Document:

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                       COLLABORATION AND LICENSE AGREEMENT

THIS COLLABORATION AND LICENSE AGREEMENT ("AGREEMENT"), dated as of December
10, 1999 (the "EFFECTIVE DATE"), is entered into by and between American
Cyanamid Company, a subsidiary of American Home Products Corporation and a
Maine Corporation having its principal offices at 1 Campus Drive, Parsippany,
New Jersey  ("ACY"), and Hyseq, Inc., a Nevada corporation having its principal
offices at 670 Almanor Avenue, Sunnyvale, California 94086  ("HYSEQ").

                                    PREAMBLE

A.   ACY desires to capitalize on its proprietary position and expertise in
     crops and other plants, and related organisms, including organisms with
     unique biological activity, through discovery of new gene targets for
     product development and for increasing its intellectual property position.

B.   ACY has proprietary technology, trade secrets, know-how and existing
     partnerships that enable the identification of novel genes, development of
     mechanism-based high throughput screens, gene cassette construction,
     transformation of plants, plant selection and evaluation and incorporation
     of novel genes into elite germplasm.

C.   Hyseq has proprietary technology, trade secrets and know-how that
     provides a high-throughput production capacity for discovering new gene
     targets that can be beneficial to ACY.

D.   ACY and Hyseq mutually desire to enter into a collaboration in which
     Hyseq will apply its sequencing and other gene discovery technologies to
     biological materials provided by ACY (the "COLLABORATION").

E.   Concurrently with the execution of this Agreement, ACY and Hyseq are
     entering into a software license agreement, pursuant to which ACY shall be
     granted a license to the "Hyseq Software" as defined therein ("SOFTWARE
     LICENSE AGREEMENT").

NOW, THEREFORE, in consideration of the mutual agreements provided in this
Agreement, Hyseq and ACY agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

The following capitalized terms used herein shall have the respective meanings
set forth below.

1.1  "ACY DATABASE" means the database created by Hyseq for ACY during the
     Collaboration, which shall contain the ACY Results and any other
     information relating to the organisms designated for work in the
     Collaboration, which database shall be updated

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     throughout the Collaboration Term (including any Collaboration Term
     Extension Year, as defined below).

1.2  "ACY MATERIALS" means all Libraries and other materials provided by ACY
     to Hyseq pursuant to this Collaboration, together with (i) any part,
     progeny, mutant or hybrid thereof, (ii) any nucleic acid or other genetic
     material therefrom, including any genes, gene sequences and gene sequence
     information, (iii) any copy, complement or transcription or expression
     product thereof, (iv) any biological or other materials identified in, or
     derived from, any of the foregoing, and (v) any related biological
     material and associated know-how and data that ACY provides to Hyseq
     hereunder.

1.3  "ACY PRODUCT" means a (a) product that tangibly incorporates gene
     sequences or products of gene sequences arising out of the ACY Results, or
     alternatively, a product that tangibly incorporates gene sequences or
     products of gene sequences derived therefrom, which products contain all
     or a portion of the aforementioned gene sequences or gene products whether
     introduced by genetic modification techniques or by enhancement or other
     in situ modification to naturally occurring genes or gene products with
     the subsequent development of products containing said genes or gene
     products so modified, whether developed through the use of conventional
     breeding techniques or otherwise; and a (b) product, including without
     limitation, a Compound, the development of which product derived from
     information contained in the ACY Database, which information was not
     independently available to ACY as may be shown by contemporaneous
     documentation.  ACY Products shall be inclusive of all classes of products
     including without limitation, cosmetics, consumer products, agricultural
     products, biopharmaceuticals, diagnostics, research use reagents,
     vaccines, food supplements, foodstuffs, feedstuffs, and Nutraceuticals;
     and ACY Products shall also include Sales of the ACY Database itself or
     the granting of access to all or a portion of said ACY Database in
     exchange for monetary consideration, in each case to one or more Third
     Party(s) to use other than in a collaboration with ACY.

1.4  "ACQUISITION" has the meaning set forth in Paragraph 9.2.1 hereof.

1.5  *

1.6  "AFFILIATE" means a person or entity that directly or indirectly
     controls, is controlled by or is under common control with, a Party to
     this Agreement.  "CONTROL" (and, with correlative meanings, the terms
     "controlled by" and "under common control with") means possession of the
     power to direct or cause the direction of the management and policies of
     the entity, whether pursuant to the ownership of voting securities, by
     contract, or otherwise.  However, for purposes of this Agreement, the term
     "Affiliate" shall not include subsidiaries or other entities in which a
     Party owns a majority of the ordinary voting power to elect the majority
     of the board of directors or other governing board but is otherwise
     restricted from electing such majority by contract or otherwise, until
     such time as (i) such restrictions are no longer in effect, or (ii) the
     subsidiary or other entity is otherwise designated by the Party in writing
     as being an "Affiliate."

* denotes request for confidential treatment

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1.7  "ACY RESULTS" means any nucleic acid sequence or other biological
     material and information related thereto, as generated from ACY Materials,
     using Hyseq Technology.

1.8  "ACY TECHNOLOGY" means all proprietary technology, copyrights, trade
     secrets, and know-how, including data, processes, procedures, methods,
     formulas, protocols, bioinformatics, software, nucleic acid sequences and
     other biological materials, and all associated information, relating to
     the discovery, identification, and sequencing of genetic information, and
     including ACY Materials, ACY Results, the ACY Database, and ACY
     Inventions, each of the foregoing categories as in existence at the
     Effective Date, or as may be generated, licensed-in or otherwise acquired
     by ACY during the term of this Agreement.

1.9  *

1.10 "APPLICABLE LAW" means, with respect to a Party, any domestic or foreign,
     federal, state or local statute, law, ordinance, rule, administrative
     interpretation, regulation, order, writ, injunction, directive, judgment,
     decree or other requirement of any governmental authority applicable to
     such Party or its properties, business or assets.

1.11 "BANKRUPTCY EVENT" means, with respect to either Party, such Party makes
     an assignment for the benefit of its creditors; files a voluntary petition
     under federal or state bankruptcy or insolvency laws; a receiver or
     custodian is appointed for such Party's business; proceedings are
     instituted against such Party under federal or state bankruptcy or
     insolvency laws; such Party's business or assets become subject to
     attachment, garnishment or other process; or a court or other governmental
     authority of competent jurisdiction determines that such Party is
     insolvent.

1.12 "CHANGE IN CONTROL" has the meaning set forth in Paragraph 9.2.1 hereof.

1.13 "CLAIMS" has the meaning set forth in Section 8.1.

1.14 *

1.15 "COLLABORATION TERM" and "COLLABORATION TERM EXTENSION YEAR" have the
     meanings set forth in Section 2.7.

1.16 "CONTROL" has the meaning set forth in Paragraph 1.5 above.

1.17 "COMPOUND" means a chemical compound or substance, substances derived
     from fermentations and fermentation extracts, other natural products
     including plant extracts and venoms, together with all complexes, mixtures
     and other combinations, prodrugs, analogs, salt forms, racemates, isomers,
     derivatives, or other modifications thereof.

1.18 "CONFIDENTIAL INFORMATION" has the meaning set forth in Section 7.1.

* denotes request for confidential treatment

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1.19 "DESIGNATED ORGANISM" means a living body from the plant or animal
     kingdoms, other than mammalian or avian species, inclusive of the specific
     Genus to which such living body belongs (e.g., examples of various Genera
     as shown in Exhibit 1.19 attached hereto), and as designated by ACY in
     accordance with Paragraph 2.1.2 hereof.

