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                                           *** Text Omitted and Filed Separately
                                               Confidential Treatment Requested
                                               Under 17 C.F.R. Sections 200.80,
                                               200.83 and 230.406.

                                                                   EXHIBIT 10.40


                                LICENSE AGREEMENT

        This Agreement, effective as of October 28, 1997 (the "Effective Date"),
is between the University of Massachusetts ("University"), a public institution
of higher education of the commonwealth of Massachusetts, and Signal
Pharmaceuticals, Inc. ("Company"), a Delaware corporation.

                                    RECITALS

        WHEREAS, University is the joint owner, together with the Regents of the
University of California ("UC"), of the inventions claimed in U.S. Patent
Application Serial No. [***] and has filed with the U.S. Patent & Trademark
Office the cases included under the U.S. Patent Applications listed on EXHIBIT
A;

        WHEREAS, Company desires the University grant to Company a worldwide
license in the field of drug discovery under the rights of University in Patent
Rights and Related Technology (as defined below); and

        WHEREAS, University is willing to grant Company such license on the
terms and conditions set forth in this Agreement.

        NOW, THEREFORE, University and Company hereby agree as follows:

1.      DEFINITIONS.

        1.1 "AFFILIATE" shall mean any legal entity (such as a corporation,
partnership, or limited liability company) that is controlled by Company. For
the purposes of this definition, the term "control" means any or both of the
following: (i) beneficial ownership of at least fifty percent (50%) of the
voting securities of a corporation or other business organization with voting
securities or (ii) a fifty percent (50%) or greater interest in the net assets
or profits of a partnership or other business organization without voting
securities.

        1.2 "CONFIDENTIAL INFORMATION" shall mean any confidential or
proprietary information furnished by one party (the "Disclosing Party") to the
other party (the "Receiving Party") in connection with this Agreement, provided
that such information is specifically designated as confidential. Such
Confidential Information shall include, without limitation, any

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diligence reports furnished to University under Section 3.1. and royalty reports
furnished to University under Section 5.1.

        1.3 "FDA" shall mean the United States Food and Drug Administration.

        1.4 "FIELD" shall mean the field of drug discovery and shall not include
reagents other than for drug discovery and shall not include the field of
diagnostics.

        1.5 "IND" (or "Investigational New Drug Application") shall mean an
application to the FDA to commence human clinical testing of a drug, as defined
by the FDA.

        1.6 "JOINT PATENT RIGHTS" shall mean U.S. Patent Application Serial No.
[***], and, to the extent of claims therein directed to subject matter
specifically described in U.S. Patent Application Serial No. [***], any
divisional, continuation, or continuation-in-part of such patent application, as
well as any patent issued thereon and any reissue, reexamination or extension of
such patent, and any foreign counterparts to such patent and patent application.

        1.7 "LICENSED PRODUCT" shall mean any material either that is covered by
the Patent Rights or the Related Technology, that is identified or produced by a
Licensed Method, or that the manufacture, use or sale of which would constitute,
but for the license granted to Company pursuant to this Agreement, an
infringement of any pending or issued claim within the Patent Rights.

        1.8 "LICENSED METHOD" shall mean any method that is covered by the
Patent Rights or Related Technology, the use of which would constitute, but for
the license granted to Company pursuant to this Agreement, an infringement of
any pending or issued claim within the Patent Rights or a misuse of Related
Technology.

        1.9 "NDA" (or "New Drug Application") shall mean an application to the
FDA to commence commercial sale of a drug, as defined by the FDA.

        1.10 "NET SALES" shall mean the total of the gross invoice prices of
Licensed Products and of Royalty-Bearing Products sold by Company, an Affiliate,
or a Sublicensee, less the sum of the following actual deductions where
applicable: cash, trade, or quantity discounts; sales, use, tariff,
import/export duties, or other excise taxes; transportation charges and
allowances or credits because of rejections, breakage, or returns.


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        In any transfers of Licensed Products or Royalty-Bearing Products
between Company and an Affiliate or Sublicensee, Net Sales shall be calculated
based on the final sale of the Licensed Product or Royalty-Bearing Product to an
independent third party only, and the transfers between Company and an Affiliate
or Sublicensee shall be excluded from the calculation of Net Sales.

        In the event that the Company or any Affiliate receives non-monetary
consideration for any Licensed Products or Royalty-Bearing Products, Net Sales
shall be calculated based on the fair market value of such consideration as
determined by the parties. In the event that company or its Affiliates use or
dispose of a Licensed Product or Royalty-Bearing Product in the provision of a
commercial service, the Licensed Product or Royalty-Bearing Product shall be
considered sold and the Net Sales shall be calculated based on the sales price
of the Licensed Product or Royalty-Bearing Product under a hypothetical sale to
an independent third party, during the same Royalty Period or, in the absence of
such sales, on the fair market value of the Licensed Product or Royalty-Bearing
Product as determined by the parties.

        1.11 "PATENT RIGHTS" shall mean the Joint Patent Rights and the UMMC
Cases.

        1.12 "RELATED TECHNOLOGY" shall mean any know-how, technical
information, research and development information, test results, and data
necessary for the effective exercise of the Patent Rights which has been
developed in the laboratory of [***] as of the first filing date of U.S.
Patent Application No. [***] and which is owned by University, provided that
data necessary for the effective exercise of the Patent Rights and developed in
the laboratory of [***] as of the effective date will be made available to
Company upon reasonable request by Company.

        1.13 "ROYALTY-BEARING PRODUCTS" shall mean any material either that is
covered by the Patent Rights, Related Technology, Licensed Method, UC Patent
Rights or UC Technology Rights, or that the manufacture, use or sale of which
would constitute, but for the licenses granted to the Company pursuant to this
Agreement and the UC Agreement, an infringement of any issued claim within the
Patent Rights or the UC Patent Rights.

