As filed with the Commission on October 6, 1997 File No. 333-_____

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------
                         FORM S-8 REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933

                                   -----------

                             CYTOTHERAPEUTICS, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                        94-3078125
- ------------------------------------          ----------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
   incorporation or organization)

                               Two Richmond Square
                         Providence, Rhode Island 02906
          ------------------------------------------------------------
          (Address of principal executive offices, including zip code)

                     StemCells, Inc. 1996 Stock Option Plan

                           1997 CytoTherapeutics, Inc.
                      StemCells Research Stock Option Plan

                            (Full title of the plan)

                          Frederic A. Eustis, III, Esq.
                                    Secretary
                             CytoTherapeutics, Inc.
                               Two Richmond Square
                         Providence, Rhode Island 02906
                                 (410) 272-3310
- --------------------------------------------------------------------------------
            (Name, address and telephone number of agent for service)

CALCULATION OF REGISTRATION FEE Title of Securities Amount to be Proposed maximum Proposed maximum Amount of to be registered registered offering price per aggregate offering registration fee share(1) price (1) Common Stock, 2,182,620 $4.8459 $10,576,827 $3206.00 par value $0.01 shares
(1) The maximum aggregate offering price for the shares of the Registrant's Common Stock, $.01 par value offered hereby is based (i) on the weighted average exercise price of the 1,782,620 shares issuable upon the exercise of options previously granted and (ii) for the remaining shares is estimated solely for the purpose of determining the registration fee pursuant to Rule 457(h) on the basis of the average of the high and low prices of CytoTherapeutics, Inc. Common Stock, par value $0.01, reported on NASDAQ/NMS on September 30, 1997. -1- PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE. The Registrant hereby incorporates the following documents herein by reference: (a) The Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (which incorporates by reference certain information from the Registrant's Proxy Statement relating to the 1997 Annual Meeting of Stockholders). (b) The Registrant's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997. (c) The Registrant's Current Report on Form 8-K filed on August 18, 1997. (d) The Registrant's Current Report on Form 8-K filed on October 6, 1997. (e) The description of the common stock of the Registrant contained in the Registrant's Registration Statement on Form 8-A (File No. 1-19871), including all amendments and reports filed for the purpose of updating such description. All documents subsequently filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold shall be deemed to be incorporated by reference herein and to be a part hereof from the date of the filing of such documents. ITEM 4. DESCRIPTION OF SECURITIES. Not required. ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL. No material interests. ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law, as amended, provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative (other than an action by or in the right of the corporation) by reason of the fact that he 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 expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, against expenses actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no -2- indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 102(b)(7) of the Delaware General Corporation Law, as amended, permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (relating to unlawful payment of dividends and unlawful stock purchase and redemption), or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Restated Certificate of Incorporation, as amended, provides that the Company's Directors shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liabilities is not permitted under the Delaware General Corporation Law as in effect at the time such liability is determined. The Restated Certificate of Incorporation, as amended, further provides that the Registrant shall indemnify its directors and officers to the full extent permitted by the law of the State of Delaware. ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED. Not applicable. ITEM 8. EXHIBITS. -------- Exhibit 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-1, File No. 33-45739). 5.1 Opinion of Ropes & Gray. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ropes & Gray (contained in the opinion filed as Exhibit 5.1 to this registration statement). 24.1 Powers of Attorney (included in Part II of this registration statement under the caption "Signatures"). 99.1. StemCells, Inc. 1996 Stock Option Plan. 99.2 Registrant's 1997 StemCells Research Stock Option Plan the (the "1997 Plan"). 99.3. Form of Performance -- Based Incentive Option Agreement Issued Under the 1997 Plan. -3- ITEM 9. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in this registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above shall not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) 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. (c) 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 foregoing provisions, 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. -4- SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this registration statement on Form S-8 to be signed on its behalf by the undersigned thereunto duly authorized, in Providence, Rhode Island, on September 30, 1997. By /s/Seth A. Rudnick -------------------------------------- Seth A. Rudnick Chairman and Chief Executive Officer and Director Each person whose signature appears below constitutes and appoints Seth A. Rudnick, Frederic A. Eustis and John McBride, and each of them singly, his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement on Form S-8 to be filed by CytoTherapeutics, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement on Form S-8 has been signed below by the following persons in the capacities shown. Signature Capacity Date - --------- -------- ---- Chairman, Chief Executive Officer September 30, 1997 /s/ Seth A. Rudnick and Director (principal executive - ------------------- officer) Seth A. Rudnick Chief Financial Officer, Vice September 30, 1997 /s/ John McBride President and Treasurer (principal - ------------------- financial officer) John McBride Controller (principal accounting September 30, 1997 /s/ Suzanne Fleming officer) - ------------------- Suzanne Fleming Director September 30, 1997 /s/ Edwin C. Cadman - ------------------- Edwin C. Cadman -5- Signature Capacity Date - ---------- -------- ---- /s/ Donald R. Conklin Director September 30, 1997 - ---------------------- Donald R. Conklin /s/ Patrick Aebischer Director September 30, 1997 - ---------------------- Patrick Aebischer /s/ Mark J. Levin Director September 30, 1997 - ---------------------- Mark J. Levin /s/ Richard J. Ramsden Director September 30, 1997 - ---------------------- Richard J. Ramsden /s/ Peter K. Simon Director September 30, 1997 - ---------------------- Peter K. Simon -6-





                                                                     Exhibit 5.1

                                 October 6, 1997


CytoTherapeutics, Inc.
2 Richmond Square
Providence, RI  02906

Ladies and Gentlemen:

         This  opinion is  furnished to you in  connection  with a  registration
statement on Form S-8 (the "Registration Statement"),  filed with the Securities
and Exchange  Commission  (the  "Commission")  under the Securities  Plan Act of
1933,  as amended,  for the  registration  of  2,000,000  shares of common stock
("Common Stock"), $.01 par value (the "Plan Shares"), of CytoTherapeutics,  Inc.
(the  "Company")  issuable upon the exercise of options  granted under Company's
1997  StemCells  Research Stock Option Plan (the "1997 Plan") and 182,620 shares
of Common Stock (the  "Assumed  Shares" and together  with the Plan Shares,  the
"Shares")  issuable  upon the  exercise of options  assumed by the Company  (the
"Options") that had previously been granted under the StemCells, Inc. 1996 Stock
Option Plan (the "StemCells Plan").

         We have acted as counsel  for the Company in  connection  with the 1997
Plan and the  assumption  of the Options and are familiar with the actions taken
by the Company in  connection  therewith.  For  purposes of this opinion we have
examined the Registration  Statement,  the 1997 Plan, the Options and such other
documents as we deemed appropriate.

         Based upon the  foregoing,  we are of the opinion  that the Shares have
been duly  authorized,  and the Shares,  when issued and sold in accordance with
the terms of the 1997 Plan and the Options,  will be validly issued,  fully paid
and non-assessable.

         We hereby  consent  to your  filing  this  opinion as an exhibit to the
Registration  Statement and to all  references to our firm included in or made a
part of this Registration Statement.

                                                              Very truly yours,

                                                              /s/ Ropes & Gray
                                                              ----------------
                                                              Ropes & Gray









                                                                    Exhibit 23.1



                         CONSENT OF INDEPENDENT AUDITORS


         We  consent  to the  incorporation  by  reference  in the  Registration
Statement (Form S-8)  pertaining to the StemCells,  Inc. 1996 Stock Plan and the
1997   CytoTherapeutics,   Inc.   StemCells   Research   Stock  Option  Plan  of
CytoTherapeutics, Inc. of our report dated February 6, 1997, except for Note 17,
as to which the date is February  13,  1997,  with  respect to the  consolidated
financial  statements of  CytoTherapeutics,  Inc.  included in its Annual Report
(Form 10-K) for the year ended December 31, 1996,  filed with the Securities and
Exchange Commission.


                                                          /s/ Ernst & Young LLP
                                                          ----------------------
                                                          ERNST & YOUNG LLP

Boston, Massachusetts
October 2, 1997







                                                                    Exhibit 99.1

                                 STEMCELLS, INC.
                                 1996 STOCK PLAN


         1. Purposes of the Plan. The purposes of this Stock Plan are to attract
and  retain  the  best   available   personnel  for  positions  of   substantial
responsibility,  to provide  additional  incentive to  Employees,  Directors and
Consultants  and to promote  the  success  of the  Company's  business.  Options
granted  under the Plan may be Incentive  Stock  Options or  Nonstatutory  Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.

         2.       Definitions.  As used herein, the following definitions shall 
                  apply:

                  a.       "Administrator" means the Board or any of its 
                           Committees as shall be administering the Plan in 
                           accordance with Section 4 hereof.

                  b.       "Applicable Laws" means the requirements relating to 
                           the administration of stock option plans under U.S. 
                           state corporate laws, U.S. federal and state 
                           securities laws, the Code, any stock exchange or 
                           quotation system on which the Common Stock is listed 
                           or quoted and the applicable laws of any foreign 
                           country or jurisdiction where Options or Stock 
                           Purchase Rights are granted under the Plan.

                  c.       "Board" means the Board of Directors of the Company.

