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                                                                     EXHIBIT 1.1


                                 STEMCELLS, INC.

                             Up to 7,500,000 Shares


                                  Common Stock
                                ($0.01 Par Value)

                                AGENCY AGREEMENT



                                October 25, 2004







                                AGENCY AGREEMENT


                                                                October 25, 2004

C.E. Unterberg, Towbin, LLC
350 Madison Avenue
New York, NY 10017

Shoreline Pacific, LLC
655 Montgomery Street
San Francisco, CA 94111

as Agents

Ladies and Gentlemen:

         StemCells, Inc., a Delaware corporation (the "Company"), proposes, upon
the terms and subject to the conditions set forth in this Agreement (together
with the exhibits attached hereto (the "Agreement")) to offer for sale (the
"Offering") up to 7,500,000 shares (the "Shares") of Common Stock, $.01 par
value per share (the "Common Stock"), of the Company. In connection with the
Offering, the Company desires to engage C.E. Unterberg, Towbin, LLC ("CEUT") and
Shoreline Pacific, LLC ("SP") as its exclusive agents (the "Agents"), upon the
terms and subject to the conditions set forth in this Agreement. The Shares and
the Offering are described in the Prospectus that is referred to below.

         The Company has prepared and filed, in accordance with the provisions
of the Securities Act of 1933, as amended, and the rules and regulations
thereunder (collectively, the "Act"), with the Securities and Exchange
Commission (the "Commission") a registration statement under the Act on Form S-3
(File No. 333-83992) filed with the Commission on March 8, 2002 (such
registration statement as amended (including Amendment No. 1 thereto filed with
the Commission on July 2, 2002) or supplemented (other than supplements relating
to offerings of securities other than the Offering) from time to time, the
"registration statement"). The registration statement has been declared by the
Commission to be effective under the Act. The Company will file with the
Commission pursuant to Rule 424(b) under the Act a final prospectus supplement
to the Basic Prospectus (as defined below), describing the Shares and the
offering thereof, in such form as has been provided to or discussed with, and
approved, by the Agents.

         The term "Registration Statement" as used in this Agreement means the
registration statement, at the time it became effective and as supplemented
(other than supplements relating to offerings of securities other than the
Offering) or amended, including (i) all financial schedules and exhibits
thereto, and (ii) all documents incorporated by reference or deemed to be
incorporated by reference therein, which schedules, exhibits and documents have
been filed with the Commission pursuant to its Electronic Data Gathering
Analysis and Retrieval System ("EDGAR"). The term "Basic Prospectus" as used in
this Agreement means the basic prospectus dated July 3, 2002 filed with the
Commission under Rule 424(b)(2) on August 28, 2002 for use in connection with
the offer and/or sale of the Shares pursuant to this Agreement. "Preliminary
Prospectus Supplement" shall mean any preliminary prospectus supplement to the
Basic Prospectus that describes the Shares and the Offering and is used prior to
filing of the Prospectus Supplement, together with the Basic Prospectus. The
term "Prospectus Supplement" as used in this Agreement means any final
prospectus supplement specifically relating to the Shares, in the form filed
with, or transmitted for filing to, the Commission pursuant to Rule 424 under
the Act. The term "Prospectus" as used in this Agreement means the Basic
Prospectus as supplemented by the




Prospectus Supplement except that if such Basic Prospectus is amended or
supplemented (other than supplements relating to offerings of securities other
than the Offering) on or prior to the date on which the Prospectus Supplement
was first filed pursuant to Rule 424, the term "Prospectus" shall refer to the
Basic Prospectus as so amended or supplemented and as supplemented by the
Prospectus Supplement. Any reference herein to the registration statement, the
Registration Statement, the Basic Prospectus, any Preliminary Prospectus
Supplement, any Prospectus Supplement or the Prospectus shall be deemed to refer
to and include (i) the documents incorporated by reference therein pursuant to
Form S-3 (the "Incorporated Documents") and (ii) the copy of the Registration
Statement, the Basic Prospectus, the Prospectus Supplement, the Prospectus or
the Incorporated Documents filed with the Commission pursuant to EDGAR. Any
reference herein to the terms "amend," "amendment" or "supplement" with respect
to the Registration Statement, the Basic Prospectus, the Preliminary Prospectus
Supplement, the Prospectus Supplement or the Prospectus shall be deemed to refer
to and include the filing of any document under the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder (collectively, the
"Exchange Act") after the effective date of the Registration Statement, or the
date of the Basic Prospectus, the Preliminary Prospectus Supplement or the
Prospectus Supplement, as the case may be, deemed to be incorporated therein by
reference. As used herein, "business day" shall mean a day on which the New York
Stock Exchange is open for trading.

         The Company hereby confirms its agreement with the Agents as follows:

         1. Agreement to Act as Agents. Upon the basis of the representations
and warranties of the Company and subject to the terms and conditions set forth
in this Agreement and in the letter agreement dated October 25, 2004 between the
Company and the Agents (the "Engagement Letter"), the Company engages the
Agents, severally and not jointly, to act as its exclusive agents, on a
reasonable "best efforts" basis, in connection with the offer and sale by the
Company of the Shares. As compensation for services rendered, at the time of
purchase (as defined below), the Company shall pay to the Agents a fee (to be
divided equally between the Agents and paid in the manner described below) equal
to 6.0% of the gross proceeds received by the Company from the sale of the
Shares in the Offering. The Shares are being offered and sold at a price of
$3.00 per Share.

         This Agreement shall not give rise to any commitment by the Agents or
any of their affiliates to underwrite or purchase any of the Shares or otherwise
provide any financing. Subscription for Shares shall be evidenced by, and the
sale of such Shares shall be made pursuant to, purchase agreements in
substantially the form included as Exhibit A hereto duly executed by each
purchaser of the Shares and the Company (the "Purchase Agreements"). Persons who
agree to purchase Shares pursuant to the Purchase Agreements that are accepted
by the Company are hereinafter referred to as the "Purchasers."

         2. Payment and Delivery. Subject to the terms and conditions hereof and
of the Purchase Agreements, payment of the purchase price for, and delivery of
certificates for, the Shares for which the Company has received Purchase
Agreements acceptable to the Company shall be made at the office of CEUT in New
York City (or at such other place as shall be agreed upon by the Agents and the
Company), at 10:00 A.M., New York City time, on or about October 28, 2004
(unless another time shall be agreed to by the Agents and the Company). The time
at which such payment and delivery are made is hereinafter sometimes called "the
time of purchase" and the date upon which the time of purchase occurs is
hereinafter sometimes called the "Closing Date." Subject to the terms and
conditions hereof and of the Purchase Agreements, payment of the purchase price
for the Shares purchased by a Purchaser shall be made to the Company in the
manner described below against delivery of certificates for the Shares, through
the facilities of The Depository Trust Company ("DTC") for subsequent delivery
to such Purchaser, and such Shares shall be registered in such name or names and
shall be in such denominations, as the Purchaser thereof may request at least
one business day before the time of purchase.


                                       2


         CEUT agrees to hold the purchase price delivered to it by persons who
agree to purchase Shares in escrow as contemplated by the form of Purchase
Agreement included as Exhibit A hereto. CEUT will, from time to time upon
request of the Company, confirm to the Company the aggregate amount of funds
delivered to it in escrow by persons who have executed and delivered a Purchase
Agreement. Subject to the terms and conditions hereof and of the Purchase
Agreements, at the time of purchase CEUT shall deliver to the Company by Federal
Funds wire transfer of same day funds the purchase price for any such Shares
payable to the Company that has been deposited in the escrow account by the
Purchasers, reduced by the amount of the fee payable to the Agents hereunder and
the Agents' bona fide estimate of the amount of expense reimbursement to which
they are entitled hereunder, against delivery of such Shares to the Purchasers
through DTC as described above. CEUT shall concurrently deliver to SP by Federal
Funds wire transfer of same day funds the fee payable to SP hereunder and SP's
bona fide estimate of the amount of expense reimbursement to which SP is
entitled hereunder. As soon as practicable after the Closing Date, the Agents
will submit to the Company their final expense reimbursement invoices and the
Company and/or CEUT, as appropriate, will make the necessary reconciling
payment(s).

         Deliveries of the documents described in Section 5 hereof with respect
to the purchase of the Shares shall be made at the offices of CEUT in New York
City at 10:00 A.M., New York City time, on the Closing Date.

         3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to and agrees with the Agents that:

                  (a) the Registration Statement was declared effective under
         the Act on July 2, 2002; no stop order of the Commission preventing or
         suspending the use of the Basic Prospectus, the Preliminary Prospectus
         Supplement, the Prospectus Supplement or the Prospectus or the
         effectiveness of the Registration Statement has been issued and no
         proceedings for such purpose have been instituted or, to the Company's
         knowledge, are threatened by the Commission; the Company is eligible to
         use Form S-3 for the Offering; such Registration Statement at the date
         of this Agreement meets, and the Offering complies with, the
         requirements of Rule 415 under the Act. The Registration Statement
         complied when it became effective, complies, and will comply at the
         time of purchase, and the Prospectus conformed as of its date,
         conforms, and will conform at the time of purchase, in each case in all
         material respects with the requirements of the Act; any statutes,
         regulations, contracts or other documents that are required to be
         described in the Registration Statement or the Prospectus or to be
         filed as exhibits to the Registration Statement have been and will be
         so described or filed; there are no documents required to be filed with
         the Commission in connection with the transaction contemplated hereby
         that have not been filed as required pursuant to the Act or will not be
         filed within the requisite time period; and the Registration Statement
         did not at the time of effectiveness, does not and will not at the time
         of purchase contain an untrue statement of a material fact or omit to
         state a material fact required to be stated therein or necessary to
         make the statements therein not misleading, and the Prospectus did not
         as of its date, does not and will not at the time of purchase contain
         an untrue statement of a material fact or omit to state a material fact
         required to be stated therein or necessary to make the statements
         therein, in light of the circumstances under which they were made, not
         misleading; provided, however, that the Company makes no warranty or
         representation with respect to any statement contained in the
         Registration Statement or the Prospectus in reliance upon and in
         conformity with information concerning an Agent and furnished in
         writing by or on behalf of such Agent to the Company expressly
         for use in the Registration Statement or the Prospectus; the Company
         has not distributed and will not distribute any offering material in
         connection with the offering or sale of the Shares other than the
         Registration Statement, the then most recent Preliminary Prospectus
         Supplement or Prospectus Supplement, as applicable, the Basic
         Prospectus and the Prospectus; the Company has timely filed all reports
         required of it to be filed