        1.14 "ROYALTY PERIOD" shall mean each of (a) the partial calendar
quarter commencing on the date on which the first Royalty-Bearing Product is
sold or used and (b) every complete or partial calendar quarter thereafter until
the later of (i) the end of the Term, or (ii) the Company is


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no longer obligated to make royalty payments to UC with respect to UC Patent
Rights under that certain Exclusive License Agreement between UC and Company
dated October 26, 1993 (UC Control Number 93-04-0786) (the "UC Agreement", a
redacted copy of which is EXHIBIT B to this Agreement) or under any equivalent
or replacement agreement between UC and Company. In addition, the term "Royalty
Period" shall also include any calendar quarter subsequent to the last "Royalty
Period" as defined in the preceding sentence during which Company has the right
to complete and sell work-in-progress and inventory of Royalty-Bearing Products
pursuant to Section 8.4.

        1.15 "SUBLICENSEE" shall mean any permitted sublicensee of the rights
granted Company under this Agreement, as further described in Section 2.2.

        1.16 "TERM" shall mean the term of this Agreement as further defined in
Section 8.1 below.

        1.17 "UMMC CASES" shall mean the U.S. Patent Applications listed on
EXHIBIT A and, to the extent of claims therein directed to subject matter
specifically described in the patent applications listed on EXHIBIT A, any
divisional, continuation, or continuation-in-part of such patent applications,
as well as any patent issued thereon and any reissue, reexamination or extension
of such patent, and any foreign counterparts to such patents and patent
applications.

        1.18 "UC PATENT RIGHTS" shall mean U.S. Patent No. [***]; U.S. Patent
No. [***]; and U.S. Patent No. [***] and any divisional, continuation, or
continuation-in-part of such patent or patent applications, as well as any
patents issued thereon and any reissue or reexams or extension of such patents,
and any foreign counterparts to such patents and patent applications.

        1.19 "UC TECHNOLOGY RIGHTS" shall mean any know-how, technical
information, research and development information, test results, and data
relating to UC Case No. 93-173 (as identified in the UC Agreement) and necessary
for the effective exercise of the UC Patent Rights which have been licensed to
Company pursuant to the UC Agreement.

2.      GRANT OF RIGHTS.

        2.1    LICENSE GRANT.

               (a) PATENT RIGHTS. Subject to the terms of this Agreement,
University hereby grants to Company and its Affiliates an exclusive, worldwide,
royalty-bearing license (with the

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right to sublicense) under the Patent Rights to develop, make, have made, use,
offer for sale, sell, and import Licensed Products in the Field.

               (b) RELATED TECHNOLOGY AND LICENSED METHOD. Subject to the terms
of this Agreement, University hereby grants to Company and its Affiliates a
non-exclusive, worldwide, royalty-bearing license (with the right to sublicense)
under the Related Technology and the Licensed Method to develop, make, have
made, use, offer for sale, sell, and import Licensed Products in the Field.

        2.2 SUBLICENSES. Company shall have the right to grant sublicenses of
its rights under Section 2.1. All sublicense agreements executed by Company
pursuant to this Article 2 shall be consistent with the terms of this Agreement
and shall provide for the automatic assignment of such agreement to University
if this Agreement is terminated. Company shall promptly furnish University with
a fully executed copy of any such sublicense agreement.

        2.3    RETAINED RIGHTS.

               (a) UNIVERSITY. University retains the right to make and use
Licensed Products covered by Patent Rights for academic research and academic
patient care, without payment of compensation to Company. University may license
its retained rights under this Section to research collaborators of University
faculty members, to post-doctoral fellows, and to students solely for academic
research and academic patient care. Notwithstanding the above retention of
rights, the University does not retain any right to make, use, or sublicense any
third party the right to use the license or sublicense of its retained rights
under this Section for commercial applications in the Field.

               (b) FEDERAL GOVERNMENT. To the extent that any invention claimed
in the Patent Rights has been partially funded by the federal government, this
Agreement and the grant of any rights in such Patent Rights are subject to and
governed by federal law as set forth in 35 U.S.C. SectionSection201-211, and the
regulations promulgated thereunder, as amended, or any successor statutes or
regulations. Company acknowledges that these statutes and regulations reserve to
the federal government a royalty-free, non-exclusive, non-transferable license
to practice any government-funded invention claimed in any non-transferable
license to practice any government-funded invention claimed in any Patent
Rights. If any term of this Agreement fails to conform with such laws and
regulations, the relevant term shall be deemed an invalid provision and modified
in accordance with section 10.10.



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        At least some of the inventions claimed in the Patent Rights and the
Related Technology were conceived or reduced to practice by [***], an employee
of the [***] and a faculty member of University, and were assigned to University
by [***] in accordance with the Collaboration Agreement, between [***] and
University dated November 16, 1990, as amended (the "Collaboration Agreement").
Pursuant to the Collaboration Agreement, University is required to grant [***] a
paid-up, non-exclusive, irrevocable license to use such Patent Rights and such
Related Technology which correspond to such inventions for [***] non-commercial
purposes (the "[***] License"), but notwithstanding any provision of this
Agreement to the contrary, Company acknowledges that [***] shall have the [***]
License.

        2.4 EFFECT OF EXPIRATION OF ROYALTY PERIOD. Unless this Agreement is
earlier terminated in accordance with Section 8 below, upon the expiration of
the last Royalty Period, Company will have a fully paid, non-exclusive,
irrevocable, worldwide, perpetual license (with the right to sublicense) under
any Patent Rights that are then expired or are no longer enforceable, Related
Technology, and Licensed Method to develop, make, have made, use, offer for
sale, sell, and import Licensed Products, provided Company is then in
substantial compliance with all provisions of this Agreement.

3.      COMPANY OBLIGATIONS RELATING TO COMMERCIALIZATIONS.

        3.1    DILIGENCE REQUIREMENTS.

               (a) Company, upon execution of this Agreement, shall diligently
proceed with the development, manufacture, and sale of Licensed Products and/or
Royalty-Bearing Products and shall earnestly and diligently endeavor to market
the same within a reasonable time after execution of this Agreement. Company
shall have the responsibility to obtain all necessary governmental approvals for
the manufacture, use, and sale of Licensed Products and Royalty-Bearing
Products. If Company is unable to perform any of the following:

                      (i)  [***];

                      (ii) [***];


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                      (iii) [***];

                      (iv)  [***]

                      (v)   reasonably fill the market demand for Licensed
Products or Royalty-Bearing Products following commencement of marketing at any
time during the exclusive period of this Agreement;

then, subject to subsection (b) of this Section 3.1, University shall have the
right and option either to terminate this agreement or to reduce Company's
exclusive license to a non-exclusive license. This right, if exercised,
supersedes the rights granted in Section 2.1;. So long as at least one of the
Company or its Affiliates or Sublicensees continues to meet the diligence
requirements set forth above, the University shall not have any termination
rights under this Section 3.1.