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

                  e.       "Committee" means a committee of Directors appointed 
                           by the Board in accordance with Section 4 hereof.

                  f.       "Common Stock" means the Common Stock of the Company.

                  g.       "Company" means StemCells, Inc., a California 
                           corporation.

                  h.       "Consultant" means any person who is engaged by the 
                           Company or any Parent or Subsidiary to render 
                           consulting or advisory services to such entity.

                  i.       "Director" means a member of the Board of Directors 
                           of the Company.



                                        1





                  j.       "Employee" means any person, including Officers and 
                           Directors, employed by the Company or any Parent or 
                           Subsidiary of the Company.  A Service Provider shall 
                           not cease to be an Employee in the case of (i) any 
                           leave of absence approved by the Company or (ii) 
                           transfers between locations of the Company or between
                           the Company, its Parent, any Subsidiary, or any
                           successor.  For purposes of Incentive Stock Options, 
                           no such leave may exceed ninety days, unless 
                           reemployment upon expiration of such leave is
                           guaranteed by statute or contract.  If reemployment 
                           upon expiration of a leave of absence approved by the
                           Company is not so guaranteed, on the 181st day of 
                           such leave any Incentive Stock Option held by the 
                           Optionee shall cease to be treated as an Incentive 
                           Stock Option and shall be treated for tax purposes as
                           a Nonstatutory Stock Option.  Neither service as a
                           Director nor payment of a director's fee by the 
                           Company shall be sufficient to constitute 
                           "employment" by the Company.

                  k.       "Exchange Act" means the Securities Exchange Act of 
                           1934, as amended.

                  l.       "Fair Market Value" means, as of any date, the value 
                           of Common Stock determined as follows:

                                    i.      If the Common Stock is listed on any
                                            established stock exchange or a 
                                            national market system, including 
                                            without limitation the NASDAQ 
                                            National Market or The NASDAQ
                                            SmallCap Market of The NASDAQ Stock 
                                            Market, its Fair Market Value shall 
                                            be the closing sales price for such 
                                            stock (or the closing bid, if no 
                                            sales were reported) as quoted on
                                            such exchange or system for the last
                                            market trading day prior to the time
                                            of determination, as reported in The
                                            Wall Street Journal or such other 
                                            source as the Administrator
                                            deems reliable;

                                    ii.     If the  Common  Stock  is  regularly
                                            quoted  by a  recognized  securities
                                            dealer  but  selling  prices are not
                                            reported,   its  Fair  Market  Value
                                            shall be the mean  between  the high
                                            bid and  low  asked  prices  for the
                                            Common  Stock  on  the  last  market
                                            trading  day  prior  to  the  day of
                                            determination; or

                                    iii.    In  the  absence  of an  established
                                            market  for the  Common  Stock,  the
                                            Fair Market Value  thereof  shall be
                                            determined  in  good  faith  by  the
                                            Administrator.

                  m.       "Incentive Stock Option" means an Option intended to 
                           qualify as an incentive stock option within the 
                           meaning of Section 422 of the Code.


                                        2






                  n.       "Nonstatutory Stock Option" means an Option not 
                           intended to qualify as an Incentive Stock Option.

                  o.       "Officer" means a person who is an officer of the 
                           Company within the meaning of Section 16 of the 
                           Exchange Act and the rules and regulations
                           promulgated thereunder.

                  p.       "Option" means a stock option granted pursuant to the
                           Plan.

                  q.       "Option Agreement" means a written or electronic 
                           agreement between the Company and an Optionee 
                           evidencing the terms and conditions of an
                           individual Option grant.  The Option Agreement is 
                           subject to the terms and conditions of the Plan.

                  r.       "Option Exchange Program"  means a program whereby 
                           outstanding Options are exchanged for Options with a 
                           lower exercise price.

                  s.       "Optioned Stock" means the Common Stock subject to an
                           Option or a Stock Purchase Right.

                  t.       "Optionee" means the holder of an outstanding Option 
                           or Stock Purchase Right granted under the Plan.

                  u.       "Parent" means a "parent corporation," whether now or
                           hereafter existing,as defined in Section 424(e) of 
                           the Code.

                  v.       "Plan" means this 1996 Stock Plan.

                  w.       "Restricted Stock" means shares of Common Stock 
                           acquired pursuant to a grant of a Stock Purchase 
                           Right under Section 11 below.

                  x.       "Section 16(b)" means Section 16(b) of the Securities
                           Exchange Act of 1934, as amended.

                  y.       "Service Provider" means an Employee, Director or 
                           consultant.

                  z.       "Share" means a share of the Common Stock, as 
                           adjusted in accordance with Section 12 below.

                  aa.      "Stock Purchase Right" means a right to purchase 
                           Common Stock pursuant to Section 11 below.



                                        3





                  bb.      "Subsidiary" means a "subsidiary corporation,
                           " whether now or hereafter existing, as defined in 
                           Section 424(f) of the Code.

         3.       Stock Subject to the Plan.  Subject to the provisions of 
Section 12 of the Plan, the maximum aggregate number of Shares which may be 
subject to option and sold under the Plan is 120,000 Shares.  The Shares may be 
authorized but unissued, or reacquired Common Stock.

                  If an  Option  or Stock  Purchase  Right  expires  or  becomes
unexercisable  without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become  available for future grant or sale under the Plan (unless the Plan
has terminated).  However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become  available  for future  distribution  under the
Plan,  except that if Shares of Restricted  Stock are repurchased by the Company
at their original  purchase price, such Shares shall become available for future
grant under the Plan.

         4.       Administration of the Plan.

                  a.       The Plan shall be administered by the Board or a 
                           Committee appointed by the Board, which Committee 
                           shall be constituted to comply with Applicable
                           Laws.

                  b.       Powers   of  the   Administrator.   Subject   to  the
                           provisions  of  the  Plan  and,  in  the  case  of  a
                           Committee, the specific duties delegated by the Board
                           to such Committee, and subject to the approval of any
                           relevant  authorities,  the Administrator  shall have
                           the authority in its discretion.

                                    i.      to determine the Fair Market Value;

                                    ii.     to select the Service Providers to 
                                            whom Options and Stock Purchase 
                                            Rights may from time to time be 
                                            granted hereunder;

                                    iii.    to determine the number of Shares to
                                            be covered by each such award 
                                            granted hereunder;

                                    iv.     to approve forms of agreement for 
                                            use under the Plan;

                                    v.      to determine the terms and 
                                            conditions, of any Option or Stock 
                                            Purchase Right granted hereunder.  
                                            Such terms and conditions include, 
                                            but are not limited to, the exercise
                                            price, the time or times when 
                                            Options or Stock Purchase Rights
                                            may be exercised (which may be based
                                            on performance


                                        4





                                            criteria),  any vesting acceleration
                                            or     waiver     of      forfeiture
                                            restrictions, and any restriction or
                                            limitation  regarding  any Option or
                                            Stock  Purchase  Right or the Common
                                            Stock  relating  thereto,  based  in
                                            each  case  on such  factors  as the
                                            Administrator,     in    its    sole
                                            discretion, shall determine;

                                    vi.     to determine whether and under what 
                                            circumstances an Option may be 
                                            settled in cash under subsection 
                                            9(f) instead of Common Stock;

                                    vii.    to reduce the exercise price of any 
                                            Option to the then current Fair 
                                            Market Value if the Fair Market 
                                            Value of the Common Stock covered by
                                            such Option has declined since
                                            the date the Option was granted;

                                    viii.   to initiate an Option Exchange 
                                            Program;

                                    ix.     to prescribe, amend and rescind 
                                            rules and regulations relating to 
                                            the Plan, including rules and 
                                            regulations relating to sub-plans 
                                            established for the purpose of 
                                            qualifying for preferred tax 
                                            treatment under foreign tax laws;

                                    x.      to allow Optionees to satisfy 
                                            withholding tax obligations by
                                            electing to have the Company 
                                            withhold from the Shares to be 
                                            issued upon exercise of an Option or
                                            Stock Purchase Right that number of 
                                            Shares having a Fair Market Value
                                            equal to he amount required to be 
                                            withheld.  The Fair Market Value of 
                                            the Shares to be withheld shall be
                                            determined on the date that the 
                                            amount of tax to be withheld is to 
                                            be determined.  All elections by 
                                            Optionees to have Shares withheld 
                                            for this purpose shall be made in 
                                            such form and under such conditions 
                                            as the Administrator may deem
                                            necessary advisable; and

                                    xi.     to construe and interpret the terms 
                                            of the Plan and awards
                                            granted pursuant to the Plan.

                  c.       Effect of Administrator's Decision.  All decisions, 
                           determinations and interpretations of the 
                           Administrator shall be final and binding on all
                           Optionees.

