<PAGE>
 
                             LETTERHEAD OF CYPRESS

                                                                   EXHIBIT 10.38


February 18, 1999


Carl F. Bobkoski
P.O. Box 964
16846 Circa del Norte
Rancho Santa Fe, California 92067


RE: EMPLOYMENT TERMS

Dear Carl:

CYPRESS BIOSCIENCE, INC. (the "Company") is pleased to offer you the position
of President, Chief Operating Officer and Corporate Secretary, on the
following terms.

You will be responsible for such duties as are normally associated with the
positions of President, Chief Operating Officer and Corporate Secretary,
including, but not limited to, responsibility in the areas of finance, sales,
marketing, MANUFACTURING, business development, risk management and planning for
the Company. You will report to me and will work in our facility located in San
Diego, California. Normal working hours are from 8:00 a.m. to 5:00 p.m., Monday
through Friday. As an exempt salaried employee, you will be expected to work
additional hours as required by the nature of your work assignments. Of course,
the Company may change your duties and work location from time to time as it
deems necessary.

Your initial base salary will be Two Hundred and Fifteen Thousand Dollars
($215,000) per year, less standard payroll deductions and all required
withholdings payable on the Company's regular payroll dates. You will be
eligible for all standard benefits provided to employees of the Company,
according to standard Company policy and as may be adopted by the Company from
time to time. Details about these benefits are available for your review. In
addition, the Company agrees that it will reimburse you for (i) the cost of your
current long term disability policy during the period of your employment in the
amount of FIVE HUNDRED TWENTY-FIVE DOLLARS ($525.00) per month, and (ii) does
not cover your son due to a pre-existing condition for up to Five Hundred
Dollars ($500.00) per month for up to six (6) months. You will also be eligible
at the sole discretion of the Board of Directors ("Board"), for an annual bonus
equal to up to twenty-five percent (25%) of your base salary. The Company
reserves the right to modify your compensation and benefits from time to time as
it deems necessary.
<PAGE>
 
Carl F. Bobkoski
February 18, 1999
Page 2


Upon commencement of employment with the Company pursuant to this letter, and
subject to the approval of the Company's Board, you will be entitled to receive
an incentive stock option grant, under the terms of the Company's 1996 Equity
Incentive Plan, as amended April 24, 1997 (the "Plan") in the amount of 500,000
shares of the Company's Common Stock on the date of the grant. The option will
be subject to vesting over four (4) years, so long as you continue to be
employed with the Company, such that the Option will vest as to one-forth (1/4)
the shares subject to the Option following twelve (12) continuous months of
service with the Company beginning on the day of grant with the remainder of the
Option vesting monthly thereafter. The Option shall have a term of ten (10)
years. Other terms of the Option shall be consistent with the Company's Plan and
with the terms set forth in the Company's standard form of stock option grant.
Based upon performance satisfactory to the Board in its sole discretion, you
will be awarded an option grant, following your first year of employment, of an
amount equivalent to your initial Option.

You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in writing signed by the Chief Executive Officer. Notwithstanding
this at-will employment relationship, if the Company terminates your employment
without "cause" after June 30, 1999, then upon your furnishing to the Company an
executed Release and Waiver of Claims (a form of which is attached hereto as
Exhibit A), you shall be entitled to receive severance payments in the form of
continuation of your base salary in effect at the time or your termination,
subject to standard payroll deductions and withholdings, for a period of six (6)
months; provided, that such salary continuation will increase by one (1) month
for every full year of continuous service with the Company. However if you
resign or your employment is terminated for "cause", all compensation and
benefits will  cease immediately, and you will receive no severance benefits
other than your current accrued base salary through the date of termination. For
purposes of this letter agreement, "cause" shall mean: (i) conviction of any
felony or a crime involving moral turpitude or dishonesty; (ii) participation in
a fraud or act of dishonesty against the Company; (iii) willful breach of the
Company's policies; (iv) intentional damage to, or misappropriation of, the
Company's property; (v) material breach of any term of this Agreement or the
Proprietary Information and Inventions Agreement (attached as Exhibit B); or
(vi) conduct by you that, in good faith and reasonable determination of the
Board, demonstrates gross unfitness to serve.

In the event of a "change in control", then the vesting of your Option shall be
immediately accelerated such that the Option shall become immediately
exercisable. For purposes of this letter agreement, "change in control", shall
mean (i) a dissolution or liquidation of the Company; (ii) a sale of all or
substantially all of the assets of the Company; (iii) a merger or consolidation
in which the Company is not the surviving corporation and in which beneficial
ownership of securities of the Company representing at least fifty percent (50%)
of the combined voting power entitled to vote in the election of directors has
changed; (iv) a reverse merger in which the Company is the surviving corporation
but the shares of Common Stock outstanding immediately preceding the merger are
<PAGE>
 
Carl F. Bobkoski
February 18, 1999
Page 3


converted by virtue of the merger into other property, whether in the form
of securities, cash or otherwise, and in which beneficial ownership of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors has changed;
(v) an acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any comparable successor provisions (excluding any employee benefit
plan, or related trust, sponsored or maintained by the Company or subsidiary of
the Company or other entity controlled by the Company) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company representing at least
fifty percent (50%) of the combined voting power entitled to vote in the
election of directors; or (vi) in the event that the individuals who, as of the
date of the adoption of this provision, are members of the Company's Board (the
"Incumbent Board"), cease for any reason to constitute at least fifty percent
(50%) of the Board. (If the election, or nomination for election by the
Company's stockholders, of any new director is approved by a vote of at least
fifty percent (50%) of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board).

As a Company employee, you will be expected to abide by Company rules and
regulations. As a condition of your employment, you will be required to sign and
comply with a Proprietary Information and Inventions Agreement, a copy of which
is attached hereto as Exhibit B, which, among other things, prohibits
unauthorized use or disclosure of Company proprietary information. In your work
for the Company, you will be expected not to use or disclose any confidential
information, including trade secrets, of any former employer or other person to
whom you have an obligation of confidentiality.

You agree that you will not bring onto Company premises any unpublished
documents or property belonging to any former employer or other person to whom
you have an obligation of confidentiality. In the performance of your duties for
the Company, you will be expected to use only that information which is
generally known and used by persons with training and experience comparable to
your own, which is common knowledge in the industry or otherwise legally in the
public domain, or which is otherwise provided or developed by the Company.

The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement regarding the subject matter set forth herein between
you and the Company. This letter agreement may not be amended or modified except
in a written agreement signed by you and the Chief Executive Officer of the
Company. As required by law, this offer is subject to satisfactory proof of your
right to work in the United States.

If you choose to accept our offer as described above, please sign and date this
letter below, and return it to me on or before February 25, 1999.

We are enthusiastic about the prospect of your joining the Company. We look
forward to a productive and enjoyable work relationship.
<PAGE>
 
Carl F. Bobkoski
February 18, 1999
Page 4


Sincerely,

CYPRESS BIOSCIENCE, INC.

/s/ JAY D. KRANZLER

Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer


AGREED AND ACCEPTED:

/s/ CARL F. BOBKOSKI
--------------------
Carl F. Bobkoski

2/18/99
--------------------
Date


Attachments:
Exhibit A - Release and Waiver of Claims
Exhibit B - Proprietary Information and Inventions Agreement