               (b) Subject to subsection (a) of this Section 3.1, if Company is
unable to meet any of the dates set forth in subsection (a), the parties shall
in good faith re-establish a date or dates that are reasonable under the then
current circumstances. Provided Company is then in full compliance with all
other material provisions of this Agreement, University shall not exercise its
rights to terminate this Agreement or convert it to a non-exclusive agreement
unless a reestablished date is not met. If a reestablished date is more than six
(6) months from the original date, Company shall begin making an annual license
maintenance fee for the delayed product of [***] per year, which fee shall begin
to be payable in [***], on the anniversary date of the Effective Date, and shall
continue until sales of the delayed product begin. The annual maintenance fee
provided for in this Section 3.1 shall not exceed [***] per year. The
re-established date shall not affect the date when any milestone payment would
be due under Section 4.3.

        3.2    INDEMNIFICATION.

               (a) INDEMNITY. Company shall indemnify, defend and hold harmless
University and its trustees, officers, faculty, students, employees, and agents
and their respective successors, heirs and assigns (the "Indemnitees"), against
any liability, damage, loss, or expense


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(including reasonable attorneys' fees and expenses of litigation) incurred by or
imposed upon any of the Indemnitees in connection with any third-party claims,
suits, actions, demands or judgments arising out of any theory of liability
(including without limitation actions in the form of tort, warranty, or strict
liability and regardless of whether such action has any factual basis)
concerning any Licensed Product or Royalty-Bearing Product, process, or service
that is made, used, or sold pursuant to any right or license granted under this
Agreement; provided, however, that such right or license granted under this
Agreement; provided, however, that such indemnification shall not apply to any
liability, damage, loss, or expense to the extent directly attributable to (i)
the negligent activities or intentional misconduct of the Indemnitees or (ii)
the settlement of a claim, suit, action, or demand by Indemnities without the
prior written approval of Company. Company also shall indemnify, defend, and
hold harmless [***] and its trustees, officers, employees, and agents, and their
respective successors, heirs and assigns (the "[***] Indemnitees"), from and
against any claims, liability, cost, expense, damage deficiency, loss, or
obligation (including, without limitation, reasonable attorney's fees and
costs), based upon, arising out of, or otherwise relating to any actions taken
or omissions made in connection with or pursuant to this License Agreement. The
[***] Indemnitees agree to provide Company with prompt written notice of any
claim, suit action, demand or judgment for which indemnification is sought under
this Agreement. Company agrees that any Sublicensee shall agree to provide [***]
with the same indemnity provided by Company herein.

        (b) PROCEDURES. The indemnities agree to provide Company with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. Company agrees, at its own
expense, to provide attorneys reasonably acceptable to University to defend
against any such claim. The Indemnitees shall cooperate fully with Company in
such defense and will permit Company to conduct and control such defense and the
disposition of such claim, suit, or action (including all decisions relative to
litigation, appeal, and settlement); provided, however, that any Indemnitee
shall have the right to retain its own counsel, at the expense of Company, if
representation of such Indemnitee by the counsel retained by Company would be
inappropriate because of actual or potential differences in the interests of
such Indemnitee and any other party represented by such counsel. Company agrees
to keep University informed of the progress in the defense and disposition of
such claim and to consult with University with regard to any proposed
settlement. The failure to deliver a written notice to Company within a
reasonable time after the commencement of such claim, suit, or action, if
prejudicial to Company's ability to defend such action, shall correspondingly
appropriately reduce Company's liability to the Indemnitees under Section 3.2,
but the omission to deliver shall


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not relieve Company of any liability that it may have to indemnitees other than
under this Section 3.2.

        (c) INSURANCE. Effective as of such time as a Licensed Product or
Royalty-Bearing Product enters human clinical trials, Company shall maintain
insurance or self-insurance that is reasonable adequate to fulfill any potential
obligation to the Indemnitees, but in any event not less than one million
dollars ($1,000,000) for injuries to any one person arising out of a single
occurrence and five million dollars ($5,000.000) for injuries to all persons
arising out of a single occurrence. Company shall provide University, upon
request, with rewritten evidence of such insurance or self-insurance. Company
shall continue to maintain such insurance or self-insurance after the expiration
or termination of this Agreement during any period in which Company or Affiliate
or Sublicensee continues to make, use, or sell a product that was a Licensed
Product or Royalty-Bearing Product under this Agreement and thereafter for a
period of five (5) years. Until such time as a Licensed Product or
Royalty-Bearing Product enters human clinical trials, Company shall maintain
insurance or self-insurance in such amount as Company customarily maintains
covering similar activities, and shall maintain such insurance so long as
Company customarily carries such insurance coverage or until a Licensed Product
or Royalty-Bearing Product enters human clinical trials.

        3.3 USE OF UNIVERSITY NAME. In accordance with Section 7.3., Company and
its Affiliates and Sublicensees shall not use the name "University of
Massachusetts" or any variation of that name in connection with the marketing or
sale of any Licensed Products.

        3.4 MARKING OF LICENSED PRODUCTS. To the extent commercially feasible
and consistent with prevailing business practices, Company shall mark, and shall
cause its Affiliates and Sublicensees to mark, all Licensed Products that are
manufactured or sold under this Agreement with the number of each issued patent
under the Patent Rights that applies to such Licensed Product.

        3.5 COMPLIANCE WITH LAW. Company shall comply with, and shall require
its Affiliates and Sublicensees comply with, all local, state, federal, and
international laws and regulations relating to the development, manufacture,
use, and sale of Licensed Products. Company expressly agrees to comply with the
following:

        (i) Company or its Affiliates or Sublicensees shall obtain all necessary
approvals from the United States Food & Drug Administration and any similar
governmental authorities of



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any foreign jurisdiction in which Company or an Affiliate or Sublicensee intends
to make, use, or sell Licensed Products.