         5.       Eligibility.



                                        5





                  a.       Nonstatutory Stock Options and Stock Purchase Rights 
                           may be granted to Service Providers.  Incentive Stock
                           Options may be granted only to Employees.

                  b.       Each Option shall be designated in the Option 
                           Agreement as either an Incentive Stock Option or a 
                           Nonstatutory Stock Option.  However, notwithstanding 
                           such designation, to the extent that the aggregate 
                           Fair Market Value of the Shares with respect to which
                           Incentive Stock Options are exercisable for the first
                           time by the Optionee during any calendar year
                           (under all plans of the Company and any Parent or 
                           Subsidiary) exceeds $100,000, such Options shall be 
                           treated as Nonstatutory Stock Options. For purposes 
                           of this Section 5(b), Incentive Stock Options shall 
                           be taken into account in the order in which they were
                           granted.  The Fair Market Value of the Shares shall 
                           be determined as of the time the Option with
                           respect to such Shares is granted.

                  c.       Neither  the Plan nor any  Option  or Stock  Purchase
                           Right shall  confer upon any  Optionee any right with
                           respect to continuing the Optionee's  relationship as
                           a Service  Provider  with the  Company,  nor shall it
                           interfere  in any way  with  his or her  right or the
                           Company's right to terminate such relationship at any
                           time, with or without cause.

         6.       Term of Plan.  The Plan shall become effective upon its 
adoption by the Board.  It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 14 of the Plan.

         7.  Term of  Option.  The term of each  Option  shall be  stated in the
Option  Agreement;  provided,  however,  that the term shall be no more than ten
(10) years from the date of grant  thereof.  In the case of an  Incentive  Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing  more than ten percent  (10%) of the voting power of all classes of
stock of the Company or any Parent or  Subsidiary,  the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.

         8.       Option Exercise Price and Consideration.

                  a.       The per share  exercise  price  for the  Shares to be
                           issued upon exercise of an Option shall be such price
                           as is determined by the  Administrator,  but shall be
                           subject to the following:

                                    i.      In the case of an Incentive Stock 
                                            Option

                                    (A)     granted to an Employee who, at the 
time of grant of such Option, owns stock representing more than ten percent 
(10%) of the voting power of all classes


                                        6





of stock of the Company or any Parent or Subsidiary, the exercise price shall be
no less than 110% of the Fair Market Value per Share on the date of grant.

                                    (B)     granted to any other Employee, the 
per Share exercise price shall be no less  than  100% of the Fair  Market  Value
per Share on the date of grant.

                                    ii.     In the case of a Nonstatutory Stock 
                                            Option

                                    (A)     granted to a Service Provider who, 
at the time of grant of such Option,  owns stock  representing more than ten 
percent (10%) of the voting power of all  classes of stock of the Company or any
Parent or  Subsidiary,  the exercise  price shall be no less than 110% of the 
Fair Market Value per Share on the date of the grant.

                                    (B)     granted to any other Service 
Provider, the per Share exercise price shall be no less than 85% of the Fair  
Market  Value per Share on the date of grant.

                                    iii.    Notwithstanding    the    foregoing,
                                            Options  may be  granted  with a per
                                            Share  exercise  price other than as
                                            required  above pursuant to a merger
                                            or other corporate transaction.

                  b.       The consideration to be paid for the Shares to be 
                           issued upon exercise of an Option, including the 
                           method of payment, shall be determined by the 
                           Administrator (and, in the case of an Incentive Stock
                           Option, shall be determined at the time of grant). 
                           Such consideration may consist of (1)cash, (2) check,
                           (3) promissory note, (4) other Shares which (x) in 
                           the case of Shares acquired upon exercise of an 
                           Option, have been owned by the Optionee for more than
                           six months on the date of surrender, and (y) have
                           a Fair Market Value on the date of surrender equal to
                           the aggregate exercise price of the Shares as to 
                           which such Option shall be exercised, (5)
                           consideration received by the Company under a 
                           cashless exercise program implemented by the 
                           Company in connection with the Plan, or (6) any
                           combination of the foregoing methods of payment.  
                           In making its determination as to the type of 
                           consideration to accept, the Administrator
                           shall consider if acceptance of such consideration 
                           may be reasonably expected to benefit the Company.

         9.       Exercise of Option.

                  a.       Procedure for Exercise; Rights as a Shareholder.  Any
                           Option   granted   hereunder   shall  be  exercisable
                           according to the terms hereof at such times and under
                           such  conditions as  determined by the  Administrator
                           and set forth in the Option Agreement, but in no case
                           at a rate of less  than  20% per year  over  five (5)
                           years from the date the Option is granted. Unless the
                           Administrator provides otherwise,  vesting of Options
                           granted hereunder

                                        7





                           shall be tolled during any unpaid leave of absence.  
                           An Option may not be exercised for a fraction of a 
                           Share.

                           An Option shall be deemed  exercised when the Company
receives:
(i) written or  electronic  notice of exercise  (in  accordance  with the Option
Agreement)  from the person  entitled  to  exercise  the  Option,  and (ii) full
payment  for the Shares  with  respect to which the  Option is  exercised.  Full
payment may consist of any consideration and method of payment authorized by the
Administrator  and permitted by the Option Agreement and the Plan. Shares issued
upon  exercise of an Option  shall be issued in the name of the  Optionee or, if
requested  by the  Optionee,  in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate  entry on the books
of the Company or of a duly authorized transfer agent of the Company),  no right
to vote or receive  dividends or any other rights as a  shareholder  shall exist
with  respect to the Shares,  notwithstanding  the  exercise of the Option.  The
Company  shall  issue (or cause to be issued)  such  Shares  promptly  after the
Option is exercised.  No  adjustment  will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued,  except as
provided in Section 12 of the Plan.

                           Exercise of an Option in any manner shall result in a
decrease in the number of Shares thereafter available, both for purposes of the 
Plan and for sale under the Option, by the number of Shares as to which the 
Option is exercised.

                  b.       Termination of Relationship as a Service Provider.  
                           If an Optionee ceases to be a Service Provider, such 
                           Optionee may exercise his or her Option
                           within such period of time as is specified in the 
                           Option Agreement (of at least thirty (30) days) to 
                           the extent that the Option is vested on the date of
                           termination (but in no event later than the 
                           expiration of the term of the Option as set forth in 
                           the Option Agreement).  In the absence of a specified
                           time in the Option Agreement, the Option shall remain
                           exercisable for three (3) months following the 
                           Optionee's termination.  If, on the date of
                           termination, the Optionee is not vested as to his or 
                           her entire Option, the Shares covered by the unvested
                           portion of the Option shall revert to the
                           Plan.  If, after termination, the Optionee does not 
                           exercise his or her Option within the time specified 
                           by the Administrator, the Option shall
                           terminate, and the Shares covered by such Option 
                           shall revert to the Plan.

                  c.       Disability of Optionee.  If an Optionee ceases to be 
                           a Service Provider as a result of the Optionee's 
                           Disability, the Optionee may exercise his or her
                           Option within such period of time as is specified in 
                           the Option Agreement to the extent the Option is 
                           vested on the date of termination (but in no event
                           later than the expiration of the term of such Option 
                           as set forth in the Option Agreement).  In the 
                           absence of a specified time in the Option
                           Agreement, the Option shall remain exercisable for 
                           twelve (12) months following the Optionee's 
                           termination.  If such disability is not a 
                           "disability" as such term is defined in Section 22(e)
                           (3) of the Code, in the case of an


                                        8





                           Incentive  Stock Option such  Incentive  Stock Option
                           shall   automatically  cease  to  be  treated  as  an
                           Incentive  Stock  Option and shall be treated for tax
                           purposes as a  Nonstatutory  Stock  Option on the day
                           three months and one day following such  termination.
                           If, on the date of  termination,  the Optionee is not
                           vested as to his or her  entire  Option,  the  Shares
                           covered by the  unvested  portion of the Option shall
                           revert  to  the  Plan.  If,  after  termination,  the
                           Optionee  does not exercise his or her Option  within
                           the  time   specified   herein,   the  Option   shall
                           terminate,  and the  Shares  covered  by such  Option
                           shall revert to the Plan.

                  d.       Death of Optionee.  If an Optionee dies while a
                           Service Provider, the Option may be exercised within 
                           such period of time as is specified in the
                           Option Agreement (but in no event later than the 
                           expiration of the term of such Option as set forth in
                           the Notice of Grant), by the Optionee's estate
                           or by a person who acquires the right to exercise the
                           Option by bequest or inheritance, but only to the 
                           extent that the Option is vested on the date of
                           death.  In the absence of a specified time in the 
                           Option Agreement, the Option shall remain exercisable
                           for twelve (12) months following the Optionee's 
                           termination.  If, at the time of death, the Optionee 
                           is not vested as to his or her entire Option, the 
                           Shares covered by the unvested portion
                           of the Option shall immediately revert to the Plan.  
                           The Option may be exercised by the executor or 
                           administrator of the Optionee's estate or, if
                           none, by the person(s) entitled to exercise the 
                           Option under the Optionee's will or the laws of 
                           descent or distribution.  If the Option is not so 
                           exercised within the time specified herein, the 
                           Option shall terminate, and the Shares
                           covered by such Option shall revert to the Plan.

                  e.       Buyout Provisions.  The Administrator may at any time
                           offer to buy out for a payment in cash or Shares, an 
                           Option previously granted, based on such
                           terms and conditions as the Administrator shall 
                           establish and communicate to the Optionee at the time
                           that such offer is made.

