certain other countries. Many of these applications
were filed through the Patent Cooperation Treaty and the European Patent Office
seeking to preserve for the Company the right to file applications in various
countries. Certain patents and patent applications relating to morphogenic
proteins, including OP-1, are owned by Stryker and have been licensed
exclusively to the Company for use in all indications other than orthopaedic
reconstruction. See "-- Collaborative and Licensing Agreements -- Stryker
Corporation." Certain other patents and patent applications are owned jointly
with other collaborators. There can be no assurance, however, that any such
patent applications will issue as patents, or that any patent now issued, or to
be issued, will provide a preferred position with respect to the technology or
products it covers.

Morphogenic Protein Technology: Within the Company's patent estate, 14
issued U.S. patents, 10 granted foreign patents, 59 U.S. pending applications
and 87 pending foreign applications pertain to the Company's morphogenic protein
technology. Of these, 14 U.S. patents, 9 foreign patents, 16 U.S. pending
applications and 42 foreign applications pertain to composition of matter; 4
U.S. pending applications and 8 foreign applications pertain to methods of
production; 14 U.S. applications and 7 foreign applications pertain to the
Company's small molecule program and 1 foreign patent, 25 U.S. pending
applications and 30 foreign applications pertain to particular tissue
applications, including renal, neural, bone, liver, periodontal, dentin,
gastrointestinal tract and immune cell-mediated tissue applications.

On February 28, 1996 the European Patent Office granted a patent to Stryker
Corporation containing claims to OP-1 composition of matter, its use and its
method of manufacture. The patent also has claims to the use of BMP-2, Genetics
Institute's lead morphogenic protein, as a bone forming protein. The claims in
the European patent provide coverage similar to that of one or more U.S. patents
issued to Stryker Corporation.

Other Technology: Within the Company's patent estate, the Company owns or
has rights to 6 U.S. patents, 4 foreign patents, 10 U.S. applications and 17
foreign applications, related to its BABS(TM) and interdomain linker technology.
The Company also has patents issued in the United States and certain foreign
countries, and applications pending in the United States and certain foreign
countries on compositions of matter, methods of use and methods of production
relating to other proprietary technology.

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

33
<PAGE> 35

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

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

The Company is aware that Genetics Institute has been issued several
patents in the field of bone morphogenic proteins including a U.S. patent with
claims to OP-1 cDNA (complementary DNA) and a U.S. patent with claims to a
method of manufacturing OP-1. The Company has rights in one or more pending
Stryker applications containing claims similar to the claimed subject matter of
the two Genetics Institute patents. The Company believes the named inventors in
the Stryker applications were the first to discover OP-1. If so, the Company
should prevail over Genetics Institute in interference proceedings in the U.S.
Patent and Trademark Office. There can be no assurance, however, that the Patent
Office will declare an interference or that the Company necessarily would
prevail in any interference proceeding. Were an interference to be lost, and if
a license were not available from Genetics Institute, the Company might be
required to alter its manufacturing techniques, thereby likely delaying FDA
approval of its products, or might be required to engage in costly litigation.
There can be no assurance that the Company necessarily would prevail in such a
litigation.

The Company also has rights in two U.S. patents issued to Stryker
containing claims which are in interference with a Genetics Institute
application claiming BMP-2 protein. The Administrative Law Judge presiding over
the interference has issued a ruling that the Genetics Institute pending claims
to osteogenic recombinant human BMP-2 protein are unpatentable to Genetics
Institute. The decision is subject to review at a final hearing in the U.S.
Patent and Trademark Office and thereafter can be appealed. There can be no
assurance that the decision ultimately will be upheld. Were the decision to be
reversed, the likelihood that the Company could maintain its right to exclude
third parties from exploiting BMP-2 in the United States would be reduced.

34
<PAGE> 36

REGULATORY ISSUES

Regulation by governmental agencies in the United States and other
countries is a significant factor in the clinical evaluation and licensing of
the Company's potential products as well as in the development and research of
new products. All of the Company's products currently under development will
require regulatory approval by the FDA under the Food, Drug, and Cosmetic Act,
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
the Company's products, all human diagnostic and therapeutic products are
subject to rigorous testing. Generally, considerable time and expense are
required to clinically evaluate the safety and efficacy of a new product.
Moreover, even after extensive preclinical testing, unanticipated side effects
can arise during clinical trials that can halt or delay the regulatory process
at any point. The Company believes that seeking and obtaining regulatory
approval for a new therapeutic or diagnostic product is likely to take several
years and require the expenditure of substantial resources.

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

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

Clinical testing usually occurs in three phases to demonstrate safety and
efficacy of the product. Phase I clinical trials consist of testing for the
safety and tolerance of the product with a small group of subjects and may also
yield preliminary information about the efficacy and dosage levels of the
product. Phase II clinical trials involve testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. Currently, FDA requires a

35
<PAGE> 37

separate IND for each distinct clinical study. After product approval, FDA may
request or require an additional phase (Phase IV) of clinical studies to provide
additional information on safety and efficacy.

Upon successful completion of Phase III testing, either a New Drug
Application ("NDA") or Product License Application/Establishment License
Application ("PLA/ELA") can be filed, depending upon whether the product is
designated as a drug or a biological, respectively. The FDA normally requires at
least two adequate and well-controlled clinical trials for product approval.
Either approval (NDA or PLA/ELA) requires 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 PLA/ELA. If so approved, the product may then
be marketed.

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

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

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

36
<PAGE> 38

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

User Fees. The United States Congress passed the Prescription Drug User Fee
Act ("User Fee Act") in October 1992. The purpose of the User Fee Act is to
reduce the time that the FDA takes to act on completed PLAs, ELAs, and NDAs.
Priority applications should be acted upon in six months and regular
applications should be acted upon in 12 months from date of submission. The User
Fee Act contemplates that establishment, application and product fees paid by
pharmaceutical companies seeking license approval or who already have products
on the market will be used to pay for extra resources at the FDA. The increase
in resources is intended to allow the FDA to meet the above deadlines. Small
companies with no product on the market may receive a reduction and deferral of
some fees. User fee waivers are possible for companies with limited resources if
they can show that fees are a barrier to innovation or to development of
products. Waivers are also possible to protect the public health, if fees would
exceed FDA costs, or on equitable grounds. The FDA has stated that it will grant
these waivers on a case-by-case basis. In particular, smaller entities (less
than $10 million in annual gross revenues and no corporate parent or funding
source with annual gross revenues of $100 million or more), or up to
medium-sized entities (annual gross revenues of less than $100 million)
developing Orphan Drugs, may qualify for a fee waiver. The FDA has issued a
draft guidance document describing criteria for user fee exceptions and waivers,
and the Company may seek such exceptions or waivers for its products if
appropriate under this guidance. The user fee program does not apply to generic
drugs and medical devices at this time. However, negotiations are ongoing since
December 1993 between the Medical Device Industry and the FDA on the
implementation of user fees for the manufacture and approval of devices. The
FDA's ability to meet the goals of the user fee program may affect its continued
existence and extension to other approval categories.

Facilities Inspection. In addition to product approval prior to marketing,
the Company must also obtain FDA approval of the facility in which its products
will be manufactured. In the case of a pharmaceutical or a device, the Company
must be in compliance with cGMP requirements; inspection of the Company's
facilities to determine such compliance would be conducted as part of the
overall NDA or PMA approval. In the case of a biological, a separate application
specific to the manufacturing facility must be approved (in the form of an ELA),
and the facility must meet guidelines set by the Center for Biologics Evaluation
and Research. Since any NDA, PMA or ELA approved by the FDA is both site and
process specific, any material change by the Company in its manufacturing
process, equipment or location would necessitate additional FDA review and
approval. In November 1995, the FDA issued a proposed rule under which companies
manufacturing "well-characterized biotechnology-derived drugs" would not be
required to obtain a separate ELA. However, in a recent notice in the Federal
Register, the FDA suggested that it was moving away from the
"well-characterized" definition, and would instead exempt specific products or
product classes on a case-by-case basis. The Company may seek such exemptions
for its products, where appropriate.

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

Other. Recent amendments to the federal laws have loosened export
restrictions on therapeutic products, including amendments permitting the export
of products not yet approved in the United States but approved in certain
foreign countries. The Company may choose to conduct such exports of its
products prior to obtaining FDA marketing approval in the United States.

37
<PAGE> 39

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

EMPLOYEES

As of June 20, 1996, the Company had 177 full-time employees, 26 of whom
hold Ph.D., D.V.M., or M.D. degrees. The Company considers its relations with
its employees to be good and has experienced a low rate of employee turnover.
None of the Company's employees is covered by a collective bargaining agreement.
The Company has entered into confidentiality agreements with all of its
employees.

38
<PAGE> 40

MANAGEMENT

The executive officers, directors and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
Michael M. Tarnow........................ 52 Chief Executive Officer, President and
Director
Brian H. Dovey(1)........................ 54 Chairman of the Board and Director
Charles Cohen, Ph.D...................... 45 Chief Scientific Officer and Director
Thomas J. Facklam, Ph.D. ................ 45 Vice President, Product Development and
Quality
Ronald D. Johnson, Ph.D.................. 51 Vice President, Operations
Gregory F. Liposky....................... 41 Vice President, Manufacturing
Stephanie K. Marrus...................... 49 Vice President, Corporate Development
Wayne E. Mayhew III...................... 44 Vice President and Chief Financial
Officer, Treasurer and Secretary
Patrick Owen Burns(2).................... 58 Director
Jeremy L. Curnock Cook(2)................ 46 Director
Martyn D. Greenacre(2)................... 54 Director
Arthur J. Hale, M.D.(1).................. 69 Director
Michael Rosenblatt, M.D. ................ 48 Director
James R. Tobin (1)....................... 51 Director
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Michael M. Tarnow joined the Company as President, Chief Executive Officer
and Director in July 1995. From 1973 until joining the Company in 1995, Mr.
Tarnow worked in various capacities at Merck & Co., Inc. From 1988 to 1990, Mr.
Tarnow headed Merck's worldwide business development activities as Executive
Director of Corporate Development. In 1990, he was appointed President and CEO
of Merck Frosst Canada, Merck's Canadian subsidiary. In 1994, Mr. Tarnow
returned to the United States as Executive Vice President of Medco Containment
Services and Merck Managed Care, where he was responsible for initiating managed
care programs in several international markets. Mr. Tarnow received his J.D.
from the University of Illinois.

Brian H. Dovey has served as Chairman of the Board since January 1995 and
as a member of the Company's Board of Directors since September 1992. Since
1988, Mr. Dovey has been a General Partner of Domain Associates, a venture
capital firm, affiliates of which are stockholders of the Company. From 1983 to
1988, Mr. Dovey was employed at Rorer Group Inc. (now Rhone-Poulenc Rorer Inc.)
where he held various management positions, most recently as President. He also
serves as a director of Athena Neurosciences, Inc., Connective Therapeutics,
Inc., NABI, ReSound Corporation, and Vivus, Inc.

Charles Cohen, Ph.D., a founder of the Company, has served as Chief
Scientific Officer since June 1990, and as a member of the Company's Board of
Directors since April 1982. Dr. Cohen served as Chief Executive Officer from
January 1985 to December 1991 and from November 1993 to July 1995, President
from January 1985 to December 1991 and from January to July of 1995, Chairman of
the Board from June 1990 to January 1995 and Vice President and Scientific
Director from April 1982 to January 1985. Prior to co-founding the Company, he
was Manager of Biochemical Development for Waters Associates, a manufacturer of
chromatography and filtration equipment, then a subsidiary of Millipore
Corporation. He also serves as a director of Exelixis Pharmaceuticals, Inc. Dr.
Cohen received his Ph.D. in Basic Medical Science from New York University
School of Medicine. Dr. Cohen served as a Research Fellow in the University of
Virginia's Department of Biophysics and Biochemistry from 1976 to 1977.

39
<PAGE> 41

Thomas J. Facklam, Ph.D. joined the Company in May 1996 as Vice President,
Product Development and Quality. Prior to joining the Company, he served as
Senior Director International Project Management and Clinical Research since
1994 at R.W. Johnson Pharmaceutical Research Institute. From 1992 to 1994, he
served as Vice President Biotechnology of Ares-Serono N.V., a pharmaceutical
company, where he had held drug development management positions from 1987 to
1992. Previously, he held research and development positions at Serono
Laboratories, Inc., a pharmaceutical company, and the Batelle Memorial
Institute, a contract research organization. He received his Ph.D. in
Biochemistry/Molecular Biology from Ohio State University.

Ronald D. Johnson, Ph.D. joined the Company in August 1992 as Vice
President, Operations. Prior to joining the Company, he had served as Vice
President, Diagnostic/Growth Factor Manufacturing since 1992 at Chiron
Corporation, a biopharmaceutical company, where he had served as Vice President,
Process Development and Manufacturing from 1987 to 1991. Previously, he held
process development positions at Merck Sharp & Dohme Research Laboratories and
Eli Lilly & Co. He received his Ph.D. in Biochemistry from Oklahoma State
University.

