
<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


For the quarter ended:                                                  0-19871
                                                                        -------
June 30, 1998                                        Commission File Number


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


           DELAWARE                                                94-3078125   
           --------                                                ----------   
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                                identification No)
                                             

                          701 GEORGE WASHINGTON HIGHWAY
                                LINCOLN, RI 02865
                                -----------------
           (Address of principal executive offices including zip code)


                                 (401) 288-1000
                                 --------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes___X____ No_________



At July 31, 1998, there were 18,277,906 shares of Common Stock, $.01 par value,
issued and outstanding. There were no issued and outstanding shares of Preferred
Stock.


                                  Page 1 of 16

<PAGE>

                             CYTOTHERAPEUTICS, INC.

                                      INDEX

PART I. FINANCIAL INFORMATION                                       Page Number

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets (unaudited)
            June 30, 1998 and December 31, 1997                               3

         Condensed Consolidated Statements of Operations (unaudited)
            Three and six months ended June 30, 1998 and 1997                 4

         Condensed Consolidated Statements of Cash Flows (unaudited)
            Six months ended June 30, 1998 and 1997                           5

         Notes to Condensed Consolidated Financial Statements (unaudited)      6

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                             7-14


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                                   15

Item 4.  Submission of Matters to a Vote of Security-Holders                 15

Item 6.  Exhibits and Reports on Form 8-K                                    15


SIGNATURES                                                                   16


                                  Page 2 of 16

<PAGE>

PART I - ITEM 1 - FINANCIAL STATEMENTS

CYTOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                            June 30, 1998   December 31, 1997
                                                             (unaudited)        (audited)
                                                            -------------   -----------------
<S>                                                         <C>              <C>          
Assets

Current assets:
      Cash and cash equivalents                             $  12,864,589    $  15,941,701
      Marketable securities                                    10,430,726       13,108,497
      Receivables from collaborative agreement                    190,455          150,880
      Other current assets                                      1,309,589          978,314
                                                            -------------    -------------
          Total current assets                                 24,795,359       30,179,392

Property, plant and equipment, net                              8,346,898        7,922,751
Other assets                                                    6,492,699        6,199,323
                                                            -------------    -------------

          Total assets                                      $  39,634,956    $  44,301,466
                                                            -------------    -------------
                                                            -------------    -------------

Liabilities and Stockholders' Equity

Current liabilities:
      Accounts payable and accrued expenses                 $   4,066,606    $   4,109,351
      Deferred revenue                                          1,758,648           16,144
      Current maturities of capitalized lease obligations         354,342          419,095
      Current maturities of long term debt                        971,737          658,986
                                                            -------------    -------------
          Total current liabilities                             7,151,333        5,203,576

Capitalized lease obligations, less current maturities          3,405,000        3,552,500
Long term debt, less current maturities                         1,250,000          555,525

Redeemable common stock                                         5,248,610        5,583,110

Common stock to be issued                                          48,375          506,600

Stockholders' equity
      Common stock                                                176,905          175,262
      Additional paid in capital                              122,546,371      121,472,844
      Accumulated deficit                                     (98,603,164)     (91,036,254)
      Deferred compensation                                    (1,585,062)      (1,702,820)
      Unrealized gain (loss) on marketable securities              (3,412)          (8,877)
                                                            -------------    -------------
          Total stockholders' equity                           22,531,638       28,900,155
                                                            -------------    -------------

          Total liabilities and stockholders' equity        $  39,634,956    $  44,301,466
                                                            -------------    -------------
                                                            -------------    -------------
</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                  Page 3 of 16

<PAGE>

PART I - ITEM 1 - FINANCIAL STATEMENTS

CYTOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

               (unaudited)

<TABLE>
<CAPTION>

                                                Three Months Ended              Six Months Ended
                                                    June 30,                        June 30,
                                              1998            1997            1998            1997
                                          ------------    ------------    ------------    ------------
<S>                                       <C>             <C>             <C>             <C>         
Revenue from collaborative arrangements   $  1,906,588    $  5,084,864    $  3,749,563    $  6,941,486

Operating expenses:
      Research and development               4,917,357       4,449,727       9,417,019       9,099,227
      General and administrative             1,264,249       1,684,917       2,411,255       3,481,347
                                          ------------    ------------    ------------    ------------
                                             6,181,606       6,134,644      11,828,274      12,580,574
                                          ------------    ------------    ------------    ------------

