<PAGE>   1

                 SEVERANCE AND SETTLEMENT AGREEMENT AND RELEASE


         Agreement made as of the 20th day of August, 1998, by and between
Transcend Therapeutics, Inc., a Delaware corporation (the "Company"), and Hector
J. Gomez, M.D., Ph.D. (the "Employee").

         WHEREAS, the parties wish to resolve amicably the Employee's separation
from the Company and establish the terms of the Employee's severance
arrangement;

         NOW, THEREFORE, in consideration of the promises and conditions set
forth herein, the sufficiency of which is hereby acknowledged, the Company and
the Employee agree as follows:

         1.       TERMINATION DATE. The Employee's Termination Date will be
August 21, 1998, the date upon which the Employee submitted and the Company
accepted, the Employee's letter of resignation as an officer, employee and as a
Director of the Company. A copy of the aforementioned letter of resignation is
attached hereto as EXHIBIT A.

         2.       MONETARY CONSIDERATION.

                  2.1      SEVERANCE PAYMENTS.

                           (a)      The Company agrees to pay the Employee an
amount equal to Employee's current annual base salary of $264,000, less all
taxes and other withholding obligations (the "Salary-based Payment"). The
Salary-based Payment shall be paid as follows: (i) an amount equal to one-half
of the Salary-based Payment shall be made by bank certified check on August 31,
1998, and an amount equal to one-half of the Salary-based Payment shall be made
over a six- (6) month period commencing October 2, 1998 (the period during which
such payments continue, as provided in the following sentence, being referred to
as the "Payment Period"). The Company and the Employee agree that the
Salary-based Payment shall not be offset by any employment or consulting
arrangement that Employee may enter into subsequent to the date hereof.

                           (b)      In addition to the Salary-based Payment
pursuant to subparagraph (a) above, the Company agrees to pay the Employee an
amount equal to $40,000, less all taxes and other withholding obligations (the
"Additional Payment"). This Additional Payment will be made by bank certified
check on August 31, 1998.

                           (c)      Notwithstanding any other provision of this
Agreement, amounts paid under this Section 2 include accrued and unused vacation
of Employee,




<PAGE>   2

and Employee shall not be entitled to additional amounts for such accrued and
unused vacation.

                  2.2      BENEFITS. For a period of twelve (12) months
beginning on August 21, 1998, the Company will continue to enroll the Employee
in those health and welfare benefit plans (other than vacation or other earned
paid time off) of the Company in which he participated prior to the Termination
Date so long as he is not prohibited from participating in such benefit plans
under the terms of the plan or by law. Such benefit plans are identified on
EXHIBIT B. For purposes of the federal law known as COBRA, the resignation by
Employee as contemplated by this Agreement will serve as a qualifying event
under COBRA, effective as of August 21, 1998, and the Company shall pay the full
cost of the COBRA payments for twelve (12) months. Thereafter, the Employee will
be required to pay the full cost of the COBRA premiums required under 29 U.S.C.
ss.1161-68. Notwithstanding the foregoing, (i) the Company shall not be required
to pay the costs of coverage at any time after the Employee has secured other
employment or consulting arrangement, and (ii) in no event shall the Employee be
permitted to continue to participate in the Company's 401(k) Savings Plan or in
any benefit plan where the plan's qualified status may be adversely affected by
the participation of a former employee.

         3.       STOCK OPTION AGREEMENTS AND ADDITIONAL CONSIDERATION.

                  3.1      STOCK OPTION AGREEMENTS. The Employee currently holds
the following three stock options: (a) a stock option to purchase 110,000 shares
of Common Stock of the Company (the "First Option") pursuant to Stock Option
Agreement dated November 28, 1994 (the "First Option Agreement"); (b) a stock
option to purchase 40,000 shares of Common Stock of the Company (the "Second
Option") pursuant to a Stock Option Agreement dated July 25, 1996 (the "Second
Option Agreement"); and (c) a Stock Option to purchase 60,000 shares of Common
Stock of the Company (the "Third Option") pursuant to a Stock Option Agreement
dated September 24, 1997 (the "Third Option Agreement").