Gregory F. Liposky joined the Company in March 1993 as Vice President,
Manufacturing concurrently with the acquisition by the Company of a
manufacturing facility from Verax Corporation ("Verax"). Prior to joining the
Company, he had served as Vice President, Bioprocessing since 1991 at Verax, a
toll manufacturer of biotechnology products, where he had served as Operations
Manager from 1989 to 1991 and Production Manager from 1985 to 1989. He received
his M.B.A. from Monmouth College.

Stephanie K. Marrus joined the Company in July 1994 as Vice President,
Corporate Development. Prior to joining the Company, she had served as Director,
Corporate Communications at Vertex Pharmaceuticals, Inc. since July 1992. From
1991 to 1992, she held two positions in the administration of Governor William
Weld. She served as Deputy Secretary for Policy in the Executive Office of
Economic Affairs and Executive Director, Massachusetts Underground Storage Tank
Board. From 1990 to 1991, she served as President of The Brant Company, a
strategic management consulting firm. From 1987 to 1990, she served as Director
of Business Development for the Hewlett-Packard Company. Previously, she held
various marketing positions in the computer industry. She received an M.B.A.
from the Wharton School of the University of Pennsylvania.

Wayne E. Mayhew III has served as Chief Financial Officer since May 1983,
Vice President since August 1984, Treasurer since December 1986, and Secretary
since June 1990. Prior to joining the Company, he was a Small Business Services
and Audit Manager for Deloitte, Haskins & Sells. Mr. Mayhew is a certified
public accountant. He received his Masters in Accountancy from Brigham Young
University.

Patrick Owen Burns has been a member of the Company's Board of Directors
since January 1987. Since 1986, he has been a Vice President of R&D Funding
Corp., a company that provides product development financing for advanced
technology companies and an affiliate of Prudential Securities Incorporated
("Prudential Securities"), an investment banking and security brokerage firm. He
served as a director of R&D Funding Corp. from 1989 to 1992. Affiliates of R&D
Funding Corp. are stockholders of the Company. Since July, Mr. Burns also has
held various officer positions, including Vice President and First Vice
President, of Prudential Securities. He is presently a Senior Vice President of
Prudential Securities. Mr. Burns also serves as a director of Ecogen Inc.,
Synbiotics Corp. and Texas Biotechnology Corp.

Jeremy L. Curnock Cook has been a member of the Company's Board of
Directors since January 1995. He is currently a director of Rothschild Asset
Management Limited which acts as an advisor to Biotechnology Investments
Limited, which is a stockholder of the Company. In 1975, Mr. Curnock Cook
founded and became Managing Director of The International Biochemical Group
Ltd., a company engaged in applied biotechnology, which was subsequently
acquired by Royal Dutch/Shell Group of Companies in 1985. He also serves as a
director of Ribozyme Pharmaceuticals, Inc. and Targeted Genetics Corp.

40
<PAGE> 42

Martyn D. Greenacre has been a member of the Company's Board of Directors
since June 1993. Since 1992, Mr. Greenacre has been President and Chief
Executive Officer of Zynaxis, Inc., a drug delivery company based in Malvern,
Pennsylvania. Prior to joining Zynaxis, from 1973 through 1992, he held several
senior management positions at SmithKline Beecham, most recently as chairman of
European operations. He also serves as a director of Cephalon Inc., Genset, IBAH
Inc., and Zynaxis, Inc.

Arthur J. Hale, M.D., has been a member of the Company's Board of Directors
since June 1987. Since 1985, Dr. Hale has been a partner and director of Apax
Partners & Co. Ventures Ltd., the United Kingdom associate of Patricof & Co.
Ventures, Inc., a venture capital firm, affiliates of which are stockholders of
the Company. Previously, he was Vice President of Research and Development at
G.D. Searle in the United Kingdom.

Michael Rosenblatt, M.D. has been a member of the Company's Board of
Directors since June 1993. Since 1996, Dr. Rosenblatt has been the Faculty Dean
for Academic Programs at Beth Israel Hospital at Harvard Medical School and
Senior Vice President for Academic Affairs at Beth Israel Hospital in Boston.
Since 1992, Dr. Rosenblatt has been the Ebert Professor of Molecular Medicine at
Harvard Medical School, Chief of the Division of Bone and Mineral Metabolism at
Beth Israel Hospital and Director of the Harvard-Massachusetts Institute of
Technology Division of Health Sciences and Technology. From 1983 through 1992,
he was with Merck Sharp & Dohme Research Laboratories, most recently serving as
Senior Vice President for Research. He also serves as a director of ProScript,
Inc.

James R. Tobin has been a member of the Company's Board of Directors since
January 1995. He became President and Chief Operating Officer of Biogen, Inc., a
biotechnology company, in 1994. Prior to joining Biogen, Mr. Tobin was with
Baxter International Inc., a health care products company, where he served as
President and Chief Operating Officer from 1992 to 1994, as Executive Vice
President from 1988 to 1992 and in various management positions prior to 1988.
He also serves as a director of Biogen, Inc. and Genovo, Inc.

The Company's Restated Certificate of Incorporation provides for a Board of
Directors classified into three terms. Patrick Owen Burns, Charles Cohen and
Jeremy L. Curnock Cook serve in a class whose term ends at the 1997 annual
stockholders' meeting. Brian H. Dovey, Arthur J. Hale and Michael M. Tarnow
serve in a class whose term ends at the 1998 annual stockholders' meeting.
Martyn D. Greenacre, Michael Rosenblatt and James R. Tobin serve in a class
whose term ends at the 1999 annual stockholders' meeting.

The Company has agreed with the PruTech Entities to use its best efforts to
cause a designee of the PruTech Entities to be elected to the Board of
Directors. The PruTech Entities have designated Patrick Owen Burns. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among any of the directors and executive officers of the
Company.

41
<PAGE> 43

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 20, 1996, by (i) each
stockholder known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common Stock, (ii) each director of the Company, (iii)
the Company's Chief Executive Officer and other executive officers, and (iv) all
directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(1)
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS (AS REQUIRED) OF BENEFICIAL OWNER** OWNED(1) OFFERING OFFERING
- ---------------------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Entities associated with
Patricof & Co. Ventures, Inc. or its associate,
Apax Partners & Co. Ventures Ltd.(2)...................... 4,894,916 16.6% 15.5%
445 Park Avenue
New York, NY 10022
Biotechnology Investments Limited(3)...................... 2,266,122 7.8 7.3
St. Julian's Court
St. Peter's Port
Guernsey, Channel Islands
Amerindo Investment Advisors, Inc.(4)..................... 2,148,500 7.4 6.9
388 Market Street
San Francisco, CA 94111
Entities associated with Domain Associates(5)............. 1,811,316 6.2 5.8
One Palmer Square
Princeton, NJ 08542
Patrick Owen Burns(6)..................................... 731,782 2.5 2.4
Charles Cohen, Ph.D.(7)................................... 672,455 2.3 2.1
Jeremy L. Curnock Cook(8)................................. 2,268,622 7.8 7.3
Brian H. Dovey(9)......................................... 1,823,607 6.2 5.8
Martyn D. Greenacre(14)................................... 7,500 * *
Arthur J. Hale, M.D.(10).................................. 3,980,090 13.5 12.7
Michael Rosenblatt, M.D.(14).............................. 12,500 * *
Michael M. Tarnow(14)..................................... 400,000 1.4 1.3
James R. Tobin(14)........................................ 2,500 * *
Thomas J. Facklam, Ph.D................................... -- -- --
Ronald D. Johnson, Ph.D.(11).............................. 112,734 * *
Gregory F. Liposky(12).................................... 23,265 * *
Stephanie K. Marrus(14)................................... 24,333 * *
Wayne E. Mayhew III(13)................................... 100,364 * *
All directors and executive officers as a group (13
Persons)................................................ 10,159,752 32.9 30.9
</TABLE>

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

* Less than 1%

** Addresses are given for beneficial owners of more than 5% of the
outstanding Common Stock only.

(1) Applicable percentage of ownership is based on 29,072,730 shares of Common
Stock outstanding as of June 20, 1996 together with applicable options or
warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of

42
<PAGE> 44

Common Stock subject to options or warrants which are currently exercisable
or convertible or which will become exercisable or convertible within sixty
(60) days after June 20, 1996 are deemed outstanding for computing the
beneficial ownership of the person holding such option or warrant but are
not outstanding for computing the beneficial ownership of any other person.
Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.

(2) Consists of 553,669 shares (529,522 shares of Common Stock and 24,147
shares of Common Stock subject to a warrant) held by Banque Wormser Freres,
Custodian for Apax CR IIA; 221,777 shares (212,099 shares of Common Stock
and 9,678 shares of Common Stock subject to a warrant) held by Banque
Wormser Freres, Custodian for Apax CR IIC; 197,785 shares of Common Stock
held by Coutts & Co (Jersey) Limited, Custodian for APA Excelsior Venture
Capital Holdings (Jersey) Ltd.; 22,779 shares of Common Stock held by
Coutts & Co (Jersey) Limited, Custodian for Apax Venture Capital Fund Ltd.;
764,994 shares of Common Stock held by Coutts & Co (Jersey) Limited,
Custodian for Apax Ventures II, Ltd.; 778,498 shares (710,674 shares of
Common Stock and 67,824 shares of Common Stock subject to a warrant) held
by Apax Funds Nominees Ltd. "A" Account, Custodian for Apax Ventures III
Trust; 954,060 shares of Common Stock held by Apax Funds Nominees Ltd. "A"
Account, Custodian for Apax Ventures III International Partners, L.P.
(870,941 shares of Common Stock and 83,119 shares of Common Stock subject
to a warrant); 487,206 shares (406,005 shares of Common Stock and 81,201
shares of Common Stock subject to a warrant) held by Apax Funds Nominees
Ltd. "B" Account, Custodian for Apax Ventures IV Trust; 841,092 shares
(700,910 shares of Common Stock and 140,182 shares of Common Stock subject
to a warrant) held by Apax Funds Nominees Ltd. "B" Account, Custodian for
Apax Ventures IV International Partners L.P., and 73,056 shares (70,048
shares of Common Stock and 3,008 shares of Common Stock subject to a
warrant) held by MMG Conseil (collectively "Entities associated with
Patricof & Co. Ventures, Inc."). Alan Patricof is a director of Patricof &
Co. Ventures, Inc., APA Partners, Apax Partners & Co. Ventures Ltd., Apax
Venture Capital Management (Jersey) Limited, Apax Partners & Cie Gestion,
which entities are the investment advisors or manager of the funds listed
in this footnote, and he may be deemed to be the beneficial owner of
4,867,738 shares of Common Stock (after giving effect to the exercise of
warrants). Dr. Hale, a director of the Company, is an associate of Patricof
& Co. Ventures, Inc. and a partner and director of Apax Partners & Co.
Ventures Ltd., the manager of or an advisor to the Entities associated with
Apax Partners & Co. Ventures Ltd. Dr. Hale may be deemed to be the
beneficial owner of 3,848,629 shares of Common Stock as described in Note
10 below. Dr. Hale disclaims beneficial ownership of shares associated with
Apax Partners & Co. Ventures Ltd. and Patricof and Co. Ventures, Inc.
Ronald Cohen is a director of Apax Partners & Co. Ventures Ltd., and he may
be deemed to be the beneficial owner of 3,126,284 shares of Common Stock
(after giving effect to the exercise of warrants). The address for Banque
Wormser Freres, Custodian for Apax CR IIA, Apax CR IIC and MMG Conseil, is
No. 45 Avenue Kleber, Paris, 75116 France; the address for Coutts & Co
(Jersey) Limited, Custodian for APA Excelsior Venture Capital Holdings
(Jersey) Ltd., Apax Venture Capital Fund Ltd. and Apax Ventures II, Ltd.,
is 23/25 Broad Street, St. Helier, Jersey, Channel Islands and the address
for Apax Funds Nominees Ltd. "A" Account, Custodian for Apax Ventures III
Trust and Apax Ventures III International Partners, L.P. and for Apax Funds
Nominees Ltd. "B" Account, Custodian for Apax Ventures IV Trust and Apax
Ventures IV International Partners, L.P., is 62 Green Street, London W14
4BA, United Kingdom. The address for Dr. Hale, Mr. Cohen and Apax Partners
& Co. Ventures Ltd. is 15 Portland Place, London W1N 3AA, United Kingdom.
The information in the chart and in this footnote, other than the
percentage of class beneficially owned, is based solely on Amendment No. 7
to Schedule 13D dated February 16, 1996 and filed with the Securities and
Exchange Commission and on information provided by counsel for the entities
and persons listed in this footnote. See Note 10.

