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Employment Agreement - CytoTherapeutics Inc. and Billie M. York

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                             CYTOTHERAPEUTICS, INC.
                          701 George Washington Highway
                                Lincoln, RI 02865
                                  401-288-1000

                                 March 20, 1998

Billie M. York, Ph.D.
6532 Castle Pines Road
Fort Worth, TX  76132

Dear Bill:

      This letter will confirm our offer to you of employment with
CytoTherapeutics, Inc. (the "Company") under the terms and conditions that
follow:

      1. Position and Duties. As of the date of this letter, you will become an
employee of the Company, available to answer questions and provide advice to the
Company from your current location or while traveling, as your current schedule
permits. As of April 20, 1998, (the "Full-Time Date"), you will be employed by
the Company hereunder on a full-time basis as Executive Vice President. As
Executive Vice President, you will exert your full-time best efforts to promote
and protect the business interests of the Company. Your initial responsibility
will be to oversee the Company's efforts to apply our encapsulated cell and stem
cell technologies toward possible development of treatments for certain diseases
and disorders of the eye and ear. If the Company determines to conduct such
efforts through a subsidiary, you shall serve as chief executive officer of such
subsidiary. More generally, you shall fulfill such responsibilities as the
Company may reasonably determine consistent with your position as an Executive
Vice President. You will report directly to the Company's Chief Executive
Officer.

      2. Salary and Bonus. For all services that you perform for the Company and
its Affiliates (as defined in Section 6(g)(ii)), the Company will compensate you
during your employment in accordance with this Paragraph 2. For the period
between now and the Full-Time Date, you will be paid Two Thousand Dollars
($2,000). Thereafter, your base salary will be at the rate of Two Hundred Thirty
Thousand Dollars ($230,000) per year. Your performance and compensation will be
reviewed at least annually by the Chief Executive Officer and the Compensation
Committee of the Board. In addition to your base salary, you will be eligible,
at the end of each calendar year, beginning with calendar 1998, during your
employment hereunder, for a bonus of up to twenty percent (20%) of your base
salary, the amount of each such bonus being determined by the Board in its
discretion on the basis of

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your performance hereunder or (if mutually agreed) on the basis of the
attainment of specific performance objectives, provided, however, that the
Company hereby agrees that, with respect to calendar year 1998, you shall
receive the full amount of such bonus ($46,000).

      3. Stock Options. Through the Company's 1992 Equity Incentive Plan (the
"Incentive Plan"), and subject to the terms and conditions of such Plan, you are
hereby granted, as of the date of this letter, an option to acquire 150,000
shares of the common stock of the Company at the fair market value of such
shares on the date of this letter, as determined by the Board. Subject to your
continued employment by the Company, the Time-Based Option will vest as follows:
(i) 37,500 of the shares will vest on the Full-Time Date and (ii) the remaining
112,500 shares shall vest at the rate of 2,344 shares per month (2,332 shares in
the final month) on the last day of each month during the ensuing forty-eight
months. Except as otherwise expressly provided herein, the Time-Based Option
shall be governed by the terms of the Incentive Plan, as in effect from time to
time.

      4. Relocation and Relocation Allowance. Promptly following the Full-Time
Date, you will establish your principal office at the Company's offices in Rhode
Island and a temporary residence for yourself within driving distance of such
office. When the Company has determined the principal location for the
activities you will be managing, you will relocate permanently to such location.
The Company will cover all reasonable costs of your temporary housing and
related expenses for so long as such principal location is undefined and shall
pay you $50,000 for your permanent relocation at the time of such relocation.

      5. Benefits. Commencing as of the Full-Time Date, you will be entitled to
participate in any and all employee benefit plans from time to time in effect
for senior management of the Company generally, except to the extent that such
plans are duplicative of benefits otherwise provided to you under this
Agreement. Such participation shall be subject to (i) the terms of the
applicable plan documents, (ii) generally applicable policies of the Company and
(iii) the discretion of the Board and plan administrators, as provided for in or
contemplated by such plan. The Company will provide you with a leased automobile
and cover the cost of professional memberships to the extent consistent with
Company policy for its senior executives. Prior to your permanent relocation to
within driving distance of the Company's principal offices, the Company will
reimburse you for the cost of one round trip per month to Texas. The Company
expects that these trips will, to the extent possible, be scheduled to coincide
with Company business. The Company will provide you with four weeks vacation per
year. The Company shall reimburse you for all expenses reasonably incurred by
you in connection with your performance of your duties hereunder on a basis
consistent with Company policies.