        (ii) Company and its Affiliates and Sublicensees shall comply with all
United States laws and regulations controlling the export of certain commodities
and technical data, including without limitation all Export Administration
Regulations of the United States Department of Commerce,. Among other things,
these laws and regulations prohibit, or require a license for, the export of
certain types of commodities and technical data to specified countries. Company
hereby gives written assurance that it will comply with, and will require its
Affiliates and Sublicensees to comply with, all United States export control
laws and regulations, and that it will indemnify, defend, and hold University
harmless (in accordance with Section 3.2) for the consequences of any such
violation.

        (iii) To the extent that any invention claimed in the Patent Rights has
been partially funded by the United States government, and only to the extent
required by applicable laws and regulations, Company agrees that any Licensed
Products used or sold in the United States will be manufactured substantially in
the United States or its territories. Current law provides that if domestic
manufacture is not commercially feasible under the circumstances, University may
seek a waiver of this requirement from the relevant federal agency on behalf of
Company.

4.      CONSIDERATION FOR GRANT OF RIGHTS.

        4.1 LICENSE FEE. In partial consideration of the rights granted Company
under this Agreement, Company shall pay to University, within thirty (30) days
after the Effective Date, a license fee of [***]. In addition, Company shall
reimburse University for patent prosecution expenses in the aggregate amount of
[***] incurred by University as of the Effective Date with respect to Patent
Rights; provided, however, that Company's obligation to reimburse such patent
prosecution expenses shall be conditioned upon University's delivery to Company
of a reasonably detailed, written itemization of such expenses. Copies of
University patent prosecution invoices which provide reasonable detail shall be
sufficient written itemization of such expenses. These license fee payments and
reimbursements are non refundable and are not creditable against any other
payments due to University under this Agreement.

        4.2 EQUITY. In partial consideration of the license granted Company
under this Agreement, Company shall issue to University, within thirty (30) days
after the Effective Date, a


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total of [***] shares of Common Stock of Company (subject to adjustment upon
changes in stock through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), under the terms of the Common Stock
Purchase Agreement dated as of the Effective Date between Company and University
(the "Common Stock Purchase Agreement").

        4.3 MILESTONE PAYMENTS. Company shall pay University the following
milestone payments and make the following issuances of Company Common Stock
(subject to adjustment upon changes in stock through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise ) to University within thirty
(30) days after the occurrence of each event described below:

<TABLE>
<CAPTION>
                           MILESTONE                       PAYMENT      STOCK ISSUANCE
<S>                                                        <C>          <C>
       [***]
</TABLE>


In addition, in the event that Company makes any milestone payment(s) to UC with
respect to subsequent compounds utilizing Patent Rights, Related Technology,
Licensed Method, UC patent Rights, or UC Technology Rights, Company shall pay to
University an amount equal to [***] of such milestone payment(s).

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These milestone payments and stock issuances are nonrefundable and are not
creditable against any other payments due to University under this Agreement.
Company shall pay University such amounts and shall issue such stock regardless
of who achieves the milestone, whether the Company or an Affiliate or
Sublicensee.

        4.4    ROYALTIES

               (a) BASE ROYALTY. In partial consideration of the rights granted
Company under this Agreement, Company shall pay to University an earned royalty
of [***] of Not Sales of Licensed Products and Royalty-Bearing Products by
Company, an Affiliate or a Sublicensee (the "[***] Royalty"), provided that the
earned royalty shall be [***] of Net Sales of a Licensed Product or
Royalty-Bearing Product if Net Sales of the Licensed Product or Royalty-Bearing
Product are less than [***] per year in any given calendar year of sales (the
"[***]"). Company shall pay the [***] Royalty to University for any Royalty
Period as to which it cannot be ascertained at the time royalty payments are due
whether Net Sales for the calendar year of such Royalty Period will be less than
[***]; provided, however, that Company shall be entitled to credit from
University in accordance with section 5.4 in the event that the Year-End Report
(as defined in Section 5.1) indicates that Company has made excessive royalty
payments to University for a calendar year. Any earned royalty due under this
Section 4.4 shall be reduced by fifty percent (50%) in the event that a Licensed
Product or Royalty-Bearing Product is not covered by Patent Rights or UC Patent
Rights but is covered by or developed from related Technology or UC Technology
Rights.

               (b) NO MULTIPLE ROYALTIES. No multiple royalties shall be payable
because a particular Licensed Product or its manufacture, use, or sale are or
shall be covered by more than one patent application or patent included within
the Patent Rights.

        4.5 MINIMUM ROYALTY. In each calendar year after the Effective Date,
Company shall pay and University shall receive the following minimum royalty
payments:

<TABLE>
<S>                 <C>                                    <C>
     [***]
</TABLE>

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If the actual royalty payments to University in any calendar year are less than
the minimum royalty payment required for that year, Company shall have the right
to pay University the difference between the actual royalty payment and the
minimum royalty payment in full satisfaction of its obligations under this
Section, provided such minimum payment is made to University within sixty (60)
days after the conclusion of the calendar year. Waiver of any minimum royalty
payment by University shall not be construed as a waiver of any subsequent
minimum royalty payment.

        4.6 SUBLICENSE INCOME. In the event the Company pays to UC any portion
of any payments the Company receives in consideration for the sublicense of the
Patent Rights, Related Technology, Licensed Method, UC Patent Rights or UC
Technology Rights, Company shall pay to University an amount equal to
[***] of such payment(s).

5.      ROYALTY REPORTS; PAYMENTS; RECORDS.

        5.1 REPORTS AND PAYMENTS. Within sixty (60) days after the conclusion of
each Royalty Period, Company shall deliver to University a report (each a
"Report") containing the following information:

                      (i) the number of Licensed Products and Royalty-Bearing
Products sold to independent third parties in each country, and the number of
Licensed Products and Royalty-Bearing Products used by Company and its
Affiliates and Sublicensees to provide commercial services in each country;

                      (ii) the gross sales price for each Licensed Product and
Royalty-Bearing Product by Company and its Affiliates during the applicable
Royalty Period in each country;

                      (iii) calculation of Net Sales for the applicable Royalty
Period in each country, including a listing of applicable deductions;

                      (iv) total royalty payable on Net Sales in U.S. dollars
together with the exchange rates used for conversion; and



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                      (v) withholding taxes, if any, required by law to be
deducted as a payment by University in respect of such Net Sales.