1.20 "DESIGNATED ORGANISM FAMILY" means the taxonomic family to which a
     Designated Organism belongs (e.g., examples of such taxonomic families are
     shown in Exhibit 1.19 attached hereto).

1.21 "FIRST COMMERCIAL SALE" means, with respect to any particular Product,
     the first arms-length Sale in any jurisdiction to one or more Third
     Parties of such Product following receipt of approval from the applicable
     regulatory agency in such jurisdiction to market such Product, if such
     approval is required prior to marketing.

1.22 "FTE" means the employment or other engagement of one person full time or
     more than one person part time, such that the total working time is the
     equivalent of one person working full time for a total of 1,800 hours
     exclusive of vacation days, sick leave, jury duty, bereavement leave and
     holidays, and which FTE is, for purposes of this Agreement, measured in
     person - years such that 100 persons employed full time equals 100 FTEs
     and ten persons employed half time equals five FTEs.

1.23 "HYSEQ PRODUCTS" has the meaning set forth in Paragraph 5.3.4.

1.24 "HYSEQ SCHEMA" means Hyseq's proprietary database schema for organization
     of data, including the logical structure of database tables and the
     relationships among such tables.

1.25 "HYSEQ SOFTWARE" means software, including the Hyseq Schema, that is
     proprietary to Hyseq, and is licensed to ACY pursuant to the terms and
     conditions of the Software License Agreement.

1.26 "HYSEQ TECHNOLOGY" means all proprietary technology, copyrights, trade
     secrets, and know-how, including data, processes, procedures, methods,
     formulas, protocols, bioinformatics, software (other than Hyseq Software),
     biological materials, Hyseq Inventions, and all associated information,
     relating to the discovery, identification, and sequencing of genetic
     information, all if and to the extent used by Hyseq in the Collaboration
     and as in existence at the Effective Date and as may be generated,
     licensed-in or otherwise acquired by Hyseq during the term of this
     Agreement.

1.27 "INITIAL COLLABORATION TERM" shall be the period extending from December
     29, 1999 until June 30, 2003.

1.28 "INITIAL FUNDING" has the meaning set forth in Paragraph 5.1.1.

1.29 "JSC" has the meaning set forth in Section 2.3 hereof.

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1.30 LIBRARY" means a collection of fragments of the nucleic acid from an
     organic source material of interest or synthetically derived, * .  The
     nucleic acid from the source material may be in the form of mRNA and
     subsequently converted into cDNA or may be in the form of genomic DNA, and
     includes all forms of such nucleic acid * .

1.31 NET SALES" means the aggregate amount invoiced or received for Sales of
     all Products hereunder, less the following deductions:

      (a)  Discounts (including price adjustments related to commercial
           programs), returns, allowances (including reasonable bad debt
           allowances), and wholesaler chargebacks allowed and taken, but in
           any case only in amounts consistent with reasonable and customary
           industry standards;

      (b)  Import, export, excise, sales or use taxes, value added
           taxes, and other taxes, tariffs or duties, but not state, federal or
           foreign income taxes;

      (c)  Freight, handling, transportation and insurance prepaid or
           allowed; and

      (d)  Amounts allowed or credited on retroactive price reductions
           or rebates.

     Any refund of any of the foregoing amounts (including any reversal of bad
     debt allowances, whether arising from amounts received in settlement of
     bad debts or otherwise) previously deducted from Net Sales shall be
     appropriately credited upon receipt thereof.

     A Party may, at its option, allocate the above deductions from Sales of
     Products based upon accruals estimated reasonably and consistent with a
     Party's standard business practices.  If a Party elects to utilize such
     accruals, actual deductions will be calculated and, if applicable,
     adjustments will be made on an annual basis.

     If a Sale is to an Affiliate of the seller and such Affiliate is the end
     user, then the "amount invoiced" with respect to such Sale shall, for
     purposes of calculating Net Sales, be the greater of (a) the actual
     amount invoiced, and (b) an amount equal to the sale price of such
     quantity of Product to a Third Party in an arm's length Sale with the
     seller.  If a Sale is for consideration other than cash, then the "amount
     invoiced" with respect to such sale is the value of the non-cash
     consideration received.

     If a Product is sold in combination with another product or products, Net
     Sales under such circumstances shall be calculated by multiplying Net
     Sales of the combination by the fraction A/(A+B), in which A is the
     invoice price of the Product when sold separately, and B is the total
     invoice price of any other product or products in combination when sold
     separately.

     If, on a country-by-country basis, the other product or products in the
     combination  are not sold separately, Net Sales, for purposes of
     determining royalties on the combination Product shall be calculated by
     multiplying actual Net Sales of such combination Product

* denotes request for confidential treatment

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     by the fraction A/C where A is the invoice price for the Product if sold
     separately and C is the invoice price of the combination Product.

     If on a country-by-country basis, neither the Product nor the other
     product or products is sold separately in said country, Net Sales, for
     the purpose of determining royalties on the combination Products shall be
     calculated as above except that A shall be the total cost of manufacture
     of the Product and C shall be the total cost of manufacture of the
     combination Product, as determined in accordance with a Party's customary
     accounting practices, consistently applied.

1.32 "NUTRACEUTICAL" means a food, part of a food or other foodstuff, or food
     supplement that may be marketed as having a specific health benefit,
     including the prevention, amelioration, eradication, or other treatment of
     disease.

1.33 "PARTY" OR "PARTIES" means ACY and/or Hyseq as the case may be.

1.34 "PATENTS" means the rights and interests in and to issued patents and
     pending patent applications in any country, which are necessary or
     commercially desirable to develop, make, have made, use, import, offer for
     sale, sell or have sold products hereunder, including, but not limited to,
     all provisional applications, substitutions, continuations,
     continuations-in-part, divisions, and renewals, all letters patent granted
     thereon, and all reissues, reexaminations and extensions thereof, whether
     owned solely or jointly by a Party or otherwise controlled by a Party with
     the right to transfer rights therein.  "HYSEQ PATENTS" shall mean those
     Patent Rights covering Hyseq Technology or products arising out of the use
     thereof in the Collaboration, owned or otherwise controlled by Hyseq.
     "ACY PATENTS" shall mean those Patent Rights owned or otherwise controlled
     by ACY.  "JOINT PATENTS" shall mean those Patents owned or otherwise
     controlled jointly by ACY and Hyseq, including joint patents embodying
     jointly developed technology pursuant to the Collaboration.

1.35 "PMTS" and "BIOINFORMATICS PMT" have the meaning set forth in Section 2.6.

1.36 "PRODUCT(S)" means ACY Products and Hyseq Products.

1.37 "PROJECT LEADER" has the meaning set forth in Section 2.5 hereof.

1.38 "RESTRICTED TECHNOLOGY" has the meaning set forth in Section 4.2.3 hereof.

1.39 "SALE" means the sale or other disposition, including without limitation,
     a trade or exchange for value, whether by a Party, a licensee or a
     sublicensee, of a Product to a Party that is not an Affiliate of the
     seller, or to any Party that is both an Affiliate of the seller and the
     end user of the Product.

1.40 "SOFTWARE LICENSE FEES" means the fees due Hyseq in consideration of the
     grant of a license to ACY under Hyseq Software Technology Rights pursuant
     to the Software License Agreement and as described more fully in Section
     5.4 hereof.

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1.41 "THIRD PARTY" means any person or entity other than ACY, Hyseq or any of
     their respective Affiliates.