      6. Confidentiality and Restricted Activities. You agree that some
restrictions on your activities during and after employment are necessary to
protect the goodwill, Confidential Information and other legitimate interests of
the Company:

            a. During your employment and for 10 years thereafter, except as
required by applicable law or for the proper performance of your duties and
responsibilities to the

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Company, you shall not use or disclose to any Person any Confidential
Information, as defined below. This restriction shall continue to apply for 10
years after your employment terminates, regardless of the reason for such
termination.

            b. While you are employed by the Company and for a period of one (1)
year thereafter, you will not, directly or indirectly, engage in any activity,
whether as owner, partner, investor, consultant, employee, agent or otherwise,
that is competitive with the business of the Company or its Affiliates,
provided, however, that nothing contained in this paragraph shall prohibit you
from owning up no more than one percent (1%) of the outstanding stock of any
publicly traded company.

            c. While you are employed by the Company and for a period of one (1)
year thereafter, you will not, directly or indirectly, hire or attempt to hire
any employee of the Company or its Affiliates, assist in such hiring by any
Person or otherwise solicit, induce or encourage any employee of the Company or
any of its Affiliates to terminate his or her relationship with them.

            d. You agree that you will not, during your employment with the
Company, improperly use or disclose any proprietary information or trade secrets
of any former or concurrent employer or other Person with whom you have an
agreement or duty to keep in confidence information acquired by you in
confidence, if any. You also agree that you will not bring onto Company premises
any unpublished document or proprietary information belonging to any such
employer or other Person, unless consented to in writing by such employer or
other Person.

            e. All documents, records, tapes, software and other media of every
kind and description relating to the business, present or otherwise, of the
Company and its Affiliates and any copies, in whole or in part, thereof (the
"Documents"), whether or not prepared by you, shall be the sole and exclusive
property of the Company and its Affiliates. You agree to safeguard all Documents
and to surrender to the Company at the time your employment terminates, or at
such earlier time or times as the Board may specify, all Documents and other
property of the Company and its Affiliates (including without limitation,
devices and equipment) then in your possession or control.

            f. You agree that the Company shall, in addition to any other
remedies available to it, be entitled to preliminary and permanent injunctive
relief against any breach by you of the covenants contained in this Paragraph 6,
without having to post bond. In the event that any provision of this Paragraph 6
shall be determined by a court of competent jurisdiction to be unenforceable by
reason of its being extended over too great a time, too large a geographic area
or too great a range of activities, it shall be interpreted to extend only over
the maximum period of time, geographic area or range of activities as to which
it may be enforceable.

            g. For purposes of this Agreement:

<PAGE>

                  i. A business shall be deemed to be competitive with the
Company or its Affiliates if it engages or proposes to engage in any business
activity which is (A) utilizing or seeking to develop technology capable of
utilizing the transplantation of cells as a therapeutic agent for the diagnosis,
prevention or treatment of human disease, injury or condition or (B) in any
field the Company or any of its Affiliates is then pursuing or then has in
contemplation or planning.

                  ii. "Affiliates" means all persons and entities directly or
indirectly controlling, controlled by or under common control with the Company,
where control may be by management authority, equity interest or otherwise.

                  iii. "Confidential Information" means any and all information
of the Company and its Affiliates that is not generally known by others with
whom they compete or do business or with whom they plan to compete or do
business and any and all information, publicly known in whole or in part or not,
which, if disclosed by the Company or its Affiliates, would assist in
competition against them. Confidential Information includes without limitation
such information relating to (i) the development, research, testing, production
and marketing activities of the Company and its Affiliates, (ii) the products
and services of the Company and its Affiliates, (iii) their patents, trade
secrets, licenses and intellectual property, patients and clinical trials; (iv)
the costs, sources of supply, financial performance and strategic plans of the
Company and its Affiliates, (v) the identity and special needs of the customers
of the Company and its Affiliates and (vi) the people and organizations with
whom the Company and its Affiliates have business relationships and those
relationships. Confidential Information also includes information that the
Company or any of its Affiliates has received belonging to others with any
understanding, express or implied, that it would not be disclosed. Confidential
Information does not include, however, information that has become publicly
known and generally available other than through a wrongful act by you.

                  iv. "Person" means an individual, a corporation, an
association, a partnership, an estate, a trust and any other entity or
organization, other than the Company or any of its Affiliates.