                                       3


         pursuant to the Act and the Exchange Act and has filed all such reports
         in the manner prescribed thereby; the Incorporated Documents, when they
         were filed with the Commission (or, to the extent such documents were
         amended, as amended), conformed in all material respects to the
         requirements of the Exchange Act and the applicable rules and
         regulations of the Commission thereunder, and none of such documents,
         when they were filed with the Commission(or, to the extent such
         documents were amended, as amended), contained any untrue statement of
         a material fact or omitted to state a material fact necessary to make
         the statements, in light of the circumstances under which they were
         made, therein not misleading; and any further documents so filed and
         incorporated by reference in the Basic Prospectus or Prospectus
         Supplement, when such documents are filed with the Commission, will
         comply in all material respects with the requirements of the Exchange
         Act and the applicable rules and regulations of the Commission
         thereunder, as applicable, and will not contain any untrue statement of
         a material fact or omit to state a material fact necessary to make the
         statements therein, in light of the circumstances under which they were
         made, not misleading;

                  (b) as of the date of the Prospectus Supplement the Company
         has, and as of the time of purchase the Company shall have, an
         authorized capitalization as set forth in the Prospectus Supplement
         under the caption "Description of Capital Stock"; all of the issued and
         outstanding shares of capital stock, including the Common Stock, of the
         Company have been duly authorized and validly issued and are fully paid
         and non-assessable, have been issued in compliance with all federal and
         state securities laws and were not issued in violation of any
         preemptive right, resale right, right of first refusal or similar
         right;

                  (c) as of October 22, 2004 there were 54,256,938 shares of
         Common Stock outstanding and the Company had reserved an aggregate of
         12,255,819 shares of Common Stock for issuance upon exercise of
         outstanding stock options and warrants, in each case as described in
         the Prospectus; since October 22, 2004, the Company has not issued any
         securities other than Common Stock of the Company pursuant to the
         exercise of previously outstanding options in connection with the
         Company's employee stock purchase and option plans (the "Plans"),
         options granted pursuant to the Plans in the ordinary course of
         business consistent with past practice and Common Stock issued pursuant
         to the exercise of previously outstanding warrants, in each case as
         disclosed in the Prospectus; there are no authorized or outstanding
         options, warrants, preemptive rights, resale rights, rights of first
         refusal or other rights to purchase, or equity or debt securities
         convertible into or exchangeable or exercisable for, any capital stock
         or other securities of the Company other than pursuant to the Purchase
         Agreements and this Agreement and those described in the Prospectus;
         the description of the Company's stock option, stock bonus and other
         stock plans or arrangements, and the options, warrants or other rights
         granted thereunder, set forth in the Registration Statement and the
         Prospectus accurately and fairly presents the information required by
         the Act to be disclosed therein with respect to such plans,
         arrangements, options and rights; the Rights are not now and never have
         been transferable separately from the shares of Common Stock or
         exercisable; no person, including any of the Company's stockholders at
         the time of the issuance of the Rights, has to the knowledge of the
         Company at any time been an Acquiring Person and no Distribution Date
         or Shares Acquisition Date has occurred or been proposed;

                  (d) the Company has been duly incorporated and is validly
         existing as a corporation in good standing under the laws of the State
         of Delaware, with full corporate power and authority to own, lease and
         operate its properties and conduct its business as described in the
         Registration Statement and the Prospectus, to execute and deliver this
         Agreement and to issue, sell and deliver the Shares as contemplated
         herein; no governmental proceeding has been instituted in the State of



                                       4


         Delaware revoking, limiting or curtailing, or seeking to revoke, limit
         or curtail, such power and authority.

                  (e) the Company is duly qualified to do business as a foreign
         corporation and is in good standing in each jurisdiction where the
         ownership or leasing of its properties or the conduct of its business
         requires such qualification, except where the failure to be so
         qualified and in good standing would not, individually or in the
         aggregate, have a material adverse effect on the business, properties,
         management, condition, financial or otherwise, operations, prospects or
         results of operation of the Company and the Subsidiaries (as
         hereinafter defined) taken as a whole (a "Material Adverse Effect"); no
         governmental proceeding has been instituted in any such jurisdiction,
         revoking, limiting or curtailing, or seeking to revoke, limit or
         curtail, such qualification, except for such proceedings as would not,
         individually or in the aggregate, have a Material Adverse Effect.

                  (f) The Company has no subsidiaries (as defined in the Act)
         other than StemCells California, Inc., a California corporation
         (collectively, the "Subsidiaries"); except as disclosed in the
         Registration Statement or the Prospectus, the Company owns all of the
         issued and outstanding capital stock of each of the Subsidiaries; none
         of the subsidiaries is a "significant subsidiary" within the meaning of
         rule 1-02(w) of Regulation S-X or is otherwise material to the business
         or operations of the Company; other than the capital stock of the
         Subsidiaries and except as disclosed in the Registration Statement or
         the Prospectus, the Company does not own, directly or indirectly, any
         shares of stock or any other equity or long-term debt securities of any
         corporation or have any equity interest in any firm, partnership, joint
         venture, association or other entity; complete and correct copies of
         the certificate of incorporation and the bylaws of the Company and the
         Subsidiaries and all amendments thereto have been delivered to the
         Agents, and no changes therein will be made subsequent to the date
         hereof and prior to the time of purchase; each Subsidiary has been duly
         incorporated and is validly existing as a corporation in good standing
         under the laws of the jurisdiction of its incorporation, with full
         corporate power and authority to own, lease and operate its properties
         and to conduct its business as described in the Registration Statement
         or the Prospectus; each Subsidiary is duly qualified to do business as
         a foreign corporation and is in good standing in each jurisdiction
         where the ownership or leasing of its properties or the conduct of its
         business requires such qualification, except where the failure to be so
         qualified and in good standing would not, individually or in the
         aggregate, have a Material Adverse Effect; no proceeding has been
         instituted in any such jurisdiction, revoking, limiting or curtailing,
         or seeking to revoke, limit or curtail, such power and authority or
         qualification, except for any such proceedings as would not,
         individually or in the aggregate, have a Material Adverse Effect; all
         of the outstanding shares of capital stock of each of the Subsidiaries
         held by the Company have been duly authorized and validly issued, are
         fully paid and non-assessable and are owned by the Company subject to
         no security interest, other encumbrance or adverse claims except as
         disclosed in the Registration Statement or the Prospectus, and no
         options, warrants or other rights to purchase, agreements or other
         obligations to issue or other rights to convert any obligation into
         shares of capital stock or ownership interests in the Subsidiaries are
         outstanding except as disclosed in the Registration Statement or the
         Prospectus;

                  (g) the Shares have been duly and validly authorized by the
         Company and, when the Shares are issued and delivered against payment
         therefor as provided herein, the Shares will be duly and validly
         issued, fully paid and non-assessable and will not be issued in
         violation of statutory and contractual preemptive rights, resale
         rights, rights of first refusal and similar rights;

                  (h) the Common Stock (including the Shares) conforms in all
         material respects to the description thereof contained in the
         Registration Statement or the Prospectus, the certificates for


                                       5


         the Shares are in due and proper form and the holders of the Shares
         will not be subject to personal liability under Delaware corporate law
         by reason of being such holders;

                  (i) this Agreement has been duly authorized, executed and
         delivered by the Company;

                  (j) except as disclosed in the Registration Statement or the
         Prospectus, neither the Company nor any of the Subsidiaries is in
         breach or violation of or in default under (nor has any event occurred
         which with notice, lapse of time or both would result in any breach or
         violation of, constitute a default under or give the holder of any
         indebtedness (or a person acting on such holder's behalf) the right to
         require the repurchase, redemption or repayment of all or a part of
         such indebtedness under) (i) its respective certificate of
         incorporation or bylaws, (ii) any law, order, rule, regulation, writ,
         injunction, judgment or decree of any court, government or governmental
         agency or body, domestic or foreign, having jurisdiction over the
         Company or any of its Subsidiaries or over their respective properties,
         or (iii) any indenture, mortgage, deed of trust, bank loan or credit
         agreement or other evidence of indebtedness, or any license, lease,
         contract or other agreement or instrument to which the Company or any
         of the Subsidiaries is a party or by which any of them or any of their
         properties is bound, except in the case of clause (ii) and (iii) above
         where such breach, violation or default would not, individually or in
         the aggregate, have a Material Adverse Effect and in the case of clause
         (i) above for such breaches, violations or defaults with respect to the
         certificate of incorporation or bylaws of Subsidiaries of the Company
         as would not, individually or in the aggregate, have a Material Adverse
         Effect;

                  (k) the execution, delivery and performance of this Agreement
         and the consummation of the transactions contemplated hereby and
         thereby, including the issuance and sale of the Shares, will not
         conflict with, result in any breach or violation of or constitute a
         default under (nor constitute any event which with notice, lapse of
         time or both would result in any breach or violation of or constitute a
         default under or give the holder of any indebtedness (or a person
         acting on such holder's behalf) the right to require the repurchase,
         redemption or repayment of all or a part of such indebtedness under)
         (i) the certificate of incorporation or bylaws of the Company or any of
         the Subsidiaries, (ii) any indenture, mortgage, deed of trust, bank
         loan or credit agreement or other evidence of indebtedness, or any
         license, lease, contract or other agreement or instrument to which the
         Company or any of the Subsidiaries is a party or by which any of them
         or any of their respective properties is bound, or (iii) any federal,
         state, local or foreign statute, law, regulation or rule or any decree,
         judgment or order applicable to the Company or any of the Subsidiaries
         or any of their respect properties, except where such breach, violation
         or default would not, individually or in the aggregate, have a Material
         Adverse Effect;