         10.  Non-Transferability  of Options and Stock Purchase Rights. Options
and Stock  Purchase  Rights may not be sold,  pledged,  assigned,  hypothecated,
transferred,  or disposed of in any manner  other than by will or by the laws of
descent  or  distribution  and may be  exercised,  during  the  lifetime  of the
Optionee, only by the Optionee.

         11.      Stock Purchase Rights.

                  a.       Rights to  Purchase.  Stock  Purchase  Rights  may be
                           issued  either  alone,  in addition  to, or in tandem
                           with other awards  granted under the Plan and/or cash
                           awards   made   outside   of  the  Plan.   After  the
                           Administrator  determines  that it will  offer  Stock
                           Purchase  Rights under the Plan,  it shall advise the
                           offeree in writing  or  electronically  of the terms,
                           conditions and restrictions

                                        9





                           related to the offer,  including the number of Shares
                           that such person shall be entitled to  purchase,  the
                           price to be  paid,  and the time  within  which  such
                           person must accept such offer. The terms of the offer
                           shall comply in all respects with Section  260.140.42
                           of Title 10 of the  California  Code of  Regulations.
                           The  offer  shall  be  accepted  by  execution  of  a
                           Restricted  Stock  purchase  agreement  in  the  form
                           determined by the Administrator.

                  b.       Repurchase Option.  Unless the Administrator
                           determines otherwise, the Restricted Stock purchase 
                           agreement shall grant the Company a repurchase
                           option exercisable upon the voluntary or involuntary 
                           termination of the purchaser's service with the 
                           Company for any reason (including death or
                           disability).  The purchase price for Shares 
                           repurchased pursuant to the Restricted Stock purchase
                           agreement shall be the original price paid by the
                           purchaser and may be paid by cancellation of any 
                           indebtedness of the purchaser to the Company.  The 
                           repurchase option shall lapse at such rate
                           as the Administrator may determine, but in no case at
                           a rate of less than 20% per year over five years from
                           the date of purchase.

                  c.       Other Provisions.  The Restricted Stock purchase 
                           agreement shall contain such other terms, provisions 
                           and conditions not inconsistent with the Plan
                           as may be determined by the Administrator in its sole
                           discretion.

                  d.       Rights  as a  Shareholder.  Once the  Stock  Purchase
                           Right is exercised,  the purchaser  shall have rights
                           equivalent to those of a  shareholder  and shall be a
                           shareholder  when his or her purchase is entered upon
                           the records of the duly authorized  transfer agent of
                           the  Company.  No  adjustment  shall  be  made  for a
                           dividend  or other right for which the record date is
                           prior  to  the  date  the  Stock  Purchase  Right  is
                           exercised,  except as  provided  in Section 12 of the
                           Plan.

         12.      Adjustment Upon Changes in Capitalization, Merger or Asset 
                  Sale.

                  a.       Changes in Capitalization.  Subject to any required 
                           action by the shareholders of the Company, the number
                           of shares of Common Stock covered by each outstanding
                           Option or Stock Purchase Right, and the number of 
                           shares of Common Stock which have been authorized for
                           issuance under the Plan but as to which no Options or
                           Stock Purchase Rights have yet been granted or which 
                           have been returned to the Plan upon cancellation or 
                           expiration of an Option or Stock Purchase Right, as 
                           well as the price per share of Common Stock covered 
                           by each such outstanding Option or Stock Purchase 
                           Right, shall be proportionately adjusted for any
                           increase or decrease in the number of issued shares 
                           of Common Stock resulting from a stock split, reverse
                           stock split, stock dividend, combination or 
                           reclassification of the Common Stock, or any other 
                           increase or decrease


                                       10





                           in the  number  of  issued  shares  of  Common  Stock
                           effected  without  receipt  of  consideration  by the
                           Company. The conversion of any convertible securities
                           of the  Company  shall  not be  deemed  to have  been
                           "effected  without  receipt of  consideration."  Such
                           adjustment   shall  be  made  by  the  Board,   whose
                           determination in that respect shall be final, binding
                           and conclusive.  Except as expressly provided herein,
                           no  issuance by the Company of shares of stock of any
                           class, or securities convertible into shares of stock
                           of any class,  shall  affect,  and no  adjustment  by
                           reason  thereof  shall be made with  respect  to, the
                           number or price of shares of Common Stock  subject to
                           an Option or Stock Purchase Right.

                  b.       Dissolution or Liquidation.  In the event of the 
                           proposed dissolution or liquidation of the Company, 
                           the Administrator shall notify each Optionee
                           as soon as practicable prior to the effective date of
                           such proposed transaction.  The Administrator in its 
                           discretion may provide for an Optionee to have the 
                           right to exercise his or her Option until fifteen 
                           (15) days prior to such transaction as to all of the 
                           Optioned Stock covered thereby, including Shares as
                           to which the Option would not otherwise be 
                           exercisable.  In addition, the Administrator may 
                           provide that any Company repurchase option applicable
                           to any Shares purchased upon exercise of an  Option 
                           or Stock Purchase Right shall lapse as to all such 
                           Shares, provided the proposed dissolution or 
                           liquidation takes place at the time and in the
                           manner contemplated.  To the extent it has not been 
                           previously exercised, an Option or Stock Purchase 
                           Right will terminate immediately prior to the
                           consummation of such proposed action.

                  c.       Merger or Asset Sale.  In the event of a merger of 
                           the Company with or into another corporation, or the 
                           sale of substantially all of the assets of the
                           Company, each outstanding Option and Stock Purchase 
                           Right shall be assumed or an equivalent option or 
                           right substituted by the successor corporation or a 
                           Parent or Subsidiary of the successor corporation.  
                           In the event that the successor corporation refuses 
                           to assume or substitute for the Option or Stock 
                           Purchase Right, the Optionee shall fully vest in and 
                           have the right to exercise the Option or Stock 
                           Purchase Right as to all of the Optioned Stock, 
                           including Shares as to which it would not otherwise 
                           be vested or exercisable.  If an Option or Stock 
                           Purchase Right becomes fully vested and exercisable 
                           in lieu of assumption or substitution in the event of
                           a merger or sale of assets, the Administrator shall 
                           notify the Optionee in writing or electronically that
                           the Option or Stock Purchase Right shall be   fully 
                           exercisable for a period of fifteen (15) days from 
                           the date of such notice, and the Option or Stock 
                           Purchase Right shall terminate upon the
                           expiration of such period.  For the purposes of this 
                           paragraph, the Option or Stock Purchase Right shall 
                           be considered assumed if, following the merger or 
                           sale of assets, the option or right confers the right
                           to purchase


                                       11





                           or receive,  for each Share of Optioned Stock subject
                           to the  Option or Stock  Purchase  Right  immediately
                           prior  to  the   merger  or  sale  of   assets,   the
                           consideration   (whether   stock,   cash,   or  other
                           securities  or  property)  received  in the merger or
                           sale of assets by  holders  of Common  Stock for each
                           Share held on the effective  date of the  transaction
                           (and  if   holders   were   offered   a   choice   of
                           consideration,  the type of  consideration  chosen by
                           the holders of a majority of the outstanding Shares);
                           provided,   however,   that  if  such   consideration
                           received  in the  merger  or  sale of  assets  is not
                           solely common stock of the successor  corporation  or
                           its Parent,  the Administrator  may, with the consent
                           of  the  successor   corporation,   provide  for  the
                           consideration to be received upon the exercise of the
                           Option or Stock  Purchase  Right,  for each  Share of
                           Optioned   Stock  subject  to  the  Option  or  Stock
                           Purchase  Right,  to be  solely  common  stock of the
                           successor  corporation  or its  Parent  equal in fair
                           market value to the per share consideration  received
                           by holders  of Common  Stock in the merger or sale of
                           assets.

         13. Time of Granting  Options and Stock  Purchase  Rights.  The date of
grant of an Option or Stock Purchase Right shall, for all purposes,  be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the  determination  shall be given to each  Employee or Consultant to whom an
Option or Stock Purchase Right is so granted within a reasonable  time after the
date of such grant.

         14.      Amendment and Termination of the Plan.

                  a.       Amendment and Termination.  The Board may at any time
                           amend, alter, suspend or terminate the Plan.

                  b.       Shareholder Approval.  The Board shall obtain 
                           shareholder approval of any Plan amendment to the 
                           extent necessary and desirable to comply with
                           Applicable Laws.

                  c.       Effect of Amendment or Termination.  No amendment, 
                           alteration, suspension or termination of the Plan 
                           shall impair the rights of any Optionee, unless
                           mutually agreed otherwise between the Optionee and 
                           the Administrator, which agreement must be in writing
                           and signed by the Optionee and the Company.  
                           Termination of the Plan shall not affect the
                           Administrator's ability to exercise the powers 
                           granted to it hereunder with respect to Options 
                           granted under the Plan prior to the date of such
                           termination.