1.42 "VALID CLAIM" means any claim of an unexpired patent which has not been
     held unenforceable, unpatentable, or invalid by a decision of a court or
     other governmental agency of competent jurisdiction, unappealed or
     unappealable within the time allowed for appeal, and which has not been
     admitted to be invalid or unenforceable through reissue, reexamination,
     disclaimer or otherwise.

1.43 "WORK PLAN" means the written protocol developed in accordance with the
     terms and conditions of the Agreement and attached hereto and made a part
     hereof by amendment, providing a detailed plan for implementation of
     various aspects of the Collaboration, which written protocol shall be
     updated and modified by the Parties during the Collaboration Term
     (including any Collaboration Term Extension Year), as contemplated by the
     provisions of Section 2.2 hereof.

                                    ARTICLE 2
                                  COLLABORATION

2.1  IMPLEMENTATION OF COLLABORATION.

     2.1.1 DERIVATION OF ACY MATERIALS.  The Parties shall exert
           reasonable commercial efforts to collaborate in the discovery and
           identification of new genes and new gene targets for product
           development wherein Hyseq shall, inter alia, apply its sequencing
           and other gene discovery technologies to ACY Materials, all in
           accordance with the Work Plan.  The ACY Materials shall be derived
           from organisms selected by ACY from the * .  Representatives of ACY
           may, upon reasonable notice, and during business hours, visit the
           Hyseq premises where the Hyseq work is being performed and consult
           informally with employees of Hyseq engaged in such work for the
           benefit of the Collaboration.

     2.1.2 DESIGNATION OF ORGANISMS.  ACY may designate up to an
           aggregate of * Designated Organisms during the Initial Collaboration
           Term, exclusive of any Collaboration Term Extension Year, if any.
           Hyseq shall have no obligation to prepare * .  ACY may designate
           additional Designated Organisms * for each additional Designated
           Organism designated after the first * .  Notwithstanding the
           foregoing, Hyseq shall have no obligation to prepare * .

     2.1.3 TIMING OF DESIGNATION.  At least * Designated Organisms must
           be designated by ACY for inclusion in the Collaboration by no later
           than March 31, 2000, and no additional Designated Organisms may be
           designated after December 31, 2002 for inclusion in the
           Collaboration during the Initial Collaboration Term.

     2.1.4 ADDITIONAL ORGANISMS.  Payment of the * covers initial
           Library testing and preparation to determine an appropriate clone
           analysis protocol for each such

* denotes request for confidential treatment

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           additional Designated Organism.  If the Collaboration is extended
           for one or more one (1) year extensions as provided in Section 2.7
           hereof, ACY shall be entitled to an additional * Designated
           Organisms and up to * Libraries (at an analysis depth of * , or
           otherwise in accordance with Paragraph 2.1.2 hereof) during each
           such Collaboration Term Extension Year, without payment of the * .

     2.1.5 ACY DELIVERABLES.  ACY shall provide ACY Materials that meet
           the specifications set forth in Exhibit 2.1.5 and that are provided
           in accordance with a timetable that allows Hyseq to perform its
           obligations under this Agreement, and as specified in the Work Plan.
           For the avoidance of doubt, the Parties acknowledge that ACY
           Materials provided to Hyseq hereunder shall not include biological
           materials derived from mammalian or avian organisms.

     2.1.6 *  As more fully set forth in the Work Plan and subject to
           delivery, by ACY, of the ACY Materials in accordance with Paragraph
           2.1.5 hereof, Hyseq shall, by utilizing the ACY Materials, process *
           at a rate of * during the first quarter of 2000, and commencing on
           April 1, 2000, Hyseq shall process * at the rate of * .  Hyseq shall
           maintain this rate of * for purposes of the Collaboration throughout
           the Collaboration Term and any Collaboration Term Extension Year,
           unless such rate is otherwise varied in accordance with the
           provisions set forth herein, and specified by amendment to the then
           obtaining Work Plan (the *).  Except as may be requested from time
           to time by ACY, and subject to Paragraphs 2.1.8 and 5.2.3, Hyseq
           shall not process more than * per quarter of the Initial
           Collaboration Term and any Collaboration Term Extension Year.  A
           maximum of * shall be processed and * total * performed during the
           Initial Collaboration Term itself, and a maximum of * shall be
           further provided during each Collaboration Term Extension Year,
           unless otherwise specified and set forth in the then applicable Work
           Plan, and consistent with the provisions of Paragraphs 2.1.8 and
           5.2.3 hereof.

     2.1.7 *VARIATION.  Additionally, although it is contemplated that
           * will be processed at an average rate of * per month commencing on
           April 1, 2000, and continuing through March 2003, for a total of up
           to * , ACY also may vary * .

     2.1.8 ACY DIRECTED CHANGES TO THE WORK PLAN AND MIX OF WORK.  ACY
           may, by notifying Hyseq in writing 90 days prior to implementation
           of a desired change, direct that the Work Plan be amended to vary
           the type of work to be performed in a quarter.  For example, if ACY
           determines it will need fewer than * , it may designate an
           equivalent amount of work, such as the processing of more * or use
           of a consultant, in lieu of some or all of the gel reactions,
           without incurring additional cost.  For purposes of determining an
           equivalent amount of work when no hourly charge is specified (*),
           Hyseq will establish the charge based on the ratio of its cost of
           performing one type of work to the type of work being substituted
           (*).  The JSC shall discuss any such substitution of work and
           subsequent changes to the Work Plan, and revise the Work Plan in
           this regard.

* denotes request for confidential treatment

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     2.1.9 ADDITIONAL WORK.  If, in the course of processing a Library,
           Hyseq or ACY determines that a change in the Work Plan (such as the
           use of a different vector) is advisable that cannot be exchanged for
           equivalent work as set forth in Paragraphs 2.1.6 through 2.1.8
           above, Hyseq will advise ACY of the charge for additional work in
           connection therewith and, following consultation, ACY will determine
           whether to proceed with the additional work.  All such changes and
           additional work shall be discussed by the JSC and the Work Plan
           shall be amended to detail the new specifications.

2.2 WORK PLANS.

     2.2.1 The Work Plan for the first year of the Collaboration shall
           be prepared by Hyseq and ACY and approved by the JSC as promptly as
           practical after the Effective Date.  It shall include a separate
           section relating to the establishment of the ACY Bioinformatics Data
           Center and technology transfer relevant thereto.  For each year of
           the Collaboration commencing with the second year, the Work Plan
           shall be prepared by Hyseq and ACY and approved by the JSC no later
           than thirty (30) days before the end of the prior calendar year.
           The Work Plan shall set forth specific research and development
           objectives, milestones and resource allocation requirements and
           shall be designed to facilitate the earliest practical
           identification of novel genes and their function.  In no event shall
           a Work Plan increase, expand or change the obligations of a Party
           without that Party's consent, except as expressly provided in
           Paragraphs 2.1.4, 2.1.7, 2.1.8 and 2.1.9 hereof.

     2.2.2 Each Work Plan shall be in writing and shall set forth with
           reasonable specificity tasks for the period covered by the Work
           Plan. The JSC may make adjustments in the Work Plan at its quarterly
           meetings or otherwise as it may determine.

2.3  JOINT STEERING COMMITTEE, PROJECT MANAGEMENT TEAMS AND PROJECT LEADERS.
     Implementation of the research to be performed in the Collaboration shall
     be coordinated by a working technical and scientific team, with oversight
     and guidance provided by a steering committee.