In addition, the Report for the Royalty Period ending on December 31 of a given
calendar year (the "Year-End Report") shall state whether Company is entitled to
credit pursuant to Section 4.4(a) as a result of having paid the [***] Royalty
during a calendar year in which Net Sales exceeded [***] and, if Company is
entitled to such credit, shall also set forth the amount of the credit to which
Company is entitled, as calculated in accordance with Section 5.4. If no
royalties are due to University for any Royalty Period, the Report for such
Royalty Period shall so state. Concurrent with the delivery of each Report,
Company shall remit to University any payment due for the applicable Royalty
Period. All such reports shall be considered Company Confidential Information.

        5.2 PAYMENTS IN U.S. DOLLARS. All payments due under this Agreement
shall be payable in U.S. dollars. Conversion of foreign currency to U.S. dollars
shall be made at the conversion rate existing in the United States (as reported
in the Wall Street Journal) on the last working day of the calendar quarter
preceding the applicable Royalty Period. Such payments shall be without
deduction of exchange, collection, or other charges.

        5.3 PAYMENT IN OTHER CURRENCIES. If by law, regulation, or fiscal policy
of a particular country, conversion into United States dollars or transfer of
funds of a convertible currency to the United States is restricted or forbidden,
Company shall give University prompt written notice of such restriction, which
notice shall satisfy the sixty-day payment deadline described in Section 5.1.
Company shall pay any amounts due University through whatever awful methods
University reasonably designates; provided, however, that if University fails to
designate such payment method within thirty (30) days after University is
notified of the restriction, Company may deposit such payment in local currency
to the credit of University in a recognized banking institution selected by
Company and identified by written notice to University and such deposit shall
fulfill all obligations of Company to University with respect to such payments.

5.4 CREDIT FOR OVERPAYMENTS. Within thirty (30) days of University's receipt of
a Year-End Report disclosing overpayment of royalties by Company, University
shall credit to Company an amount equal to the lesser of (a) the difference
between the [***] royalty paid to University and the [***] Royalty to which
University was actually entitled and (b) the difference



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between the [***] Royalty and the applicable minimum royalty for such calendar
year, as specified in Section 4.5.

        5.5 RECORDS. Company shall maintain and shall require its Affiliates and
Sublicensees to maintain, complete and accurate records of Licensed Products and
Royalty-Bearing Products that are made, used, or sold under this Agreement and
any amounts payable to University in relation to such Licensed Products and
Royalty Bearing Products, which records shall contain sufficient information to
permit University to confirm the accuracy of any Reports due to University under
Section 5.1. The relevant party shall retain such records relating to a given
Royalty Period for at least three (3) years after the conclusion of that Royalty
Period during which time University shall have the right, at its expense, to
cause its internal accountants or an independent, certified public accountant to
inspect such records during normal business hours for the sole purpose of
verifying any reports and payments due under this Agreement. Such accountant
shall not disclose to University any information other than information relating
to accuracy of reports and payments delivered under this Agreement. The parties
shall reconcile any underpayment or overpayment within thirty (30) days after
the accountant delivers the results of the audit. In the event that any audit
performed under this Section reveals an underpayment in excess of ten percent
(10%) in any Royalty Period, Company shall bear the full cost of such audit;
however, Company shall have the right to review and verify the audit results for
thirty (30) days after the accountant delivers the results of the audit, prior
to being required to pay the cost of the audit. University may exercise its
rights under this Section only once every year and only with reasonable prior
notice to Company.

        5.6 LATE PAYMENTS. Any payment by Company that are not paid on or before
the date such payments are due under this Agreement shall bear interest, to the
extent permitted by law, at two percentage points above the Prime Rate of
interest as reported in the Wall Street Journal on the date payment is due, with
interest calculated based on the number of days that payment is delinquent.

        5.7 METHOD OF PAYMENT. All payments under this Agreement should be made
in the name of the "University of Massachusetts" and sent to the address
identified below. Each payment should reference this Agreement and identify the
obligation under this Agreement that the payment satisfies.



                                       15


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        5.8 WITHHOLDING AND SIMILAR TAXES. Royalty payments and other payments
due to University under this Agreement shall not be reduced by reason of any
withholding or similar taxes applicable to such payments to University.

6.      PATENTS AND INFRINGEMENT.

        6.1 RESPONSIBILITY FOR JOINT PATENT RIGHTS. Company shall have primary
responsibility, at Company's expense, for the preparation, filing, prosecution,
and maintenance of all Joint Patent Rights (except as otherwise agreed in
writing by University and by UC), using patent counsel selected by Company.
Company shall consult with University as to the preparation, filing,
prosecution, and maintenance of all such Joint Patent Rights reasonably prior to
any deadline or action with the U.S. Patent & Trademark Office or any foreign
patent office (a "Patent Office") and shall furnish University with copies of
all relevant documents reasonably in advance of such consultation.
Responsibility for any patent rights covered by the UMMC Cases shall be
determined in accordance with Section 6.2 below.

        6.2 CONTROL OF UMMC CASES. From and after the Effective date, University
shall have responsibility for and control over the prosecution and maintenance
of the UMMC Cases and Company shall bear responsibility for the expenses of such
prosecution and maintenance. For so long as University controls prosecution and
maintenance of the UMMC Cases, University shall (a) not make any filings of any
nature or type with a Patent Office in connection with the UMMC Cases
(including, without limitation any initial filing, any amendments to such
filing, any continuations-in-part or any response to any Patent Office action or
communication) without the prior approval of Company, (b) keep Company fully
informed of the status of the UMMC Cases, (c) furnish Company with copies of all
relevant documents in connection with University's preparation, filing,
prosecution, maintenance or abandonment of the UMMC Cases reasonably prior to
any deadline or action with any Patent Office, and (d) consult with Company
regarding such documents and endeavor in good faith to consider and incorporate
any comments on such documents that Company may have (University to have final
authority with respect to such prosecution and maintenance in the event of
disagreement between it and Company).