Earnings (loss) from operations             (4,275,018)     (1,049,780)     (8,078,711)     (5,639,088)

Other income (expense):
      Investment income                        351,522         467,769         745,496       1,116,399
      Interest expense                        (124,877)        (70,583)       (233,695)       (246,094)
      Other income (loss)                            0         (15,360)              0        (110,780)
                                          ------------    ------------    ------------    ------------
                                               226,645         381,826         511,801         759,525
                                          ------------    ------------    ------------    ------------

Net earnings (loss)                       ($ 4,048,373)   ($   667,954)   ($ 7,566,910)   ($ 4,879,563)
                                          ------------    ------------    ------------    ------------
                                          ------------    ------------    ------------    ------------

Net earnings (loss) per share                   ($0.22)         ($0.04)         ($0.42)         ($0.30)
                                          ------------    ------------    ------------    ------------
                                          ------------    ------------    ------------    ------------

Shares used in calculation                  18,199,870      16,498,374      18,192,212      16,484,864
                                          ------------    ------------    ------------    ------------
                                          ------------    ------------    ------------    ------------
</TABLE>

See accompanying notes to condensed financial statements.


                                  Page 4 of 16

<PAGE>

PART I - ITEM 1 - FINANCIAL STATEMENTS


CYTOTHERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

      (unaudited)

<TABLE>
<CAPTION>

                                                                       Six Months Ended
                                                                          June 30,
                                                                   1998            1997
                                                               ------------    ------------
<S>                                                            <C>             <C>          
Cash flows from operating activities:
      Net earnings (loss)                                      ($ 7,566,910)   ($ 4,879,563)
      Adjustments to reconcile net earnings (loss) to
        net cash used for operating activities:
            Depreciation and amortization                         1,039,208         967,350
            Compensation expense relating to the grant
              of stock options                                      117,758          27,413
            Loss on sale of fixed assets                               --               825
            Changes in operating assets and liabilities           1,377,593      (1,963,479)
                                                               ------------    ------------
      Net cash used in operating activities                      (5,032,351)     (5,847,454)
                                                               ------------    ------------

Cash flows from investing activities:
      Proceeds from sale of marketable securities                13,634,045       9,936,929
      Purchases of marketable securities                        (10,952,827)     (6,104,205)
      Purchase of property, plant and equipment                  (1,226,809)     (4,504,373)
      Proceeds from the sale of fixed assets                           --             1,941
      Acquisition of other assets                                  (576,588)       (572,576)
                                                               ------------    ------------
      Net cash provided by (used in) investing activities           877,821      (1,242,284)
                                                               ------------    ------------

Cash flows from financing activities:
      Proceeds from the exercise of stock options                   282,445         375,825
      Proceeds from financing transactions                        1,259,300            --
      Principal payments under capitalized lease obligations
        and mortgage payable                                       (464,327)       (538,485)
                                                               ------------    ------------
      Net cash provided by (used in) financing activities         1,077,418        (162,660)
                                                               ------------    ------------
Effect of exchange rate on cash and cash equivalents                   --          (234,206)
                                                               ------------    ------------
Decrease in cash and cash equivalents                            (3,077,112)     (7,486,604)
Cash and cash equivalents, January 1                             15,941,701      19,921,584
                                                               ------------    ------------

Cash and cash equivalents, June 30                             $ 12,864,589    $ 12,434,980
                                                               ------------    ------------
                                                               ------------    ------------

</TABLE>

See accompanying notes to condensed financial statements.

                                    Page 5 of 16

<PAGE>

PART I - ITEM 1 - FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998 and 1997

NOTE 1.   BASIS OF PRESENTATION

         The accompanying, unaudited, condensed consolidated financial
         statements have been prepared by the Company in accordance with
         generally accepted accounting principles for interim financial
         information and with the instructions to Form 10-Q and Article 10 of
         Regulation S-X. Accordingly, they do not include all of the information
         and footnotes required by generally accepted accounting principles for
         complete financial statements. In the opinion of management, the
         accompanying financial statements include all adjustments, consisting
         of normal recurring accruals considered necessary for a fair
         presentation of the financial position, results of operations and cash
         flows for the periods presented. Results of operations for the three
         and six months ended June 30, 1998 are not necessarily indicative of
         the results that may be expected for the entire fiscal year ended
         December 31, 1998.