     2.3.1 ESTABLISHMENT OF JSC. Hyseq and ACY shall establish a "joint
           steering committee" (the "JSC").  The JSC will act on behalf of the
           two companies and will be responsible for planning and monitoring of
           the Collaboration and for setting forth specific research and
           development objectives, milestones and resource allocation
           requirements, and determining when milestones are met.  In
           particular, the activities of the JSC shall include reviewing
           progress in the Collaboration and recommending necessary adjustments
           to the Collaboration as the research and development progresses,
           supervising the Project Management Teams, determining the organisms
           for which assays will be developed, considering the in-licensing of
           additional technology for the Collaboration.  The JSC shall have
           sole responsibility for budgetary and other financial oversight.

     2.3.2 ASSIGNMENT OF TASKS.  In planning and monitoring the
           Collaboration, the JSC shall assign tasks and responsibilities
           taking into account each Party's respective

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           specific capabilities and expertise in order in particular to avoid
           duplication and enhance efficiency and synergies.

     2.3.3 EXPENSES.  ACY and Hyseq each shall bear all travel,
           lodging, meals and other costs and expenses associated with the
           participation of their representatives on the JSC and PMTs.

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2.4  JSC MEMBERSHIP.

     Hyseq and ACY each shall appoint, in their sole discretion, up to three
     members to the JSC, which shall include a Chair to be designated by ACY
     and a Co-Chair to be designated by Hyseq, and shall include commercial
     representatives as well as representatives from research.  Substitutes or
     alternates for the Chair and Co-Chair or other JSC members may be
     appointed at any time by notice in writing to the other Party.  The
     Parties may mutually agree to change the size of the JSC as long as there
     shall be an equal number of representatives of each Party on the JSC.
     The initial Chair, Co-Chair and other JSC members shall be designated by
     the Parties upon execution of this Agreement, and each Party shall notify
     the other in writing of their selection of members and any subsequent
     changes thereto.

     2.4.1 ACTIONS.  Each representative of ACY and Hyseq shall have
           one vote on the JSC.  Any approval, determination, decision or other
           action by the JSC shall require the affirmative vote of a majority
           of the representatives, provided, however, that the ACY Chair shall
           cast the deciding vote if the JSC is deadlocked.  Representatives of
           the JSC may at any time vote by proxy.

     2.4.2 MEETINGS.  The JSC shall conduct meetings at an agreed upon
           number of times per calendar year, such meetings to alternate
           between ACY's offices and Hyseq's offices, unless otherwise agreed.
           If approved by a majority of the representatives of the JSC,
           meetings may be held telephonically.  The Co-Chair or Chair may call
           additional meetings at any time beyond the regularly scheduled
           meetings, which additional meetings shall be held by videoconference
           unless otherwise agreed.  A representative of the Party hosting the
           meeting will take minutes of meetings.  Such minutes will be
           distributed for comment prior to the following meeting and will
           thereafter be submitted for approval at such following meeting.

2.5  PROJECT LEADERS.

     Hyseq and ACY shall each appoint two "project leaders," one of whom shall
     serve as such Party's primary technical liaison with the other Party to
     discuss technical matters pertaining to the ACY Bioinformatics Data
     Center, the other of whom shall serve as the primary contact for matters
     relating to the Collaboration in general, and implementation of the
     overall Work Plan (each a "PROJECT LEADER").

2.6  PROJECT MANAGEMENT TEAM.

     2.6.1 ESTABLISHMENT OF PMTS.  Hyseq and ACY shall establish
           "Project Management Teams" (the "PMTS") to act on behalf of the two
           companies, and to manage the Collaboration as directed by the JSC.
           A first PMT shall be established to manage and coordinate the
           establishment of the ACY Bioinformatics Data Center and technology
           transfer incidental thereto ("BIOINFORMATICS PMT").  Hyseq and ACY
           each shall appoint, in their sole discretion, up to five members to
           the Bioinformatics PMT, which shall include each Party's
           Bioinformatics Project Leader; and shall also include one or more
           members with computer hardware,

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           computer systems, computer software, and bioinformatics expertise.
           A second PMT shall also be established to provide, inter alia,
           scientific oversight and recommendation to the JSC for resource
           allocations in the implementation of the Work Plan in respect of
           other work to be carried out in the course of the Collaboration.
           This second PMT shall consist of each Party's Project Leader from
           the Bioinformatics PMT, and one or more members with Library
           construction and evaluation, sequencing techniques, microarray
           techniques, and cluster-based expression profiling expertise.

     2.6.2 SELECTION OF MEMBERS.  The initial Project Leaders and other
           PMT members shall be designated by the Parties upon execution of
           this Agreement, and each Party shall notify the other in writing of
           their selection of members and any subsequent changes thereto.
           Substitutes or alternates for the Project Leaders or other PMT
           members may be appointed at any time by notice in writing to the
           other Party.  The Parties may mutually agree to change the size of
           the PMT as long as there shall be an equal number of representatives
           of each Party on the PMT.

     2.6.3 CHAIRS.  Each PMT shall be chaired by its two Project
           Leaders.  Any disputes or deadlock decisions with respect to the
           management of the Collaboration by the PMT shall be referred to the
           JSC for timely resolution, but in any event no later than sixty (60)
           days from the date of such referral.

     2.6.4 PMT MEETINGS AND REPORTS.  Unless otherwise agreed or
           directed by the JSC, each PMT shall conduct videoconference meetings
           on a monthly basis, issue monthly reports to the JSC, and conduct in
           person meetings at alternating facilities on at least a semi-annual
           basis.

2.7  COLLABORATION TERM.

     2.7.1 TERM OF THE COLLABORATION.  The initial term of the
           Collaboration shall expire on June 30, 2003, unless extended as
           provided below or unless earlier terminated by either Party pursuant
           to the provisions of this Agreement (hereinafter the Initial
           Collaboration Term and each Collaboration Term Extension Year, as
           applicable, the "COLLABORATION TERM").

     2.7.2 EXTENSION OF THE COLLABORATION.  ACY may seek to extend the
           Collaboration upon the same terms and conditions provided herein, in
           four (4) increments of one (1) year each (each a "COLLABORATION TERM
           EXTENSION YEAR"), for up to an additional four (4) years ending on
           June 30, 2007, by serving Hyseq with notice of this intent by
           December 31 of the third year of the Initial Collaboration Term, and
           each consecutive year thereafter for the next three (3) years, as
           applicable.  Subject to the provisions of Section 2.8 below, Hyseq
           may decline to extend the length of the Initial Collaboration Term,
           by providing written notice thereof to ACY not later than 15 days
           after ACY's notice of intent to so extend.

     2.7.3 EVALUATION OF YEARLY RESULTS OF COLLABORATION PRIOR TO EARLY
           TERMINATION OF THE COLLABORATION.  Prior to serving Hyseq with
           notice of early termination of the

                                       12

<PAGE>   13

           Collaboration in accordance with the provisions set forth in
           Paragraph 9.2.1(iii), (iv), or (v) hereof, ACY shall provide notice
           to Hyseq of its failure to comply with such provisions.  The JSC
           shall convene a meeting as soon as practicable thereafter, but in
           no event later than within a period of two weeks, to discuss the
           progress and results of the Collaboration thus far, and to promptly
           determine the reason for the failure to comply with the requisite
           obligations and milestones.  The JSC shall promptly attempt to
           devise a plan to rectify the problems causing such failure
           determined by the JSC.  If a plan satisfactory to ACY and Hyseq is
           decided on by the JSC, ACY shall withdraw its notice of failure to
           comply, and the Collaboration shall continue for the remaining time
           period of the Collaboration Term (taking into account any time
           spent during such discussions and deliberations by the JSC in lieu
           of performing work in the Collaboration).  The JSC shall cause the
           Work Plan to be modified in accordance with their determinations
           and future plans in this regard.  If a plan satisfactory to ACY is
           not decided on by the JSC, ACY may, in its sole discretion, serve
           written notice of early termination of the Collaboration in
           accordance with the provisions of Paragraph 9.2.1(iii), (iv) or (v)
           hereof, which notice shall be retroactive to the date of notice of
           failure to comply as provided to Hyseq pursuant to the provisions
           of this Paragraph 2.7.3.