Notwithstanding the foregoing, University acknowledges and agrees that it will
not prosecute any subject matter with respect to UMMC Cases which would
interfere, as defined by 35 U.S.C. Section135, with subject matter in issued
claims of the UC Patent Rights or the Joint Patent Rights, or take any other
action to prompt a declaration of interference of the UMMC Cases with any such
patent rights and, in the event that such an interference is declared, will
immediately take steps



                                       16
<PAGE>   17
reasonably necessary to dissolve such interference including, if necessary,
abandoning the claims.

The University shall not abandon any of the UMMC Cases, fail to respond to any
outstanding action from a Patent Office or fail to pay any applicable issue fee
or maintenance fee without first offering to transfer to Company responsibility
for control over prosecution and maintenance of the applicable rights under the
UMMC Cases with a reasonable amount of time to allow Company to prevent the
abandonment of the UMMC Cases, or respond to such Patent Office action or pay
such issue fee or maintenance fee.

Company shall reimburse University for the expenses of such preparation, filing,
prosecution and maintenance with respect to UMMC Cases; provided, however, that
Company's obligation to reimburse such expenses shall be conditioned upon
University's delivery to Company of a reasonable written itemization of such
expenses. The amount of such expenses incurred to date which Company shall be
obligated to reimburse University is $51,500 (as of July 25, 1997). Copies of
University's invoices with respect to such expenses shall be deemed to be
sufficient written itemization of such expenses.

        6.3    INFRINGEMENT.
               (a) NOTIFICATION OF INFRINGEMENT. Each party agrees to provide
written notice to the other party promptly after becoming aware of any
infringement of the Patent Rights.

               (b) COMPANY RIGHT TO PROSECUTE. So long as the license granted
Company under Section 2.1(a) remains exclusive (subject to the retained rights
under Section 2.3 and any applicable rights of UC with respect to Joint Patent
Rights), Company shall have the right, under its own control and its own
expense, to prosecute any third party infringement of the Patent Rights in the
Field or, together with other licensees of the Patent Rights in other fields, to
defend the Patent Rights in any declaratory judgment action brought by a third
party which alleges invalidity, unenforceability, or non-infringement of the
Patent Rights. Prior to commencing any action as aforesaid, Company shall
consult with University and shall consider the views of University regarding the
advisability of the proposed action and its effect on the public interest.
Company shall not enter into any settlement, consent judgment, or other
voluntary final disposition of any infringement action under this Subsection
without the prior written consent of the University, which consent shall not be
unreasonably withheld or delayed. Any recovery obtained in an action under this
Subsection which relates solely to the Patent Rights shall be distributed as
follows: (i) each party shall be reimbursed for any expenses incurred in the
action



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(including the amount of any royalty payments withheld from University as
described below); (ii) as to ordinary damages, Company shall receive an amount
equal to its lost profits or a reasonable royalty on the infringing sales
(whichever measure of damages the court shall have applied), and shall remit to
University a reasonable approximation of the royalties that Company would have
paid to University if Company had sold the infringing products and services
rather than the infringer, and (iii) as to special or punitive damages, the
parties shall share any award in proportion to the share of expense paid by each
party. Company may offset a total of [***] of any expenses incurred under this
Subsection against any royalty payments due to University under this Agreement,
provided that in no event shall the royalty payments under Section 4.4., when
aggregated with any other offsets and credits allowed under this Agreement, be
reduced by more than [***] in any Royalty Period.

               (c) UNIVERSITY AS INDISPENSABLE PARTY. University shall permit
any action under this Section to be brought in its name if required by law,
provided that Company shall hold University harmless from, and if necessary
indemnify University against, any costs, expenses, or liability that University
may incur in connection with such action.

               (d) UNIVERSITY RIGHT TO PROSECUTE. In the event that Company
fails to initiate an infringement action with respect to Patent Rights within a
reasonable time after it first becomes aware of the basis for such action, or to
answer a declaratory judgment or other action within a reasonable time after
such action is filed, University shall have the right to prosecute such
infringement or answer such declaratory judgment action, under its sole control
and its sole expense, and any recovery obtained shall be given to University.

               (e) COOPERATION. Each party agrees to cooperate fully in any
action under this Section 6.3 which is controlled by the other party, provided
that the controlling party reimburses the cooperating party promptly for
reasonable costs and expenses incurred by the cooperating party in connection
with providing such assistance.

7.      CONFIDENTIAL INFORMATION; PUBLICATIONS; PUBLICITY.

        7.1    CONFIDENTIAL INFORMATION

               (a) DESIGNATION. Confidential Information that is disclosed in
writing shall be marked with a legend indicating its confidential status (such
as "Confidential" or "Proprietary"). Confidential Information that is disclosed
orally or visually shall be documented in a written



                                       18


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notice prepared by the Disclosing Party and delivered to the Receiving Party
within thirty (30) days of the date of disclosure; such notice shall summarize
the Confidential Information disclosed to the Receiving Party and reference the
time and place of disclosure.

               (b) OBLIGATIONS. For a period of five (5) years after disclosure
of any portion of Confidential Information, the Receiving Party shall (i)
maintain such Confidential Information in strict confidence, except that the
Receiving Party may disclose or permit the disclosure of any Confidential
Information to its directors, officers, employees, consultants, and advisors who
are obligated to maintain the confidential nature of such Confidential
Information and who need to know such Confidential Information solely for the
performance and administration of this Agreement; and (ii) allow its trustees or
directors, officers, employees, consultants, and advisors to reproduce the
Confidential Information only to the extent necessary for the purposes of this
Agreement, with all such reproductions being considered Confidential
Information.

               (c) EXCEPTIONS. The obligations of the Receiving Party under
Subsection 7.1(b) above shall not apply to the extent that the receiving Party
can demonstrate that certain Confidential Information (i) was in the public
domain prior to the time of its disclosure under this Agreement; (ii) entered
the public domain after the time of its disclosure under this Agreement through
means other than an unauthorized disclosure resulting from an act or omission by
the Receiving Party; (iii) was independently developed or discovered by the
Receiving Party without use of the Confidential Information; (iv) is or was
disclosed to the Receiving Party at any time whether prior to or after the time
of its disclosure under this Agreement, by a third party having no fiduciary
relationship with the Disclosing Party and having no obligation of
confidentiality with respect to such Confidential Information; or (v) is
required to be disclosed to comply with applicable laws or regulations, or with
a court or administrative order, provided that the Disclosing Party receives
reasonable prior written notice of such obligation for disclosure.