                  (l) the Common Stock (including the Shares) is registered
         under the Exchange Act and the outstanding shares of Common Stock of
         the Company are quoted on The Nasdaq SmallCap Market ("Nasdaq") and the
         Company has taken no action designed to, or likely to have the effect
         of terminating the registration of the Common Stock under the Exchange
         Act or delisting or suspending from trading the Shares from Nasdaq, nor
         has the Company received any information suggesting that the Commission
         or (except as disclosed in the Prospectus) Nasdaq is contemplating
         terminating or suspending such registration or listing. All of the
         shares of Common Stock included in, or issuable upon exercise or
         conversion of, the Shares were described in a "Notification Form for
         Listing of Additional Shares" filed with Nasdaq. The Company has
         complied with the requirements of Rule 4350(i)(2) of the Nasdaq
         Marketplace Rules in connection with the Offering;


                                       6


                  (m) no approval, authorization, consent or order of or filing
         with any federal, state, local or foreign governmental or regulatory
         commission, board, body, authority or agency or of or with Nasdaq, or
         approval of the shareholders of the Company, is required in connection
         with the issuance and sale of the Shares or the consummation by the
         Company of the transactions contemplated hereby other than registration
         under the Act of the offer and sale of the Shares and filings with
         Nasdaq, each of which has been effected, and any necessary
         qualification under the securities or blue sky laws of the various
         jurisdictions in which Shares are being offered or under the rules and
         regulations of the National Association of Securities Dealers, Inc.;

                  (n) except as disclosed in the Registration Statement or the
         Prospectus, (i) no person has the right, contractual or otherwise, to
         cause the Company to issue or sell to it any shares of Common Stock or
         shares of any other capital stock or other equity interests of the
         Company, and (ii) except as provided herein or in the Engagement
         Letter, no person has the right to act as an underwriter, placement
         agent or financial advisor to the Company in connection with the offer
         and sale of the Shares, in the case of each of the foregoing clauses
         (i) and (ii), whether as a result of the filing or effectiveness of the
         Registration Statement or the sale of the Shares as contemplated
         thereby or otherwise; except as disclosed in the Registration Statement
         or the Prospectus, no person has the right, contractual or otherwise,
         to cause the Company to register under the Act any shares of Common
         Stock or shares of any other capital stock or other securities of the
         Company, or to include any such shares or interests in the Registration
         Statement or the Offering, whether as a result of the filing or
         effectiveness of the Registration Statement or the sale of the Shares
         as contemplated thereby or otherwise;

                  (o) each of the Company and the Subsidiaries has all necessary
         licenses, authorizations, consents and approvals and has made all
         necessary filings required under any federal, state, local or foreign
         law, regulation or rule, in order to conduct its respective business as
         currently conducted and has conducted such business in accordance with
         such laws, regulations and rules, except where the failure to have such
         licenses, authorizations, consents and approvals or the failure to
         conduct business in accordance with such laws, rules and regulations
         would not, individually or in the aggregate, have a Material Adverse
         Effect; neither the Company nor any of the Subsidiaries is in violation
         of, or in default under, or has received notice of any proceedings
         relating to revocation or modification of, any such license,
         authorization, consent or approval or any federal, state, local or
         foreign law, regulation or rule or any decree, order or judgment
         applicable to the Company or any of such Subsidiaries, except where
         such violation, default, revocation or modification would not,
         individually or in the aggregate, have a Material Adverse Effect;

                  (p) all legal or governmental proceedings, affiliate
         transactions, contracts, licenses, agreements, leases or documents of a
         character required to be described in the Registration Statement or the
         Prospectus or to be filed as an exhibit to the Registration Statement
         have been so described or filed as required;

                  (q) except as disclosed in the Registration Statement or the
         Prospectus, there are no actions, suits, claims, investigations or
         proceedings pending or, to the Company's knowledge, threatened to which
         the Company or any of the Subsidiaries or any of their respective
         directors or officers is or would be a party or of which any of their
         respective properties is or would be subject at law or in equity,
         before or by any federal, state, local or foreign governmental or
         regulatory commission, board, body, authority or agency, except any
         such action, suit, claim, investigation or proceeding which would not
         result in a judgment, decree or order having, individually or in the
         aggregate, a Material Adverse Effect or prevent consummation of the
         transactions contemplated hereby;


                                       7


                  (r) Grant Thornton LLP and Ernst & Young LLP, whose reports on
         the consolidated financial statements of the Company and the
         Subsidiaries are filed with the Commission as part of the Registration
         Statement and the Prospectus, are independent public accountants as
         required by the Act and the Exchange Act;

                  (s) the consolidated financial statements included in the
         Registration Statement or the Prospectus, together with the related
         notes and schedules, present fairly in all material respects the
         consolidated financial position of the Company and the consolidated
         Subsidiaries as of the dates indicated and the consolidated results of
         operations and cash flows of the Company and the consolidated
         Subsidiaries for the periods specified and comply in all material
         respects with the requirements of the Act and have been prepared in
         conformity with generally accepted accounting principles applied on a
         consistent basis during the periods involved except as set forth in the
         notes thereto and subject, in the case of unaudited financial
         statements, to normal year-end adjustments, which are not expected to
         be material in amount; any pro forma financial statements or data
         included in the Registration Statement or the Prospectus comply with
         the requirements of Regulation S-X of the Act, the assumptions used in
         the preparation of such pro forma financial statements and data are
         reasonable, the pro forma adjustments used therein are appropriate to
         give effect to the transactions or circumstances described therein and
         the pro forma adjustments have been properly applied to the historical
         amounts in the compilation of those statements and data; the supporting
         exhibits and schedules in the Registration Statement, if any, present
         fairly in all material respects the information required to be stated
         therein; the other financial and statistical data set forth in the
         Registration Statement or the Prospectus are accurately presented and
         prepared on a basis consistent with the financial statements and books
         and records of the Company; there are no financial statements
         (historical or pro forma) or supporting schedules or exhibits that are
         required to be included in the Registration Statement or the Prospectus
         that are not included as required; and the Company and the consolidated
         Subsidiaries do not have any material liabilities or obligations,
         direct or contingent (including any off-balance sheet obligations), not
         disclosed in the Registration Statement or the Prospectus;

                  (t) except as set forth in the Registration Statement or the
         Prospectus, subsequent to the respective dates as of which information
         is given in the Registration Statement and the Prospectus, there has
         not been (i) any material adverse change, or any development involving
         a prospective material adverse change, in the business, properties,
         management, condition, financial or otherwise, operations, prospects or
         results of operation of the Company and the Subsidiaries taken as a
         whole, (ii) any transaction which is material to the Company and the
         Subsidiaries taken as a whole, (iii) any obligation, direct or
         contingent (including any off-balance sheet obligations), incurred by
         the Company or the Subsidiaries, which is material to the Company and
         the Subsidiaries taken as a whole, (iv) any change in the capital stock
         (other than pursuant to the exercise or conversion of outstanding stock
         options or warrants described in the Prospectus) or any material change
         in the outstanding indebtedness of the Company or the Subsidiaries or
         (v) any dividend or distribution of any kind declared, paid or made on
         any class of capital stock of the Company;

                  (u) neither the Company nor any of the Subsidiaries is nor,
         after giving effect to the Offering as described in the Prospectus,
         will any of them be an "investment company" or an entity "controlled"
         by an "investment company," as such terms are defined in the Investment
         Company Act of 1940, as amended (the "Investment Company Act");

                  (v) the Company and any "employee benefit plan" (as defined
         under the Employee Retirement Income Security Act of 1974, as amended,
         and the regulations and published interpretations thereunder
         (collectively, "ERISA")) established or maintained by the Company or


                                       8


         its "ERISA Affiliates" (as defined below) are in compliance in all
         material respects with ERISA; "ERISA Affiliate" means, with respect to
         the Company, any member of any group of organizations described in
         Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986,
         as amended, and the regulations and published interpretations
         thereunder (the "Code") of which the Company is a member; no
         "reportable event" (as defined under ERISA) has occurred or is
         reasonably expected to occur with respect to any "employee benefit
         plan" established or maintained by the Company or any of its ERISA
         Affiliates; no "employee benefit plan" established or maintained by the
         Company or any of its ERISA Affiliates, if such "employee benefit plan"
         were terminated, would have any "amount of unfunded benefit
         liabilities" (as defined under ERISA); neither the Company nor any of
         its ERISA Affiliates has incurred or reasonably expects to incur any
         liability under: (i) Title IV of ERISA with respect to termination of,
         or withdrawal from, any "employee benefit plan"; or (ii) Sections 412,
         4971, 4975 or 4980B of the Code; each "employee benefit plan"
         established or maintained by the Company or any of its ERISA Affiliates
         that is intended to be qualified under Section 401(a) of the Code is so
         qualified and nothing has occurred, whether by action or failure to
         act, which would reasonably be expected to cause the loss of such
         qualification;

                  (w) except as disclosed in the Registration Statement or the
         Prospectus, the Company and each of the Subsidiaries has good and
         marketable title to all property (real and personal) described in the
         Registration Statement or in the Prospectus as being owned by each of
         them, free and clear of all liens, claims, security interests or other
         encumbrances, except where the failure to do so would not, individually
         or in the aggregate, have a Material Adverse Effect; all the property
         (real and personal) described in the Registration Statement or the
         Prospectus as being held under lease by the Company or a Subsidiary is
         held thereby under valid, subsisting and enforceable leases, except
         where the failure to do so would not, individually or in the aggregate,
         have a Material Adverse Effect;