         For further information, refer to the audited financial statements and
         footnotes thereto as of December 31, 1997 included in the Company's
         Annual Report to Stockholders and the Annual Report on Form 10-K filed
         with the Securities and Exchange Commission.

NOTE 2.   NET LOSS PER SHARE

         Net loss per share is computed using the weighted average number of
         shares of common stock outstanding. Common equivalent shares from stock
         options and warrants are excluded as their effect is antidilutive.

NOTE 3.   ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

         As of January 1, 1998, the Company adopted Statement 130, Reporting
         Comprehensive Income. Statement 130 establishes new rules for reporting
         and display of comprehensive income and its components; however, the
         adoption of this Statement had no impact on the Company's net income or
         shareholders' equity. Statement 130 requires unrealized gains or losses
         on the Company's available-for-sale securities and foreign currency
         translation adjustments, which prior to adoption were reported
         separately in shareholders' equity to be included in other
         comprehensive income.

         For the three months end June 30, 1998 and 1997, total
         comprehensive loss amounted to $4,047,000 and $655,000. For the
         first six months of 1998 and 1997, total comprehensive loss
         amounted to $7,561,000 and $4,962,000.


                                  Page 6 of 16

<PAGE>

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

The following discussion of the financial condition and results of operations of
the Company for the three and six months ended June 30, 1998 and 1997 should be
read in conjunction with the accompanying unaudited condensed consolidated
financial statements and the related footnotes thereto.

This report may contain certain forward-looking statements regarding, among
other things, the Company's results of operations, the progress of the Company's
product development and clinical programs, the need for, and timing of,
additional capital and capital expenditures, partnering prospects, the need for
additional intellectual property rights, effects of regulations, the need for
additional facilities and potential market opportunities. The Company's actual
results may vary materially from those contained in such forward-looking
statements because of risks to which the Company is subject, such as risks of
delays in research, development and clinical testing programs, obsolescence of
the Company's technology, lack of available funding, competition from third
parties, intellectual property rights of third parties, failure of the Company's
collaborators to perform, regulatory constraints, litigation and other risks to
which the Company is subject. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated
herein by reference.

Overview

Since its inception in August 1988, the Company has been primarily engaged in
research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company
expects that its research and development expenditures will increase in future
years as research and product development efforts accelerate and clinical trials
are initiated or broadened. The Company has incurred annual operating losses
since inception and expects to incur substantial operating losses in the future.
As a result, the Company is dependent upon external financing from equity and
debt offerings and upon revenues from collaborative research arrangements with
corporate sponsors to finance its operations. The Company's results of
operations have varied significantly from year to year and from quarter to
quarter, and may vary significantly in the future due to the occurrence of
material, nonrecurring events, including without limitation, the receipt of
one-time, nonrecurring licensing and milestone payments.

Results of Operations
Three months ended June 30, 1998 and 1997

For the quarter ended June 30, 1998 and 1997, revenues from collaborative


                                  Page 7 of 16

<PAGE>

agreements totaled $1,907,000 and $5,085,000, respectively.  The revenues
were earned primarily from a Development, Marketing and License Agreement with
Astra AB, which was signed in March 1995. Included in the 1997 revenues is a
$3,000,000 milestone payment from Astra related to the Phase II clinical trial
program for the Company's cell-containing, pain-control implant.

Research and development expenses totaled $4,917,000 for the three months ended
June 30, 1998, compared with $4,450,000 for the same period in 1997.

General and administrative expenses were $1,264,000 for the three months ended
June 30, 1998, compared with $1,685,000 for the same period in 1997. The
decrease of $421,000, or 25%, from 1997 to 1998 was primarily attributable to a
reduction in legal expenses, as well as a reduction in employee expenses.

Interest income for the three months ended June 30, 1998 and 1997 was $352,000
and $468,000, respectively. The decrease in interest income in 1998 is
attributable to the lower average investment balances, $23,669,00 vs.
$34,672,000 in the second quarter of 1998 and 1997, respectively.

Interest expense was $125,000 for the three months ended June 30, 1998, compared
with $71,000 for the same period in 1997. The increase from 1997 to 1998 is
attributable to the capitalization of interest for the new facility in 1997 in
the amount of $99,000.

Net loss for the three months ended June 30, 1998 was $4,048,000, or $0.22 per
share, as compared to net loss of $668,000, or $0.04 per share, for the
comparable period in 1997. The consolidated results for the second quarter of
1998 include a $502,000 net loss attributable to StemCells, Inc., the Company's
wholly owned subsidiary, compared to the consolidated results for the second
quarter of 1997 which include a $544,000 net loss attributable to Modex
Therapeutiques SA, the Company's formerly 50% owned Swiss subsidiary.