<PAGE>

      7. Inventions.

            a. You hereby represent to the Company and agree that, except as
described in Schedule A hereof, you have no invention, original work of
authorship, development, improvement or trade secret that was made by you prior
to your employment with the Company and which relates to the Company's current
or proposed business, products or research and development.

            b. You will promptly make full written disclosure to the Company,
hold in trust for the Company's sole right and benefit and hereby assign and
agree to assign to the Company or its designee all of your right, title and
interest in any and all Inventions. As used in this Agreement, "Inventions"
means inventions, discoveries, developments, methods, processes, compositions,
works, concepts and ideas (whether or not patentable or copyrightable or
constituting trade secrets) conceived, made, created, developed or reduced to
practice by you (whether alone or with others and whether or not during normal
business hours or on or off Company premises) during your employment that relate
in any way to the business, products or services of the Company or any of its
Affiliates or to any prospective activity of the Company or any of its
Affiliates or for which the Confidential Information or the Company's facilities
have been utilized. You further acknowledge and agree that all original works of
authorship made by you solely or jointly with others within the scope of your
employment and eligible for protection by copyright are "works made for hire,"
as that term is defined in the United States Copyright Act. You agree to keep
and maintain adequate and current records of all Inventions made by you solely
or jointly with others during your employment with the Company. Such records
will be in the form of notes, sketches, drawings or any other format that may be
specified by the Company These records will be available to, and remain the sole
property of, the Company at all times. You agree to assist the Company or its
designee, at the Company's expense, in every proper way, to secure the Company's
rights in the Inventions and copyrights, including without limitation disclosure
to the Company of all pertinent information and data with respect thereto, the
execution of all applications, specifications, oaths, assignments and all other
instruments that the Company shall deem necessary or desirable in order to apply
for and obtain such rights, and in order to assign and convey to the Company,
its successors, designees and nominees the sole and exclusive right, title and
interest in and to such Inventions, and any copyrights, patents, or other
intellectual property rights relating thereto, both during your employment by
the Company and thereafter. In the event that the Company is unable for any
reason to secure or to prosecute any patent application with respect to any of
such Inventions (including without limitation, renewals, extensions,
continuations, divisions or continuations in part thereof), you hereby
irrevocably designate and appoint the Company and its duly authorized officers
and agents as your agents and attorney-in-fact to act for and in your behalf and
instead of you, to execute and file any such application and to do all other
lawfully permitted acts to further the prosecution and issuance of patents
thereof with the same legal force and effect as if executed by you. You agree
that you will assist the Company in the prosecution and enforcement of the
Company's rights to the Inventions and copyrightable materials after termination
of your employment, at the Company's expense.

<PAGE>

      8. Termination and Termination Benefits. Your employment with the Company
is "at will," which means that either you or the Company may terminate your
employment at any time, with or without cause or good reason.

            a. The Company may terminate your employment other than for "cause"
at any time upon written notice to you and, in that event, the Company will pay
you a lump sum amount equal to one year's base salary (determined by reference
to your base salary as in effect at the time of such termination), such lump sum
amount to be payable within 30 days of such notice of termination.

            b. The Company may terminate your employment upon written notice to
you in the event that you become disabled during your employment through any
illness, injury, accident or condition of either physical or psychological
nature and, as a result, you are unable to perform substantially all of your
duties and responsibilities hereunder for ninety (90) days during any three
hundred and sixty-five (365) calendar days. In that event, the Company will
continue to pay you your base salary (i) for a period of six (6) months
following such termination or (ii) until you obtain other employment or (iii)
until you become eligible for disability income under any disability income plan
provided by the Company, whichever of these events shall first occur.