2.8  EXCLUSIVITY.

     Hyseq warrants and represents that for the duration of the Collaboration
     Term inclusive of each Collaboration Term Extension Year, if any, Hyseq
     will not itself or together with or on behalf of a Third Party undertake
     research or product development and commercialization, and it will not
     collaborate with or grant any license rights to or otherwise enable any
     Third Party in the * .  Hyseq further warrants and represents that with
     respect to * , said covenant of exclusivity shall extend for * .

2.9  ACY MATERIALS.

     2.9.1 SEGREGATION OF ACY MATERIALS, ACY RESULTS, AND ACY DATABASE.
           Hyseq acknowledges that all ACY Materials, ACY Results, and the ACY
           Database are each the sole and exclusive property of ACY, and Hyseq
           shall maintain same for the benefit of ACY.  Hyseq may use the ACY
           Materials only for purposes of performing its duties under the
           Collaboration and exercising its rights granted in Article 4 hereof.
           Subject to the licenses granted to Hyseq pursuant to Article 4
           hereof, Hyseq agrees that it will in no event utilize for itself, or
           directly or indirectly make available to any Third Party, all or any
           portion of the ACY Materials, ACY Results, and ACY Database, without
           the express prior written consent of ACY.  The foregoing provisions
           of this Paragraph do not apply to any actions taken by Hyseq for
           verification purposes or to the extent required to perform its
           obligations under this Agreement.  Hyseq shall maintain all ACY
           Materials and the ACY Database, including the ACY Results, separate
           and apart from any of its own data and records or those of any Third
           Party in its possession.  In no event shall Hyseq permit a Third
           Party access to any ACY Materials, and in

* denotes request for confidential treatment

                                       13

<PAGE>   14

           no event shall Hyseq permit a Third Party access to any portion of
           the ACY Database that has been indicated by ACY as "proprietary and
           strictly confidential," and if applicable, "restricted."

     2.9.2 DISPOSITION AFTER EXPIRATION OF THE COLLABORATION.  Subject to 2.9.1,
           upon expiration of the Collaboration and at the instruction of ACY,
           Hyseq shall:

           (i)   return all or a designated portion of such ACY Materials to
                 ACY; or

           (ii)  transfer all or a designated portion of such ACY Materials to
                 a designee of ACY; or

           (iii) maintain for archival purposes, all or a portion of such ACY
                 Materials and allow ACY reasonable access to same, the
                 reasonable expenses of such archiving and access to be borne
                 by ACY; or

           (iv)  destroy all or a portion of such ACY Materials.

                                    ARTICLE 3
                  TECHNOLOGY TRANSFER AND ESTABLISHMENT OF ACY
                           BIOINFORMATICS DATA CENTER

3.1  INSTALLATION.  As soon as practicable after the Effective Date, the
     Bioinformatics PMT shall initiate the installation of a logical and
     physical design of an ACY Bioinformatics Data Center as set forth in
     Exhibit 3.1.  In connection therewith, the Bioinformatics PMT shall,
     within a period of seven (7) business days from the date of receipt of
     applicable specifications, approve a plan to purchase equipment, and shall
     develop an installation plan which shall be subject to approval by the
     Bioinformatics PMT.  The installation shall be completed not later than
     six (6) months after the later of (i) the approval of said plans, or
     (ii) receipt by Hyseq of the Initial Funding.

3.2  * .  Hyseq shall, with the participation and assistance of ACY, recruit
     and employ or otherwise engage * individuals, all as agreed upon by ACY
     and set forth in the Work Plan.  The selected FTEs shall install and
     implement * , and shall provide continued on-site technical support to
     ACY, on premises in the United States as may be designated by ACY from
     time to time (*).  The Parties contemplate that by the beginning of the
     second year of the Collaboration, such * shall be recruited from the New
     Jersey area.  The * shall be based at the premises designated by ACY, and
     shall be required to agree to be bound by terms and conditions consistent
     with Article 7 and Section 11.1 hereof.  Their key responsibilities shall
     be as follows:

     3.2.1  *
     3.2.2  *
     3.2.3  *

* denotes request for confidential treatment

                                       14

<PAGE>   15

3.3  EMPLOYEE EXPENSES.  All expenses incidental to the recruiting and employ
     of the * shall be borne by Hyseq, including their salaries, wages, fringe
     benefits, related payroll taxes, overtime, vacation and holiday pay
     illness, personal days off with pay, costs of employee fringe benefits,
     including health and life insurance, welfare, pension, and profit-sharing
     as applicable; and all overhead (except for office space, telephone and
     other utilities to be provided without charge by ACY at the ACY designated
     facility) associated with their employment hereunder, including general
     and administrative expenses; all as expended during the Initial
     Collaboration Term and each Collaboration Term Extension Year, as
     applicable.  Upon termination of this Agreement, ACY may offer to employ
     such FTEs directly on mutually agreed terms.

3.4  BIOINFORMATICS TECHNOLOGY TRAINING.  Hyseq shall at all times during the
     Initial Collaboration Term and any Collaboration Term Extension Year,
     exert reasonable commercial efforts to keep the * and the ACY
     Bioinformatics PMT abreast of all improvements, customization, upgrades,
     and other modifications or additions made to the Hyseq Technology and
     Hyseq Software, and Hyseq shall use reasonable commercial efforts to train
     such * and ACY Bioinformatics PMT on a timely basis, in the use of same as
     applicable to the discharge of Hyseq's obligations hereunder.  The * and
     representatives of ACY or members of the Bioinformatics PMT shall attend
     training sessions on the premises of Hyseq at times to be agreed by the
     Parties and set forth in the Work Plan in furtherance of the aforesaid
     continued training, provided, however that ACY shall bear all travel,
     lodging, meals and other costs incurred by ACY personnel in attending said
     training sessions on the premises of Hyseq.

3.5  ADDITIONAL CONSULTATION.  Technical training and additional consultation
     equal to * shall be provided by Hyseq to ACY during the Initial
     Collaboration Term and any Collaboration Term Extension Year, at no
     additional cost to ACY.

3.6  ADDITIONAL FTE.  Additional technical training and consultation equal to
     * hours with respect to * , and up to * , shall be provided by Hyseq
     during the Initial Collaboration Term and each Collaboration Term
     Extension Year, at no additional cost to ACY.

3.7  REQUESTED FURTHER CONSULTATION.  Consultation in addition to that
     provided by Hyseq as set forth above shall be provided upon request at the
     rate of * plus pre-approved expenses, such as lodging, travel, telephone,
     telefax, postage, and facilities and equipment rental, and shipping.

                                    ARTICLE 4
                                 LICENSE GRANTS

4.1  LICENSES GRANTED TO ACY.

     4.1.1 SOFTWARE LICENSE. Hyseq and ACY are concurrently entering
           into the Software License Agreement pursuant to which Hyseq is
           granting to ACY a worldwide, non-exclusive license, with the right
           to sublicense, on the terms and conditions set forth therein.