               (d) OWNERSHIP AND RETURNS. The Receiving Party acknowledges that
the Disclosing Party (or any third party entrusting its own information to the
Disclosing Party) claims ownership of its Confidential Information in the
possession of the Receiving Party. Upon the expiration or termination of this
Agreement, and at the request of the Disclosing Party, the Receiving Party shall
return to the Disclosing Party all originals, copies, and summaries of
documents, materials and other tangible manifestations of Confidential
Information in the possession or control of the Receiving Party, except that the
Receiving Party may retain one copy




                                       19
<PAGE>   20
of the Confidential Information in the possession of its legal counsel solely
for the purpose of monitoring its obligations under this Agreement.

        7.2 PUBLICATIONS. University and its employees will be free to disclose
publicly (through journals, lectures, or otherwise) the results of any research
in the Field or relating to the subject matter of the Patent Rights, except as
otherwise provided by written agreement between University and Company (e.g., a
sponsored research agreement).

        7.3 PUBLICITY RESTRICTIONS. Company shall not use the name of University
or any of its trustees, officers, faculty, students, employees, or agents, or
any adaptation of such names, or any terms of this Agreement in any promotional
material or other public announcement or disclosure without the prior written
consent of University. The foregoing notwithstanding, Company shall have the
right to disclose such information without the consent of University in any
prospectus, offering memorandum, or other document or filing required by
applicable securities laws or other applicable law or regulation, provided that
Company shall have given University at least ten (10) days prior written notice
of the proposed text and of the requirement for the proposed disclosure for the
purpose of giving University the opportunity to comment on such text. Company
and its Affiliates and Sublicensees shall not use the name, likeness, or logos
of the [***] in any press release, general publication, advertising, marketing,
promotional or sales literature without prior written consent from an authorized
official of the [***].

8.      TERM AND TERMINATION.

        8.1 TERM. This Agreement shall commence on the Effective Date and shall
remain in effect until (i) the expiration of all issued patents within the
Patent Rights or (ii) for a period of ten (10) years after the Effective Date if
no such patents have issued within that ten-year period, unless earlier
terminated in accordance with the provisions of this Agreement (the "Term").

        8.2 TERMINATION FOR DEFAULT. In the event that either party commits a
material breach of its obligations under this Agreement and fails to cure that
breach within sixty (60) days after receiving written notice thereof, the other
party may terminate this Agreement immediately upon written notice to the party
in breach. If the alleged breach involves nonpayment of any amounts due
University under this Agreement, Company shall be entitled to the sixty-day cure
period only with respect to the first such breach, with the cure period for each
subsequent breach shortened as follows: thirty (30) days for the second breach;
fifteen (15) days for the third



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breach; and termination immediately upon written notice to Company, without any
cure period for any subsequent breach.

        8.3 FORCE MAJEURE. Neither party will be responsible for delays
resulting from causes beyond the reasonable control of such party, including
without limitation fire, explosion, flood, war, strike, or riot, provided that
the nonperforming party uses commercially reasonable efforts to avoid or remove
such causes of nonperformance and continues performance under this Agreement
with reasonable dispatch whenever such causes are removed.

        8.4 EFFECT OF TERMINATION. The following provisions shall survive the
expiration or termination of this Agreement: Articles 1, 5 (except that Section
5.1 shall only survive as to the obligation to provide final report and
payment), 7 and 9; Sections 3.2, 3.5, 8.4, 10.8 and 10.9. In addition, Sections
4.3, 4.4 and 4.5 shall survive the expiration (but not the termination) of this
Agreement until the end of the last Royalty Period. Upon the early termination
of this Agreement, Company and its Affiliates and Sublicensees may complete and
sell any work-in-progress and inventory of licensed products that exist as of
the effective date of termination, provided that (i) Company is current in
payment of all amounts due University under this Agreement, (ii) Company pays
University the applicable royalty on such sales of Licensed Products and
Royalty-Bearing Products in accordance with the terms and conditions of this
Agreement, and (iii) Company and its Affiliates and Sublicensees shall complete
and sell all work-in-progress and inventory of Licensed Products within six (6)
months after the effective date of termination.

9.      DISPUTE RESOLUTION.

        9.1 PROCEDURES MANDATORY. The parties agree that any dispute arising out
of or relating to this Agreement shall be resolved solely by means of the
procedures set forth in this Article, and that such procedures constitute
legally binding obligations that are an essential provision of this Agreement;
provided, however, that all procedures and deadlines specified in this Article
may be modified by written agreement of the parties. If either party fails to
observe the procedures of this Article, as modified by their written agreement,
the other party may bring an action for the specific performance in any court of
compentent jurisdiction.

        9.2    DISPUTE RESOLUTION PROCEDURES.



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<PAGE>   22

               (a) NEGOTIATION. In the event of any dispute arising out of or
relating to this Agreement, the affected party shall notify the other party, and
the parties shall attempt in good faith or resolve the matter within ten (10)
days after the date of such notice (the "Notice Date"). Any disputes not
resolved by good faith discussions shall be referred to senior executives of
each party, who shall meet at a mutually acceptable time and location within
thirty (30) days after the Notice Date and attempt to negotiate a settlement.

               (b) MEDIATION. If the matter remains unresolved within sixty (60)
days after the notice Date, or if the senior executives fail to meet within
thirty (30) days after the Notice Date, either party may initiate mediation upon
written notice to the other party, whereupon both parties shall be obligated to
engage in a mediation proceeding under then current Center for Public Resources
("CPR") Model Procedure for Mediation of Business Disputes, except that specific
provisions of this Section shall override inconsistent provisions of the CPR
Model Procedure. The mediator will be selected from the CPR Panels of Neutrals.
If the parties cannot agree upon the selection of a mediator within ninety (90)
days after the Notice Date, then upon the request of either party, the CPR shall
appoint the mediator. The parties shall attempt to resolve the dispute through
mediation until one of the following occurs: (i) the parties reach a written
settlement; (ii) the mediator notifies the parties in writing that they have
reached an impasse; (iii) the parties agree in writing that they have reached an
impasse; or (iv) the parties have not reached a settlement within one hundred
and twenty (120) days after the Notice Date.