                  (x) except as disclosed in the Registration Statement or the
         Prospectus, the Company and the Subsidiaries own, or have obtained
         licenses for, or have other rights to use, the inventions, patent
         applications, patents, trademarks (both registered and unregistered),
         trade names, copyrights, trade secrets and other proprietary
         information described in the Registration Statement or the Prospectus
         as being owned or licensed by them, except where the failure to own,
         license or have such rights would not, individually or in the
         aggregate, have a Material Adverse Effect; the expiration of any
         registered patents, trademarks, service marks or copyrights owned by
         the Company or any of its Subsidiaries would not result in a Material
         Adverse Effect that is not otherwise specifically disclosed in the
         Basic Prospectus and Prospectus Supplement; except as disclosed in the
         Registration Statement or the Prospectus, there are no third parties
         who have or, to the Company's knowledge, will be able to establish
         rights to any material intellectual property owned by the Company; to
         the knowledge of the Company, there is no infringement by third parties
         of any material intellectual property owned by the Company; there is no
         pending or, to the knowledge of the Company, threatened action, suit,
         proceeding or claim by others challenging the Company's rights in or to
         any material intellectual property or challenging the validity or scope
         of any material intellectual property owned by the Company; except as
         disclosed in the Registration Statement or the Prospectus, there is no
         pending or, to the knowledge of the Company, threatened action, suit,
         proceeding or claim by others that the Company infringes or otherwise
         violates any patent, trademark, copyright, trade secret or other
         proprietary rights of others; except as disclosed in the Registration
         Statement or the Prospectus, there is no patent or patent application
         that contains claims that interfere with the issued or pending claims
         of any patent or patent application owned by the Company; and to the
         knowledge of the Company, there is no prior art that could reasonably
         be expected to render any patent application owned by the Company
         unpatentable that has not been disclosed to the U.S. Patent and
         Trademark Office.


                                       9


                  (y) except as disclosed in the Registration Statement or the
         Prospectus, neither the Company nor any of the Subsidiaries is engaged
         in any unfair labor practice; except for matters which would not,
         individually or in the aggregate, have a Material Adverse Effect and
         except as disclosed in the Registration Statement or the Prospectus,
         (i) there is (A) no unfair labor practice complaint pending or, to the
         Company's knowledge, threatened against the Company or any of the
         Subsidiaries before the National Labor Relations Board, and no
         grievance or arbitration proceeding arising out of or under collective
         bargaining agreements is pending or threatened, (B) no strike, labor
         dispute, slowdown or stoppage pending or, to the Company's knowledge,
         threatened against the Company or any of the Subsidiaries and (C) no
         union representation dispute currently existing concerning the
         employees of the Company or any of the Subsidiaries, and (ii) to the
         Company's knowledge, (A) no union organizing activities are currently
         taking place concerning the employees of the Company or any of the
         Subsidiaries and (B) there has been no violation of any federal, state,
         local or foreign law relating to discrimination in the hiring,
         promotion or pay of employees, any applicable wage or hour laws or any
         provision of the Employee Retirement Income Security Act of 1974, as
         amended, or the rules and regulations promulgated thereunder concerning
         the employees of the Company or any of the Subsidiaries;

                  (z) except as disclosed in the Registration Statement or the
         Prospectus, the Company and the Subsidiaries and their properties,
         assets and operations are in compliance with, and hold all permits,
         authorizations and approvals required under, Environmental Laws (as
         defined below), except to the extent that failure to so comply or to
         hold such permits, authorizations or approvals would not, individually
         or in the aggregate, have a Material Adverse Effect; except as
         disclosed in the Registration Statement or the Prospectus, there are no
         past or present conditions, circumstances, activities, practices,
         actions, omissions or plans that would reasonably be expected to give
         rise to any material costs or liabilities to the Company or the
         Subsidiaries under, or to interfere with or prevent compliance by the
         Company or the Subsidiaries with, Environmental Laws; except as would
         not, individually or in the aggregate, have a Material Adverse Effect
         and except as disclosed in the Registration Statement or the
         Prospectus, neither the Company nor any of the Subsidiaries (i) is the
         subject of any investigation, (ii) has received any notice or claim,
         (iii) is a party to or affected by any pending or threatened action,
         suit or proceeding, (iv) is bound by any judgment, decree or order or
         (v) has entered into any agreement, in each case relating to any
         alleged violation of any Environmental Law or any actual or alleged
         release or threatened release or cleanup at any location of any
         Hazardous Materials (as defined below); no property which is owned,
         leased or occupied by the Company or any Subsidiary has been designated
         as a Superfund site pursuant to the U.S. Comprehensive Response,
         Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss.
         9601, et seq.), or otherwise designated as a contaminated site under
         applicable federal, state or local law; in the ordinary course of its
         business, the Company periodically reviews the effect of Environmental
         Laws on the business, operations and properties of the Company and its
         Subsidiaries, in the course of which it identifies and evaluates
         associated costs and liabilities (including, without limitation, any
         capital or operating expenditures required for clean-up, closure of
         properties or compliance with Environmental Laws, or any permit,
         license or approval, any related constraints on operating activities
         and any potential liabilities to third parties); on the basis of such
         review, the Company has reasonably concluded that such associated costs
         and liabilities would not, singly or in the aggregate, have a Material
         Adverse Effect, whether or not arising from transactions in the
         ordinary course of business (as used herein, "Environmental Law" means
         any federal, state, local or foreign law, statute, ordinance, rule,
         regulation, order, decree, judgment, injunction, permit, license,
         authorization or other binding requirement, or common law, relating to
         health, safety or the protection, cleanup or restoration of the
         environment or natural resources, including those relating to the
         distribution, processing, generation, treatment, storage, disposal,
         transportation, other handling or release or threatened release of
         Hazardous Materials, and "Hazardous Materials" means any material
         (including,


                                       10


         without limitation, pollutants, contaminants, hazardous or toxic
         substances or wastes) that is regulated by or may give rise to
         liability under any Environmental Law);

                  (aa) all tax returns required to be filed by the Company and
         each of the Subsidiaries have been filed, and all taxes and other
         assessments of a similar nature (whether imposed directly or through
         withholding) including any interest, additions to tax or penalties
         shown as due thereon from such entities have been paid, other than
         those being contested in good faith and for which adequate reserves
         have been provided, except as would not, individually or in the
         aggregate, have a Material Adverse Effect;

                  (bb) the Company and each of the Subsidiaries maintains
         insurance policies covering its properties, operations, personnel and
         businesses with recognized, financially sound and reputable
         institutions in such amounts and with such deductibles and covering
         such risks as are prudent and customary in the business in which it is
         engaged; all such insurance is fully in force on the date hereof and
         will be fully in force at the time of purchase except as would not,
         individually or in the aggregate, have a Material Adverse Effect; the
         Company has no reason to believe that it will not be able: (i) to renew
         its existing insurance coverage as and when such policies expire to the
         extent such coverage is available on commercially reasonable terms; or
         (ii) to obtain comparable coverage from similar institutions as may be
         necessary or appropriate to conduct its business as now conducted and
         at a cost that would not reasonably be expected to result in a Material
         Adverse Effect; the Company has not been denied any insurance coverage
         that it has sought or for which it has applied;

                  (cc) neither the Company nor any of the Subsidiaries has
         sustained since the date of the last audited financial statements in
         the Registration Statement or the Prospectus any loss or interference
         with its respective business from fire, explosion, flood or other
         calamity, whether or not covered by insurance, or from any labor
         dispute or court or governmental action, order or decree except as
         disclosed in the Registration Statement or the Prospectus or as would
         not, individually or in the aggregate, have a Material Adverse Effect;

                  (dd) each agreement described in or filed as an exhibit to the
         Registration Statement or the Prospectus is in full force and effect
         and is valid and enforceable by the Company in accordance with its
         terms, except for such as would not, individually or in the aggregate,
         have a Material Adverse Effect; neither the Company nor, to the
         Company's knowledge, any other party is in default in the observance or
         performance of any term or obligation to be performed by it under any
         such agreement, and no event has occurred that with notice or lapse of
         time or both would constitute such a default, in any such case where
         such default or event would have a Material Adverse Effect; except as
         disclosed in the Registration Statement or the Prospectus and except as
         would not, individually or in the aggregate, have a Material Adverse
         Effect, the Company has not sent or received any written communication
         regarding termination of any of the contracts or agreements referred to
         or described in, or filed as an exhibit to, the Registration Statement,
         and no such termination has been threatened by the Company or, to the
         Company's knowledge, any other party to any such contract or agreement;

                  (ee) the Company and each of the Subsidiaries maintains a
         system of internal accounting controls sufficient to provide reasonable
         assurance that (i) transactions are executed in accordance with
         management's general or specific authorization; (ii) transactions are
         recorded as necessary to permit preparation of financial statements in
         conformity with generally accepted accounting principles and to
         maintain accountability for assets; (iii) access to assets is permitted
         only in accordance with management's general or specific authorization;
         and (iv) the recorded


                                       11


         accountability for assets is compared with existing assets at
         reasonable intervals and appropriate action is taken with respect to
         any differences;

                  (ff) the Company has established and maintains disclosure
         controls and procedures (as such term is defined in Rule 13a-15(e) and
         15d-15(e) under the Exchange Act) as required by and in compliance in
         all material respects with the Exchange Act; the principal executive
         officers (or their equivalents) and principal financial officers (or
         their equivalents) of the Company have made all certifications required
         by the Sarbanes-Oxley Act of 2002 and any related rules and regulations
         promulgated by the Commission as currently in effect (the
         "Sarbanes-Oxley Act"), and the statements contained in any such
         certification are complete and correct in all material respects; there
         is and has been no failure on the part of the Company and any of the
         Company's directors or officers, in their capacities as such, to comply
         with any provision of the Sarbanes-Oxley Act of 2002, including Section
         402 related to loans and Sections 302 and 906 related to
         certifications;