43
<PAGE> 45

(3) Consists of 2,266,122 shares (2,165,538 shares of Common Stock and 100,584
shares of Common Stock subject to a warrant) beneficially owned by
Biotechnology Investments Limited ("BIL"). Mr. Curnock Cook is a director
of Rothschild Asset Management Limited, which is an advisor to BIL and to
Rothschild Asset Management (C.I.) Limited, which is the manager of BIL.
Mr. Curnock Cook is also a shareholder, but is not an officer or director,
of BIL. Rothschild Asset Management (C.I.) Limited is a wholly-owned
subsidiary of Rothschild Asset Management Limited. Mr. Curnock Cook
disclaims beneficial ownership of the shares owned by BIL. The information
in the chart and in this footnote, other than the percentage of class
beneficially owned, is based solely on a Schedule 13D dated January 19,
1995 and filed with the Securities and Exchange Commission and on
information provided to the Company by representatives of BIL. See Note 8.

(4) Amerindo Investment Advisors, Inc. ("Amerindo") is considered the
beneficial owner of an aggregate of 2,148,500 shares of Common Stock, which
shares were purchased for certain advisory clients of Amerindo. The
information in the chart and in this footnote, other than the percentage of
class beneficially owned, is based solely on a Schedule 13G dated February
13, 1996 and filed with the Securities and Exchange Commission and on
information provided to the Company by representatives of Amerindo.

(5) Consists of 1,750,062 shares (1,458,385 shares of Common Stock and 291,677
shares of Common Stock subject to a warrant) held by Domain Partners III,
L.P. and 61,254 shares (51,045 shares of Common Stock and 10,209 shares of
Common Stock subject to a warrant) held by DP III Associates, L.P.)
(collectively "Entities associated with Domain Associates"). Mr. Dovey is a
General Partner of Domain Associates and a General Partner of the general
partner of the Entities associated with Domain Associates and may be deemed
to be the beneficial owner of shares owned by the Entities associated with
Domain Associates. The information in the chart and in this footnote, other
than the percentage of class beneficially owned, is based solely on a
Schedule 13D dated January 19, 1995 and filed with the Securities and
Exchange Commission and on information provided to the Company by
representatives of Domain Associates. See Note 9.

(6) Consists of 7,500 shares of Common Stock subject to options exercisable on
June 20, 1996 or within 60 days thereafter, 724,282 shares of Common Stock
held by PruTech Research and Development Partnership III. Mr. Burns is a
Vice President of R&D Funding Corp, an affiliate of the PruTech Research
and Development Partnership III and Prudential Securities and a Senior Vice
President of Prudential Securities. Mr. Burns disclaims beneficial
ownership of the shares owned by the Prudential Entities.

(7) Consists of 298,163 shares of Common Stock owned directly by Dr. Cohen,
12,000 shares of Common Stock owned by Dr. Cohen's children and 362,292
shares of Common Stock subject to options exercisable on June 20, 1996 or
within 60 days thereafter.

(8) Consists of 2,500 shares of Common Stock subject to options exercisable on
June 20, 1996 or within 60 days thereafter and 2,266,122 shares of Common
Stock (after giving effect to the exercise of warrants) beneficially owned
by BIL. Mr. Curnock Cook is also a shareholder, but is not an officer or
director, of BIL. Rothschild Asset Management (C.I.) Limited is a
wholly-owned subsidiary of Rothschild Asset Management Limited. Mr. Curnock
Cook disclaims beneficial ownership of the shares owned by BIL. See Note 3.

(9) Consists of 12,291 shares of Common Stock subject to options exercisable on
June 20, 1996 or within 60 days thereafter and 1,811,316 shares of Common
Stock (after giving effect to the exercise of warrants) held by Entities
associated with Domain Associates. Mr. Dovey is a General Partner of Domain
Associates and a General Partner of the general partner of the Entities
associated with Domain Associates and may be deemed to be the beneficial
owner of shares owned by the Entities associated with Domain Associates.
Does not include 2,266,122 shares of Common Stock (after giving effect to
the exercise of warrants) beneficially owned by BIL. Domain Associates is
the U.S. venture capital advisor to BIL. Domain Associates has neither

44
<PAGE> 46

voting nor investment power over the shares owned by BIL and Mr. Dovey
disclaims beneficial ownership of the shares owned by BIL. See Notes 3 and
5.

(10) Consists of 112,061 shares of Common Stock owned directly by Dr. Hale,
11,900 shares of Common Stock owned by Dr. Hale's wife, 7,500 shares of
Common Stock subject to options exercisable on June 20, 1996 or within 60
days thereafter, and 3,848,629 shares of Common Stock (after giving effect
to the exercise of warrants) held by Coutts & Co (Jersey) Limited,
Custodian for Apax Venture Capital Fund Ltd., Coutts & Co (Jersey) Limited,
Custodian for Apax Ventures II, Ltd., Apax Funds Nominees Ltd. "A" Account,
Custodian for Apax Ventures III Trust, Apax Funds Nominees Ltd. "A"
Account, Custodian for Apax Ventures III International Partners, L.P., Apax
Funds Nominees Ltd. "B" Account, Custodian for Apax Ventures IV Trust and
Apax Funds Nominees Ltd. "B" Account, Custodian for Apax Ventures IV
International Partners, L.P. (collectively "Entities associated with Apax
Partners & Co. Ventures Ltd."). Dr. Hale is an associate of Patricof & Co.
Ventures Inc., and a partner and director of Apax Partners & Co. Ventures
Ltd., the manager of or an advisor to the Entities associated with Apax
Partners & Co. Ventures Ltd. Dr. Hale disclaims beneficial ownership of the
shares associated with the Entities associated with Apax Partners & Co.
Ventures Ltd. and Patricof & Co. Ventures, Inc. See Note 2.

(11) Consists of 19,089 shares of Common Stock and 93,645 shares of Common Stock
subject to options exercisable on June 20, 1996 or within 60 days
thereafter.

(12) Consists of 2,099 shares of Common Stock and 21,166 shares of Common Stock
subject to options exercisable on June 20, 1996 or within 60 days
thereafter.

(13) Consists of 39,775 shares of Common Stock and 60,589 shares of Common Stock
subject to options exercisable on June 20, 1996 or within 60 days
thereafter.

(14) Consists of shares of Common Stock subject to options exercisable on June
20, 1996 or within 60 days thereafter.

45
<PAGE> 47

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement,
Hambrecht & Quist LLC and Cowen & Company (the "Underwriters") have severally
agreed to purchase from the Company the following respective number of shares of
Common Stock.

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC...........................................
Cowen & Company.................................................
--------
Total......................................................... 2,000,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover of this Prospectus and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow and such dealers may reallow a concession
not in excess of $ per share to certain other dealers. After the public
offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell such shares to
the Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), and to contribute to payments the Underwriters may be
required to make in respect thereof.

Certain stockholders of the Company, including the Company's executive
officers and directors, who will own in the aggregate 9,206,487 shares of Common
Stock, representing approximately 30% of the aggregate outstanding shares of
Common Stock after the offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 90-day period following the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent of
the Underwriters, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 90-day
period following the date of this Prospectus, except that the Company (i) may
issue shares upon the exercise of options granted prior to the date hereof, and
(ii) may issue options to purchase Common Stock to directors, officers and
employees in accordance with the Company's customary practices.

46
<PAGE> 48

In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) or their respective affiliates intend to engage in passive market making in
the Company's Common Stock during the cooling off period.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts and for the Underwriters by Shearman & Sterling, New York,
New York. Members of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. own an
aggregate of approximately 12,000 shares of Common Stock of the Company and
2,000 warrants to purchase shares of Common Stock of the Company.

EXPERTS

The consolidated financial statements of Creative BioMolecules, Inc. as of
December 31, 1995 and September 30, 1995 and 1994 and for the three months ended
December 31, 1995 and for each of the three years in the period ended September
30, 1995, included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

The statements in the Prospectus regarding laws and regulations
administered by the FDA under the captions "Risk Factors -- No Assurance of FDA
Approval; Comprehensive Government Regulation" and "Business -- Regulatory
Issues" and other references herein to regulatory matters within the
jurisdiction of the FDA have been reviewed and approved by Fox, Bennett &
Turner, Washington, D.C., regulatory counsel to the Company, as experts on such
matters, and are included herein in reliance upon that review and approval.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-02511. Copies of such materials can be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. The Commission maintains
a Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically.
Reports, proxy statements and other information about the Company may also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, covering the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations

47
<PAGE> 49

of the Commission. For further information, reference is made to the
Registration Statement and the exhibits thereto, copies of which may be obtained
at prescribed rates, or which may be examined free of charge, at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. This registration statement has been filed
electronically through the Commission's Electronic Data Gathering, Analysis, and
Retrieval System and may be obtained through the Commission's Web site
(http://www.sec.gov).

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated by reference and made a part hereof: Annual
Report on Form 10-K for the fiscal year ended September 30, 1995; Transition
Report on Form 10-Q for the transition period ended December 31, 1995; Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; the Company's Current
Reports on Form 8-K with respect to events dated December 31, 1995, January 8,
1996, January 24, 1996, May 7, 1996, May 9, 1996 and June 3, 1996; and the
description of the Company's capital stock contained in the Company's
registration statement on Form 8-A under the Exchange Act and Amendment No. 1
thereto on Form 8, filed with the Commission on December 3, 1992 and December
29, 1992, respectively (File No. 0-19910), including amendments or reports filed
for the purpose of updating such description. All documents filed by the Company
with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act after the date of this Prospectus and prior to the termination of
the offering of the Common Stock shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for the purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is incorporated by reference herein modifies
or supersedes such earlier statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. Copies of all documents incorporated by reference
herein (other than exhibits to such documents which are not specifically
incorporated by reference into such documents) will be provided without charge
to each person who receives copies of this Prospectus, upon request of such
person directed to Wayne E. Mayhew III, Vice President and Chief Financial
Officer, Creative BioMolecules, Inc., 45 South Street, Hopkinton, Massachusetts
01748, telephone (508) 435-9001.

To the extent that any proxy statement is incorporated by reference herein,
such incorporation shall not include any information contained in such proxy
statement that is not, pursuant to the Commission's rules, deemed to be "filed"
with the Commission or subject to the liabilities of Section 18 of the Exchange
Act.

48
<PAGE> 50

CREATIVE BIOMOLECULES, INC.

<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 51

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, 1995 and September 30, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the three month period ended December 31, 1995 and
each of the three years in the period ended September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its subsidiary
at December 31, 1995 and September 30, 1995 and 1994, and the results of their
operations and their cash flows for the three month period ended December 31,
1995 and each of the three years in the period ended September 30, 1995 in
conformity with generally accepted accounting principles.

Boston, Massachusetts
April 3, 1996

F-2
<PAGE> 52

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30,
MARCH 31, DECEMBER 31, -----------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 14,322,409 $ 11,917,779 $ 4,427,229 $ 2,657,416
Marketable securities..................... 3,193,792 8,084,269 6,058,894 2,765,156
Accounts receivable....................... 2,896,172 2,818,618 2,562,927 1,463,981
Inventory................................. 580,968 562,290 586,095 699,218
Prepaid expenses and other................ 327,868 149,105 212,955 242,207
------------ ------------ ------------ ------------
Total current assets.................... 21,321,209 23,532,061 13,848,100 7,827,978
------------ ------------ ------------ ------------
Property, plant and equipment -- net........ 14,594,490 14,736,306 15,273,710 17,205,807
------------ ------------ ------------ ------------
Other assets:
Patents and licensed technology -- net.... 376,137 382,703 496,500 540,434
Deferred patent application
costs -- net............................ 2,620,015 2,431,298 2,315,244 1,625,189
Deposits and other........................ 458,473 258,473 258,473 270,794
------------ ------------ ------------ ------------
Total other assets...................... 3,454,625 3,072,474 3,070,217 2,436,417
------------ ------------ ------------ ------------
Total.............................. $ 39,370,324 $ 41,340,841 $ 32,192,027 $ 27,470,202
============ ============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lease obligations -- current portion...... $ 47,149 $ 42,567 $ 63,519 $ 155,744
Accounts payable.......................... 1,787,686 738,100 722,954 1,436,908
Accrued liabilities....................... 483,733 512,446 488,484 428,506
Accrued compensation...................... 560,358 495,633 922,111 732,284
Deferred contract revenue................. 147,920
------------ ------------ ------------ ------------
Total current liabilities............... 2,878,926 1,788,746 2,197,068 2,901,362
------------ ------------ ------------ ------------
Lease obligations........................... 1,694,436 1,710,910 1,713,169 1,749,719
------------ ------------ ------------ ------------
Deferred compensation -- Officers........... 12,500 12,500 12,500
------------ ------------ ------------ ------------
Commitments (Notes 4, 5 and 9)..............
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized, none
issued..................................
Common stock, $.01 par value, 50,000,000
shares authorized, 29,069,505 shares,
28,894,996 shares, 25,832,654 shares and
19,534,818 shares issued and
outstanding............................. 290,695 288,950 258,327 195,348
Common stock payable...................... 1,736,586 1,736,586 1,736,586
Additional paid-in capital................ 107,145,599 105,001,625 92,252,751 81,038,434
Accumulated deficit....................... (72,639,332) (69,198,476) (65,978,374) (58,356,307)
Less stockholders' notes receivable....... (1,807,440)
------------ ------------ ------------ ------------
Total stockholders' equity.............. 34,796,962 37,828,685 28,269,290 22,806,621
------------ ------------ ------------ ------------
Total.............................. $ 39,370,324 $ 41,340,841 $ 32,192,027 $ 27,470,202
============ ============ ============ ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 53