* denotes request for confidential treatment

                                       15

<PAGE>   16

     4.1.2 COLLABORATION LICENSE.  Hyseq hereby grants to ACY a worldwide,
           exclusive right and license under Hyseq Technology, Hyseq Patents and
           Hyseq's interests in Joint Patents to discover, develop, make, have
           made, use, import, offer for sale, and to sell ACY Products in the *
           , subject to the payment of royalties as applicable and in accordance
           with Article 5 herein.  Said license shall extend until termination
           of the Collaboration, and then shall apply only to each Designated
           Organism Family for one (1) year post termination of the
           Collaboration.

     4.1.3 THE ACY DATABASE LICENSE(S).  Hyseq hereby grants to ACY a worldwide
           right and license, with the right to sublicense, under Hyseq
           Technology, Hyseq Patents and Hyseq's interests in Joint Patents, to
           use the ACY Database, including the ACY Results contained therein,
           for any use whatsoever, including all research purposes, to discover,
           develop, make, have made, use, import, offer for sale, and to sell
           ACY Products in any field, subject to the payment of royalties as
           applicable and in accordance with Article 5 herein.  ACY's right and
           license as granted in this Paragraph 4.1.3 shall be exclusive in the
           * and non-exclusive for all applications and fields outside of the *
           .  ACY retains the exclusive right for use of the ACY Database for
           any and all uses and applications whatsoever in the * .

     4.1.4 NO OTHER RIGHTS.  Except as expressly provided otherwise in this
           Agreement and the Software License Agreement, no rights in or to any
           Hyseq Technology, Hyseq Software or Hyseq Patents shall be
           transferred to ACY, and unless otherwise agreed in writing, ACY is
           not granted any other license under the Hyseq Technology, Hyseq
           Software, or Hyseq Patents, and warrants and represents that it will
           make no use of same except as permitted hereunder.

* denotes request for confidential treatment

                                       16

<PAGE>   17

4.2  LICENSES GRANTED TO HYSEQ.

     4.2.1 ACY hereby grants to Hyseq a worldwide, fully paid research
           use license, with no right to sublicense, under ACY Patents and ACY
           Technology, including the ACY Database and ACY Materials, to
           undertake its obligations in the Collaboration.  Said license shall
           extend until termination of the Collaboration.

     4.2.2 ACY hereby grants to Hyseq a worldwide, non-exclusive
           license, with no right to sublicense, to use the ACY Database for
           all applications outside the * , including all research purposes and
           to discover, develop, make, have made, use, import, offer for sale,
           and to sell Hyseq Products outside the Agricultural Field, subject
           to the payment of royalties as applicable and in accordance with
           Article 5 herein.  Consistent with the prohibition on sublicensing,
           no ACY Results or other data will be displayed on, or made available
           through the Internet to anyone other than ACY, on sites such as, for
           example, "GeneSolutions.com," except as may be otherwise agreed by
           the Parties.

     4.2.3 Notwithstanding the provisions of Sections 4.2.1 and 4.2.2
           above, the licenses granted to Hyseq shall expressly exclude the
           right to use any ACY data in the ACY Database if and to the extent
           such ACY data has been developed by ACY or an Affiliate of ACY using
           technology that is not permitted by contract to be used by Hyseq or
           a Third Party, and has been identified to Hyseq as such ("RESTRICTED
           TECHNOLOGY").

     4.2.4 Except as expressly provided otherwise in this Agreement and
           the Software License Agreement, no rights in and to ACY data, the
           ACY Database, ACY Materials, ACY Patents, ACY Technology or other
           trade secrets or know-how, shall be transferred to Hyseq unless
           otherwise agreed in writing.  Hyseq is not granted any other license
           with respect to same and Hyseq warrants and represents that it shall
           make no use of same other than as permitted hereunder.  For the
           avoidance of doubt,  Hyseq is granted no right and license in the *
           whatsoever, other than the rights granted in Paragraph 4.2.1.

4.3  RIGHTS IN BANKRUPTCY.  The rights granted pursuant to this Agreement
     constitute "intellectual property" within the meaning of Sections 101 and
     365(n) of the United States Bankruptcy Code.  Upon the bankruptcy of
     either Party, the non-bankrupt Party shall be further entitled to a
     complete duplicate of (or complete access to, as appropriate) any such
     intellectual property under which the non-bankrupt Party is not in default
     which is the subject of an enforceable license to such non-bankrupt Party,
     and same, if not already in its possession, shall be promptly delivered to
     such non-bankrupt Party by the bankrupt Party.

* denotes request for confidential treatment

                                       17

<PAGE>   18

                                    ARTICLE 5
                      PAYMENTS, REPORTING, AND AUDIT RIGHTS

5.1  INITIAL COLLABORATION RESEARCH FUNDING.

     5.1.1 ACY will pay Hyseq $5.0 million (the "INITIAL FUNDING") on
           or before December 29, 1999, * .

     5.1.2 * million of said Initial Funding shall be applied by Hyseq
           against the purchase and other costs associated with computers to be
           used on Hyseq premises for the purpose of the Collaboration, all in
           accordance with the Work Plan.  All right, title, and interest in
           and to said equipment shall reside in ACY during the Collaboration,
           provided further that Hyseq shall have an option to purchase said
           equipment upon expiration or early termination of this Agreement,
           for the sum of * .

     5.1.3 * million of said Initial Funding shall be applied by Hyseq
           against the purchase and other costs associated with software and
           computers to be used on ACY's premises for the purpose of the
           Collaboration and otherwise.  All right, title, and interest in and
           to same shall reside with ACY, except for the Hyseq Software,
           including the Hyseq Schema, which is licensed to ACY pursuant to the
           Software License Agreement.

5.2  ADDITIONAL COLLABORATION RESEARCH FUNDING.

     5.2.1 During the Initial Collaboration Term, ACY shall make
           research payments to Hyseq in accordance with the following: *
           (payable on the last business day of each such quarter); * (payable
           on the last business day of each such calendar quarter); * (payable
           on the last business day of each such calendar quarter; and *
           (payable on the last business day of such calendar quarter).

     5.2.2 If the Collaboration is extended, ACY shall pay * .  In
           order to avoid any down time in which Hyseq would not be * , ACY may
           elect to overlap work performed in each Collaboration Term Extension
           Year with that of the last three to six months of the prior term,
           and in such event, ACY shall be entitled to * , such that the
           payment for * in a Collaboration Term Extension Year shall be
           reduced to * .

     5.2.3 Provided ACY has not directed changes to the Work Plan and
           mix of work in accordance with Paragraph 2.1.8 hereof, if *
           processed by Hyseq in accordance with the Work Plan exceeds * in any
           given calendar quarter within a year during the Collaboration, and
           by the end of the next quarter of said year is not offset by a
           reduction * in that quarter, then ACY shall pay Hyseq an additional
           * that quarter, which additional fee shall be due within 30 days of
           the end of the quarter following the quarter in which the * has
           occurred.

* denotes request for confidential treatment

                                       18

<PAGE>   19

     5.2.4 The Software License Fees are included in fees payable under
           this Section 5.2 during the Collaboration Term.