                  (gg) the Company has made available to the Agents (including
         through the public availability of documents filed on EDGAR) true,
         correct, and complete copies of all documentation pertaining to any
         extension of credit in the form of a personal loan made, directly or
         indirectly, by the Company to any director or executive officer of the
         Company, or, to the knowledge of the Company, any family member or
         affiliate of any director or executive officer of the Company; and
         since January 1, 2004, the Company has not, directly or indirectly,
         including through any Subsidiary: (i) extended credit, arranged to
         extend credit, or renewed any extension of credit, in the form of a
         personal loan, to or for any director or executive officer of the
         Company, or, to the knowledge of the Company, to or for any family
         member or affiliate of any director or executive officer of the
         Company; or, (ii) made any material modification, including any renewal
         thereof, to any term of any personal loan to any director or executive
         officer of the Company, or, to the knowledge of the Company, any family
         member or affiliate of any director or executive officer, which loan
         was outstanding on the date of this Agreement;

                  (hh) neither the Company nor any of its Subsidiaries nor, to
         the knowledge of the Company, any director, officer, agent, employee or
         affiliate of the Company or any of its Subsidiaries is aware of or has
         taken any action, directly or indirectly, that would result in a
         violation by such persons of the Foreign Corrupt Practice Act of 1977,
         as amended and the rules and regulations thereunder (the "FCPA") and
         the Company and its Subsidiaries have conducted their business in
         compliance with the FCPA and have instituted and maintain policies and
         procedures designed to ensure, and which are reasonably expected to
         continue to ensure, continued compliance therewith;

                  (ii) any statistical and market-related data included in the
         Registration Statement or the Prospectus are based on or derived from
         sources that the Company believes to be reliable and accurate, and the
         Company has obtained the written consent to the use of such data from
         such sources to the extent required;

                  (jj) neither the Company nor any of the Subsidiaries nor, to
         the Company's knowledge, any employee or agent of the Company or the
         Subsidiaries (acting on behalf of the Company or the Subsidiary) has
         made any payment of funds of the Company or the Subsidiaries or
         received or retained any funds in violation of any law, rule or
         regulation, which payment, receipt or retention of funds is of a
         character required to be disclosed in the Registration Statement or the
         Prospectus; and


                                       12


                  (kk) neither the Company nor any of the Subsidiaries nor, to
         the Company's knowledge, any of their respective directors, officers,
         affiliates or controlling persons has taken, directly or indirectly,
         any action designed, or which has constituted or would reasonably be
         expected to cause or result in, under the Exchange Act or otherwise,
         the stabilization or manipulation of the price of any security of the
         Company to facilitate the sale or resale of the Shares in violation of
         applicable law.

         In addition, any certificate signed by any officer of the Company and
delivered to the Agents or counsel for the Agents in connection with the Closing
shall be deemed to be a representation and warranty by the Company as to matters
covered thereby, to the Agents.

         4. Certain Covenants of the Company. The Company hereby agrees:

                  (a) to furnish such information as may be required and
         otherwise to cooperate in qualifying the Shares for offering and sale
         by the Company under the securities or blue sky laws of such states or
         other jurisdictions as the Agents may designate and to maintain such
         qualifications in effect so long as the Agents may request for the
         distribution of the Shares; provided that the Company shall not be
         required to qualify as a foreign corporation, to consent to the service
         of process under the laws of any such jurisdiction (except service of
         process with respect to the offering and sale of the Shares by the
         Company) or to subject itself to taxation in respect of doing business
         in any jurisdiction in which it is not otherwise subject; and to
         promptly advise the Agents of the receipt by the Company of any
         notification with respect to the suspension of the qualification of the
         Shares for sale in any jurisdiction or the initiation or threatening of
         any proceeding for such purpose;

                  (b) to make available to the Agents electronic copies of the
         Basic Prospectus, any Preliminary Prospectus Supplement and the
         Prospectus (in each case as amended or supplemented if the Company
         shall have made any amendments or supplements thereto after the
         respective dates of such documents); to furnish the Agents, without
         charge, during the period beginning on the date hereof and ending on
         the later of the time of purchase or such date, as in the opinion of
         counsel for the Agents, the Prospectus Supplement is no longer required
         by law to be delivered in connection with sales by the Agents, as many
         copies of the Prospectus and any amendments and supplements thereto
         (including any Incorporated Documents) as the Agents may reasonably
         request.

                  (c) if, at the time this Agreement is executed and delivered,
         it is necessary for the Registration Statement or any post-effective
         amendment thereto to be declared effective before the Shares may be
         sold in the Offering, the Company will endeavor to cause the
         Registration Statement or such post-effective amendment to become
         effective as soon as possible and the Company will advise the Agents
         promptly and, if requested by the Agents, will confirm such advice in
         writing when the Registration Statement and any such post-effective
         amendment thereto has become effective;

                  (d) to advise the Agents promptly, confirming such advice in
         writing, of any request by the Commission, made prior to the time of
         purchase, for amendments or supplements to the Registration Statement
         or the Prospectus or for additional information with respect thereto,
         or of notice of institution of proceedings for, or the entry of a stop
         order, made prior to the time of purchase, suspending the effectiveness
         of the Registration Statement and, if the Commission should enter a
         stop order prior to the time of purchase suspending the effectiveness
         of the Registration Statement, to use its best efforts to obtain the
         lifting or removal of such order as soon as possible; to advise the
         Agents promptly of any proposal to amend or supplement the


                                       13


         Registration Statement or the Prospectus, made prior to the time of
         purchase, including by filing any documents that would be incorporated
         therein by reference, to provide the Agents and their counsel copies of
         any such documents for review and comment a reasonable amount of time
         prior to any proposed filing;

                  (e) subject to Section 4(d) hereof, to file promptly all
         reports and any definitive proxy or information statement required to
         be filed by the Company with the Commission in order to comply with the
         Exchange Act subsequent to the date of the Prospectus and for so long
         as the delivery of a prospectus is required to be delivered in
         connection with the Offering;

                  (f) to advise the Agents promptly of the happening of any
         event within the time during which a prospectus for the Offering is
         required to be delivered under the Act, which requires the making of
         any change in the Prospectus then being used so that the Prospectus
         would not include an untrue statement of material fact or omit to state
         a material fact necessary to make the statements therein, in the light
         of the circumstances under which they are made, not misleading, and,
         during such time, subject to Section 4(d) hereof, to prepare and
         furnish, at the Company's expense, to the Agents promptly such
         amendments or supplements to such Prospectus as may be necessary to
         reflect any such change; before amending the Registration Statement or
         supplementing any Preliminary Prospectus Supplement or the Prospectus
         in connection with the Offering, the Company will furnish you with a
         copy of such proposed amendment or supplement and will not file such
         amendment or supplement to which you reasonably object;

                  (g) to make generally available to its security holders, and
         to deliver to the Agents, an earnings statement of the Company (which
         will satisfy the provisions of Section 11(a) of the Act) covering a
         period of twelve months beginning after the effective date of the
         Registration Statement (as defined in Rule 158(c) under the Act) as
         soon as is reasonably practicable after the termination of such
         twelve-month period;

                  (h) for so long as a prospectus is required to be delivered
         under the Act in connection with the Offering, to comply with all the
         undertakings contained in the Registration Statement;

                  (i) to apply the net proceeds from the sale of the Shares in
         the manner set forth under the caption "Use of Proceeds" in the
         Prospectus;

                  (j) without duplication, to reimburse the Agents for expenses
         in accordance with Section 4 of the Engagement Letter and to pay all of
         the Company's costs, expenses, fees and taxes in connection with (i)
         the preparation and filing of the Registration Statement, the Basic
         Prospectus, each Preliminary Prospectus Supplement and Prospectus
         Supplement, and any amendments or supplements thereto, and the printing
         and furnishing of copies of each thereof to the Agents (including costs
         of mailing and shipment), (ii) the registration, issue, sale and
         delivery of the Shares including any stock or transfer taxes and stamp
         or similar duties payable by the Company upon the sale, issuance or
         delivery of the Shares sold by the Company in the Offering, (iii) the
         producing, word processing and/or printing of this Agreement, any
         Purchase Agreements, any Powers of Attorney and any closing documents
         (including compilations thereof) and the reproduction and/or printing
         and furnishing of copies of each thereof to the Agents and the
         Purchasers, (iv) the qualification of the Shares for offering and sale
         under state or foreign laws and the determination of their eligibility
         for investment under state or foreign law as aforesaid (including the
         legal fees and filing fees and other disbursements of counsel for the
         Agents) and the printing and furnishing of copies of any blue sky
         surveys or legal investment surveys to the Agents and to dealers, (v)
         any qualification of the Shares for quotation on Nasdaq and any


                                       14


         registration thereof under the Exchange Act, (vi) the fees and
         disbursements of any transfer agent or registrar for the Shares, (vii)
         the costs and expenses of the Company relating to any presentations or
         meetings undertaken in connection with the marketing of the offering
         and sale of the Shares, and (viii) the performance of the Company's
         other obligations hereunder;

                  (k) until the completion of the distribution of the Shares in
         the Offering, not to take, directly or indirectly, any action designed
         to or that would constitute or that would reasonably be expected to
         cause or result in, under the Exchange Act or otherwise, stabilization
         or manipulation of the price of any security of the Company to
         facilitate the sale or resale of the Shares; and

                  (l) the Company will timely, and in any event prior to the
         time of purchase, file this Agreement with the Commission on an
         appropriate form.