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
THREE MONTHS ENDED THREE MONTHS
MARCH 31, ENDED YEAR ENDED SEPTEMBER 30,
------------------------- DECEMBER 31, -----------------------------------------
1996 1995 1995 1995 1994 1993
----------- ----------- ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and development
contracts.............. $ 1,055,704 $ 1,489,475 $ 970,806 $ 5,824,344 $ 3,651,949 $ 1,576,174
Manufacturing
contracts.............. 612,064 2,121,256 770,133 6,158,574 1,411,262 460,515
License fees and
royalties.............. 101,584 2,157 544,000 7,500 30,000
Product sales............ 15,600 34,537
Interest................. 250,442 203,010 260,953 648,602 580,160 549,007
Other.................... 20,000 13,384 349 53,470 140,757 3,472
----------- ----------- ----------- ----------- ------------ ------------
Total revenues.... 2,039,794 3,827,125 2,004,398 13,228,990 5,807,228 2,653,705
----------- ----------- ----------- ----------- ------------ ------------
Costs and expenses:
Research and
development............ 3,832,752 2,777,558 3,193,979 11,687,847 17,679,692 12,898,203
Manufacturing
contracts.............. 477,533 1,708,105 715,171 5,329,779 1,388,577 438,910
Product sales............ 3,494 5,874
Marketing, general and
administrative......... 1,115,563 921,035 1,254,566 3,603,954 4,793,508 3,120,957
Interest................. 54,802 50,589 60,784 229,477 200,563 208,573
----------- ----------- ----------- ----------- ------------ ------------
Total costs and
expenses........ 5,480,650 5,457,287 5,224,500 20,851,057 24,065,834 16,672,517
----------- ----------- ----------- ----------- ------------ ------------
Net loss................... $(3,440,856) $(1,630,162) $(3,220,102 ) $(7,622,067) $(18,258,606) $(14,018,812)
=========== =========== =========== =========== ============ ============
Net loss per common share.. $ (0.12) $ (0.08) $ (0.11 ) $ (0.37) $ (0.95) $ (0.94)
=========== =========== =========== =========== ============ ============
Weighted average number of
common and common
equivalent shares
outstanding.............. 29,027,234 19,777,519 28,120,190 20,430,900 19,212,477 14,855,368
=========== =========== =========== =========== ============ ============
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 54

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DIVIDENDS
CONVERTIBLE PAYABLE ON COMMON
PREFERRED STOCK CONVERTIBLE STOCK
------------------------- PREFERRED ----------
SHARES AMOUNT STOCK SHARES
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992...................................... 9,426,738 $ 94,267 $ 2,728,930 1,792,279
Dividends paid.................................................. (2,728,930) 545,786
Conversion of preferred stock................................... (9,426,738) (94,267) 9,426,738
Issuance of common stock in connection with underwritten public
offering (net of costs of $2,572,058)......................... 3,450,000
Forgiveness of notes receivable.................................
Issuance of common stock and common stock payable in connection
with asset purchase........................................... 394,890
Issuance of common stock in connection with private placement
(net of costs of $1,239,867).................................. 2,900,000
Issuance of common stock........................................ 66,273
Net loss........................................................
---------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1993...................................... 0 0 0 18,575,966
Repayment of notes receivable...................................
Forgiveness of notes receivable.................................
Issuance of common stock in connection with asset purchase...... 394,890
Issuance of common stock for note receivable.................... 467,715
Issuance of common stock........................................ 96,247
Net loss........................................................
---------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1994...................................... 0 0 0 19,534,818
Forgiveness of notes receivable.................................
Issuance of common stock for note receivable.................... 66,271
Repayment of notes receivable...................................
Issuance of Series 1994/A Preferred Stock in connection with
private placement (net of costs $269,064)..................... 1,130,000 11,300
Issuance of common stock in connection with asset purchase...... 394,890
Conversion of Series 1994/A Preferred Stock into common stock... (1,130,000) (11,300) 5,650,000
Issuance of common stock........................................ 186,675
Net loss........................................................
---------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1995...................................... 0 0 0 25,832,654
Issuance of common stock in connection with self-managed public
offering of common stock (net of costs of $108,026)........... 3,000,000
Issuance of common stock........................................ 62,342
Net loss........................................................
---------- -------- ---------- ----------
BALANCE DECEMBER 31, 1995........................................ 0 0 0 28,894,996
---------- -------- ---------- ----------
Reclassification of equity consideration in connection with
asset purchase (unaudited)....................................
Issuance of common stock (unaudited)............................ 174,509
Net loss (unaudited)............................................
---------- -------- ---------- ----------
BALANCE, MARCH 31, 1996 (unaudited).............................. 0 $ 0 $ 0 29,069,505
========== ======== ========== ==========

</TABLE>

COMMON ADDITIONAL
STOCK PAID-IN ACCUMULATED
AMOUNT PAYABLE CAPITAL DEFICIT
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992...................................... $ 17,923 $ 33,070,134 $(26,078,889)
Dividends paid.................................................. 5,458 2,723,472
Conversion of preferred stock................................... 94,267
Issuance of common stock in connection with underwritten public
offering (net of costs of $2,572,058)......................... 34,500 21,543,442
Forgiveness of notes receivable.................................
Issuance of common stock and common stock payable in connection
with asset purchase........................................... 3,949 $ 5,785,131 2,710,920
Issuance of common stock in connection with private placement
(net of costs of $1,239,867).................................. 29,000 14,681,133
Issuance of common stock........................................ 663 184,955
Net loss........................................................ (14,018,812)
-------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993...................................... 185,760 5,785,131 74,914,056 (40,097,701)
Repayment of notes receivable...................................
Forgiveness of notes receivable.................................
Issuance of common stock in connection with asset purchase...... 3,949 (4,048,545) 4,044,596
Issuance of common stock for note receivable.................... 4,677 1,763,286
Issuance of common stock........................................ 962 316,496
Net loss........................................................ (18,258,606)
-------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994...................................... 195,348 1,736,586 81,038,434 (58,356,307)
Forgiveness of notes receivable.................................
Issuance of common stock for note receivable.................... 663 69,358
Repayment of notes receivable...................................
Issuance of Series 1994/A Preferred Stock in connection with
private placement (net of costs $269,064)..................... 10,949,011
Issuance of common stock in connection with asset purchase...... 3,949 (3,949)
Conversion of Series 1994/A Preferred Stock into common stock... 56,500 (45,200)
Issuance of common stock........................................ 1,867 245,097
Net loss........................................................ (7,622,067)
-------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995...................................... 258,327 1,736,586 92,252,751 (65,978,374)
Issuance of common stock in connection with self-managed public
offering of common stock (net of costs of $108,026)........... 30,000 12,611,974
Issuance of common stock........................................ 623 136,900
Net loss........................................................ (3,220,102)
-------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1995........................................ 288,950 1,736,586 105,001,625 (69,198,476)
-------- ----------- ----------- -----------
Reclassification of equity consideration in connection with
asset purchase (unaudited).................................... (1,736,586) 1,736,586
Issuance of common stock (unaudited)............................ 1,745 407,388
Net loss (unaudited)............................................ (3,440,856)
-------- ----------- ----------- -----------
BALANCE, MARCH 31, 1996 (unaudited).............................. $290,695 $ 0 $107,145,599 $(72,639,332)
======== =========== =========== ===========
</TABLE>

STOCKHOLDERS'
NOTES
RECEIVABLE
-----------
<S> <C>
BALANCE, SEPTEMBER 30, 1992...................................... $ (156,646)
Dividends paid..................................................
Conversion of preferred stock...................................
Issuance of common stock in connection with underwritten public
offering (net of costs of $2,572,058).........................
Forgiveness of notes receivable................................. 44,155
Issuance of common stock and common stock payable in connection
with asset purchase...........................................
Issuance of common stock in connection with private placement
(net of costs of $1,239,867)..................................
Issuance of common stock........................................
Net loss........................................................
-----------
BALANCE, SEPTEMBER 30, 1993...................................... (112,491)
Repayment of notes receivable................................... 24,183
Forgiveness of notes receivable................................. 44,154
Issuance of common stock in connection with asset purchase......
Issuance of common stock for note receivable.................... (1,763,286)
Issuance of common stock........................................
Net loss........................................................
-----------
BALANCE, SEPTEMBER 30, 1994...................................... (1,807,440)
Forgiveness of notes receivable................................. 44,154
Issuance of common stock for note receivable.................... (70,021)
Repayment of notes receivable................................... 1,833,307
Issuance of Series 1994/A Preferred Stock in connection with
private placement (net of costs $269,064).....................
Issuance of common stock in connection with asset purchase......
Conversion of Series 1994/A Preferred Stock into common stock...
Issuance of common stock........................................
Net loss........................................................
-----------
BALANCE, SEPTEMBER 30, 1995...................................... 0
Issuance of common stock in connection with self-managed public
offering of common stock (net of costs of $108,026)...........
Issuance of common stock........................................
Net loss........................................................
-----------
BALANCE DECEMBER 31, 1995........................................ 0
-----------
Reclassification of equity consideration in connection with
asset purchase (unaudited)....................................
Issuance of common stock (unaudited)............................
Net loss (unaudited)............................................
-----------
BALANCE, MARCH 31, 1996 (unaudited).............................. $ 0
===========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 55

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS
MARCH 31, ENDED YEAR ENDED SEPTEMBER 30,
------------------------- DECEMBER ---------------------------------------
1996 1995 31, 1995 1995 1994 1993
----------- ----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(3,440,856) $(1,630,162) $(3,220,102 ) $(7,622,067) $(18,258,606) $(14,018,812)
----------- ----------- ------------ ----------- ------------ ------------
Adjustments to reconcile net loss to cash
used:
Depreciation and amortization............. 607,405 615,216 758,544 2,471,184 2,347,602 1,521,886
Compensation expense...................... 46,378 29,750 107,002 78,967 69,654
Deferred patent and application costs..... 92,426 137,474 183,086
Bad debt expense.......................... 232,671
Increase (decrease) in cash from:
Accounts receivable..................... (77,554) (2,406,188) (255,691 ) (1,101,169) (1,020,377) (494,970)
Inventory and prepaid expenses.......... (197,441) (282,224) 87,655 142,375 (146,662) (61,022)
Accounts payable and accrued
liabilities........................... 1,130,973 (270,497) (417,120 ) (477,274) 66,282 565,409
Deferred contract revenue............... 1,920 (147,920) 147,920
----------- ----------- ------------ ----------- ----------- -----------
Total adjustments..................... 1,463,383 (2,295,395) 203,138 1,086,624 1,843,877 1,784,043
----------- ----------- ------------ ----------- ----------- -----------
Net cash used for operating
activities............................ (1,977,473) (3,925,557) (3,016,964 ) (6,535,443) (16,414,729) (12,234,769)
----------- ----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities........... (540,313) (6,059,238) (4,735,565 ) (12,701,607) (16,740,819) (16,380,725)
Sale of marketable securities............... 5,430,790 2,710,190 9,407,869 22,208,504 14,151,306
Expenditures for property, plant and
equipment................................. (435,190) (239,283) (47,495 ) (445,082) (2,949,005) (5,022,755)
Expenditures for patents.................... (212,550) (257,370) (175,902 ) (832,552) (644,879) (541,300)
Decrease (increase) in deposits and other... (200,000) (35,620) (27,679) 12,233 (251,127)
----------- ----------- ------------ ----------- ----------- -----------
Net cash provided by (used for)
investing activities.................. 4,042,737 (6,591,511) (2,248,772 ) (4,599,051) 1,886,034 (8,044,601)
----------- ----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
Public placement of common stock.......... 12,750,000 24,150,000
Private placement of common stock......... 15,950,000
Series 1994/A Preferred Stock............. 4,366,806 11,229,375
Other..................................... 351,258 1,400 137,523 239,465 322,135 160,118
Costs of raising equity..................... (15,117) (108,026 ) (269,064) (3,479,611)
Decrease in stockholders' notes
receivable................................ 1,833,307 1,833,307 24,183
Repayments of obligations under capital
leases.................................... (11,892) (38,466) (23,211 ) (128,776) (182,472) (214,556)
----------- ----------- ------------ ----------- ----------- -----------
Net cash provided by financing
activities............................ 339,366 6,147,930 12,756,286 12,904,307 163,846 36,565,951
----------- ----------- ------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 2,404,630 (4,369,138) 7,490,550 1,769,813 (14,364,849) 16,286,581
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR...................................... 11,917,779 10,515,954 4,427,229 2,657,416 17,022,265 735,684
----------- ----------- ------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $14,322,409 $ 6,146,816 $11,917,779 $ 4,427,229 2,657,416 $17,022,265
============ ============ ============= ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................... $ 54,802 $ 50,589 $ 60,784 $ 229,477 $ 200,563 $ 208,573
============ ============ ============= ============ ============ ============
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 56

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

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

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

Reclassifications -- Certain reclassifications have been made to amounts at
September 30, 1994 and 1995 to conform to the presentation at December 31, 1995.