Results of Operations
Six months ended June 30, 1998 and 1997

For the six months ended June 30, 1998 and 1997, revenues from collaborative
agreements totaled $3,750,000 and $6,941,000. The revenues were earned primarily
from a Development, Marketing and License Agreement with Astra AB.

Research and development expenses totaled $9,417,000 for the six months ended
June 30, 1998, compared with $9,099,000 for the same period in 1997.

General and administrative expenses were $2,411,000 for the six months ended
June 30, 1998, compared with $3,481,000 for the same period
in 1997.  The


                                  Page 8 of 16

<PAGE>

decrease of $1,070,000 or 31%, from 1997 to 1998 was primarily attributable to a
reduction in legal fees, as well as a reduction in employee expenses.

Interest income for the six months ended June 30, 1998 and 1997 was $745,000 and
$1,116,000, respectively. The average investment balances were $25,329,000 and
$37,555,000 for the first six months of 1998 and 1997, respectively.

Interest expense was $234,000 for the six months ended June 30, 1998, compared
with $246,000 for the same period in 1997.

Net loss for the six months ended June 30, 1998 was $7,567,000, or $0.42 per
share, as compared to a net loss of $4,880,000, or $0.30 per share, for the
comparable period in 1997.


Liquidity and Capital Resources

Since its inception, the Company has financed its operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.

The Company had unrestricted cash, cash equivalents and marketable securities
totaling $23,295,000 at June 30, 1998. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate bonds and money market funds.

In May 1996, the Company secured an equipment loan facility with a bank in the
amount of $2,000,000. The Company has borrowed $2,000,000 under this agreement
as of June 30, 1998. The loan required interest payments only for the first two
years; principal payments are payable over a three-year period beginning in
August 1998. The loan is secured by equipment purchased with the proceeds of the
credit facility.

In October 1997, the Company completed a series of transactions which resulted
in the establishment of its previously 50%-owned Swiss subsidiary, Modex
Therapeutiques, SA, as an independent company. In the transactions, the Company
reduced its ownership interest from 50% to approximately 25% in exchange for $4
million cash and elimination of its prior contingent obligation to contribute an
additional Sfr 2.4 million (approximately $1.7 million) to Modex in July 1998.
In the transactions, all of the put and call arrangements between the Company
and other stockholders of Modex were eliminated. In April 1998, Modex completed
a financing, in which the Company elected not to participate, which resulted 
in a reduction of its ownership interest to approximately 20%.


                                  Page 9 of 16

<PAGE>

The Company and Modex also modified the terms of their existing royalty-bearing
Cross License Agreement to (i) expand the field in which Modex is exclusively
licensed to apply the Company's proprietary encapsulated cell technology to
include, in addition to the original field of diabetes, obesity and anemia, the
treatment of hemophilia A and B utilizing Factor VIII and/or Factor IX and two
additional applications to be agreed upon by the Company and Modex; (ii)
eliminate the Company's requirement to make future milestone payments to Modex
of up to 300,000 shares of CytoTherapeutics' Common Stock; (iii) limit the scope
of the Company's technology licensed to Modex to existing and future
encapsulation technology; and (iv) specify the terms under which the Company
will manufacture any products Modex may develop based on the Company's
technology and grant Modex an option to manufacture, or to have manufactured,
such products on payment of a higher royalty. The Cross License Agreement
continues to provide for the payment of royalties from Modex to the Company on
the sale of any licensed products. The revised agreement also limits the scope
of the Modex technology exclusively licensed, on a royalty-bearing basis, to the
Company for the application of diseases, conditions and disorders of the central
nervous system to existing and future encapsulation technology and certain
additional existing technology. In addition to the purchase of Modex's Common
Stock from the Company, investors participating in the transaction also invested
$1.6 million directly in Modex.