         15.      Conditions Upon Issuance of Shares.



                                       12





                  a.       Legal Compliance. Shares shall not be issued pursuant
                           to the  exercise of an Option  unless the exercise of
                           such  Option and the  issuance  and  delivery of such
                           Shares shall comply with Applicable Laws and shall be
                           further  subject to the  approval  of counsel for the
                           Company with respect to such compliance.

                  b.       Investment  Representations.  As a  condition  to the
                           exercise of an Option,  the Administrator may require
                           the person  exercising  such Option to represent  and
                           warrant  at the  time of any such  exercise  that the
                           Shares are being  purchased  only for  investment and
                           without any present  intention to sell or  distribute
                           such  Shares if, in the  opinion  of counsel  for the
                           Company, such a representation is required.

         16.  Inability  to Obtain  Authority.  The  inability of the Company to
obtain authority from any regulatory body having  jurisdiction,  which authority
is deemed by the  Company's  counsel to be necessary to the lawful  issuance and
sale of any Shares  hereunder,  shall  relieve the Company of any  liability  in
respect of the failure to issue or sell such  Shares as to which such  requisite
authority shall not have been obtained.

         17.      Reservation of Shares.  The Company, during the term of this 
Plan, at all times reserve and keep available such number of Shares as shall be 
sufficient to satisfy the requirements of the Plan.

         18.      Shareholder Approval.  The Plan shall be subject to approval 
by the shareholders of the Company within twelve (12) months after the date the 
Plan is adopted.  Such shareholder approval shall be obtained in the degree and 
manner required under Applicable Laws.

         19. Information to Optionees and Purchasers.  The Company shall provide
to each  Optionee and to each  individual  who acquires  Shares  pursuant to the
Plan,  not less  frequently  than  annually  during the period such  Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding,  and, in
the case of an individual who acquires Shares  pursuant to the Plan,  during the
period such individual owns such Shares,  copies of annual financial statements.
The Company  shall not be required to provide such  statements  to key employees
whose duties in  connection  with the Company  assure their access to equivalent
information.


                                       13





                                                                    Exhibit 99.2

                             CYTOTHERAPEUTICS, INC.

                 1997 CYTOTHERAPEUTICS, INC. STEMCELLS RESEARCH
                                STOCK OPTION PLAN


         1.       PURPOSE

         The  purpose of this 1997  CytoTherapeutics,  Inc.  StemCells  Research
Stock Option Plan (the "Plan") is to advance the interests of  CytoTherapeutics,
Inc.  (the   "Company")  by  enhancing  the  ability  of  the  Company  and  its
subsidiaries to attract and retain directors, employees, consultants or advisers
who are in a position to make  significant  contributions  to the success of the
Company,  and in particular the success of the Company's research  programs,  to
reward them for their  contributions  and to encourage them to take into account
the long-term interests of the Company.

         The Plan  provides  for the award of options to purchase  shares of the
Company's  common stock  ("Stock").  Options granted pursuant to the Plan may be
incentive  stock options as defined in section 422 of the Internal  Revenue Code
of 1986 (as from time to time amended,  the "Code") (any option that is intended
to  qualify  as an  incentive  stock  option  being  referred  to  herein  as an
"incentive option"), or options that are not incentive options, or both. Options
granted  pursuant  to the Plan shall be  presumed  to be  non-incentive  options
unless expressly designated as incentive options.

         2.       ELIGIBILITY FOR AWARDS

         Persons  eligible  to  receive  awards  under  the  Plan  shall  be all
executive  officers  of the Company and its  subsidiaries  and other  employees,
consultants and advisers who, in the opinion of the Board,  are in a position to
make  a  significant  contribution  to  the  success  of  the  Company  and  its
subsidiaries,  and in particular the success of the Company's stemcells research
programs.  Directors,  including directors who are not employees, of the Company
shall be  eligible  to receive  awards  under the Plan to the extent  that their
eligibility  would not disqualify them as disinterested  persons for purposes of
rule 16b-3 ("Rule 16b-3") under the Securities  Exchange Act of 1934, as amended
(the "Exchange Act").  Incentive options shall be granted only to "employees" as
defined in the  provisions of the Code or regulations  thereunder  applicable to
incentive  stock  options.  A  subsidiary  for  purposes  of the Plan shall be a
corporation in which the Company owns, directly or indirectly,  stock possessing
50% or more of the total combined voting power of all classes of stock.  Persons
selected for awards under the Plan are referred to herein as "participants."

         3.       ADMINISTRATION



                                        1





         The Plan shall be  administered by the Board of Directors (the "Board")
of the  Company.  The Board  shall have  authority,  not  inconsistent  with the
express  provisions of the Plan, (a) to grant awards  consisting of options,  to
such  participants  as the Board may select;  (b) to determine the time or times
when awards  shall be granted and the number of shares of Stock  subject to each
award; (c) to determine which options are, and which options are not,  incentive
options;  (d) to  determine  the  terms and  conditions  of each  award;  (e) to
prescribe the form or forms of any instruments  evidencing  awards and any other
instruments  required under the Plan and to change such forms from time to time;
(f) to adopt,  amend and rescind rules and regulations for the administration of
the Plan;  and (g) to interpret  the Plan and to decide any questions and settle
all  controversies and disputes that may arise in connection with the Plan. Such
determinations  of the Board  shall be  conclusive  and shall bind all  parties.
Subject to Section 8 the Board shall also have the authority, both generally and
in  particular  instances,  to  waive  compliance  by  a  participant  with  any
obligation  to be performed by the  participant  under an award--,  to waive any
condition or provision of an award,  and to amend or cancel any award (and if an
award is  canceled,  to  grant a new  award on such  terms  as the  Board  shall
specify)  except  that the  Board may not take any  action  with  respect  to an
outstanding  award that  would  adversely  affect the rights of the  participant
under such award without such  participant's  consent.  Nothing in the preceding
sentence  shall  be  construed  as  limiting  the  power  of the  Board  to make
adjustments required by Section 5(c) and Section 6(j).

         The Board may, in its  discretion,  delegate  some or all of its powers
with respect to the Plan to a committee  (the  "Committee"),  in which event all
references in this Plan (as  appropriate)  to the Board shall be deemed to refer
to the Committee. The Committee, if one is appointed,  shall consist of at least
two  directors.  A majority of the members of the Committee  shall  constitute a
quorum,  and all  determinations of the Committee shall be made by a majority of
its  members.  Any  determination  of the  Committee  under the Plan may be made
without  notice or meeting of the Committee by a writing signed by a majority of
the Committee members. In the event the Board shall delegate the power to select
directors  and  executive  officers  to  receive  awards  under the Plan and the
timing,  pricing  and amount of such awards to a committee  or  committees,  the
make-up of the Committee shall satisfy the requirements of Rule 16b-3 applicable
to the Company and all members of which shall be  disinterested  persons  within
the meaning of the  applicable  provisions  of Rule 16b-3 and,  with  respect to
executive  officers  only,  "outside  directors"  within the  meaning of Section
162(m) under the Code.


         4.       EFFECTIVE DATE AND TERM OF PLAN

         No awards shall be granted  under the Plan after the  completion of ten
years  from the date on which the Plan was  adopted  by the  Board,  but  awards
previously granted may extend beyond that date.



                                        2





         5.       SHARES SUBJECT TO THE PLAN

                  a.       Number of Shares.  Subject to adjustment as provided 
                           in Section 5(c), the aggregate number of shares of 
                           Stock that may be delivered upon the exercise of 
                           awards granted under the Plan shall be 2,000,000 
                           common shares.  If any award granted under the Plan 
                           terminates without having been exercised in full, or 
                           upon exercise is satisfied other than by delivery
                           of Stock, the number of shares of Stock as to which 
                           such award was not exercised shall be available for 
                           future grants within the limits set forth in
                           this Section 5(a).

         The  maximum  number of shares for which  options may be granted to any
individual  over the life of the Plan  shall be  1,000,000.  The  per-individual
limitations   described  in  this  paragraph  shall  be  construed  and  applied
consistent with the rules and regulations under Section 162(m) of the Code.

                  b.       Shares to be Delivered.  Shares  delivered  under the
                           Plan shall be  authorized  but unissued  Stock or, if
                           the  Board  so  decides   in  its  sole   discretion,
                           previously  issued Stock  acquired by the Company and
                           held in its treasury.  No fractional  shares of Stock
                           shall be delivered under the Plan.

                  c.       Changes in Stock.  In the event of a stock dividend, 
                           stock split or combination of shares, 
                           recapitalization or other change in the Company's
                           capital stock, the number and kind of shares of Stock
                           subject to awards then outstanding or subsequently 
                           granted under the Plan, the exercise price of
                           such awards, the maximum number of shares of Stock 
                           that may be delivered under the Plan, and other 
                           relevant provisions shall be appropriately adjusted
                           by the Board, whose determination shall be binding
                           on all persons.