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

Revenue Recognition -- The Company's research agreements with collaborative
partners have typically provided for the partial or complete funding of research
and development for specified projects and royalties payable to the Company in
exchange for licenses to market resulting products. These research agreements
are generally cancelable on short-term notice by the collaborative partner. In
certain of these agreements, the Company retains the right to manufacture and
supply the active ingredient. Revenue is earned and recognized based upon work
performed, upon the sale or licensing of product rights, upon shipment of
product for use in preclinical and clinical testing or upon attainment of
benchmarks specified in the related agreements.

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

<TABLE>
During the three months ended March 31, 1996, 1995 and December 31, 1995
and the years ended September 30, 1995, 1994 and 1993, major customers of the
Company were as follows:

<CAPTION>
THREE MONTHS THREE
ENDED MONTHS YEAR ENDED SEPTEMBER
MARCH 31, ENDED 30,
------------- DECEMBER 31, ----------------------
CUSTOMER 1996 1995 1995 1995 1994 1993
- -------- ---- ---- ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Customer A.................................. 50% 37% 48% 35% 49% 36%
Customer B.................................. 2% 11% 18%
Customer C.................................. 11% 2%
Customer D.................................. 30% 54% 37% 46% 2%
</TABLE>

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

Cash Equivalents and Marketable Securities -- Cash equivalents consist of
short-term, highly liquid investments purchased with remaining maturities of
three months or less. All other liquid investments

F-7
<PAGE> 57

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

are classified as marketable securities. Marketable securities are stated at
market value which approximates amortized cost plus accrued interest.

Effective October 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which requires that securities be
classified as "available-for-sale", "held to maturity" or "trading". As of
December 31, 1995 and September 30, 1995, the Company classified its marketable
securities as available-for-sale and had approximately $5,251,000 and $4,980,000
in United States government and agency instruments, respectively, and $2,833,000
and $1,079,000 in corporate bonds and notes, respectively, all with maturities
of less than one year.

The adoption of SFAS No. 115, which has not been applied retroactively to
the prior year financial statements, had no material effect on the Company s
accumulated deficit or stockholders equity because fair value approximated the
investments amortized cost. For the three months ended December 31, 1995 and the
year ended September 30, 1995, gross realized gains and losses were not
material. In computing realized gains and losses, the Company computes the cost
of its investments on a specific identification basis. Such cost includes the
direct costs to acquire the securities, adjusted for the amortization of any
discount or premium. At December 31, 1995 and September 30, 1995, gross
unrealized gains and losses were not material.

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

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

Patents and Licensed Technology -- The Company has filed applications for
United States and foreign patents covering aspects of its technology. Costs
related to pending patent applications have been deferred. Costs related to
successful patent applications and costs related to pending applications from
which the Company is currently deriving economic benefit, are amortized over the
estimated useful life of the patent, generally 16 to 20 years, using the
straight-line method. Costs related to licensed technology also have been
deferred and are amortized over the estimated useful life of the underlying
technology, generally 10 to 17 years, using the straight-line method.
Accumulated amortization was approximately $225,000, $429,000 and $346,000 at
December 31, 1995 and September 30, 1995 and 1994, 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.

Fair Value of Financial Instruments -- The Company adopted SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The provisions of SFAS
No. 107 require disclosure of the fair value of financial instruments and the
significant methods and assumptions used to estimate the fair value.

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.

F-8
<PAGE> 58

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which is effective for the Company beginning January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board ("APB")
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB No. 25
to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share in the Company's
audited consolidated financial statements for the year ending December 31, 1996.

Net Loss Per Common Share -- Net loss per common share is computed based on
the weighted average number of shares of common stock outstanding during each
year. Pursuant to the policy of the staff of the Securities and Exchange
Commission ("SEC"), the Company's preferred stock, which converted in the year
ended September 30, 1993 into common stock at the consummation of the
underwritten public offering (Note 7), is treated as if these shares were
converted to common stock on their respective original dates of issuance.
Pursuant to the requirements of the SEC, common stock issued, stock options
granted and dividends issued as common stock within one year prior to the
registered offering of Senior B Stock (using the treasury stock method and the
estimated fair value of the Company's common shares registered in the offering
of Senior B Stock) have been included in the calculation of common and common
equivalent shares as if these shares were outstanding for all periods presented.
Except for the foregoing, common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.

Other -- The Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-lived Assets and Long-lived Assets to Be Disposed Of" in 1996. Adoption
of SFAS No. 121 did not have a significant effect on the Company's consolidated
financial statements.

2. ACQUISITION OF ASSETS

On March 15, 1993, the Company acquired certain assets of Verax consisting
principally of a leased manufacturing facility and equipment. The total purchase
price of approximately $13,700,000 consisted of approximately $3,100,000 in
cash, assumption of certain liabilities of Verax totaling approximately
$2,000,000, acquisition costs of approximately $160,000 and an equity
consideration valued at $8,500,000. The equity consideration consisted of annual
installments of the Company's common stock to be made through March 1996 of
which 1,184,670 shares were issued through March 15, 1995. Based on the market
value of the Company's common stock in 1996, no additional shares will be
issued.

F-9
<PAGE> 59

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
Property, plant and equipment consisted of the following:

SEPTEMBER 30,
MARCH 31, DECEMBER 31, -------------------------
1996 1995 1995 1994
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land....................................... $ 352,000 $ 352,000 $ 352,000 $ 352,000
Building................................... 1,500,000 1,500,000 1,500,000 1,500,000
Laboratory equipment and furniture......... 8,376,441 8,358,045 8,343,238 8,086,628
Leasehold improvements..................... 12,335,730 12,335,738 12,332,185 12,232,738
Office furniture and equipment............. 1,995,748 1,970,138 1,936,876 1,859,524
Construction in progress................... 555,463 164,270 168,397 156,465
------------ ----------- ----------- -----------
Total............................ 25,115,382 24,680,191 24,632,696 24,187,355
Less accumulated depreciation and
amortization............................. (10,520,892) (9,943,885 ) (9,358,986) (6,981,548)
------------ ----------- ----------- -----------
Total............................ $ 14,594,490 $14,736,306 $15,273,710 $17,205,807
============ =========== =========== ===========
</TABLE>

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

SEPTEMBER 30,
MARCH 31, DECEMBER 31, -------------------------
1996 1995 1995 1994
---------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land......................................... $ 352,000 $ 352,000 $ 352,000 $ 352,000
Building..................................... 1,500,000 1,500,000 1,500,000 1,500,000
Laboratory equipment and furniture........... 47,000 47,000 598,313 598,313
Office furniture and equipment............... 233,889 233,889
---------- ---------- ----------- ----------
Total.............................. 1,899,000 1,899,000 2,684,202 2,684,202
Less accumulated amortization................ (325,765) (293,463) (1,018,412) (857,965)
---------- ---------- ----------- ----------
Total.............................. $1,573,235 $1,605,537 $ 1,665,790 $ 1,826,237
========== ========== =========== ==========
</TABLE>

4. LEASE OBLIGATIONS

As part of the acquisition of certain assets of Verax (Note 2), the Company
assumed certain liabilities consisting principally of obligations under capital
leases totaling $1,852,000. These obligations bear interest at variable rates
based on the prime rate ranging from 9.25 % to 10.5 % at December 31, 1995 and
are due monthly through the year 2008.

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

The Company has noncancelable operating lease agreements for office and
laboratory space and certain laboratory equipment. Rent expense for all
operating leases was approximately $150,000, $597,000, $478,000 and $413,000 for
the three months ended December 31, 1995 and the years ended September 30, 1995,
1994 and 1993, respectively.

F-10
<PAGE> 60

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LEASE OBLIGATIONS -- (CONTINUED)
<TABLE>
Future minimum lease obligations at December 31, 1995 were as follows:

<CAPTION>
YEAR ENDING DECEMBER 31 CAPITAL OPERATING
----------------------- ---------- ----------
<S> <C> <C>
1996........................................................ $ 264,971 $ 516,179
1997........................................................ 264,971 511,888
1998........................................................ 254,877 236,143
1999........................................................ 251,513
2000 and thereafter......................................... 2,877,904
---------- ----------
Total minimum lease payments................................ 3,914,236 $1,264,210
==========
Less amount representing interest........................... 2,160,759
----------
Present value of net minimum lease payments................. 1,753,477
Less current portion........................................ 42,567
----------
Long-term obligations under capital leases.................. $1,710,910
==========
</TABLE>

Under a security requirement of a capital lease agreement with a leasing
company, the Company purchased and pledged as collateral a letter of credit
totaling $187,500, which expired on December 1, 1995.

5. COMMITMENTS

On September 28, 1994, the Company signed a three-year manufacturing
contract with Biogen to produce in the Company's manufacturing facility several
of Biogen's protein-based therapeutic candidates for use in Biogen's clinical
trials. To enable the Company to meet its obligations under the manufacturing
contract, Biogen is (i) constructing a building addition and leasehold
improvements to the Company's manufacturing facility and (ii) financing the
costs of the construction work at an estimated total cost of $2,500,000. The
Company agreed to reimburse Biogen for the costs of the addition and
improvements at the end of the lease term at an amount equal to Biogen's
construction costs less $300,000 and less all accumulated depreciation.

Biogen also is installing and financing certain equipment with an estimated
total cost of $1,500,000, as provided in an equipment lease agreement. Under the
terms of the equipment lease agreement, the Company agrees to pay Biogen $25,000
per month, commencing when the equipment is placed in service and ending
December 31, 1997. The Company has the option to purchase the equipment at the
end of the lease term for an amount equal to its then fair market value. At
December 31, 1995, construction of the building and leasehold improvements and
installation of the equipment are not complete.

As security for its obligations under the manufacturing contract and the
equipment lease agreement, the Company granted to Biogen a security interest in
the manufacturing facility and certain of its equipment and furniture at the
manufacturing facility and any applicable inventory or other assets related to
the operation of the manufacturing facility with a total net book value at
December 31, 1995 of $12,568,000.

6. 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

F-11
<PAGE> 61

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. STOCK PLANS -- (CONTINUED)

of shares of common stock authorized for issuance thereunder. A total of
5,150,000 shares of common stock have been reserved for issuance under the 1987
Plan upon the exercise of options or in connection with awards or direct
purchases of stock.

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

<TABLE>
Activity under the plans is summarized as follows:

THREE THREE
MONTHS MONTHS
ENDED ENDED YEARS ENDED SEPTEMBER 30,
MARCH 31, DECEMBER 31, ---------------------------------
1996 1995 1995 1994 1993
----------- ------------ --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of period..... 3,714,057 3,747,763 1,357,879 1,180,739 989,864
Granted ($2.03 - $10.63)........... 576,000 13,000 2,816,441 281,400 248,750
Exercised ($0.35 - $8.00).......... (163,359) (9,477) (106,471) (18,740) (34,302)
Canceled ($0.50 - $10.00).......... (15,132) (37,229) (320,086) (85,520) (23,573)
--------- --------- --------- --------- ---------
Outstanding, end of period
($0.35 - $10.63)................... 4,111,566 3,714,057 3,747,763 1,357,879 1,180,739
========= ========= ========= ========= =========
</TABLE>

At March 31, 1996 and December 31, 1995, 423,769 and 1,017,290 shares,
respectively, were available for grant under the 1987 Plan. At March 31, 1996,
options for 1,132,129 and 15,600 shares under the 1987 Plan and the 1983 Plan,
respectively, were exercisable. At December 31, 1995, options for 1,409,983 and
24,960 shares under the 1987 Plan and the 1983 Plan, respectively, were
exercisable.

Employee Stock Purchase Plan -- In November 1993, the Company adopted an
Employee Stock Purchase Plan which permits eligible employees to purchase common
stock of the Company up to an aggregate of 250,000 shares. This Plan was
subsequently amended to increase to 500,000 the number of shares of common stock
authorized for issuance thereunder. During the three months ended March 31,
1996, no shares were issued under this Plan; during the three months ended
December 31, 1995, 55,515 shares were issued under this Plan at a price of $2.34
per share; during the year ended September 30, 1995, 143,475 shares were issued
under this Plan at a price of $1.4875 per share; during the year ended September
30, 1994, 77,507 shares were issued under this Plan at prices of $7.4375 and
$2.75 per share; and during the year ended September 30, 1993, 16,182 shares
were issued under this Plan at a price of $6.80 per share.