                  The Company and the Employee agree that the total number of
shares of Common Stock that have vested as of August 21, 1998 and are
exercisable pursuant to the Options described above is as set forth on EXHIBIT C
which is attached hereto (the "Vested Options"). The Employee will have the
right to exercise the Vested Options under the First Option Agreement until
November 21, 1998 and Vested Options under the Second Option Agreement until
August 21, 1999, each in accordance with the terms of the First Stock Option
Agreement and Second Stock Option Agreement




                                       2
<PAGE>   3


                  3.2      ADDITIONAL CONSIDERATION.

                           (a)      The Employee shall be entitled to purchase
from the Company the Palm Pilot III Palm D with Mac Kit currently used by him
for $200.00 on the date of this Agreement;

                           (b)      The Company shall transfer all right, title
and interest to the PowerMac 6100/66 Desktop Computer, Stylewriter II Printer,
Multiscan 15 Monitor, Fax/Modem and HP 590 Fax Machine currently used by the
Employee on the date of this Agreement; and

                           (c)      The Company will make available to the
Employee for a six-month period a direct-dial telephone extension and voice mail
box to enable the Employee to receive telephone calls and messages.

         4.       RELEASE.

                  4.1      EMPLOYEE'S RELEASE. The Employee hereby fully,
forever, irrevocably and unconditionally releases, remises and discharges the
Company, its officers, directors, stockholders, corporate affiliates, agents and
employees from any and all claims, charges, complaints, demands, actions, causes
of action, suits, rights, debts, sums of money, costs, accounts, reckonings,
covenants, contracts, agreements, promises, doings, omissions, damages,
executions, obligations, liabilities, and expenses (including attorneys' fees
and costs), of every kind and nature which he ever had or now has against the
Company, its officers, directors, stockholders, corporate affiliates, agents and
employees, including, but not limited to, all claims arising out of his
employment; all employment discrimination claims under Title VII of the Civil
Rights Act of 1964, 42 U.S.C. ss. 2000e et seq., the Age Discrimination in
Employment Act, 29 U.S.C. ss. 621 et seq., M.G.L. c.151B, ss. 1 et seq., the
Americans With Disabilities Act, 29 U.S.C. ss. 706 et seq., and the National
Labor Relations Act, 29 U.S.C. ss. 151 et seq.; damages arising out of all
employment discrimination claims; all claims under the Massachusetts Civil
Rights Act, the Employee Retirement Income Security Act, 29 U.S.C. ss. 1001 et
seq., and the Family and Medical Leave Act, 29 U.S.C. ss. 2601 et seq.; wrongful
discharge claims, breach of contract claims and all other statutory or common
law claims and damages, PROVIDED, HOWEVER that the Employee still retains such
right to indemnification as described in paragraph 10 below and this Release
shall not preclude Employee from asserting any claims to enforce this Agreement,
including claims with respect to the compensation and benefits to which he is
entitled hereunder (including those described on Exhibit B) or to assert a claim
against the Employer for indemnification pursuant to paragraph 10.

                  The Employee acknowledges that he has been given twenty-one
(21) days to consider this Agreement and that the Company advised him to consult
with



                                        3
<PAGE>   4

an attorney of his own choosing prior to signing this Agreement. The Employee
may revoke this Agreement for a period of seven (7) days after the execution of
this Agreement, and the Agreement shall not be effective or enforceable until
the expiration of this seven (7) day revocation period.

                  4.2      THE COMPANY'S RELEASE. The Company, its officers,
directors and stockholders, hereby fully, forever, irrevocably and
unconditionally release, remise and discharge the Employee from any and all
claims, charges, complaints, demands, actions, causes of action, suits, rights,
debts, sums of money, costs, accounts, reckonings, covenants, contracts,
agreements, promises, doings, omissions, damages, executions, obligations,
liabilities, and expenses (including attorneys' fees and costs) arising out of
any action undertaken by the Employee for the Company within the scope of his
employment. This Release shall not affect whatever indemnification rights the
Employee may have under the Company's Bylaws or Restated Certificate of
Incorporation or by operation of law.

         5.       NO REINSTATEMENT. The Employee understands and agrees that, as
a condition for payment to him of the above-described sums, he shall not be
entitled to any employment with the Company at any time in the future, and that
he will not apply for employment with the Company.

         6.       NATURE OF AGREEMENT. The Employee understands and agrees that
this Agreement is a severance and settlement agreement and does not constitute
an admission of liability or wrongdoing on the part of the Company or the
Employee.

         7.       AMENDMENT. This Agreement shall be binding upon the parties
and may not be abandoned, supplemented, changed or modified in any manner,
orally or otherwise, except by an instrument in writing of concurrent or
subsequent date signed by a duly authorized representative of the parties
hereto. This Agreement is binding upon and shall inure to the benefit of the
parties and their respective agents, assigns, heirs, executors, successors and
administrators.