         The Board may also adjust the number of shares  subject to  outstanding
awards and the exercise price and the terms of  outstanding  awards to take into
consideration   material   changes  in  accounting   practices  or   principles,
extraordinary  dividends,  consolidations  or mergers (except those described in
Section 6(j)),  acquisitions  or  dispositions of stock or property or any other
event if it is determined by the Board that such  adjustment is  appropriate  to
avoid distortion in the operation of the Plan,  provided that no such adjustment
shall be made in the case of an  incentive  option,  without  the consent of the
participant, if it would constitute a modification,  extension or renewal of the
option within the meaning of section 424(h) of the Code.

         6.       TERMS AND CONDITIONS OF OPTIONS



                                        3





                  a.       Exercise Price of Options.  The exercise price of 
                           each option shall be determined by the Board but in 
                           the case of an incentive option shall not be
                           less than 100% (110%, in the case of an incentive 
                           option granted to a ten percent shareholder) of the 
                           fair market value of the Stock at the time the
                           option is granted; nor shall the exercise price be 
                           less, in the case of an original issue of authorized 
                           stock, than par value.  For this purpose, "fair
                           market value" in the case of incentive options shall 
                           have the same meaning as it does in the provisions of
                           the Code and the regulations thereunder applicable to
                           incentive options; and "ten-percent shareholder" 
                           shall mean any participant who at the time of grant 
                           owns directly, or by reason of the attribution rules 
                           set forth in section 424(d) of the Code, is deemed to
                           own stock possessing more than 10% of the total 
                           combined voting power of all classes of stock of the 
                           Company or of any of its parent or subsidiary
                           corporations.

                  b.       Duration of  Options.  Options  shall be  exercisable
                           during  such  period  or  periods  as the  Board  may
                           specify.  The  latest  date on which an option may be
                           exercised  (the "Final  Exercise  Date") shall be the
                           date that is ten years (five years, in the case of an
                           incentive    option   granted   to   a   "ten-percent
                           shareholder"  as defined in (a) above)  from the date
                           the option was  granted or such  earlier  date as the
                           Board may specify at the time the option is granted.

                  c.       Exercise of Options.

                           i.       Options  shall  become  exercisable  at such
                                    time or times  and upon such  conditions  as
                                    the Board shall  specify.  In the case of an
                                    option not immediately  exercisable in full,
                                    the  Board  may at any time  accelerate  the
                                    time at which all or any part of the  option
                                    may be exercised.

                           ii.      Options  may be  exercised  only in writing.
                                    Written notice of exercise must be signed by
                                    the  proper  person  and  furnished  to  the
                                    Company, together with (i) such documents as
                                    the Board may  require  and (ii) in the case
                                    of  options,  payment  in full as  specified
                                    below  in  Section  6(d) for the  number  of
                                    shares for which the option is exercised.

                           iii.     The  delivery of Stock upon the  exercise of
                                    an option  shall be  subject  to  compliance
                                    with (i)  applicable  federal and state laws
                                    and  regulations,  (ii)  if the  outstanding
                                    Stock is at the  time  listed  on any  stock
                                    exchange,  the listing  requirements of such
                                    exchange, and (iii)


                                        4





                                    Company  counsel's  approval  of  all  other
                                    legal   matters  in   connection   with  the
                                    issuance and delivery of such Stock.

                           iv.      In the case of an option that is not an 
                                    incentive option, the Board shall have the 
                                    right to require that the participant 
                                    exercising the option remit to the Company 
                                    an amount sufficient to satisfy any federal,
                                    state, or local withholding tax requirements
                                    (or make other arrangements satisfactory to 
                                    the Company with regard to such taxes) prior
                                    to the delivery of any Stock pursuant to the
                                    exercise of the option.  If permitted by the
                                    Board, either at the time of the grant
                                    of the option or the time of exercise, the 
                                    participant may elect, at such time and in 
                                    such manner as the Board may prescribe, to 
                                    satisfy such withholding obligation by (i) 
                                    delivering to the Company Stock (which in 
                                    the case of Stock acquired from the Company 
                                    shall have been owned by the participant for
                                    at least six months prior to the
                                    delivery date) having a fair market value 
                                    equal to such withholding obligation, or 
                                    (ii) requesting that the Company withhold 
                                    from the shares of Stock to be delivered 
                                    upon the exercise a number of shares of 
                                    Stock having a fair market value equal to 
                                    such withholding obligation.

                  In the case of an incentive  option, if at the time the option
                  is exercised the Board  determines  that under  applicable law
                  and   regulations   the  Company   could  be  liable  for  the
                  withholding  of any  federal  or state tax with  respect  to a
                  disposition of the Stock received upon exercise, the Board may
                  require  as a  condition  of  exercise  that  the  participant
                  exercising the option agree (i) to inform the Company promptly
                  of any  disposition  (within the meaning of section  424(c) of
                  the Code and the  regulations  thereunder)  of Stock  received
                  upon  exercise,  and (ii) to give such  security  as the Board
                  deems adequate to meet the potential  liability of the Company
                  for the  withholding of tax, and to augment such security from
                  time to time in any amount  reasonably deemed necessary by the
                  Board to preserve the adequacy of such security.

                           v.       If an option is exercised by the executor or
                                    administrator of a deceased participant,  or
                                    by the  person or persons to whom the option
                                    has been  transferred  by the  participant's
                                    will or the  applicable  laws of descent and
                                    distribution,  the Company shall be under no
                                    obligation to deliver Stock pursuant to such
                                    exercise  until the Company is  satisfied as
                                    to the  authority  of the  person or persons
                                    exercising the option.




                                        5





                  d.       Payment for and Delivery of Stock.  Stock purchased 
                           upon exercise of an option under the Plan shall be 
                           paid for as follows:

                           (1)      in cash or by personal check, certified 
                                    check, bank draft or money order payable to 
                                    the order of the Company; or

                           (2)      if so permitted by the Board (which,  in the
                                    case of an incentive  option,  shall specify
                                    the method of payment at the time of grant),
                                    (A) through the  delivery of shares of Stock
                                    (which,  in the case of Stock  acquired from
                                    the  Company,  shall  have  been held for at
                                    least six months prior to delivery) having a
                                    fair market  value on the last  business day
                                    preceding the date of exercise  equal to the
                                    purchase  price  or  (B)  by  delivery  of a
                                    promissory  note of the  participant  to the
                                    Company,  such  note to be  payable  on such
                                    terms as are  specified  by the Board or (C)
                                    by   delivery   of  an   unconditional   and
                                    irrevocable   undertaking  by  a  broker  to
                                    deliver  promptly to the Company  sufficient
                                    funds  to pay the  exercise  price or (D) by
                                    any combination of the permissible  forms of
                                    payment;   provided,   that  if  the   Stock
                                    delivered  upon exercise of the option is an
                                    original issue of authorized Stock, at least
                                    so much of the exercise  price as represents
                                    the par  value of such  Stock  shall be paid
                                    other than by a personal check or promissory
                                    note of the person exercising the option.

                  e.       [Intentionally Omitted]

                  f.       Rights as Shareholder.  A participant shall not have 
                           the rights of a shareholder with regard to awards 
                           under the Plan except as to Stock actually received 
                           by the participant under the Plan.

                  g.       Nontransferability of Awards.  Except as the Board 
                           may otherwise determine, no award may be transferred 
                           other than by will or by the laws of descent and 
                           distribution, and during a participant's lifetime an 
                           award may be exercised only by the participant.

                  h.       Death.  If a participant dies, each option held by 
                           the participant immediately prior to death may be 
                           exercised, to the extent it was exercisable 
                           immediately prior to death, by the participant's 
                           executor or administrator or by the person or persons
                           to whom the option is transferred by will or the 
                           applicable laws of descent and distribution, at any
                           time within the one-year period (or such longer or 
                           shorter period as the Board may determine) beginning 
                           with the date of the participant's death but in no
                           event beyond the Final Exercise Date.  All options 
                           held by a participant


                                        6





                           immediately   prior  to  death   that  are  not  then
                           exercisable shall terminate on the date of death.

                  i.       Termination of Service Other Than By Death.  Except 
                           as otherwise determined by the Board, if an 
                           employee's employment with the Company and its 
                           subsidiaries terminates for any reason other than by 
                           death, all options held by the employee that are not 
                           then exercisable shall terminate. Options that are 
                           exercisable on the date employment terminates shall
                           continue to be exercisable for a period of three 
                           months (or such longer period as the Board may 
                           determine, but in no event beyond the Final Exercise 
                           Date) unless the employee was discharged for cause 
                           that in the opinion of the Board casts such discredit
                           on the employee as to justify termination of the 
                           employee's options.  After completion of the post-
                           termination exercise period, such options shall 
                           terminate to the extent not previously exercised,
                           expired or terminated.  For purposes of this Section
                           6(i), employment shall not be considered terminated 
                           (i) in the case of sick leave or other bona fide 
                           leave of absence approved for purposes of the Plan
                           by the Board, so long as the employee's right to 
                           reemployment is guaranteed either by statute or by 
                           contract, or (ii) in the case of a transfer
                           of employment between the Company and a subsidiary 
                           or between subsidiaries, or to the employment of a 
                           corporation (or a parent or subsidiary corporation of
                           such corporation) issuing or assuming an option
                           or SAR in a transaction to which section 424(a) of 
                           the Code applies.