               (c) TRIAL WITHOUT JURY. If the parties fail or resolve the
dispute through mediation, or if neither party elects to initiate mediation,
each party shall have the right to pursue any other remedies legally available
to resolve the dispute, provided, however, that the parties expressly waive any
right to a jury trial in any legal proceeding under this Section.

        9.3    PRESERVATION OF RIGHTS PENDING RESOLUTION.

               (a) PERFORMANCE TO CONTINUE. Each party shall continue to perform
its obligations under this Agreement pending final resolution of any dispute
arising out or relating to this Agreement; provided, however, that a party may
suspend performance of its obligations during any period in which the other
party fails or refuses to perform its obligations.

               (b) PROVISIONAL REMEDIES. Although the procedures specified in
this Article are the sole and exclusive procedures for the resolution of
disputes arising out of relating to this Agreement, either party may seek a
preliminary injunction or other provisional equitable relief if,



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<PAGE>   23

in its reasonable judgment, such action is necessary to avoid irreparable harm
to itself or to preserve its rights under this Agreement.

               (c) STATUTE OF LIMITATIONS. The parties agree that all applicable
statutes of limitation and time-based defenses (such as estoppel and laches)
shall be tolled while the procedures set forth in Subsections (9.2.(a) and
9.2(b) are pending. The parties shall take any actions necessary to effectuate
this result.

10.     MISCELLANEOUS.

        10.1 REPRESENTATIONS AND WARRANTIES. University represents and warrants
that its employees have assigned to University their entire right, title, and
interest in the Patent Rights and that it has authority to grant the rights and
licenses set forth in this Agreement. UNIVERSITY MAKES NO OTHER WARRANTIES
CONCERNING THE PATENT RIGHTS AND RELATED TECHNOLOGY, INCLUDING WITHOUT
LIMITATION ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. Specifically, University makes no warranty or representation
(i) regarding the validity or scope of the Patent Rights (ii) that the
exploitation of Patent Rights or any Licensed Product will not infringe any
patents or other intellectual property rights of a third party, and (iii) that
any third party is not currently infringing or will not infringe the Patent
Rights.

        10.2 TAX-EXEMPT STATUS. Company acknowledges that University, as a
public institution of the Commonwealth of Massachsuetts, holds the status of an
exempt organization under the United States Internal Revenue Code. Company also
acknowledges that ascertain facilities in which the licensed inventions were
developed may have been financed through offerings of tax-exempt bonds. If the
Internal Revenue Service determines, or if counsel to University reasonably
determines, that any term of this Agreement jeopardizes the tax-exempt status of
University or the bonds used to finance University facilities, the relevant term
shall be deemed in invalid provisions and modified in accordance with Section
10.10.

        10.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

        10.4 HEADINGS. All headings are for convenience only and shall not
affect the meaning of any provision of this Agreement.



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<PAGE>   24

        10.5 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective permitted successors and
assigns.

        10.6 ASSIGNMENT. This Agreement may not be assigned by either party
without the prior written consent of the other party, except that Company may
assign this Agreement to an affiliate or to a successor in connection with the
merger, consolidation, or sale of all or substantially all of its assets or that
portion of its business to which this Agreement relates.

        10.7 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented,
or otherwise modified only by means of a written instrument signed by both
parties. Any waiver of any rights or failure to act in a specific instance shall
relate only to such instance and shall not be construed as an agreement to waive
any rights or fail to act in any other instance, whether or not similar.

        10.8. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts irrespective of
any conflicts of law principles.

        10.9 NOTICE. Any notices required or permitted under this Agreement
shall be in writing, shall specifically refer to this Agreement, and shall be
sent by hand, recognized national overnight courier, confirmed facsimile
transmission, confirmed electronic mail, or registered or certified mail,
postage prepaid, return receive requested, to the following addresses or
facsimile numbers of the parties.



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<PAGE>   25

        If to University:

        Office of Commercial Ventures and Intellectual Property
        University of Massachsuetts
        55 Lake Avenue North
        Worcester, MA 01605
        Attention:    Joseph F. X. McGuirl
                      Executive Director

        Tel:   (508) 856-1626
        Fax:   (508) 856-5004

        If to Company:

        Signal Pharmaceuticals, Inc.
        5555 Oberlin Drive
        San Diego, CA 92121
        Attention:    Alan J. Lewis, Ph.D.
                      President and Chief Executive Officer

        Tel:   (619) 558-7500
        Fax:   (619) 558-7513


All notices under this Agreement shall be deemed effective upon receipt. A party
may change its contact information immediately upon written notice to the other
party in the manner provided in this Section.

        10.10 SEVERABILITY. In the event that any provision of this Agreement
shall be held invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect any other provision of this Agreement, and the
parties shall negotiate in good faith to modify the Agreement to preserve (to
the extent possible) their original intent. If the parties fail to reach a
modified agreement within sixty (60) days after the relevant provision is held
invalid or unenforceable, then the dispute shall be resolved in accordance with
the procedures set forth in Article 9. While the dispute is pending resolution,
this Agreement shall be construed as if such provision were deleted by agreement
of the parties.

        10.11 ENTIRE AGREEMENT. Except for the Common Stock Purchase Agreement,
this Agreement constitutes the entire agreement between the parties with respect
to its subject



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<PAGE>   26
and supersedes all prior agreement or understandings between the parties
relating to its subject matter.

        IN WITNESS WHEREOF, The parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.

UNIVERSITY OF MASSACHUSETTS                 SIGNAL PHARMACEUTICALS, INC.



By:  /s/ JOSEPH F.X. McGUIRL                 By: /s/ CARL BOBKOSKI
    --------------------------------            ------------------------------
        Joseph F.X. McGuirl                      Carl Bobkoski
        Executive Director, CVIP                 Executive Vice President



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<PAGE>   27

                                    EXHIBIT A

                               LIST OF UMMC CASES



                    U.S. PATENT APPLICATION SERIAL NO. [***]

                    U.S. PATENT APPLICATION SERIAL NO. [***]


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