         5. Conditions of Agents' Obligations. The obligations of the Agents
hereunder are subject to the accuracy of the representations and warranties of
the Company contained herein on the date hereof and at the time of purchase and
the performance by the Company of its obligations hereunder and to the following
additional conditions precedent:

                  (a) The Company shall furnish to the Agents at the time of
         purchase an opinion of Ropes & Gray LLP, special counsel for the
         Company, addressed to the Agents, and dated the time of purchase, in
         form and substance as set forth on Exhibit B hereto. ---------

                  (b) The Agents shall have received from Grant Thornton LLP
         letters dated, respectively, the date of this Agreement and the time of
         purchase, and addressed to the Agents in the form and substance
         heretofore approved by, or otherwise satisfactory to, the Agents.

                  (c) The Agents shall have received from Cooley Godward LLP,
         counsel for the Agents, such opinion or opinions dated the time of
         purchase and addressed to the Agents, with respect to the issuance and
         sale of the Shares, the Registration Statement, the Prospectus and
         other related matters as the Agents may reasonably require, and the
         Company shall have furnished to such counsel such documents as they may
         reasonably request for the purpose of enabling them to pass upon such
         matters.

                  (d) No Prospectus or amendment or supplement to the
         Registration Statement or the Prospectus, including documents deemed to
         be incorporated by reference therein, shall have been filed to which
         you reasonably object in writing.

                  (e) Prior to the time of purchase, (i) the Prospectus
         Supplement shall have been duly filed with the Commission in accordance
         with Rule 424(b); (ii) no stop order with respect to the effectiveness
         of the Registration Statement shall have been issued under the Act or
         proceedings initiated under Section 8(d) or 8(e) of the Act; (iii) no
         order preventing or suspending the use of the Prospectus Supplement
         shall have been issued and no proceeding for that purpose shall have
         been initiated or threatened by the Commission; (iv) no order having
         the effect of ceasing or suspending the distribution of the Shares or
         any other securities of the Company shall have been issued by the
         Commission or Nasdaq and no proceedings for that purpose shall have
         been instituted or shall be pending or, to the knowledge of the
         Company, contemplated by the Commission or Nasdaq; (v) the Registration
         Statement and all amendments thereto shall not contain an untrue
         statement of a material fact or omit to state a material fact required
         to be stated therein or necessary to make the statements therein not
         misleading; and (vi) the Prospectus and all amendments or supplements
         thereto shall not contain an untrue statement of a material fact or


                                       15


         omit to state a material fact required to be stated therein or
         necessary to make the statements therein, in the light of the
         circumstances under which they are made, not misleading.

                  (f) Between the time of execution of this Agreement and the
         time of purchase, no material adverse change or any development
         involving a prospective material adverse change in business,
         properties, management, condition, financial or otherwise, operations,
         prospects or results of operation of the Company and the Subsidiaries
         taken as a whole shall occur or become known, which, in the sole
         judgment of the Agents, makes it impracticable or inadvisable to
         proceed with the Offering on the terms and in the manner contemplated
         by the Prospectus.

                  (g) The Company shall have furnished to the Agents a
         certificate of the Company, signed by the Chairman of the Board or the
         President and the principal financial or accounting officer of the
         Company, dated the date of the time of purchase, to the effect that the
         signers of such certificate have carefully examined the Registration
         Statement, the Prospectus, any supplements to the Prospectus and this
         Agreement and that to the knowledge of such person after reasonable
         inquiry:

                           (1)      the representations and warranties of the
                                    Company in this Agreement are true and
                                    correct on and as of the time of purchase
                                    with the same effect as if made at the time
                                    of purchase and the Company has complied
                                    with all the agreements and satisfied all
                                    the conditions on its part to be performed
                                    or satisfied at or prior to the time of
                                    purchase;

                           (2)      The Registration Statement has become
                                    effective and no stop order suspending the
                                    effectiveness of the Registration Statement
                                    has been issued and no proceedings for that
                                    purpose have been instituted or, to such
                                    person's knowledge, threatened; and

                           (3)      since the date of the most recent financial
                                    statements included or incorporated by
                                    reference in the Prospectus, except as
                                    disclosed in the Prospectus there has been
                                    no material adverse change or any
                                    development involving a prospective material
                                    adverse change in business, properties,
                                    management, condition, financial or
                                    otherwise, operations, prospects or results
                                    of operation of the Company and the
                                    Subsidiaries taken as a whole.

                  (h) The Company shall have furnished to you such other
         documents and certificates as the Agents may reasonably request.

         6. Effective Date of Agreement; Termination. This Agreement shall
become effective when the parties hereto have executed and delivered this
Agreement.

         The obligations of the Agents hereunder shall be subject to termination
in the absolute discretion of the Agents if (x) any of the conditions specified
in Section 5 have not been fulfilled as of 10:00 A.M. New York City time on the
date specified in Section 2, or (y) since the time of execution of this
Agreement, there shall have occurred: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or Nasdaq; (ii) a suspension or material limitation in trading in
the Company's securities on Nasdaq; (iii) a general moratorium on commercial
banking activities declared by either federal or New York State authorities or a
material disruption in commercial banking or securities settlement or clearance
services in the United States; (iv) an outbreak or escalation of hostilities or
acts of terrorism involving the United States or a declaration by the United
States of a national emergency or war; or (v) any other calamity or crisis or
any change in


                                       16


financial, political or economic conditions in the United States or elsewhere,
if the effect of any such event specified in clause (iv) or (v) in the Agents'
sole judgment makes it impracticable or inadvisable to proceed with the Offering
or the delivery of the Shares on the terms and in the manner contemplated in the
Registration Statement and the Prospectus, or (z) since the time of execution of
this Agreement, there shall have occurred any downgrading, or any notice or
announcement shall have been given or made of (i) any intended or potential
downgrading or (ii) any watch, review or possible change that does not indicate
an affirmation or improvement in the rating accorded any securities of or
guaranteed by the Company or any Subsidiary by any "nationally recognized
statistical rating organization," as that term is defined in Rule 436(g)(2)
under the Act.

         If the Agents elect to terminate this Agreement as provided in this
Section 6, the Company shall be notified promptly in writing.

         If the sale of the Shares, as contemplated by this Agreement, is not
carried out by the Agents for any reason permitted under this Agreement or if
such sale is not carried out because of any refusal, inability or failure on the
part of the Company to comply with any of the terms of this Agreement, the
Company shall not be under any obligation or liability under this Agreement
(except to the extent provided in Sections 4(j) hereof), and neither of the
Agents shall be under any obligation or liability to the Company or the other
Agent under this Agreement. Under such circumstances, the Engagement Letter
shall remain in full force and effect in accordance with its terms.

         7. Indemnity and Contribution.

            (a) The Company agrees to indemnify and hold harmless each of the
Agents, the directors, officers, employees and agents of such Agent and each
person who controls such Agent within the meaning of either the Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or in any amendment thereof, or in the Basic Prospectus, any
Preliminary Prospectus Supplement or the Prospectus, or in any amendment thereof
or supplement thereto, arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arise out of or are
based upon any act or failure to act or any alleged act or failure to act by the
Agent in connection with, or relating in any manner to, the Shares or the
Offering, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon matters covered above
and agrees to reimburse each such indemnified party, as incurred, for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by the Agent seeking (or whose director,
officer, employee, agent or control person is seeking) indemnification
specifically for inclusion therein; provided, further, that with respect to any
Preliminary Prospectus Supplement, the foregoing indemnity agreement shall not
inure to the benefit of any indemnified party if the Company identified the
untrue statement or omission in writing to the Agents and copies of the
Prospectus were timely delivered to the Agents pursuant to this Agreement and a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of either of the Agents to such person asserting such loss, claim,
damage, liability or expense, if required by law to have been so delivered, at
or prior to the written confirmation of the sale of the Shares to such person,
and if the delivery of such Prospectus (as


                                       17


so amended or supplemented) would have caused such loss, claim, damage,
liability or expense not to have been incurred. This indemnity agreement will be
in addition to any liability which the Company may otherwise have.

            (b) Each of the Agents agrees to indemnify and hold harmless the
Company and the other Agent, as well as the respective directors, officers,
employees and agents of the Company and such other Agent and each person who
controls the Company or such other Agent within the meaning of either the Act or
the Exchange Act, to the same extent as the foregoing indemnity from the Company
to such Agent, but only with reference to written information relating to such
Agent furnished to the Company by such Agent specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which the Agents may otherwise have.

            (c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 7, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph "(a)" or "(b)" above unless
and to the extent such failure results in the forfeiture by the indemnifying
party of substantial rights and defenses and (ii) will not, in any event,
relieve the indemnifying party from any obligations to any indemnified party
other than the indemnification obligation provided in paragraph "(a)" or "(b)"
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
reasonably satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with an actual or reasonably likely conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded based upon the advice of
counsel that there may be legal defenses available to it which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party; provided that the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions arising out of the same allegations be liable for the reasonable fees
and expenses of more than one separate firm of attorneys at any time for all
indemnified parties (in addition to any local counsel), which firm shall be
designated in writing by the Agents if more than one indemnified party seeks
indemnification under paragraph (a) above. An indemnifying party will not,
without the prior written consent of the indemnified parties covered thereby,
settle or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder by the indemnified
parties covered thereby (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each such indemnified party from
all liability arising out of such claim, action, suit or proceeding. No
indemnifying party shall be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the indemnifying party agrees to indemnify
each indemnified party from and against any loss or liability by reason of such
settlement or judgment if it would be otherwise obligated to do so hereunder.


                                       18


            (d) In the event that the indemnity provided in paragraph "(a)" or
"(b)" of this Section 7 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Agents severally agree to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and the Agents may
be subject in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and by the Agents on the other from the
offering of the Shares. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company and the Agents severally
shall contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
of the Agents on the other in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the total net
proceeds from the offering (before deducting expenses) received by it, and
benefits received by each of the Agents shall be deemed to be equal to the total
compensation of such Agent as set forth in this Agreement. Relative fault shall
be determined by reference to, among other things, whether any untrue or any
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information provided by the Company on the
one hand or the Agents on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company and the Agents agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph "(d)," (i) neither of the Agents shall be required to contribute
any amount in excess of the amount of the placement agent fees actually received
by such Agent pursuant to this Agreement, and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person who
controls an Agent within the meaning of either the Act or the Exchange Act and
each director, officer, employee and agent of an Agent shall have the same
rights to contribution as such Agent, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (d).