In September 1997, a merger of a wholly-owned subsidiary of the Company and
StemCells, Inc. was completed in the form of a purchase. Through the merger, the
Company acquired StemCells for a purchase price totaling approximately
$9,475,000, consisting of 1,320,691 shares of the Company's Common Stock and
options and warrants for the purchase of 259,296 of CytoTherapeutics' Common
Shares at nominal consideration, valued at $7,900,000 in the aggregate, the
assumption of certain liabilities of $934,000 and transaction costs of $641,000.
The purchase price was allocated, through a valuation, to license agreements
valued at $1,131,000, to be amortized over three years, and to acquired research
and development of $8,344,000 which has been expensed. As part of the
acquisition of StemCells, Richard M. Rose, MD, became President, Chief Executive
Officer and a director of the Company and Dr. Irving Weissman became a director
of the Company.

Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former principal
shareholders of StemCells to repurchase approximately 500,000 of the Company's
shares of Common Stock exchanged for StemCells shares, upon the occurrence of
certain events as defined.


                                  Page 10 of 16

<PAGE>

To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to expedite
the progress of the Company's stem cell program, the Company awarded these
individuals options to acquire a total of approximately 1.6 million shares of
the Company's common stock, at an exercise price of $5.25 per share, the quoted
market price at the grant date; approximately 100,000 of these options are
exercisable immediately, 1,031,000 of these options vest and become exercisable
only upon the achievement of specified milestones related to the Company's stem
cell development program. The remaining 469,000 options vest over eight years.
In connection with the 469,000 options issued to a non-employee, Dr. Anderson,
the Company has recorded deferred compensation of $1,750,000, the fair value of
such options at the date of grant, which will be amortized over an eight-year
period. If the milestones specified relating to the 1,031,000 option grant are
achieved, at that time the Company will record compensation expense for the
excess of the quoted market price of the Common Stock over the exercise price of
$5.25 per share for 562,000 options and the fair market value for 469,000 of
such options determined using the Black-Scholes method. The Company has also
designated a pool of 400,000 options to be granted to persons in a position to
make a significant contribution to the success of the stem cells program.

Stem cells research will be conducted pursuant to the provisions of an agreement
between the Company and Drs. Weissman and Gage providing for a two-year research
plan. If the goals of the research plan are accomplished, the Company has agreed
to fund continuing stems cells research. Increases in stem cells research
funding of not more than 25% per year will be funded by the Company as long as
the goals of the research plan are being met. However, the Company will retain
the option of (i) ceasing or reducing neural stem cell research even if all
research plan goals are met, but will be required to accelerate the vesting of
all still-achievable performance-based stock options, and (ii) ceasing or
reducing non-neural stem cell research even if all plan goals are being met by
affording the scientific research founders the opportunity to continue
development of the non-neural stem cell research by licensing the technology
related to such research to the founders in exchange for a payment to the
Company equal to all prior Company funding for such research, plus royalty
payments.

In April 1997, CytoTherapeutics entered into an agreement with NeuroSpheres Ltd.
replacing all previous agreements and resolving its dispute with NeuroSpheres.
The pending action in the United State District Court and its counterpart
actions in Calgary, Alberta, Canada, as well as all arbitration proceedings,
have been discontinued. Under the terms of the settlement, the Company has an
exclusive royalty-bearing license to growth-factor responsive stem cells for
transplantation. NeuroSpheres had an option to acquire co-exclusive rights, but
failed to exercise the option by the April 1998 deadline. Accordingly, the
NeuroSpheres' option to acquire co-


                                  Page 11 of 16
<PAGE>

exclusive rights has lapsed and CytoTherapeutics retains exclusive rights for
transplantation. The parties have no further research obligations to each other.

In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology. The Company and Cognetix have also entered into an option agreement
giving CytoTherapeutics the right to option up to three of Cognetix's compounds
for use in treating eye diseases. CytoTherapeutics has exercised its right as to
one protein. The Company and Cognetix are presently discussing proposed
revisions to their relationship under the agreements.

In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat Parkinson's disease, Huntington's disease and amyotrophic
lateral sclerosis ("ALS").

Under the terms of the agreement for Parkinson's disease, Genentech
purchased 829,171 shares of common stock for $8,300,000 to fund development of
products to treat Parkinson's disease. Additional equity purchases and other
funding by Genentech is available for future clinical development as determined
by the parties. Genentech has the right, in its discretion, to terminate the
Parkinson's program at specified milestones in the program. If the Parkinson's
program is terminated and the funds the Company received from the sale of stock
to Genentech pursuant to the Parkinson's agreement exceed the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech has the right to require the Company to repurchase from Genentech
shares of Company Common Stock having a value equal to the amount of the
overfunding, based upon the share price paid by Genentech. As such, the Common
Stock purchased by Genentech is classified as Redeemable Common Stock until such
time as the related funds are expended on the program. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
are currently underway to determine the balance of Redeemable Common Stock to be
redeemed in accordance with the agreement.