Director Plan -- In November 1993, the Company adopted the 1992
Non-Employee Director Non-Qualified Stock Option Plan which provides for the
granting of options to purchase up to an aggregate of 100,000 shares of common
stock to non-employee directors. During the three months ended March 31, 1996,
options to purchase 70,000 shares were granted at exercise prices of $9.34 per
share; during the three months ended December 31, 1995 no options were granted;
during the year ended September 30, 1995, options to purchase 20,000 shares were
granted at exercise prices of $2.625 to $2.875 per share; during the year ended
September 30, 1994 no options were granted; and during the

F-12
<PAGE> 62

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. STOCK PLANS -- (CONTINUED)
year ended September 30, 1993, options to purchase 80,000 shares were granted at
exercise prices of $8.00 to $8.50 per share.

During the year ended September 30, 1994, options to purchase 30,000 shares
were canceled at exercise prices of $8.50 per share. At March 31, 1996 and
December 31, 1995, options to purchase 37,500 and 35,000 shares, respectively,
were exercisable.

In March 1996, the Company's stockholders approved an increase in the
number of shares of common stock authorized for issuance under the 1992
Non-Employee Director Non-Qualified Stock Option Plan from 100,000 shares to
300,000 shares.

7. STOCKHOLDERS' EQUITY

On December 24, 1992, the Company sold to the public 3,000,000 shares of
common stock at a price of $7.00 per share. Net proceeds to the Company, after
deducting underwriting commissions and other expenses of the offering, were
approximately $18,678,000. All classes of previously authorized and issued
preferred stock were automatically converted into common stock upon the closing
of the underwritten public offering. The Company granted the underwriters of the
offering a 30-day option to purchase up to an additional 450,000 shares of
common stock to cover overallotments. In January 1993, the underwriters
exercised the overallotment option and purchased an additional 450,000 shares of
common stock, with net proceeds to the Company of approximately $2,900,000.

On September 30, 1993, the Company sold, in a private placement offering,
2,900,000 shares of common stock at a price of $5.50 per share. Net proceeds to
the Company, after deducting fees and other expenses of the offering, were
approximately $14,710,000. The shares sold in this offering were subsequently
registered for resale to the public by the private placement purchasers.

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

In December 1994 and January 1995, the Company sold in a private placement,
1,130,000 units (the "Units"), consisting of one share of Series Preferred Stock
and one warrant to purchase one share of the Company's common stock. Each
warrant is exercisable for a period of five years from the date of issuance at
an exercise price of $2.385. Net proceeds to the Company, after deducting fees
and other expenses of the offering, were approximately $11,000,000.

In March 1995, the Company's stockholders approved an increase in the
number of authorized shares of common stock from 28,000,000 shares to 50,000,000
shares and an increase in the number of authorized shares of preferred stock
from 5,000,000 shares to 10,000,000 shares.

In June 1995, holders of 30,000 shares of Series Preferred Stock elected to
convert their Series Preferred Stock into 150,000 shares of common stock. In
August 1995, holders of 40,251 shares of Series Preferred Stock elected to
convert their Series Preferred Stock into 201,255 shares of common stock. On
August 31, 1995, after twenty consecutive trading days on which the closing
price of the Company's common stock exceeded $3.975 per share, the remaining
1,059,749 shares of Series Preferred Stock automatically converted into
5,298,745 shares of common stock.

F-13
<PAGE> 63

CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. STOCKHOLDERS' EQUITY -- (CONTINUED)

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

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

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

8. 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,
1995, the Company had available net operating loss carryforwards of
approximately $62,200,000 for income tax purposes. In addition, the Company had
approximately $1,300,000 of unused investment and research and development tax
credits. These net operating loss and tax credit carryforwards will expire at
various dates between 1997 and 2010.

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

The components of deferred income taxes at December 31, 1995 and September
30, 1995 and 1994 were primarily deferred tax assets of approximately
$21,100,000, $20,100,000 and $17,700,000, respectively, of net operating loss
carryforwards and approximately $1,300,000 of investment and research and
development tax credits at each of such dates. The Company has not yet achieved
profitable operations. Accordingly, management believes that the tax benefits as
of December 31, 1995 do not satisfy the realization criteria set forth in SFAS
No. 109 and has recorded a valuation allowance for the entire net asset.

9. 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 $5,000, $21,000, $22,000 and $54,000 for the
three months ended December 31, 1995 and the years ended September 30, 1995,
1994 and 1993, respectively.

10. 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. Effective January 1, 1993, the Board of Directors
authorized matching contributions up to 3% of participants' salaries amounting
to approximately $53,000, $180,000, $175,000 and $124,000 for the three months
ended December 31, 1995 and the years ended September 30, 1995, 1994 and 1993,
respectively.

F-14
<PAGE> 64
================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 13
Price Range of Common Stock................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 14
Selected Consolidated Financial Data....... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operation................................ 16
Business................................... 21
Management................................. 39
Principal Stockholders..................... 42
Underwriting............................... 46
Legal Matters.............................. 47
Experts.................................... 47
Available Information...................... 47
Incorporation of Certain Documents by
Reference................................ 48
Financial Statements....................... F-1
</TABLE>

================================================================================

2,000,000 SHARES

LOGO

COMMON STOCK
------------------

PROSPECTUS

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

HAMBRECHT & QUIST

COWEN & COMPANY

, 1996

================================================================================
<PAGE> 65

PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
The following table sets forth the Registrant's costs and expenses, other
than underwriting discounts and commissions, expected to be incurred in
connection with the issuance and distribution of the securities being
registered. Except for the SEC Registration Fee, the NASD Filing Fee and Nasdaq
National Market Additional Listing Fee, the amounts stated are estimates.

<S> <C>
SEC Registration Fee............................................ $ 7,932
NASD Filing Fee................................................. 2,800
Nasdaq National Market Additional Listing Fee................... 17,500
Transfer Agent and Registrar.................................... 5,000
Legal Fees and Expenses......................................... 235,000
Printing and Engraving Expenses................................. 150,000
Blue Sky Fees and Expenses (including legal fees)............... 22,500
Accounting Fees and Expenses.................................... 35,000
Miscellaneous Expenses.......................................... 24,268
--------
Total......................................................... $500,000
========
</TABLE>

The Registrant shall bear all expenses shown above.

ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Article Ninth of the Registrant's Restated Certificate of Incorporation
provides as follows:

"NINTH. 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same now exists or may hereafter be amended, the
corporation shall indemnify, and advance expenses to, its directors and officers
and any person who is or was serving at the request of the corporation as a
director or officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, provided, however, that except with
respect to proceedings to enforce rights to indemnification, the By-laws of the
corporation may provide that the corporation shall indemnify any director,
officer or such person in connection with a proceeding (or part thereof)
initiated by such director, officer or such other person only if such proceeding
(or part thereof) was authorized by the board of directors of the corporation.
The corporation, by action of its board of directors, may provide
indemnification or advance expenses to employees and agents of the corporation
or other persons only on such terms and conditions and to the extent determined
by the board of directors in its sole and absolute discretion.

2. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.

3. The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this Article NINTH.

4. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall, unless otherwise provided when authorized
or ratified, continue as to a person

II-1
<PAGE> 66

who has ceased to be a director or officer and shall inure to the benefit of the
heirs, executors or administrators of such officer or director. The
indemnification and advancement of expenses that may have been provided to an
employee or agent of the corporation by action of the board of directors
pursuant to the last sentence of Paragraph 1 of this Article NINTH, shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be an employee or agent of the corporation and shall inure to
the benefit of the heirs, executors and administrators of such a person, after
the time such person has ceased to be an employee or agent of the corporation,
only on such terms and conditions and to the extent determined by the board of
directors in its sole discretion."

Article V of the Registrant's Restated By-Laws provides as follows:

"INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 1. Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or an officer of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan (hereinafter an "Indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such Indemnitee in
connection therewith; provided, however, that, except as provided in Section 3
of this Article with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a proceeding (or part thereof) initiated by such Indemnitee only
if such proceeding (or part thereof) was authorized by the board of directors of
the Corporation.

Section 2. Right to Advancement of Expenses. The right to indemnification
conferred in Section 1 of this Article shall include the right to be paid by the
Corporation the expenses (including attorney's fees) incurred in defending any
such proceeding in advance of its final disposition; provided, however, that, if
the Delaware General Corporation Law requires, an advancement of expenses
incurred by an Indemnitee in his capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such Indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf of
such Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such Indemnitee is not entitled to be indemnified for such expenses
under this Section 2 or otherwise. The rights to indemnification and to the
advancement of expenses conferred in Sections 1 and 2 of this Article shall be
contract rights and such rights shall continue as to an Indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the Indemnitee's heirs, executors and administrators. Any repeal or
modification of any of the provisions of this Article shall not adversely affect
any right or protection of an Indemnitee existing at the time of such repeal or
modification.

Section 3. Right of Indemnification to Bring Suit. If a claim under Section
1 of this Article is not paid in full by the Corporation within sixty (60) days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty (20) days, the Indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant

II-2
<PAGE> 67

to the terms of an undertaking, the Indemnitee shall also be entitled to be paid
the expenses of prosecuting or defending such suit. In (i) any suit brought by
the Indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the Indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the Indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article or otherwise shall be on the Corporation.

Section 4. Non-Exclusivity of Rights. The rights to indemnification and to
the advancement of expenses conferred in this Article shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation as amended from time to
time, these by-laws, any agreement, any vote of stockholders or disinterested
directors or otherwise.

Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.

Section 6. Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the board of
directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article with respect to the indemnification and advancement of expenses
of directors and officers of the Corporation."

OTHER INDEMNIFICATION PROVISIONS

The Registrant has obtained insurance which insures the officers and
directors of the Registrant against certain losses and which insures the
Registrant against certain of its obligations to indemnify such officers and
directors.

II-3
<PAGE> 68

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<S> <C>
(1.1) Form of Underwriting Agreement
(4.1) Article FOURTH of Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended December 31, 1992)
(4.2) Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2
to the Registrant's Registration Statement on Form S-1, No. 33-46200)
(5.1) Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., with
respect to the legality of the securities being registered
*(10.1) 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
(23.1) Consent of Deloitte & Touche LLP
(23.2) Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1)
(23.3) Consent of Fox, Bennett and Turner
*(24) Power of Attorney (see Signature Page, II-5)
</TABLE>

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

* Previously filed.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item
15 -- Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

The undersigned Registrant hereby undertakes that:

(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 69

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the town of Hopkinton,
Commonwealth of Massachusetts on the 26th day of June, 1996.

CREATIVE BIOMOLECULES, INC.

By: /s/ WAYNE E. MAYHEW III

--------------------------------------
Wayne E. Mayhew III
Vice President and
Chief Financial Officer,
Treasurer and Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------- ------------------------------------------------ --------------
<C> <S> <C>
/s/ * Chairman of the Board and Director June 26, 1996
- ---------------------------------------
Brian H. Dovey
/s/ * President and Chief Executive Officer and June 26, 1996
- --------------------------------------- Director (principal executive officer)
Michael M. Tarnow
/s/ * Chief Scientific Officer and Director June 26, 1996
- ---------------------------------------
Charles Cohen, Ph.D.
/s/ WAYNE E. MAYHEW III Vice President and Chief Financial Officer, June 26, 1996
- --------------------------------------- Treasurer and Secretary (principal financial
Wayne E. Mayhew III officer)
/s/ * Controller (principal accounting officer) June 26, 1996
- ---------------------------------------
Susan B. Blanton
/s/ * Director June 26, 1996
- ---------------------------------------
Patrick Owen Burns
/s/ * Director June 26, 1996
- ---------------------------------------
Jeremy L. Curnock Cook
/s/ * Director June 26, 1996
- ---------------------------------------
Martyn D. Greenacre
/s/ * Director June 26, 1996
- ---------------------------------------
Arthur J. Hale, M.D.
/s/ * Director June 26, 1996
- ---------------------------------------
Michael Rosenblatt, M.D.
/s/ * Director June 26, 1996
- ---------------------------------------
James R. Tobin
</TABLE>

* By executing his name hereto, Wayne E. Mayhew III is signing this
document on behalf of the persons indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.

<TABLE>
<C> <S> <C>
By: /s/ WAYNE E. MAYHEW III
- --------------------------------------
Wayne E. Mayhew III
(Attorney-in-Fact)
</TABLE>

II-5
<PAGE> 70

EXHIBIT INDEX

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

* Previously filed.

<PAGE> 1
EXHIBIT 1.1

CREATIVE BIOMOLECULES, INC.

2,000,000 SHARES

COMMON STOCK

UNDERWRITING AGREEMENT

_____ __, 1996

HAMBRECHT & QUIST LLC
COWEN & COMPANY
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104

Ladies and Gentlemen:

Creative BioMolecules, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 2,000,000 shares of its authorized but
unissued Common Stock, $0.01 par value (herein called the Common Stock) (said
2,000,000 shares of Common Stock being herein called the Underwritten Stock).
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 300,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.

The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.

