CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION

      CYTOTHERAPEUTICS, INC. (THE "COMPANY") WISHES TO CAUTION READERS THAT THE
FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE AFFECTED AND IN
THE FUTURE COULD AFFECT THE COMPANY'S RESULTS AND COULD CAUSE ACTUAL RESULTS AND
THE NEEDS AND FINANCIAL CONDITION OF THE COMPANY TO VARY MATERIALLY FROM
FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY ON THE BASIS OF MANAGEMENT'S
CURRENT EXPECTATIONS. THE BUSINESS IN WHICH THE COMPANY IS ENGAGED IS DEPENDENT
ON UNPROVEN TECHNOLOGY, RAPIDLY CHANGING, EXTREMELY COMPETITIVE AND INVOLVES A
HIGH DEGREE OF RISK, AND ACCURACY WITH RESPECT TO FORWARD-LOOKING STATEMENTS IS
DIFFICULT.

      DEPENDENCE ON ASTRA AND RESULTS OF PHASE IIB CLINICAL TRIAL. The Company's
ability to continue development of its encapsulated-cell therapy products is
dependent on the willingness of Astra AB to continue to support further
development of the Company's encapsulated-cell product for the treatment of
chronic pain. While Astra increased its support for this program during 1998 and
the first half of 1999 in order to facilitate completion of the Phase IIB
clinical trial for this product, Astra has the right to terminate the agreement
providing for its support for this product at any time. The Company expects that
the results from the Phase IIB clinical trial for this product will be available
about mid-1999. The Company expects Astra to make a decision on continued
support for the Company's chronic pain program based in substantial part on
Astra's review of the results of this trial. Should Astra determine to terminate
the program or seek to reduce its support for the program or to otherwise
adversely modify the terms of the Company's relationship with Astra, any such
action would have a material, adverse effect on the Company's liquidity and
capital resources and would likely result in the Company's inability to continue
to fund further development of its proposed encapsulated-cell products.

      NEED TO OBTAIN CORPORATE PARTNER OR PARTNERS TO SUPPORT STEM CELL
DEVELOPMENT EFFORTS. The Company's ability to continue to fund the development
of its neural and other stem cell technologies will be dependent on the
Company's ability to reach appropriate partnering arrangements providing support
for the Company's discovery and development efforts. While the Company has
engaged, and expects to continue to engage, in discussions regarding such
arrangements, the Company has not reached any agreement regarding any such
arrangements and there can be no assurance that the Company will be able to
obtain any such agreement.

      LACK OF LIQUIDITY AND CAPITAL RESOURCES. The Company has limited liquidity
and capital resources and must obtain significant additional capital resources
in order to sustain its product development efforts. The Company's ability to
obtain additional capital will be substantially dependent on Astra's decision
regarding continuation of support for the Company's chronic pain product and the
Company's ability to obtain partnering support for its stem cell technology. The
Company's liquidity and capital resources will be adversely affected to the
extent that the Company is required to redeem common stock of the Company held
by Genentech, Inc. under the terms of the Company's partnering agreement with
Genentech regarding possible development of an encapsulated-cell product for the
treatment of Parkinson's disease, which was terminated by Genentech in May 1998.
Under this agreement, if upon termination of the agreement the $8.3 million
received by the Company from the sale of the Company's Common Stock to Genentech
at the commencement of the agreement exceeds by more than $1 million the funds
expended by the Company in developing the proposed Parkinson's product, the
Company is obligated to repurchase from Genentech for cash consideration shares
of the Company's common stock having a value equal to the amount of the
overfunding, at the same per share price originally paid by Genentech ($10.01
per share). Genentech has requested that the Company redeem shares of the Common
Stock having an aggregate value of at least $3.1 million. The Company is
negotiating with Genentech regarding the terms and amount of such redemption
(which the Company currently expects may be approximately $3.1 million).

      EARLY STAGE DEVELOPMENT; HISTORY OF OPERATING LOSSES - Substantially all
of the Company's revenues to date have been derived, and for the foreseeable
future substantially all of the Company's revenues will be derived, from
collaborative agreements, research grants and income earned on invested funds.
The Company will incur substantial operating losses in the future as the Company
conducts its research, development, clinical trial and manufacturing activities.
There can be no assurance that the Company will achieve revenues from product
sales or become profitable.

      FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING - The



development of the Company's products will require the commitment of substantial
resources to conduct the time-consuming research, preclinical development and
clinical trials that are necessary for regulatory approvals and to establish
production and marketing capabilities, if such approvals are obtained. The
Company will need to raise substantial additional funds to continue its product
development efforts and intends to seek such additional funds through
partnership, collaborative or other arrangements with corporate sponsors, public
or private equity or debt financings, or from other sources. Future cash
requirements may vary from projections based on changes in the Company's
research and development programs, progress in preclinical and clinical testing,
the Company's ability to enter into, and perform successfully under,
collaborative agreements, competitive and technological advances, the need to
obtain proprietary rights owned by third parties, facilities requirements,
changes in regulations and other factors. Lack of necessary funds may require
the Company to delay, reduce or eliminate some or all of its research and
product development programs or to license its potential products or
technologies to third parties. No assurance can be given that funding will be
available when needed, if at all, or on terms acceptable to the Company.