         8.       VALIDITY. Should any provision of this Agreement be declared
or be determined by any court of competent jurisdiction to be illegal or
invalid, the validity of the remaining parts, terms, or provisions shall not be
affected thereby and said illegal and invalid part, term or provision shall be
deemed not to be a part of this Agreement.

         9.       CONFIDENTIALITY. The Employee and the Company understand and
agree that the terms and contents of this Agreement, and the contents of the
negotiations and discussions resulting in this Agreement, shall be maintained as
confidential by both parties, their agents and representatives, and the matters
related to the Employee's resignation shall also remain confidential, and none
of the above shall be disclosed except to the extent determined by either of the
parties in the sole judgment 




                                       4

<PAGE>   5


of each that such disclosure would be in the best interests of the Company or
may be required by federal or state law or as otherwise agreed to in writing by
the authorized agent of each party.

         10.      INDEMNIFICATION. The Company will continue indemnification of
the Employee to the extent that he is entitled to such indemnification as
provided in the Company's Bylaws and Restated Certificate of Incorporation or
under statutory or common law.

         11.      NON-DISPARAGEMENT. The Employee agrees not to make any
disparaging statements to any other person concerning the Company, its officers,
directors, employees or agents, nor engage in conduct intended to be detrimental
to the interests of the Company, its officers, directors, employees or agents.
The Company agrees that it will not make any disparaging statements to any other
person concerning the Employee nor engage in conduct intended to be detrimental
to the interests of the Employee, provided however, the Company may make such
disclosure of the events and circumstances involving or relating to the
Employee=s resignation as required.

         12.      ENTIRE AGREEMENT. This Agreement contains and constitutes the
entire understanding and agreement between the parties hereto with respect to
the severance and settlement and cancels all previous oral and written
negotiations, agreements, commitments, and writings in connection therewith.

         13.      APPLICABLE LAW. This Agreement shall be governed by the laws
of the Commonwealth of Massachusetts.

         14.      VOLUNTARY ASSENT. The Employee affirms that no other promises
or agreements of any kind have been made to or with him by any person or entity
whatsoever to cause him to sign this Agreement, and that he fully understands
the meaning and intent of this Agreement. The Employee states and represents
that he has had an opportunity to fully discuss and review the terms of this
Agreement with an attorney. The Employee further states and represents that he
has carefully read this Agreement, understands the contents herein, freely and
voluntarily assents to all of the terms and conditions hereof, and signs his
name of his own free act.

         15.      EXECUTION. This Settlement Agreement may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, and all such counterparts together shall constitute but one and the
same instrument.

         16.      AUTHORITY. Each of the Company and the Employee has full power
and authority to enter into and to perform this Agreement in accordance with its
terms.





                                       5

<PAGE>   6

         IN WITNESS WHEREOF, all parties have set their hand and seal to this
Agreement as of the date written above.




TRANSCEND THERAPEUTICS, INC.


By: /s/ Jerry T. Jackson                            Date:       8/20/98
    --------------------------------                      ---------------------
    Jerry T. Jackson, Chairman


    /s/ Hector J. Gomez                             Date:       8/20/98
    --------------------------------                      ---------------------
    Hector J. Gomez, M.D., Ph.D.






                                       6
<PAGE>   7



                                                                       EXHIBIT A


                                        August 21, 1998


To the Board of Directors:

         I hereby resign as the President and Chief Executive Officer and as a
Director of Transcend Therapeutics, Inc. ("Transcend"), and from any other
office with Transcend that I may hold, effectively immediately.




                                            -----------------------------------
                                            Hector J. Gomez





<PAGE>   8



                                                                       EXHIBIT B



                        HEALTH AND WELFARE BENEFIT PLANS


Guardian Health and Dental Plan (not including life or long-term disability).





<PAGE>   9

                                                                       EXHIBIT C


                              STOCK OPTION SUMMARY



<TABLE>
<CAPTION>
      Date of                                                          Exercise
       Grant          Shares     Exercised    Remaining      Vested      Price
      -------         ------     ---------    ---------      ------    --------
<S>   <C>             <C>         <C>          <C>           <C>         <C>  

1.    11/28/94       110,000      18,465       91,535        91,535      $ .50

2.     7/25/96        40,000          --       40,000        20,841      $2.50

3.     9/24/97        60,000          --       60,000           --       $8.25




</TABLE>