     5.2.5 If ACY wishes to designate more than twelve (12) Designated
           Organisms prior to December 31, 2002, or more than four (4) new
           Designated Organisms in any Collaboration Term Extension Year, ACY
           shall be entitled to so designate, subject to Paragraphs 2.1.2 and
           2.1.4 and upon payment of * .  Said * shall be payable no later than
           30 days after receipt by ACY of an invoice to be generated by Hyseq
           upon delivery of notice of the additional designation.

5.3  ROYALTIES.

     5.3.1 ACY OBLIGATION TO PAY ROYALTIES.  ACY shall pay Hyseq
           royalties on Net Sales of ACY Products for a period expiring on the
           later of (a) the expiration of the last Patent covering any such
           Product on a country-by-country basis, or (b) fifteen (15) years
           after the First Commercial Sale of such Product hereunder, said
           royalty rates set forth below.  Upon expiration of the obligation to
           pay royalties with respect to a Product pursuant to this Paragraph
           5.3.1, the license with respect thereto shall be deemed fully paid.

     5.3.2 ACY ROYALTY RATES.

            (i)  ACY shall pay Hyseq royalties * on Net Sales of
                 ACY Products in the *, wherein said Product incorporates a
                 gene sequence or gene product as defined in Paragraph 1.3(a)
                 herein, in any jurisdictions where the manufacture, use or
                 sale of such ACY Products are covered by a Valid Claim of a
                 Patent directed to a composition of matter containing said
                 Product, or use or manufacture of such Product, which royalty
                 shall be reduced to * if not covered by any such Patent or if
                 the Product does not incorporate such gene sequence or gene
                 product as defined in Paragraph 1.3(b) herein.

            (ii) ACY shall pay Hyseq royalties of * on Net Sales
                 of ACY Products outside the * , wherein said Product
                 incorporates a gene sequence or gene product as defined in
                 Paragraph 1.3(a) herein, in any jurisdictions where the
                 manufacture, use or sale of such ACY Products are covered by a
                 Valid Claim of a Patent directed to a composition of matter
                 containing said Product, or manufacture or use of such
                 Product, which royalty rate shall be reduced to * if the
                 Product does not incorporate such gene sequence or gene
                 product as defined in Paragraph 1.3(b) herein.  Each such
                 royalty rate shall be reduced by one-half if the applicable
                 Product is not covered by any such Patent.

     5.3.3 HYSEQ OBLIGATION TO PAY ROYALTIES.  Hyseq shall pay ACY
           royalties on Net Sales of Hyseq Products for a period expiring on
           the later of (a) the expiration of the last Patent covering any such
           Hyseq Product on a country-by-country basis, or (b) fifteen (15)
           years after the First Commercial Sale by Hyseq of such Hyseq

* denotes request for confidential treatment

                                       19

<PAGE>   20

           Product hereunder, said royalty rates set forth below.  Upon
           expiration of the obligation to pay royalties with respect to a
           Hyseq Product pursuant to this Paragraph 5.3.3, the license with
           respect thereto shall be deemed fully paid.

     5.3.4 HYSEQ ROYALTY RATES.  In consideration of the licenses
           granted to Hyseq herein, Hyseq shall pay ACY royalties of * on Net
           Sales of Hyseq products outside the *: (a) that tangibly incorporate
           gene sequences or products of gene sequences arising out of the
           Collaboration, or alternatively, products that tangibly incorporate
           gene sequences or products of gene sequences therefrom, which
           products contain all or a portion of said gene sequences or gene
           products whether introduced by genetic modification techniques or by
           enhancement or other in situ modification to naturally occurring
           genes or gene products with the subsequent development of products
           containing said genes or gene products so modified; and Hyseq shall
           pay ACY royalties of * on Net Sales of Hyseq products, including
           without limitation, Compounds, that  (b) are developed, made, used
           or sold as, or for use as an ingredient in a product outside the * ,
           the development of which product derived from information contained
           in the ACY Database which information was not independently
           available to Hyseq as may be shown by contemporaneous documentation
           (collectively referred to herein as "HYSEQ PRODUCTS"), in any
           jurisdictions where the manufacture, use or sale of any such Hyseq
           Product is covered by a Valid Claim of a Patent directed to a
           composition of matter containing such Product, or use or manufacture
           of such Product.  Each such royalty rate shall be reduced by
           one-half if the applicable Product is not covered by any such
           Patent.

     5.3.5 TIMING OF ROYALTY PAYMENTS.  Royalties shall be paid in
           arrears on a quarterly basis, with payments due 90 days after the
           end of the calendar quarter, for each Product on a
           product-by-product basis, commencing upon the First Commercial Sale
           of a particular Product in any jurisdiction.

     5.3.6 OTHER ROYALTY-RELATED PROVISIONS.  If it is necessary for a
           Party or its sublicensee to pay a royalty to one or more Third
           Parties for making, using or selling a Product in a jurisdiction,
           the royalty it pays to the other Party in such jurisdiction will be
           reduced by the same proportion as the lowest reduction of royalties
           required of one or more of the other licensors (e.g., if one
           licensor is required to reduce by * and another is required to
           reduce by * , the other Party also will reduce royalties by *),
           provided, however, in no event will royalties in any jurisdiction be
           reduced, by reason of Third Party royalty reduction, to less than *
           of the royalty otherwise payable to the other Party.

5.4  HYSEQ SOFTWARE LICENSE FEES.  In addition to the amount specified in
     Paragraph 5.1.3, and as set forth in the Software License Agreement, ACY
     shall pay Hyseq * for the use of Hyseq Software, including all
     Modifications and Upgrades thereto.  Said * is included in the amount
     payable under Section 5.2 above during the Collaboration Term.  Upon
     termination of the Collaboration, ACY shall have a paid-up license to the
     Hyseq Software, including all modifications, upgrades, and improvements
     thereto, all as in

* denotes request for confidential treatment

                                       20

<PAGE>   21

     existence as of the date of such termination, and shall be entitled to
     continue to receive Upgrades and be licensed thereunder, subject to
     payment of the Renewal Fee (as defined and further described in the
     Software License Agreement), and provided further that if the
     Collaboration is terminated prior to June 30, 2003, ACY shall be
     responsible for payment of any remaining annual Base License Fee (as
     defined in the Software License Agreement) through June 30, 2003, on a
     pro rata basis.  Upon such termination, ACY shall be responsible for
     securing licenses of * Third Party software, and for maintaining service
     contracts on any hardware used in connection with the ACY Database.  In
     connection with the foregoing, Hyseq shall assist ACY in all reasonable
     respects, and shall grant ACY access to continued modifications,
     upgrades, and improvements to the Hyseq Software, as set forth more fully
     in the Software License Agreement.

5.5  NET SALES REPORTS.  Within sixty (60) days after the end of each fiscal
     quarter following the First Commercial Sale of any Product, the selling
     Party shall provide the other Party with a written report setting forth
     (i) gross Sales of the applicable Product made during such quarter, (ii)
     the deductions taken from gross Sales to arrive at Net Sales, and (iii)
     Net Sales of the applicable Product made during such quarter.  Each such
     Sales report shall include reasonable supporting documentation.

5.6  ACCOUNTING AND AUDITS.  Each Party shall keep and maintain proper and
     complete records and books of account documenting gross Sales of their
     respective Products, deductions taken therefrom to arrive at Net Sales,
     and Net Sales.  Each Party shall permit an independent public accountant
     designated by the other Party, except one to which the other Party shall
     have reasonable objection, to have access, no more than once in each
     calendar year, but only for as long as royalties are paid under this
     Agreement, during regular business hours, and upon reasonable notice, to
     inspect its records and books for the sole purpose of determining the
     appropriateness of any royalty payments made by the disclosing Party to
     the other Party hereunder.  If such examination results in a final
     determination that royalties have been overstated or understated, the
     applicable amount shall be refunded or paid promptly.  The fees and
     expenses of such accountant shall be paid by requesting Party, unless the
     audit results in a final determination that royalty payments have been
     understated by more than ten percent (10%) for the period examined, in
     which case the audited Party shall pay the fees and expenses of such
     accountant.  All information obtained by, or provided to, the requesting
     Party and/or its accountants pursuant to this Section shall be subject to
     obligations of strict confidentiality.