            (e) The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers and of the
Agents set forth in or made in a certificate delivered pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Agents or the Company or any of the officers,
directors or controlling persons referred to in Section 7 hereof, and will
survive delivery of and payment for the Shares. The provisions of Sections 4(j)
and 7 hereof shall survive the termination or cancellation of this Agreement.

         8. Information Furnished by the Agents. The statements set forth in the
tenth paragraph relating to stabilization under the caption "Plan of
Distribution" in the Prospectus Supplement constitute the only information
furnished by or on behalf of the Agents as such information is referred to in
Sections 3 and 7 hereof.

         9. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing and shall be delivered or
sent by courier, hand delivery, mail, facsimile transmission or telegram and, if
to the Agents, shall be sufficient in all respects if delivered or sent to both
C.E. Unterberg, Towbin, LLC, 350 Madison Avenue, New York, NY 10017, Facsimile
number (212) 389-8881, Attention: General Counsel, and Shoreline Pacific, LLC,
655 Montgomery Street, Suite 1000, San Francisco, CA 94111, Facsimile number
(415) 399-1366, Attention: Harlan Kleiman; and, if to the Company, shall be
sufficient in all respects if delivered or sent to the Company at the offices of
the


                                       19


Company at 3155 Porter Drive, Palo Alto, CA 94304 Facsimile number (650)
475-3101, Attention: General Counsel.

         10. Governing Law; Construction. This Agreement and any claim,
counterclaim or dispute of any kind or nature whatsoever arising out of or in
any way relating to this Agreement ("Claim"), directly or indirectly, shall be
governed by, and construed in accordance with, the laws of the State of New
York. The section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.

         11. Submission to Jurisdiction. Except as set forth below, no Claim may
be commenced, prosecuted or continued in any court other than the courts of the
State of New York located in the City and County of New York or in the United
States District Court for the Southern District of New York, which courts shall
have jurisdiction over the adjudication of such matters, and each of the Agents
and the Company hereby consents to the jurisdiction of such courts and personal
service with respect thereto. Each of the Agents and the Company hereby consents
to personal jurisdiction, service and venue in any court in which any Claim is
brought by any third party against either of the Agents or any indemnified
party. Each of the Agents and the Company (on its behalf and, to the extent
permitted by applicable law, on behalf of its shareholders and affiliates)
waives all right to trial by jury in any action, proceeding or counterclaim
(whether based upon contract, tort or otherwise) in any way arising out of or
relating to this Agreement. Each of Agents and the Company agrees that a final
judgment in any such action, proceeding or counterclaim brought in any such
court shall be conclusive and binding upon the Company and the Agents and may be
enforced in any other courts to the jurisdiction of which either the Company or
either of the Agents is or may be subject, by suit upon such judgment.

         12. Parties at Interest. The Agreement herein set forth has been and is
made solely for the benefit of the Agents and the Company and to the extent
provided in Section 7 hereof the controlling persons, partners, directors and
officers referred to in such section, and their respective successors, assigns,
heirs, personal representatives and executors and administrators. No other
person, partnership, association or corporation (including a Purchaser) shall
acquire or have any right under or by virtue of this Agreement.

         13. Counterparts. This Agreement may be signed by the parties in one or
more counterparts which together shall constitute one and the same agreement
among the parties.

         14. Successors and Assigns. This Agreement shall be binding upon the
Agents and the Company and their successors and assigns and any successor or
assign of the Company's and the Agents' respective businesses and/or assets.


         15. Engagement Letter. Except to the extent specifically stated herein,
the Engagement Letter shall remain in full force and effect in accordance with
its terms; provided, however, that to the extent any provision of this Agreement
conflicts with, or addresses representations, warranties, rights or obligations
also addressed by, the Engagement Letter (including without limitation, the
separate letter agreement signed concurrently with the Engagement Letter and
dated October 25, 2004 between the parties regarding indemnification), the
provisions of this Agreement shall supersede the conflicting or duplicative
provisions of the Engagement Letter solely with respect to the Offering. Except
as provided in this Section 15, this Agreement constitutes the entire agreement
of the parties hereto and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. In this Agreement, the masculine, feminine and neuter
genders and the singular and the plural include one another. The section
headings in this Agreement are for the convenience of the parties only and will
not affect the construction or interpretation of this Agreement.


                                       20


This Agreement may be amended or modified, and the observance of any term of
this Agreement may be waived, only by a writing signed by the Company and the
Agents.

         If the foregoing correctly sets forth the understanding between the
Company and the Agents, please so indicate in the space provided below for that
purpose, whereupon this agreement and your acceptance shall constitute a binding
agreement between the Company and the Agents.

                                                    Very truly yours,

                                                    STEMCELLS, INC.



                                                    By:/s/  Martin McGlynn
                                                       --------------------
                                                       Name:  Martin McGlynn
                                                       Title: President and CEO


Accepted and agreed to as of the
date first above written

C.E. UNTERBERG, TOWBIN, LLC



By:  /s/  Andrew Armo
     -----------------
     Name:  Andrew Armo
     Title:  Co-President



SHORELINE PACIFIC, LLC



By:    /s/  Harlan P. Kleiman
      ------------------------
      Name:  Harlan P. Kleiman
      Title:  CEO


                                       21

                                    Exhibit A


                           FORM OF PURCHASE AGREEMENT




                                    Exhibit B


                       FORM OF OPINION OF ROPES & GRAY LLP

                                                                    Exhibit 10.1

StemCells, Inc.
3155 Porter Drive
Palo Alto, CA  94304
Attention:  Chief Executive Officer

Ladies and Gentlemen:

         The undersigned, ________________________________ (the "Investor"),
hereby confirms its agreement with you as follows:

         1. This Purchase Agreement (the "Agreement") is made as of October 25,
2004 between StemCells, Inc., a Delaware corporation (the "Company"), and the
Investor.

         2. The Company has authorized the sale and issuance of up to 7,500,000
shares of common stock of the Company (the "Shares") in a public offering. The
offering has been registered under the Securities Act of 1933, as amended,
pursuant to the Company's Registration Statement on Form S-3 (No. 333-83992) as
amended (the "Registration Statement"). The Registration Statement was declared
effective on July 2, 2002 and remains effective on the date hereof.

         3. The Company and the Investor agree that the Investor will purchase
from the Company and the Company will issue and sell to the Investor _________
Shares for a purchase price of $3.00 per Share, or an aggregate purchase price
of $__________. The Investor acknowledges that the offering of the Shares is not
a firm commitment underwriting and that there is no minimum offering amount.

         4. The completion of the purchase and sale of the Shares (the
"Closing") shall occur on October 28, 2004 (the "time of purchase"). At or prior
to the Closing, the Investor shall deliver to C.E. Unterberg Towbin, LLC, as
agent for the Company ("CEUT"), a Federal Funds wire transfer in the full amount
of the purchase price for the Shares being purchased by the Investor. At the
Closing, the Company shall deliver to the Investor, using customary book-entry
procedures, the number of Shares as set forth above in Section 3 against
delivery to the Company by CEUT of a Federal Funds wire transfer in the net
amount (after payment of agents' fees and expenses) of the purchase price for
the Shares being purchased.

         5. The Investor represents that, except as set forth below, (a) it has
had no position, office or other material relationship within the past three
years with the Company or persons known to it to be affiliates of the Company,
(b) neither it, nor any group of which it is a member or to which it is related,
beneficially owns (including the right to acquire or vote) any securities of the
Company and (c) it has no direct or indirect affiliation or association with any
NASD member as of the date hereof:
- --------------------------------------------------------------------------------

         6. The Investor hereby confirms receipt of the Prospectus Supplement
dated October 25, 2004 and the Basic Prospectus dated July 3, 2002
(collectively, the "Prospectus") of the Company distributed by email to the
Investor accompanied by this Agreement. The Investor confirms that it had full
access to the Prospectus and was fully able to read, review, download and print
the Prospectus.

         7. The Investor, if outside the United States, will comply with all
applicable laws and regulations in each foreign jurisdiction in which it
purchases, offers, sells or delivers Shares or has in its possession or
distributes any offering material, in all cases at its own expense.

         8. The Investor further represents and warrants to the Company that the
Investor is purchasing the Shares for the Investor's own account and not with a
view to or for sale in connection with any distribution of the Shares.

         9. Each of the Company and the Investor represents and warrants to, and
covenants with, the other party, that (a) it has full right, power, authority
and capacity to enter into this Purchase




Agreement and to consummate the transactions contemplated hereby and has taken
all necessary action to authorize the execution, delivery and performance of
this Purchase Agreement, and (b) this Purchase Agreement constitutes a valid and
binding obligation of the Investor enforceable against it in accordance with the
terms of this Purchase Agreement.

         10. The Investor understands that nothing in the Prospectus, this
Purchase Agreement or any other materials presented to the Investor in
connection with the purchase and sale of the Shares constitutes legal, tax or
investment advice. The Investor has consulted such legal, tax and investment
advisors as it, in its sole discretion, has deemed necessary or appropriate in
connection with its purchase of Shares.

         11. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of New York, without giving effect to the
principles of conflicts of law.

         12. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which, when taken together, shall
constitute but one instrument, and shall become effective when one or more
counterparts have been signed by each party hereto and delivered to the other
parties.

         Please confirm that the foregoing correctly sets forth the agreement
between us by signing in the space provided below for that purpose.