      UNCERTAINTIES OF CLINICAL DEVELOPMENT AND NEW MODE OF THERAPY - None of
the Company's proposed products has been approved for commercial sale or entered
Phase III clinical trials. Even if the Company's proposed products appear to be
promising at an early stage of research or development such products may later
prove to be ineffective, have adverse side effects, fail to receive necessary
regulatory approvals, be difficult or uneconomical to manufacture or market on a
commercial scale, be adversely affected by government price controls or
limitations on reimbursement, be precluded from commercialization by proprietary
rights of third parties, by regulatory restrictions, or be subject to
significant competition from other products. There can be no assurance that the
Company will be able to demonstrate, as required, that its implants, on a
consistent basis and on a commercial scale, among other things: (i) successfully
isolate transplanted cells from the recipient's immune system; (ii) remain
biocompatible with the tissue into which they are implanted, including, for
certain implants, brain tissue; (iii) adequately maintain the viability of cells
contained within the membrane for a sufficiently long time to be efficacious and
commercially viable; (iv) safely permit the therapeutic substances produced by
the cells within the membrane to pass through the membrane unto the patient in
controlled doses for extended periods; and (v) are sufficiently durable for the
intended indication. While clinicians have generally had little difficulty in
retrieving the Company's implants, there have been cases where the implant broke
on attempted explant. The Company has changed its implantation procedure and its
implants and is continuing a program of developing stronger implants. In
addition, the viability of implanted


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encapsulated cells varies depending of the cell type, the implantation location
and other factors. Lack of viability could restrict certain of the Company's
programs to indications where long-term delivery of the therapeutics substances
is not required. There can also be no assurance that the products that may be
generated in the Company's stem cell programs will: (i) survive and persist in
the desired locations, (ii) provide the therapeutic benefits intended, (iii)
properly differentiate and integrate into existing tissue in the desired manner,
or (iv) not cause tumors or other side effects.

      There has been increasing regulatory concern about the risks of cell
transplantation. Certain of these concerns have focused on the use of cells
derived from cows (such as are used in the Company's pain program) and cells
from primates and pigs. The United Kingdom has adopted a moratorium on all
xenotransplantation pending further research and discussion; the EC Commission
has introduced a ban on the use of "high-risk material" from cattle and sheep in
the Member States of the European Union in the manufacture of pharmaceuticals.
In addition, the FDA has proposed guidelines that impose significant constraints
on the conduct of clinical trials utilizing xenotransplantion and are likely to
significantly affect the cost of producing the Company's products using
non-human cells; such costs could make the Company's products cost more to
produce than the Company receives for their production. Furthermore, the FDA has
published a "Proposed Approach to Regulation of Cellular and Tissue-Based
Products" which relates to the use of human cells. The Company cannot presently
determine the effects of such actions or what other actions might be taken.
Restrictions on the testing or use of cells, whether human or non-human, as
human therapeutics, could adversely affect the Company's product development
programs and the Company itself and could prevent the Company from producing
and/or selling products or make the cost of production by the Company
prohibitively high. See "Government Regulation."

      DEPENDENCE ON OUTSIDE PARTIES - The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to maintain its existing arrangements or
to enter into any additional arrangements on terms acceptable to the Company, or
successfully perform its obligations under its existing or any additional
arrangements. If any of the Company's collaborators terminates its relationship
with the Company or fails to perform its obligations in a timely manner, the
development or commercialization of the Company's product candidate or research
program under such collaborative agreement may be adversely affected. Moreover,
as noted above, the Company is particularly dependent on its pain program
partner, Astra AB.

      NEED FOR AND UNCERTAINTY OF OBTAINING PATENT PROTECTION - Patent
protection for products such as those the Company proposes to develop is highly
uncertain and involves complex factual and evolving legal questions. No
assurance can be given that any patents issued or licensed to the Company will
not be challenged, invalidated or circumvented, or that the rights granted under
such patents will provide competitive advantages to the Company. On the other
hand, it is important for the Company to obtain patent protection. This is
particularly true in the case of the Company's stem cell technology where the
first person or entity to discover and patent a particular stem or progenitor
cell may effectively block all others, meaning that it will be critically
important to the Company's stem cell development efforts for the Company or its
collaborators to be the first to discover any stem cell which the Company is
seeking to discover. Failure to be the first to make such a discovery would
likely force the Company to terminate or substantially modify its efforts
directed toward the discovery of the discovered stem cell, and would likely have
a substantial adverse effect on the Company.