            c. The Company may terminate your employment hereunder for cause at
any time upon written notice to you setting forth in reasonable detail the
nature of such cause. The following, as determined by the Company in its
reasonable judgment, shall constitute "cause" for termination: (i) your willful
failure to perform your material duties and responsibilities to the Company and
its Affiliates (including, without limitation, those duties and responsibilities
described in Section 1); (ii) your material breach of Paragraph 6 or Paragraph 7
of this Agreement; (iii) fraud, embezzlement or other material dishonesty with
respect to the Company or any of its Affiliates; or (iv) your conviction of, or
plea of nolo contendere to, a felony.

            d. You may terminate your employment at any time, with or without
good reason, upon written notice to the Company. If you decide to terminate your
employment without good reason, you agree to give the Company three months'
notice of termination. You may terminate your employment hereunder with good
reason at any time upon written notice to the Company. The following shall
constitute "good reason" for termination: material breach by the Company of any
provision of this Agreement, which breach continues for more than thirty (30)
business days following receipt by the Company of written notice from you
setting forth in reasonable detail the nature of such breach. If you terminate
your employment with good reason, the Company will be obligated to you under
Paragraph 8.a hereof as if the Company had terminated your employment other than
for cause.

            e. If you resign without good reason or your employment is
terminated by the Company for cause, the Company shall have no further
obligation to you other than for base

<PAGE>

salary earned through the date of termination. No severance pay or other
benefits of any kind will be provided.

      9. Withholding. All payments and reimbursements made by the Company under
this Agreement shall be reduced by any tax or other amounts required to be
withheld by the Company under applicable law.

      10. Assignment. Neither you nor the Company may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without your consent to
one of its Affiliates or to any Person with whom the Company shall hereafter
affect a reorganization, consolidation or merger or to whom the Company
transfers all or substantially all of its properties or assets. This Agreement
shall inure to the benefit of and be binding upon you and the Company and each
of your respective successors, executors, administrators, heirs and permitted
assigns.

      11. Waiver. Except as otherwise expressly provided in this Agreement, no
waiver of any provision hereof shall be effective unless made in writing and
signed by the waiving party. The failure of either party to require performance
of any term or obligation of this Agreement, or the waiver by either party of
any breach of this Agreement, shall not prevent any subsequent enforcement of
such term or obligation or be deemed a waiver of any subsequent breach.

      12. Severability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.

      13. Notices. Except as otherwise expressly provided herein, any notices,
requests, demands and other communications provided for by this Agreement shall
be in writing and shall be effective when delivered in person or deposited in
the United States mail, postage prepaid, registered or certified, and addressed
to you at your last known address on the books of the Company or, in the case of
the Company, at its main office, attention of the Chairman of the Board.

      14. Captions. The captions and headings in this Agreement are for
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.

      15. Entire Agreement. This Agreement sets forth the entire agreement and
understanding between you and the Company and supersedes all prior
communications, agreements and understandings, written and oral, with respect to
the terms and conditions of

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your employment. This Agreement may not be amended or modified, except by an
agreement in writing signed by you and the Chairman of the Board or other
specifically authorized representative of the Company.

      16. Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of Rhode Island, without regard to the
conflict of laws principles thereof.

      17. No Conflicting Agreements. You hereby represent to the Company that
neither your execution and delivery of this Agreement nor your acceptance of
employment with the Company nor your performance under this Agreement will
conflict with or result in a breach of any of the terms, conditions or
provisions of any agreement to which you are a party or are bound or any order,
injunction, judgment or decrees of any court or governmental authority or any
arbitration award applicable to you.

      18. Compliance with Agreement. The Company's obligations under this
Agreement and its obligation to deliver stock under the terms of the stock
options granted pursuant to the terms of this Agreement (or otherwise granted
you during the course of your employment) are conditioned on your compliance
with the terms and conditions of this Agreement and the accuracy of the
representations made to the Company by you herein.

<PAGE>

      If the foregoing is acceptable to you, please sign the enclosed copy of
this letter in the space provided below and return it to me, whereupon this
letter and such copy will constitute a binding agreement between you and the
Company on the basis set forth above as of the date first above written.

                                Sincerely yours,
                                CYTOTHERAPEUTICS, INC.


                                By:

                                    Richard M. Rose, M.D.
                                    Chairman
Accepted and agreed:


Billie M. York, Ph.D.

Date: 
     --------------------

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                                                                      Schedule A

                                Prior Inventions

      [See attached list]