         In the  case  of a  participant  who is  not  an  employee,  provisions
relating to the exercisability of options following termination of service shall
be  specified  in the  award.  If not so  specified,  all  options  held by such
participant  that are not then  exercisable  shall terminate upon termination of
service.   Unless  otherwise  provided  for  in  the  award,  options  that  are
exercisable on the date the participant's  service as a director,  consultant or
adviser terminates shall continue to be exercisable for a period of three months
(or such longer  period as the Board may  determine,  but in no event beyond the
Final Exercise Date). After completion of the post-termination  exercise period,
such options shall terminate to the extent not previously exercised,  expired or
terminated.

                  j.       Mergers, etc.  Except as otherwise determined by the 
                           Board and specified in the award, in the event of a 
                           consolidation or merger in which the Company is not
                           the surviving corporation or which results in the
                           acquisition of substantially all the Company's 
                           outstanding Stock by a single person or entity or by 
                           a group of persons and/or entities acting in concert,
                           or in the event of the sale or transfer of 
                           substantially all the Company's assets, all 
                           outstanding awards shall thereupon terminate, 
                           provided that at least 20 days prior to the effective
                           date of any such merger, consolidation or sale of 
                           assets, the Board shall either (i) make all 
                           outstanding awards exercisable immediately prior to 
                           consummation of such merger,


                                        7





                           consolidation or sale of assets or (ii) if there is a
                           surviving or acquiring corporation,  arrange, subject
                           to consummation of the merger,  consolidation or sale
                           of assets,  to have that  corporation or an affiliate
                           of that corporation grant to participants replacement
                           awards, which awards in the case of incentive options
                           shall satisfy, in the determination of the Board, the
                           requirements of section 424(a) of the Code.

         The Board may grant  awards under the Plan in  substitution  for awards
held by directors, employees, consultants or advisers of another corporation who
concurrently become directors, employees, consultants or advisers of the Company
or a  subsidiary  of the Company as the result of a merger or  consolidation  of
that  corporation  with the Company or a subsidiary  of the  Company,  or as the
result of the  acquisition  by the  Company or a  subsidiary  of the  Company of
property or stock of that  corporation.  The Company may direct that  substitute
awards  be  granted  on  such  terms  and  conditions  as  the  Board  considers
appropriate in the circumstances.

         7.       EMPLOYMENT RIGHTS

         Neither the  adoption of the Plan nor the grant of awards  shall confer
upon any  participant  any right to continue  as an employee or director  of, or
consultant  or adviser to, the Company or any parent or  subsidiary or affect in
any way the right of the Company or parent or  subsidiary  to terminate  them at
any time.  Except as specifically  provided by the Board in any particular case,
the loss of existing or potential profit in awards granted under this Plan shall
not  constitute  an  element  of  damages  in the  event of  termination  of the
relationship  of a  participant  even if the  termination  is in violation of an
obligation of the Company to the participant by contract or otherwise.

         8.       EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND
TERMINATION

         Neither  adoption of the Plan nor the grant of awards to a  participant
shall affect the Company's right to make awards to such participant that are not
subject to the Plan, to issue to such participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued.

         The Board may at any time  discontinue  granting awards under the Plan.
With the  consent  of the  participant,  the  Board  may at any time  cancel  an
existing  award in whole or in part and grant  another  award for such number of
shares as the Board specifies. The Board may at any time or times amend the Plan
or any  outstanding  award for the purpose of  satisfying  the  requirements  of
section 422 of the Code or of any changes in applicable  laws or  regulations or
for any other  purpose  that may at the time be  permitted by law, or may at any
time  terminate the Plan as to further  grants of awards,  but no such amendment
shall adversely affect the rights of any participant  (without the participant's
consent) under any award previously granted.


                                        8







                                                                    Exhibit 99.3

Optionee:  _________________   Shares Subject to Option:  ___________  

Dated: _________________



                             CYTOTHERAPEUTICS, INC.

                  PERFORMANCE-BASED INCENTIVE OPTION AGREEMENT


         This  Agreement  is made as of the date set forth  above by and between
CytoTherapeutics, Inc., a Delaware corporation (the "Company" or "CTI"), and the
Optionee specified above (the "Optionee").

         WHEREAS, Optionee has entered into a Consulting or Employment Agreement
with the Company which  provides for the grant of the options  evidenced  hereby
(the "Consulting/Employment Agreement"); and

         WHEREAS,  Optionee is in a position to make a significant  contribution
to the  long-term  success  of the  Company,  and in  particular  the  Company's
stemcell research program.

         NOW, THEREFORE, the Company and Optionee agree as follows:

         1. Grant of Option.  This agreement  evidences the grant by the Company
to Optionee pursuant to the Company's 1997 StemCells  Research Stock Option Plan
(the  "Plan")  of an  option  to  purchase,  in whole or in part,  on the  terms
provided  herein,  the number of shares  specified above of the Company's Common
Stock,  $.01 par value (the "Common  Stock"),  at a per share price equal to the
last sales price for the Common Stock on the NASDAQ  National  Market  System on
the last trading day prior to the date of this  Agreement (the  "Option").  This
Option is not  intended to qualify as an  "incentive  stock  option"  within the
meaning of Section 422 of the Internal  Revenue Code of 1986,  as amended.  This
Option shall  terminate on the tenth  anniversary  of the date of this Agreement
(the "Final Exercise Date"),  and is subject to earlier  termination as provided
in Sections 6 and 7 below.

         2.       Exercisability of Option.  Subject to the terms and conditions
hereof, this Option shall vest and become exercisable as follows:
                                                                    % of Shares
Milestone                                                                Vesting
- ---------                                                               --------
 

On the date of this Agreement                                             6.25%



                                        1





First Corporate Partnership (as defined below)
(before September 1, 1998)

   If greater than $5,000,000 and less than or equal to $10,000,000       6.25%

   If greater than $10,000,000 and less than or equal to $15,000,000      8.75%

   If greater than  $15,000,000                                          11.25%

Second Corporate Partnership (before September 1, 1999)

   If greater than $5,000,000 and less than or equal to $10,000,000       6.25%

   If greater than $10,000,000 and less than or equal to $15,000,000      8.75%

   If greater than $15,000,000                                           11.25%

First Corporate  Partnership resulting from discovery of 
a new stem cell (before June 30, 2000)

   If greater than $5,000,000 and less than or equal to $10,000,000       6.25%

   If greater than $10,000,000 and less than or equal to $15,000,000      8.75%

   If greater than $15,000,000                                           11.25%

Second Corporate Partnership resulting from discovery of
a new stem cell (before June 30, 2000)

   If greater than $5,000,000 and less than or equal to $10,000,000       6.25%

   If greater than $10,000,000 and less than or equal to $15,000,000      8.75%

   If greater than $15,000,000                                           11.25%

Commencement of first clinical trial of a CTI                            12.50%
stem cell product (before June 30, 2000)

Filing of first United States regulatory filing for                      12.50% 
marketing 12.50% approval of a CTI stem cell product 
(before June 30, 2003)


                                        2






Filing of first European Union or Japanese regulatory                    12.50% 
filing for market approval with respect to a 
CTI stem cell product (before June 30, 2004)

First United States commercial approval of a                             25.00%
CTI stem cell product (before June 30, 2005)

First European Union or Japanese commercial                              25.00%
approval of a CTI stem cell product (before June 30, 2005)

For purposes of the foregoing,  "Corporate Partnership" means any joint venture,
licensing  agreement,  collaboration  agreement,  or  research  and  development
agreement to which the Company is a party and which is material to the long-term
success of the Company. A "Corporate Partnership resulting from the discovery of
a new  stem  cell"  shall  mean a  Corporate  Partnership  which  is  formed  to
commercially  develop  technology  resulting from research conducted pursuant to
the  Research  Plan (as such term is defined in a letter  agreement  between the
Company and Messrs. Weissman, Gage and Anderson, dated as of September __, 1997)
which the  corporate  partner and CTI  reasonably  believe  has  resulted in the
discovery of a previously  undiscovered  stem cell. The dollar amounts set forth
above with respect to Corporate Partnerships refer to the receipt by the Company
of the aggregate  amount of the following  payments  received in connection with
any such Corporate Partnership:

                  (i)      any non-refundable up-front license fees;

                  (ii)     the present value of all non-refundable, 
                           non-contingent license fees payable at a later date;

                  (iii)    the amount by which the  purchase  price paid for any
                           non-refundable,  non-contingent  equity investment in
                           the Company made in  connection  with such  Corporate
                           Partnership  exceeds  the fair  market  value of such
                           equity  investment  as  reasonably  determined by the
                           Board of Directors of the Company; and

                  (iv) 50% of all non-contingent payments for sponsored research
                  under any sponsored  research  agreement,  provided,  however,
                  that in the case of the $5 million target in each of the first
                  two corporate  partnership  milestones,  100% of such payments
                  shall count toward satisfaction of such target.