1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (herein called the Commission) a registration
statement on Form S-3 (No. 33-_____), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the Securities Act) of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of Rule 430A of the rules and
regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
<PAGE> 2
2

The term Registration Statement as used in this agreement shall mean
such registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a Rule 462(b) registration statement),
and, in the event of any amendment thereto after the effective date of such
registration statement (herein called the Effective Date), shall also mean (from
and after the effectiveness of such amendment) such registration statement as so
amended (including any Rule 462(b) registration statement). The term Prospectus
as used in this Agreement shall mean the prospectus, including the documents
incorporated by reference therein, relating to the Stock first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus, including the documents incorporated by reference
therein, included in such registration statement prior to the time it becomes
effective.

The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

(a) The Company hereby represents and warrants as follows:

(i) The Company meets the requirements for use of Form
S-3 under the Securities Act.

(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property
owned or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified
would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole).

(iii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any materially adverse
<PAGE> 3
3

change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, the Company has not entered into any material transaction not
referred to in the Registration Statement and the Prospectus. Since
such dates, no dividend or distribution of any kind has been declared
or has been paid or made by the Company on its capital stock.

(iv) There are no outstanding options, warrants or other
rights granted by the Company to purchase its Common Stock or other
securities, other than the Stock to be sold pursuant to this Agreement
and as otherwise described in the Prospectus and, to the best of the
knowledge of the Company, no such option, warrant or other right has
been granted to any person, the exercise of which would cause such
person to own more than 5 percent of its Common Stock outstanding
immediately after the offering of the Stock, other than as might result
from the sale of the Stock pursuant to this Agreement and as otherwise
described in the Prospectus.

(v) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus; the Registration
Statement and the Prospectus comply, and on the Closing Date (as
hereinafter defined) and any later date on which Option Stock is to be
purchased, the Prospectus will comply, in all material respects, with
the provisions of the Securities Act and the Securities Exchange Act of
1934, as amended (herein called the Exchange Act) and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a
material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date the Prospectus did not and,
on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (v) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf
of the Underwriters for use in the Registration Statement or the
Prospectus.

(vi) The documents incorporated by reference in the
Prospectus pursuant to Item 12 of Form S-3 under the Securities Act, at
the time they were filed with the Commission, complied in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder and, when read together and
with the other information in the Prospectus, at the time the
Registration Statement became effective and at all times subsequent
thereto up to the Closing Date (and, if any shares of Option Stock are
purchased, up to the Date of Delivery), will not contain an
<PAGE> 4
4

untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading.

(vii) The execution and delivery of this Agreement, the
issuance, sale and delivery of the Stock, the consummation by the
Company of the transactions contemplated in this Agreement and in the
Registration Statement and compliance by the Company with the terms of
this Agreement have been duly authorized by all necessary corporate
action on the part of the Company and do not and will not conflict
with, or result in a breach of, the respective Articles or Certificate
of Incorporation or bylaws (or corporate documents of similar effect)
of the Company or any of its subsidiaries, nor will the performance of
this Agreement and the consummation of the transactions herein
contemplated result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (a) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the property of any of them is bound or (b) any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or over the properties of any of them; and no consent,
approval, authorization or order of any court or governmental agency or
body is required for the consummation by the Company of the
transactions herein and therein contemplated, except such as may be
required under the Securities Act or under the securities or Blue Sky
laws of the various states, or by the National Association of
Securities Dealers, Inc. (herein called the "NASD").

(viii) The Company had at the date indicated a duly
authorized and outstanding capitalization as set forth in the
Prospectus under the caption "Capitalization", and the Common Stock
conforms in all material respects to the description thereof contained
or incorporated by reference in the Prospectus, and such description
conforms in all material respects to the rights set forth in the
instruments defining the same.

(ix) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid
and nonassessable; no holder thereof is or will be subject to personal
liability solely by reason of being such a holder, and none of the
outstanding shares of Common Stock was issued in violation of the
preemptive rights of any stockholder of the Company.

(x) The Stock has been duly authorized and, when issued
and sold to the Underwriters as provided herein, will be duly and
validly issued, fully paid and nonassessable and conforms to the
description thereof in the Prospectus. No further approval or authority
of the stockholders or the Board of Directors of the Company will be
required for the issuance and sale of the Stock as contemplated herein;
no holder thereof will be subject to personal liability solely by
reason of being such a holder; such Stock will not be subject to the
preemptive rights of any stockholder of the Company;
<PAGE> 5
5

and all corporate action required to be taken for the authorization,
issuance and sale of the Stock has been validly and sufficiently taken.

(xi) The Company owns, or possesses adequate rights to
use, all material patents, patent rights, inventions, trade secrets,
licenses, know-how, proprietary techniques, including processes and
substances, trademarks, service marks, trade names and copyrights
described or referred to in the Prospectus, or owned or used by it or
which are necessary for the conduct of its business as described in the
Prospectus (herein collectively called the "Information Property").
Except as disclosed in the Prospectus, the Company has not received any
notice of infringement of, or notice from the holder of any Information
Property or from any person having a proprietary interest in any
Information Property of a conflict with asserted rights of others with
respect to, any Information Property which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
materially adversely affect the business operations, financial
condition, income or business prospects of the Company and its
subsidiaries, taken as a whole.

(xii) The Company holds all material licenses, certificates
and permits from state, federal and other regulatory authorities which
are necessary for the conduct of its business; the Company is not in
violation of its Articles or Certificate of Incorporation or bylaws (or
corporate documents of similar effect). Neither the Company nor its
subsidiaries are in default in the performance or observance of any
provision of any obligation, agreement, covenant or condition contained
in any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which any of them or any of their
respective properties may be bound, or are in violation of any law,
order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, the
violation of which, or default in the performance or observance of
which, would have a material effect on the business affairs or business
prospects, properties, financial condition or earnings of the Company
and its subsidiaries, taken as a whole.

(xiii) Except as set forth in the Prospectus, there is no
action, suit or proceeding, at law or in equity, pending or, to the
best of the Company's knowledge, threatened against the Company or any
of its subsidiaries by a private litigant, by any federal, state or
other commission, board or agency or in any proceeding before any
administrative agency, wherein any unfavorable result or decision could
materially adversely affect the business affairs or business prospects,
properties, financial condition or income or earnings of the Company or
its subsidiaries, taken as a whole, or prevent consummation of the
transactions contemplated hereby; and there are no contracts or
documents of the Company which would be required to be filed as
exhibits to the Registration Statement by the Securities Act and which
have not been filed as exhibits to the Registration Statement.
<PAGE> 6
6

(xiv) The consolidated financial statements of the Company
and its subsidiaries, together with related notes and schedules as set
forth in the Registration Statement or incorporated by reference
therein, present fairly the financial position and the results of
operations of the Company and its subsidiaries on a consolidated basis,
at the indicated dates and for the indicated periods, in accordance
with generally accepted accounting principles. Such financial
statements have been prepared in accordance with generally accepted
accounting principles, consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of
results for such periods have been made. The summary financial data
included in the Registration Statement present fairly the information
shown therein and have been compiled on a basis consistent with the
financial statements presented therein.

(xv) The Company has fulfilled its obligations, if any,
under the minimum funding standards of Section 302 of the United States
Employee Retirement Income Security Act of 1974 (herein called "ERISA")
and the regulations and published interpretations thereunder with
respect to each "plan" (as defined in ERISA and such regulations and
published interpretations) in which employees of the Company are
eligible to participate, and each such plan is in compliance in all
material respects with the presently applicable provisions of ERISA and
such regulations and published interpretations, and have not incurred
any unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such
plan under Title IV of ERISA.

(xvi) No authorization, approval, consent or license of any
government, governmental instrumentality or court, domestic or foreign
(other than under the Securities Act, the securities or blue sky laws
of the various states and the NASD), is required for the valid
authorization, issuance and delivery of the Stock or the execution,
delivery or performance of this Agreement by the Company.

(xvii) Deloitte & Touche LLP, who have certified certain of
the financial statements filed with the Commission as part of or
incorporated by reference in the Registration Statement, are
independent public accountants with respect to the Company as required
by the Securities Act.

(xviii) Except as set forth in the Registration Statement and
the Prospectus, each of the Company and its subsidiaries has filed all
necessary United States income tax returns and all necessary state
income, franchise, sales and use tax returns as required by law or
regulation, domestic or foreign, and has paid all taxes shown thereon
as due, and each of the Company and its subsidiaries has no knowledge
of any tax deficiency which has been or might be asserted against any
of them which would materially and adversely affect any of the
businesses or properties of the Company and its subsidiaries taken as a
whole; to the knowledge of the Company all tax liabilities are
adequately provided for on the books of the Company and its
subsidiaries.
<PAGE> 7
7

(xix) The Company is not involved in any labor disputes
which, either individually or in the aggregate, could have a material
adverse effect on the business or operations of the Company, nor, to
the knowledge of the Company, is any such dispute threatened.

(xx) All material contracts, leases and agreements
referred to in or filed as exhibits to the Registration Statement to
which the Company or any subsidiary is a party, or by which the Company
or any subsidiary is bound, are in full force and effect.

(xxi) Prior to the Closing Date the Stock to be issued and
sold by the Company will be authorized for listing by The Nasdaq
National Market upon official notice of issuance.

3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.

(a) On the basis of the representations and warranties
and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell 2,000,000 shares of the Underwritten Stock to
the several Underwriters and each of the Underwriters agrees to
purchase from the Company the respective aggregate number of shares of
Underwritten Stock set forth opposite its name in Schedule I. The price
at which such shares of Underwritten Stock shall be sold by the Company
and purchased by the several Underwriters shall be $___ per share. In
making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraphs (b) and (c) of this
Section 3, the agreement of each Underwriter is to purchase only the
respective number of shares of the Underwritten Stock specified in
Schedule I.

(b) If for any reason one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 8 or
9 hereof) to purchase and pay for the number of shares of the Stock
agreed to be purchased by such Underwriter or Underwriters, the Company
shall immediately give notice thereof to you, and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by
you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon
the terms herein set forth, all or any part of the shares of the Stock
which such defaulting Underwriter or Underwriters agreed to purchase.
If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of
the Stock which each non-defaulting Underwriter is otherwise obligated
to purchase under this Agreement shall be automatically increased on a
pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to
purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares
of the Stock exceeds 10% of the total number of shares of the Stock
which
<PAGE> 8
8

all Underwriters agreed to purchase hereunder. If the total number of
shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company shall have the right,
within 24 hours next succeeding the 24-hour period above referred to,
to make arrangements with other underwriters or purchasers satisfactory
to you for purchase of such shares and portion on the terms herein set
forth. In any such case, either you or the Company shall have the right
to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed
as the Closing Date pursuant to said Section 5 in order that any
necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements
within the 24-hour periods stated above for the purchase of all the
shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of
the Company to any non-defaulting Underwriter and without any liability
on the part of any non-defaulting Underwriter to the Company. Nothing
in this paragraph (b), and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.

(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions
herein set forth, the Company grants an option to the several
Underwriters to purchase, severally and not jointly, up to 300,000
shares in the aggregate of the Option Stock from the Company at the
same price per share as the Underwriters shall pay for the Underwritten
Stock. Said option may be exercised only to cover over-allotments in
the sale of the Underwritten Stock by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on
or before the thirtieth day after the date of this Agreement upon
written or telegraphic notice by you to the Company setting forth the
aggregate number of shares of the Option Stock as to which the several
Underwriters are exercising the option. Delivery of certificates for
the shares of Option Stock, and payment therefor, shall be made as
provided in Section 5 hereof. The number of shares of the Option Stock
to be purchased by each Underwriter shall be the same percentage of the
total number of shares of the Option Stock to be purchased by the
several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem
advisable to avoid fractional shares.

4. OFFERING BY UNDERWRITERS.

(a) The terms of the public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public
offering price after the closing of the public offering and increase or
decrease the concessions and discounts to dealers as they may
determine.
<PAGE> 9
9

(b) The information set forth in the last paragraph on
the front cover page and under "Underwriting" in the Registration
Statement, any Preliminary Prospectus and the Prospectus relating to
the Stock filed by the Company (insofar as such information relates to
the Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on
behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.

5. DELIVERY OF AND PAYMENT FOR THE STOCK.

(a) Delivery of certificates for the shares of the
Underwritten Stock and the Option Stock (if the option granted by
Section 3(c) hereof shall have been exercised not later than 10:00
A.M., New York City time, on the date two business days preceding the
Closing Date), and payment therefor, shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, at
10:00 a.m., New York City time, on the [fourth] business day after the
date of this Agreement, or at such time on such other day, not later
than seven full business days after such [fourth] business day, as
shall be agreed upon in writing by the Company and you. The date and
hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.

(b) If the option granted by Section 3(c) hereof shall be
exercised after 10:00 a.m., New York City time, on the date two
business days preceding the Closing Date, delivery of certificates for
the shares of Option Stock, and payment therefor, shall be made at the
offices of Shearman & Sterling, 599 Lexington Avenue, New York, New
York 10022, at 10:00 a.m., New York City time, on the third business
day after the exercise of such option.