The Company also licensed certain growth factors for the treatment of
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms
of the agreements, the Company is responsible for conducting and funding all
preclinical and clinical development, subject to specified rights


                                  Page 12 of 16

<PAGE>

of Genentech to participate in the development and marketing of the proposed
products. Should Genentech share in the development cost of the proposed
products, the companies will share profits at a negotiated percentage upon
commercialization. Should Genentech elect not to participate in the development,
upon commercialization, the Company will pay Genentech an agreed upon royalty
based upon sales. These agreements supersede the Development Collaboration and
License Agreement between the Company and Genentech entered into in March 1994.

In March 1995, the Company signed a collaborative research and development
agreement with Astra AB for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000, a milestone payment of $3,000,000 in the first quarter of
1997 which was recognized as revenue in the second quarter of 1997 and may make
up to $13,000,000 in additional payments subject to the achievement of certain
development milestones. Under the agreement, the Company is obligated to conduct
certain research and development pursuant to a four-year research plan agreed
upon by the parties. Over the term of the research plan, the Company expects to
receive annual research payments from Astra of $5 million to $7 million. Subject
to the successful development of such products and obtaining necessary
regulatory approvals, Astra is obligated to conduct all clinical trials of
products arising from the collaboration and to seek approval for their sale and
use. Astra has the exclusive worldwide right to market products covered by the
agreement. Until the later of either the last to expire of all patents included
in the licensed technology or a specified fixed term, the Company is entitled to
a royalty on the worldwide net sales of such products in return for the license
granted to Astra and the Company's obligation to manufacture and supply such
products. Astra has the right to terminate the original agreement beginning
April 1, 1998. In May 1998, Astra AB agreed to increase the annual research and
development payments from $7 million to $8.5 million for the calendar year 1998.
This increase in funding will be recognized as revenue in the 3rd and 4th
quarters of 1998.

Substantial additional funds will be required to support the Company's research
and development programs, for acquisition of technologies and intellectual
property rights, for preclinical and clinical testing of its anticipated
products, pursuit of regulatory approvals, acquisition of capital equipment,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings, and funding from collaborative
arrangements will be used to fund operations.

The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing


                                  Page 13 of 16

<PAGE>

and availability of any future financing will depend principally upon equity
market conditions, interest rates and, more specifically, on the Company's
continued progress in its exploratory, preclinical and clinical development
programs. There can be no assurance that such funds will be available on
favorable terms, if at all.

The Company expects that its existing capital resources, revenues from 
collaborative agreements and income earned on invested capital will be 
sufficient to fund its operations through 1999. The Company's cash 
requirements may vary, however, depending on numerous factors. Lack of 
necessary funds may require the Company to: delay, scale back or eliminate 
some or all of its research and product development programs; and/or reduce 
its capital expenditures; and/or license its potential products or 
technologies to third parties.

                                  Page 14 of 16

<PAGE>

PART II - ITEM 1


LEGAL PROCEEDINGS

         None.


PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

(a)  On May 5, 1998 the 1998 Annual Meeting of Stockholders was held in Lincoln,
     Rhode Island.

(b)  Not applicable

(c)  The following is a brief description of each matter voted upon at the
     meeting and a breakdown of the votes cast for, against or withheld, as well
     as the number of abstentions voted for each proposal.

         1. Proposal to elect the following nominees as Directors of the
         Company: Mark J. Levin, Irving L. Weissman, M.D.

                  Mr.  Levin -                    13,727,774 votes in favor
                                                  107,272 votes withheld

                  Dr.  Weissman -                 13,727,423 votes in favor
                                                  107,623 votes withheld


PART II - ITEM 6


EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     Exhibit 99 - Cautionary Factors Relevant to Forward-Looking-Information.

(b)  Reports on Form 8-K

     None.


                                  Page 15 of 16

<PAGE>

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                        CYTOTHERAPEUTICS, INC.
                                        ------------------------
                                        (Name of Registrant)




August 14, 1998                         /s/ John S. McBride
-----------------                       -------------------
(Date)                                  Executive Vice President and Chief
                                        Financial Officer
                                        (principal financial officer and
                                        principal accounting officer)





                                  Page 16 of 16