The Company shall not structure any Corporate  Partnership in a bad faith effort
to avoid giving rise to the vesting of options hereunder.

         3.       Exercise of Option.  Each election to exercise this Option 
shall be in writing, signed by Optionee or by his duly appointed guardian or 
representative, his executor or


                                        3





administrator  or the person or persons to whom this  Option is  transferred  by
will or the  applicable  laws of descent  and  distribution  (collectively,  the
"Legal Representative"),  and received by the Company at its principal office in
Providence,  Rhode Island, accompanied by payment in full as provided in Section
4 below. In the event this Option is exercised by such Legal Representative, the
Company shall be under no obligation to deliver stock hereunder unless and until
the Company is reasonably  satisfied that the person or persons  exercising this
Option  is or  are  the  duly  appointed  guardian(s)  or  representative(s)  of
Optionee,  the duly appointed  executor(s) or  administrator(s)  of the deceased
Optionee  or the person or persons to whom this Option has been  transferred  by
will or the applicable laws of descent and distribution.

         4. Payment for Stock.  Shares of Common Stock shall be issued only upon
receipt by the Company of full payment of the  purchase  price for the shares as
to which this Option is exercised.  The purchase price is payable by Optionee to
the Company either (i) in cash or by certified  check or cashier's check payable
to the order of the  Company;  or (ii)  through the delivery of shares of Common
Stock (duly owned by Optionee  and as to which  Optionee has good title free and
clear of any liens and  encumbrances)  which have been  outstanding for at least
six months and which have a fair  market  value (as  determined  by the Board of
Directors of the Company) on the last business day prior to the date of exercise
of this  Option  equal  to the  purchase  price;  or  (iii)  by  delivery  of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company  sufficient  funds to pay the exercise price; or (iv) by any combination
of the forgoing  permissible forms of payment. The Company will not be obligated
to deliver any shares unless and until, in the opinion of the Company's counsel,
all applicable  federal and state laws and regulations  have been complied with,
nor, in the event the  outstanding  Common  Stock is at the time listed upon any
stock exchange,  unless and until the shares to be delivered have been listed or
authorized  to be listed upon  official  notice that legal matters in connection
with the  issuance  and  delivery  of such  shares  have  been  approved  by the
Company's  counsel.  The  Company  will use its best  efforts to effect any such
compliance  or  listing,  and  Optionee  agrees  to take any  action  reasonably
requested  by the Company in  connection  therewith.  Subject to any  applicable
limitations  under the  Securities  Act of 1933,  as amended,  and the rules and
regulations thereunder,  the Company will promptly file a Registration Statement
on Form S-8 (or any successor form),  with respect to the shares of Common Stock
issuable upon exercise of this Option,  and the Company will use all  reasonable
efforts to maintain the effectiveness of such registration statement for so long
as this Option shall remain  outstanding.  The Company may require that Optionee
agree  that he will  notify the  Company  when he makes any  disposition  of the
shares issued upon exercise of this Option  whether by sale,  gift or otherwise.
Optionee  will have the  rights  of a  shareholder  only as to  shares  actually
acquired by him upon exercise of this Option.

         5.       Non-transferability of Option.  This Option may not be 
transferred by Optionee otherwise than by will or by the laws of descent and 
distribution.  During Optionee's lifetime this Option may be exercised only by
Optionee or Optionee's duly appointed guardian or representative.


                                        4






         6.  Termination  of  Service.  In the  event  Optionee  ceases  to be a
consultant  to or  employee of the Company  because the Company  terminates  his
service  for  Cause  (as  defined  in the  Consulting/Employment  Agreement)  or
Optionee  terminates  his  service  without  Good  Reason  (as  defined  in  the
Consulting/Employment Agreement), this Option shall immediately terminate except
that Optionee may thereafter exercise this Option, to the extent he was entitled
to exercise it on the date when his service terminated,  for a period of 90 days
after the date of such  termination.  In no event,  however,  may this Option be
exercised after the Final Exercise Date.

         7.  Death or  Disability.  In the  event  Optionee  dies or  Optionee's
service  with the  Company  terminates  by reason  of  disability  (meaning  the
inability  of  Optionee,  because of  physical or mental  illness or injury,  to
perform  substantially all of his duties and  responsibilities  to the Company),
this Option shall  continue to be eligible for vesting as set forth in Section 2
of this  Agreement  for a period  of two  years  after  Optionee's  death or the
termination of his service because of disability.  In addition,  this Option may
be  exercised,  as to all or any of (a) the shares that Optionee was entitled to
purchase  immediately  prior to his  death  or the  termination  of his  service
because  of  disability  and (b) the  shares  that vest in  accordance  with the
preceding  sentence,  by  Optionee or his Legal  Representative,  at any time or
times within three years after his death or such termination of service.  Except
as so exercised this Option will expire at the end of such period.  In no event,
however, may this Option be exercised after the Final Exercise Date.

         8.  Administration.  This Option will be  administered  by the Board of
Directors  of the  Company,  which will have the  authority  to  interpret  this
agreement and to decide all questions and settle all  controversies and disputes
which  may arise in  connection  herewith.  All  decisions,  determinations  and
interpretations  of the  Board  of  Directors  will be  binding  on all  parties
concerned. A majority of the members of the Board of Directors will constitute a
quorum,  and all  determinations  of the  Board of  Directors  will be made by a
majority of its members.  Any determination of the Board of Directors under this
agreement  may be made without  notice or meeting of the Board of Directors by a
written  instrument  signed  by a  majority  of  the  members  of the  Board  of
Directors. In the event of any conflict between the terms of this Option and the
terms of the Plan the terms of this Option will control.

         9. Stock to be Delivered.  Stock to be delivered  upon exercise of this
Option may  constitute an original issue of authorized but unissued stock or may
consist of previously  issued stock  acquired by the Company as determined  from
time to time by the Board of  Directors.  The Board of Directors  and the proper
officers of the  Company  will take any  appropriate  action  required  for such
delivery.

         10.      Changes in Stock.  In the event of a stock dividend, stock 
split or combination of shares, recapitalization or other change in the 
Company's capital structure, the Board of Directors of the Company (whose 
determination will be binding on Optionee) will make


                                        5





appropriate  adjustments  to the  number  and kind of  shares  of stock or other
securities  subject  to this  Option,  the  exercise  price and  other  relevant
provisions.  Except as provided in the  following  paragraph,  in the event of a
Change in Control  (as defined  below),  this Option will expire and cease to be
exercisable,  provided that at least twenty days prior to the effective  date of
any such Change in Control,  the Board of  Directors  shall either (a) make this
Option  immediately  exercisable in full, or (b) arrange to have the acquiror or
an affiliate  thereof  grant a  replacement  option or other  replacement  award
containing  terms  that  the  Board of  Directors  reasonably  determines  to be
equitable under the  circumstances.  "Change in Control" means any consolidation
or merger in which the Company is not the surviving  corporation,  a transaction
or series of  related  transactions  that  result in the  acquisition  of all or
substantially all of the Company's  outstanding  Common Stock by a single person
or entity or by a group of persons or entities acting in concert, or the sale or
transfer of all or substantially all of the Company's assets.

         11. Acceleration of Options on Change in Control. Any Change in Control
will  result in the  accelerated  vesting of the lesser of (i) 50% of the shares
originally  issuable  pursuant  to this  Option or (ii) all of the shares  which
would  become  vested  on  the  achievement  of all  milestones  which  are  not
time-barred at the time of Change in Control.

In addition,  the Shares subject to this Option shall be  accelerated  under the
circumstances and to the extent described in Section 1 (f) of the Agreement (the
"Research  Agreement")  dated  September  26,  1997  among the  Company,  Irving
Weissman and Fred H. Gage.

         12.  Amendments.  The Board of Directors of the Company may at any time
or times amend this Option for the purpose of satisfying the requirements of any
changes in applicable  laws or regulations or for any other purpose which may at
the time be permitted by law,  provided that no such  amendment  will  adversely
affect the rights of Optionee without his consent.

         13.      Governing Law.  This agreement shall be governed by and 
construed in accordance with the laws of the State of Delaware (not including 
the conflict of laws principles thereof).




                                        6




                                                    [Incentive Option Agreement]

         IN WITNESS  WHEREOF,  the  Company  has  caused  this  agreement  to be
executed by its duly authorized officer. This Option is granted at the Company's
office, on the date stated above.


                                                 CYTOTHERAPEUTICS, INC.



                                                 By:___________________________
                                                    President



Accepted and Agreed:



- -----------------------------
Optionee






                                        7