(c) Payment for the Stock purchased from the Company
shall be made to the Company or its order by one or more certified or
official bank check or checks in same day funds. Such payment shall be
made upon delivery of certificates for the Stock to you for the
respective accounts of the several Underwriters against receipt
therefor signed by you. Certificates for the Stock to be delivered to
you shall be registered in such name or names and shall be in such
denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one
business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day
prior to the Closing Date or, in the case of the Option Stock, by 3:00
p.m., New York time, on the business day preceding the date of
purchase.

It is understood that you, individually and not on behalf of
the Underwriters, may (but shall not be obligated to) make payment to
the Company for shares to be purchased by any Underwriter whose check
shall not have been received by you on the Closing
<PAGE> 10
10

Date or any later date on which Option Stock is purchased for the
account of such Underwriter. Any such payment by you shall not relieve
such Underwriter from any of its obligations hereunder.

6. FURTHER AGREEMENTS OF THE COMPANY. The Company
covenants and agrees as follows:

(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which you
shall not previously have been advised and furnished with a copy or to
which you shall have reasonably objected in writing or which is not in
compliance with the Securities Act or the rules and regulations of the
Commission.

(b) The Company will promptly notify each Underwriter in
the event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, (iii)
the institution or notice of intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice
of the initiation or threatening of any proceeding for such purpose.
The Company will make every reasonable effort to prevent the issuance
of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.

(c) The Company will (i) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as
originally filed and of each amendment thereto filed prior to the time
the Registration Statement becomes effective and, promptly upon the
filing thereof, a signed copy of each post-effective amendment, if any,
to the Registration Statement (together with, in each case, all
exhibits thereto unless previously furnished to you) and will also
deliver to you, for distribution to the Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to
the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter
or dealer, likewise send to the Underwriters as many additional copies
of the Prospectus and as many copies of any supplement to the
Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated
by the Securities Act.
<PAGE> 11
11

(d) If at any time during the period in which a
prospectus is required by law to be delivered by an Underwriter or
dealer any event relating to or affecting the Company, or of which the
Company shall be advised in writing by you, shall occur as a result of
which it is necessary, in the opinion of counsel for the Company or of
counsel for the Underwriters, to supplement or amend the Prospectus in
order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of
the Stock, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters
shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion
either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented or
amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters
and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance
with the applicable provisions of the Securities Act and the applicable
rules and regulations thereunder for such period.

(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any
post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended prospectus proposed to be
filed.

(f) The Company will cooperate, when and as requested by
you, in the qualification of the Stock for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate
and, during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, in keeping such qualifications
in good standing under said securities or blue sky laws; provided,
however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will,
from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for
distribution of the Stock.

(g) During a period of five years commencing with the
date hereof, the Company will furnish to you, and to each Underwriter
who may so request in writing, copies of all periodic and special
reports furnished to stockholders of the Company and of all
information, documents and reports filed with the Commission.
<PAGE> 12
12

(h) Not later than the 45th day following the end of the
fiscal quarter first occurring after the first anniversary of the
Effective Date, the Company will make generally available to its
security holders an earnings statement in accordance with Section 11(a)
of the Securities Act and Rule 158 thereunder.

(i) The Company agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement,
including all costs and expenses incident to (i) the preparation,
printing and filing with the Commission and the National Association of
Securities Dealers, Inc. of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters
of copies of any Preliminary Prospectus and of the several documents
required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph
(d) of this Section 6, (v) the furnishing to you and the Underwriters
of the reports and information referred to in paragraph (g) of this
Section 6 and (vi) the printing and issuance of stock certificates,
including the transfer agent's fees.

(j) The Company agrees to reimburse you, for the account
of the several Underwriters, for blue sky fees and related
disbursements (including counsel fees and disbursements and cost of
printing memoranda for the Underwriters) paid by or for the account of
the Underwriters or their counsel in qualifying the Stock under state
securities or blue sky laws and in the review of the offering by the
NASD.

(k) The Company hereby agrees that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
the Company will not, for a period of 90 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any
short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for
or any rights to purchase or acquire Common Stock or (ii) enter into
any swap or other agreement that transfers, in whole or in part, any of
the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Stock to
be sold to the Underwriters pursuant to this Agreement, (B) shares of
Common Stock issued by the Company upon the exercise of options granted
under the stock option plans of the Company (the "Option Plans") or
upon the exercise of warrants outstanding as of the date hereof, all as
described in footnote 1 to the table under the caption "Capitalization"
in the Preliminary Prospectus, and (C) options to purchase Common Stock
granted under the Option Plans.
<PAGE> 13
13

(l) The Company is familiar with the Investment Company
Act of 1940, as amended, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner to ensure that
the Company was not and will not be an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.

7. INDEMNIFICATION AND CONTRIBUTION.

(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
(excluding the documents incorporated therein by reference) and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the Company
with paragraph (c) of Section
<PAGE> 14
14

6 hereof. The indemnity agreements of the Company contained in this paragraph
(a) and the representations and warranties of the Company contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.

(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.

(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the
<PAGE> 15
15

Notice, but the omission so to notify such indemnifying party or parties of any
such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.

(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in
<PAGE> 16
16

respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Stock received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Stock. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.

The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).

(e) The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who controls such Underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
<PAGE> 17
17

8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company if after
the date of this Agreement trading in the Common Stock shall have been
suspended, or if there shall have occurred (i) the engagement in hostilities or
an escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof,
(ii) any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Stock impracticable, (iii)
suspension of trading in securities generally or a material adverse decline in
value of securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq National Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.

9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company of all its obligations to be performed hereunder
at or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:

(a) The Registration Statement shall have become
effective; and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings therefor shall be pending or
threatened by the Commission.

(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing
the Stock, all corporate proceedings and other legal matters incident
to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Shearman &
Sterling, counsel for the Underwriters, and such counsel shall have
been furnished with such documents and
<PAGE> 18
18

information as they may reasonably have requested to enable them to
pass upon the matters referred to in this subsection.

(c) You shall have received from Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., counsel for the Company, from Testa,
Hurwitz & Thibeault, patent counsel for the Company and from Fox,
Bennett & Turner, regulatory counsel for the Company, opinions,
addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex A, Annex B and Annex C hereto, respectively,
and if Option Stock is purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of
such later date.

(d) You shall be satisfied that (i) as of the Effective
Date, the statements made in the Registration Statement and the
Prospectus were true and correct and neither the Registration Statement
nor the Prospectus omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein,
respectively, not misleading, (ii) since the Effective Date, no event
has occurred which should have been set forth in a supplement or
amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
business, properties, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of business, the
Company has not entered into any material transaction not referred to
in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, (iv) neither the
Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and
the Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company or any of its subsidiaries is a party
or of which property of the Company or any of its subsidiaries is the
subject which are material and which are not disclosed in the
Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to
be filed as exhibits to the Registration Statement which have not been
filed as required, (vii) the representations and warranties of the
Company herein are true and correct in all material respects as of the
Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and (viii) there has not been any
material change in the market for securities in general or in
political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment
to make a public offering of the Stock, or a material adverse change in
market levels for securities in general (or those of companies in
particular) or financial or economic conditions which render it
inadvisable to proceed.
<PAGE> 19
19

(e) You shall have received on the Closing Date and on
any later date on which Option Stock is purchased a certificate, dated
the Closing Date or such later date, as the case may be, and signed by
the President and the Chief Financial Officer of the Company, stating
that the respective signers of said certificate have carefully examined
the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein and any supplements or
amendments thereto, and that the statements included in clauses (i)
through (vii) of paragraph (d) of this Section 9 are true and correct.

(f) You shall have received from Deloitte & Touche LLP, a
letter or letters, addressed to the Underwriters and dated the Closing
Date and any later date on which Option Stock is purchased, confirming
that they are independent public accountants with respect to the
Company within the meaning of the Securities Act and the applicable
published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with
the execution of this Agreement (herein called the Original Letter),
but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased
(i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or
such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original
Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of its
subsidiaries which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Stock or the
purchase of the Option Stock as contemplated by the Prospectus.

(g) You shall have been furnished evidence in usual
written or telegraphic form from the appropriate authorities of the
several jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.

(h) Prior to the Closing Date, the Stock to be issued and
sold by the Company shall have been duly authorized for listing by the
Nasdaq National Market upon official notice of issuance.

(i) On or prior to the Closing Date, you shall have
received from all directors and executive officers of the Company, and
from the holders listed on Schedule II hereto of the Common Stock,
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC,
stating that without the prior written consent of Hambrecht & Quist LLC
on behalf of the Underwriters, such person or entity will not, for a
period of 90 days following the effective date of the Registration
Statement, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of Common Stock or any securities
convertible into or
<PAGE> 20
20

exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock, whether any such transaction described above is
to be settled by delivery of Common Stock or such other securities, in
cash or otherwise.

All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Shearman & Sterling, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.

In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.

10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of
the Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.

In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.

11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such
<PAGE> 21
21

payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.

12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.

13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104, Attention: William R.
Timken; and if to the Company, shall be mailed, telegraphed or delivered to
[Creative BioMolecules, Inc., 45 South Street, Hopkinton, Massachusetts 01748
Attention: Wayne E. Mayhew III]. All notices given by telegraph shall be
promptly confirmed by letter.

14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or their respective directors or officers, and (c)
delivery and payment for the Stock under this Agreement; provided, however, that
if this Agreement is terminated prior to the Closing Date, the provisions of
paragraph (k) of Section 6 hereof shall be of no further force or effect.

This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
<PAGE> 22
22

Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.

Very truly yours,

CREATIVE BIOMOLECULES, INC.

By_______________________________
Name:
Title:

The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.

HAMBRECHT & QUIST LLC
COWEN & COMPANY
By Hambrecht & Quist LLC

By______________________________________
Managing Director

Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE> 23
SCHEDULE I

UNDERWRITERS

<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC...................................................

Cowen & Company.........................................................
---------

Total........................................................
=========
</TABLE>

<PAGE> 1
EXHIBIT 5.1

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111

701 Pennsylvania Avenue, N.W. Telephone: 617/542-6000
Washington, D.C. 20004 Fax: 617/542-2241
Telephone: 202/434-7300
Fax: 202/434-7400

June 27, 1996

Creative BioMolecules, Inc.
45 South Street
Hopkinton, Massachusetts 01748

Gentlemen:

We have acted as counsel to Creative BioMolecules, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-3 (the "Registration Statement"), pursuant to which the
Company is registering under the Securities Act of 1933, as amended, a total of
2,300,000 shares (including 300,000 shares for an over-allotment option granted
to the underwriters) (the "Shares") of its common stock, $.01 par value per
share (the "Common Stock"). The Shares are to be sold to a group of underwriters
(the "Underwriters") who will be parties to an Underwriting Agreement with the
Company, the form of which Agreement has been filed as an exhibit to the
Registration Statement. This opinion is being rendered in connection with the
filing of the Registration Statement.

In connection with this opinion, we have examined the Company's
Restated Certificate of Incorporation and Restated By-Laws, as amended to date;
such records of the corporate proceedings of the Company as we deemed material;
and the Registration Statement and the exhibits thereto filed with the
Commission.

In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies.

Based upon the foregoing, we are of the opinion that, (i) the Shares
have been duly and validly authorized by the Company, and (ii) the Shares, when
issued and delivered by the Company against payment therefor by the
Underwriters, will be duly and validly issued, fully paid and non-assessable
shares of the Common Stock, free of preemptive rights.

Our opinion is limited to the General Corporation Law of the State of
Delaware, and we express no opinion with respect to the laws of any other
jurisdiction. No opinion is expressed herein with respect to the qualification
of the Shares under the securities or blue sky laws of any state or any foreign
jurisdiction.
<PAGE> 2
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Creative BioMolecules, Inc.
June 27, 1996
Page 2

We understand that you wish to file this opinion as an exhibit to the
Registration Statement, and we hereby consent thereto. We hereby further consent
to the reference to us under the caption "Legal Matters" in the prospectus
included in the Registration Statement.

Very truly yours,

/s/ Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Creative
BioMolecules, Inc. on Form S-3 of our report dated April 3, 1996, appearing in
the Prospectus, which is part of this Registration Statement. We also consent to
the incorporation by reference in this Registration Statement of Creative
BioMolecules, Inc. on Form S-3 of our reports on the financial statements of
Creative BioMolecules, Inc. dated April 3, 1996 appearing in the Current Report
on Form 8-K, dated December 31, 1995, and November 15, 1995, appearing in the
Annual Report on Form 10-K, of Creative BioMolecules, Inc. for the year ended
September 30, 1995, and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

June 25, 1996

<PAGE> 1

EXHIBIT 23.3

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

We consent to the reference of our firm under the heading "Experts" in the
Prospectus constituting part of this Registration Statement on Form S-3.

/s/ Fox, Bennett & Turner

Washington, D.C.

As of June 26, 1996.