      EXISTENCE OF THIRD PARTY PATENTS AND PROPRIETARY RIGHTS; NEED TO OBTAIN
LICENSE - A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent applications or have
been issued patents relating to cell therapy and encapsulation and other
technologies potentially relevant to or required by the Company's expected
products. The Company cannot predict which, if any, of such applications will
issue as patents or the claims that might be allowed. The Company is aware that
a number of entities have filed applications relating to stem and/or progenitor
cells. The Company is also aware of a number of third-party patent applications
and patents relating to cell encapsulation or claiming use of genetically
modified cells to treat disease, disorder or injury. In particular, the Company
is aware of a third-party U.S. patent which relates the use of cells for
alleviating chronic pain in humans and of two issued U. S. patents claiming
certain methods for treating defective, diseased or damaged cells in the
mammalian


                                                                              40


CNS by grafting genetically modified cells. The Company cannot predict the
effect of existing patent applications and patents on future unencapsulated
products. In addition, the Company is aware of third-party patents and patent
applications claiming rights to the neurotrophic factors (such as CNTF, NT 4/5,
Neurturin, and CT-1) which the Company hopes to deliver with its technology, and
to the production of these factors through the use of genetically modified
cells. The Company expects to use genetically modified cells to produce these
factors for use in its encapsulated products and expects that it may wish to
genetically modify its stem/progenitor cells. The Company may also be required
to seek licenses in regard to other cell lines, the techniques used in creating,
obtaining or maintaining such cell lines, the materials used in the manufacture
of its implants or otherwise. There can be no assurance that the Company will be
able to establish collaborative arrangements or obtain licenses to the foregoing
technology or to other necessary or desirable technology on acceptable terms, if
at all, or that the patents underlying any such licenses will be valid and
enforceable. See "Patents, Proprietary Rights and Licenses" in the Company's
Annual Report on Form 10-K.

      GOVERNMENT REGULATION - The Company's research, preclinical development
and clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. There can be
no assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products, or in other unpredictable consequences. See "Government
Regulation" in the Company's Annual Report on Form 10-K.

      SOURCES OF CELLS AND OTHER MATERIALS - The Company's potential products
require genetically engineered cell lines or living cells harvested from animal
or human sources. There can be no assurance that the Company will successfully
identify or develop sources of the cells required for its potential products and
obtain such cells in quantities sufficient to satisfy the commercial
requirements of its potential products. These supply limitations may apply, in
particular, to primary cells that must be drawn directly from animal or human
sources, such as the bovine adrenal chromaffin cells currently used in the
Company's product for the treatment of pain. As an alternative to primary cells,
the Company is developing products based on the use of genetically altered
cells. Intellectual property rights to important genetic constructs used in
developing such cells, including the constructs used to develop cells producing
neurotrophic factors, are or may be claimed by one or more companies, which
could prevent the Company from using such cells. In addition, many suppliers of
materials used by the Company in its media, implants, and other components have
restricted the use of such materials for implantation into humans; if the
Company cannot obtain the necessary materials for its implants, the Company
would be adversely affected.

      MANUFACTURING UNCERTAINTIES - The Company's pilot manufacturing plant, may
not have sufficient capacity to permit the Company to produce all the products
for all of the clinical trials it anticipates developing. In addition, the
Company has not developed the capability to commercially manufacture any of its
proposed products and is unaware of any other company that has manufactured any
membrane-encapsulated cell product on a commercial scale. There can be no
assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost or in the quantities
necessary to make a commercially viable product, if at all.

      COMPETITION - Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities and
other research institutions. Currently, several of these competitors market and
sell therapeutic products for the treatment of chronic pain, Parkinson's disease
and other CNS conditions. In addition, most of the Company's competitors have
substantially greater capital resources, experience in obtaining regulatory
approvals and, in the case of commercial entities,


                                                                              41


experience in manufacturing and marketing pharmaceutical products, than the
Company. A number of other companies are attempting to develop methods of
delivering therapeutic substances within or across the blood brain barrier.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than those being
developed by the Company or that would render the Company's technology and
products obsolete or non-competitive. See "Competition" in the Company's Annual
Report on Form 10-K.

      DEPENDENCE ON KEY PERSONNEL - The Company is highly dependent on the
principal members of its management and scientific staff and certain of its
outside consultants. Loss of the services of any of these individuals could have
a material adverse effect on the Company's operations. In addition, the
Company's operations are dependent upon its ability to attract and retain
additional qualified scientific and management personnel. There can be no
assurance the Company will be able to attract and retain such personnel on
acceptable terms given the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions for experienced
personnel.

      REIMBURSEMENT AND HEALTH CARE REFORM - In both domestic and foreign
markets, sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and
other health care payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis. See "Reimbursement and Health Cost Control" in the Company's Annual
Report on Form 10-K.


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