                                                           
                                                              Name of Investor:

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



                                                              By:
                                                                 -------------------------------------------------
                                                                   Name:
                                                                   Title:
                                                              Address:
                                                                      --------------------------------------------

                                                              Tax ID No.:
                                                                         -----------------------------------------
                                                              Contact Name:
                                                                           ---------------------------------------
                                                              Contact Fax Number:
                                                                                 ---------------------------------
                                                              Contact Email:
                                                                            --------------------------------------
                                                              Contact Telephone Number:
                                                                                       ---------------------------
                                                              Name in which book-entry should be made (if
                                                              different):
                                                                         -----------------------------------------
                                                              Broker:
                                                                     ---------------------------------------------
                                                              Broker Contact Name:
                                                                                  --------------------------------
                                                              Broker Phone Number:
                                                                                  --------------------------------
                                                              Broker Fax:
                                                                         -----------------------------------------
                                                              Broker Email:
                                                                           ---------------------------------------
                                                              DTC Account Number:
                                                                                 ---------------------------------


AGREED AND ACCEPTED:

STEMCELLS, INC.


By:
   --------------------------------------------------
     Name:
     Title:

                                                                    Exhibit 99.1

[STEMCELLS, INC. LOGO]

COMPANY CONTACT                                   INVESTOR RELATIONS
Martin McGlynn                                    Ina McGuinness or Bruce Voss
Chief Executive Officer                           Lippert/Heilshorn & Associates
(650) 475-3100                                    (310) 691-7100
                                                  imcguinness@lhai.com
FOR IMMEDIATE RELEASE

            STEMCELLS ANNOUNCES THIRD QUARTER 2004 FINANCIAL RESULTS

PALO ALTO, CALIF., OCTOBER 26, 2004 - StemCells, Inc. (NASDAQ: STEM) today
reported its financial results for the third quarter ended September 30, 2004.

The Company reported a loss of $4,338,000, or $0.08 per share, for the third
quarter ended September 30, 2004, compared with a loss before deemed dividends
of $2,429,000, or $0.07 per share, for the third quarter ended September 30,
2003. For the third quarter in 2003, net loss applicable to common shareholders
after deemed dividends to preferred shareholders was $2,599,000 or $0.08 per
share. There were no dividends or deemed dividends for the same period in 2004,
as all of the Company's previously outstanding cumulative convertible preferred
stock was converted to the Company's common stock prior to the end of 2003.
Total revenue for the third quarter of 2004 and 2003 was $5,000 and $103,000
respectively. Revenue for 2004 was from licensing agreements and 2003 was from
grants and licensing agreements. Cash and cash equivalents at September 30, 2004
totaled $23,141,000 compared with $13,082,000 at December 31, 2003.

The increase in net loss from 2003 to 2004 for the quarter reported was
primarily attributable to three factors: the increase in expenditures required
for various activities undertaken toward StemCells' planned IND (Investigational
New Drug filing), a revision of the estimated reserve for the exit cost
obligation related to the former corporate headquarters in Rhode Island, and
increased costs associated with new Sarbanes-Oxley compliance.

As previously reported, the Company is targeting the filing of its first IND in
the first quarter of 2005, to evaluate the safety and efficacy of its
proprietary human neural stem cells as a treatment for Batten's disease, an
always fatal neurodegenerative disease and member of the Lysosomal Storage
Disease family.

ABOUT STEMCELLS INC.
StemCells, Inc. is a biotechnology company focused on the discovery, development
and commercialization of stem cell-based therapies to treat diseases of the
nervous system, liver, and pancreas. The Company's stem cell programs seek to
repair or repopulate neural or other tissue that has been damaged or lost as a
result of disease or injury. Further information about the Company is available
on its web site at www.stemcellsinc.com.

Apart from statements of historical facts, the text of this press release
constitutes forward-looking statements regarding, among other things, the future
business operations of StemCells, Inc. ("the




Company"). The forward-looking statements speak only as of the date of this news
release. StemCells does not undertake to update any of these forward-looking
statements to reflect events or circumstances that occur after the date hereof.
Such statements reflect management's current views and are based on certain
assumptions that may or may not ultimately prove valid. The Company's actual
results may vary materially from those contemplated in the forward-looking
statements due to risks and uncertainties to which the Company is subject,
including uncertainties regarding the Company's ability to obtain the capital
resources needed to continue its current research and development operations and
to conduct the research, preclinical development and clinical trials necessary
for regulatory approvals; the fact that the Company's stem cell technology is at
the preclinical stage and has not yet led to the development of any proposed
product; the uncertainty whether the Company will be able to file an IND in the
time it projects and whether the FDA will permit it to proceed to clinical
testing; the uncertainty whether the Company will achieve revenues from product
sales or become profitable; uncertainties regarding the Company's obligations in
regard to its former encapsulated cell therapy facilities in Rhode Island; and
other factors that are described in Exhibit 99 to the Company's Annual Report on
Form 10-K entitled "Cautionary Factors Relevant to Forward-Looking Statements."

                                     -more-




                                 STEMCELLS INC.



                     CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)



                                                        Three months ended            Nine months ended
                                                           September 30,                  September 30,
                                                         2004           2003           2004            2003
                                                         ----           ----           ----            ----
                                                                                     
Revenue from grants and licensing agreements               $5            $33           $103            $152
Operating Expenses
    Research and development                            2,075          1,444          5,882           4,524
    General & administrative                              904            783          2,645           2,381
    Wind-down expenses related to our
        former corporate headquarters                   1,346            224          1,944             698
                                                        -----            ---          -----             ---
Total operating expenses                                4,325          2,451         10,471           7,603
Loss from operations                                  (4,320)        (2,418)       (10,368)         (7,451)
Other income (expense)                                   (17)           (11)           (43)           (101)
                                                         ---            ---            ---            ----
Net loss                                              (4,337)        (2,429)       (10,411)         (7,552)
Dividend to preferred shareholders                                                                       47
Deemed dividend                                                         170                           1,658
                                                                        ---                           -----
Net loss applicable to common shareholders
                                                     ($4,337)       ($2,599)      ($10,411)        ($9,257)
Net loss per share applicable to common
    shareholders; basic and diluted                   ($0.08)        ($0.08)        ($0.23)         ($0.30)
Weighted average shares -- basic and diluted       54,232,231     33,824,249     46,132,704      30,666,932


                                 STEMCELLS INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS



                                                            September 30,             December 31,
                                                               2004                          2003
(IN THOUSANDS)                                                (unaudited)               (a)
                                                                                
Assets
Current assets:
     Cash & cash equivalents                                        23,141                 $13,082
     Other current assets                                              292                     325
                                                                       ---                     ---
Total current assets                                                23,433                  13,407
Property, plant & equipment, net                                     3,447                   3,611
Other assets, net                                                    2,724                   2,768
                                                                     -----                   -----
Total assets                                                       $29,604                 $19,786
Liabilities and stockholders' equity
Current liabilities                                                 $3,513                  $2,522
Non-current liabilities                                              6,680                   6,300
Stockholders' equity                                                19,411                  10,964
                                                                    ------                  ------
Total liabilities and stockholders' equity                         $29,604                 $19,786
                                                                   -------                 -------


         (a) Derived from audited financial statements included in StemCells'
         annual report on form 10-K filed with the SEC.

                                                                    EXHIBIT 99.2

[STEMCELLS LOGO]

COMPANY CONTACT                               INVESTOR RELATIONS
Martin McGlynn                                Ina McGuinness or Bruce Voss
Chief Executive Officer                       Lippert/Heilshorn & Associates
(650) 475-3100                                (310) 691-7100
                                              imcguinness@lhai.com

FOR IMMEDIATE RELEASE

             STEMCELLS RAISES $22.5 MILLION IN NEW EQUITY FINANCING

PALO ALTO, CALIF., OCTOBER 26, 2004 -- StemCells, Inc. (NASDAQ: STEM) announced
today that it has entered into definitive agreements with institutional
investors with respect to the registered direct placement of 7,500,000 shares of
its common stock at a purchase price of $3.00 per share, for gross proceeds of
approximately $22,500,000. C.E. Unterberg, Towbin, LLC and Shoreline Pacific,
LLC served as placement agents for the transaction.

The transaction is expected to be consummated within the next few days following
satisfaction of certain customary closing conditions contained in the definitive
transaction agreements.

StemCells sold these shares under a shelf registration statement previously
filed with and declared effective by the U.S. Securities and Exchange
Commission.

ABOUT STEMCELLS INC.
StemCells, Inc. is a biotechnology company focused on the discovery, development
and commercialization of stem cell-based therapies to treat diseases of the
nervous system, liver, and pancreas. The Company's stem cell programs seek to
repair or repopulate neural or other tissue that has been damaged or lost as a
result of disease or injury. Further information about the Company is available
on its web site at www.stemcellsinc.com.

Apart from statements of historical facts, the text of this press release
constitutes forward-looking statements regarding, among other things, the future
business operations of StemCells, Inc. ("the Company"). The forward-looking
statements speak only as of the date of this news release. StemCells does not
undertake to update any of these forward-looking statements to reflect events or
circumstances that occur after the date hereof. Such statements reflect
management's current views and are based on certain assumptions that may or may
not ultimately prove valid. The Company's actual results may vary materially
from those contemplated in the forward-looking statements due to risks and
uncertainties to which the Company is subject, including uncertainties regarding
the Company's ability to obtain the capital resources needed to continue its
current research and development operations and to conduct the research,
preclinical development and clinical trials necessary for regulatory approvals;
the fact that the Company's stem cell technology is at the pre-clinical stage
and has not yet led to the development of any proposed product; the uncertainty
whether the Company will be able to file an IND in the time it projects and
whether the FDA will permit it to proceed to clinical testing; the uncertainty
whether the Company will achieve revenues from product sales or become
profitable; uncertainties regarding the Company's obligations in regard to its
former encapsulated cell therapy facilities in Rhode Island; and other factors
that are described in Exhibit 99 to the Company's Annual Report on Form 10-K
entitled "Cautionary Factors Relevant to Forward-Looking Statements."


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