5.7  TAXES.  Each Party shall pay any and all taxes levied on account of
     royalties or other payments it receives under this Agreement.  If
     Applicable Laws require that taxes be withheld, the paying Party shall (a)
     deduct these taxes from the remittal amount, (b) pay the taxes to the
     proper taxing authority, and (c) send proof of payment to the receiving
     Party within forty-five (45) days following that payment.

5.8  CURRENCY; CONVERSION.  All payments made under this Agreement shall be in
     U.S. dollars.  With respect to any royalty payment based on Net Sales made
     in a currency other than U.S. dollars,  each Party shall convert such
     currency to U.S. dollars in

* denotes request for confidential treatment

                                       21

<PAGE>   22

     accordance with the foreign currency conversion procedures, as in effect
     from time to time, then used by it in the ordinary course of its
     business.

5.9 BLOCKED CURRENCY/ROYALTY RATES.

     5.9.1 If by reason of any restrictive exchange laws or
           regulations, a Party shall be unable to convert to U.S dollars,
           amounts equivalent to the royalties payable hereunder in respect of
           Products sold for funds other than U.S. dollars,  such royalty
           payments shall be deferred until such restrictive practices are
           lifted so as to permit such conversion, or until the receiving
           Party, at its option, designates a bank of the receiving Party's
           choice in the country in question, where such royalties may be
           legally remitted in trust for such receiving Party, in local
           currency.

     5.9.2 If in any country where Products are manufactured or sold,
           rates of royalties provided for herein are prohibited by law or
           regulation, a Party shall pay such royalties at the highest rate
           permitted in that country for licenses of the type herein granted,
           and shall be deemed in compliance with its royalty payment
           obligations hereunder in so doing.

5.10 BANK ACCOUNTS.  All payments made hereunder shall be made by check to the
     receiving Party at the respective addresses provided herein, or as may be
     indicated from time to time hereunder by the receiving Party in writing.

                                    ARTICLE 6
                          INVENTIONS AND PATENT RIGHTS

6.1  TITLE.

     6.1.1 All inventions, discoveries, know-how, copyrights, and trade
           secrets arising from the Collaboration that are made, conceived or
           reduced to practice by, or generated solely by Hyseq employees or
           Hyseq agents in the course of, or as a result of, performing their
           duties under the Collaboration ("HYSEQ INVENTIONS") shall be solely
           owned by Hyseq.  ACY shall have no rights in any Hyseq Inventions
           except as herein granted or as required to exercise its rights and
           perform its obligations under the Collaboration.  Notwithstanding
           the foregoing, Hyseq shall assign to ACY all of its right, title and
           interest in and to Hyseq Inventions that are genes or portions
           thereof, derived from the ACY Materials and whose identity is
           discovered or further determined in the course of, or as a result of
           performing said duties under the Collaboration, subject to payment
           of any applicable royalties pursuant to Article 5.

     6.1.2 Ownership of the Hyseq Software and Modifications and
           Upgrades (as defined in the Software License Agreement) shall be in
           accordance with the provisions set forth in the Software License
           Agreement.

                                       22

<PAGE>   23

     6.1.3 All inventions, discoveries, know-how, copyrights, and trade
           secrets arising from the Collaboration that are made, conceived or
           reduced to practice by, or generated solely by ACY employees or ACY
           agents in the course of, or as a result of, performing their duties
           under the Collaboration ("ACY INVENTIONS") shall be solely owned by
           ACY.  Hyseq shall have no rights in any ACY Inventions except as
           herein granted or as required to exercise its rights and perform its
           obligations under the Collaboration.

     6.1.4 *

     6.1.5 Subject to payment of the applicable fees pursuant to the
           terms of this Agreement, ACY retains all right, title, and interest
           in and to the ACY Database, including the ACY Results and all
           proprietary data contained therein, and including all intellectual
           property relating thereto as developed hereunder.  ACY shall
           determine the disposition of any copyrights, or copyrightable
           material, first produced or composed in the performance of the
           Collaboration, and relating to the ACY Database.

     6.1.6 All ACY Materials shall be solely owned by ACY.  Hyseq shall
           have no rights in any such materials except as granted herein or as
           required to exercise its rights and perform its obligations under
           the Collaboration.

6.2  NOTIFICATION.  Each Party shall promptly notify the other upon the
     making, conceiving or reducing to practice of any invention or discovery
     made in accordance with the terms of this Agreement.

6.3  CERTAIN ACY PATENTING RIGHTS.  ACY shall have the sole right to prepare,
     file, prosecute, maintain and extend patent applications, except as
     provided for below, concerning all ACY Inventions.  ACY shall have the
     first right, using in-house or outside legal counsel selected at ACY's
     sole discretion, to prepare, file, prosecute, maintain and extend patent
     applications and patents concerning all * , in countries of ACY's choice
     throughout the world with appropriate credit to Hyseq representatives,
     including the naming of such Parties as inventors where appropriate and in
     accordance with the relevant legal requirements, for which ACY shall bear
     the costs relating to such activities which occur at ACY's request or
     direction.

6.4  CERTAIN PATENTING ELECTIONS OF ACY.  If ACY, prior or subsequent to
     filing patent applications on any ACY Inventions or * , elects not to
     maintain same as a trade secret and also elects not to file, prosecute or
     maintain patent applications thereon, or on ensuing patents or certain
     claims encompassed by such patent applications or ensuing patents in the
     United States of America, ACY shall give Hyseq notice thereof within a
     reasonable period prior to allowing such patent applications or patents or
     such certain claims encompassed by such patent applications or ensuing
     patents to lapse or become abandoned or otherwise unpatentable or
     unenforceable, and Hyseq shall thereafter have the right, at its sole
     expense, to prepare, file, prosecute and maintain patent applications and
     patents or divisional applications related to such certain claims
     encompassed by such

* denotes request for confidential treatment

                                       23

<PAGE>   24

     patent applications or ensuing patents in countries of its choice
     throughout the world.  ACY patenting efforts shall not be construed as an
     election not to maintain or file under this Paragraph if ACY elects to
     delay such efforts for strategic purposes.

6.5  * AND DISCOVERIES.  The Party filing patent applications for * shall do
     so in the name of, and on behalf of, both ACY and Hyseq.  Each of Hyseq
     and ACY shall hold all information it presently knows or acquires under
     this Article 6, which is related to all such patents and patent
     applications, as confidential under the provisions of Article 7 hereof.

6.6  ASSIGNMENT OF INVENTIONS.  In the event that, despite the provisions of
     this Article 6, ACY obtains rights in any Hyseq Invention or Hyseq obtains
     any rights in any ACY Invention, except as may be otherwise provided
     herein, the Party obtaining such rights agrees to assign all such rights
     to the other Party.  Each Party will execute any documents reasonably
     requested by the other Party in order to implement the provisions of this
     Paragraph 6.6.

6.7  EMPLOYEE ASSIGNMENTS.  Neither ACY nor Hyseq will permit any employees,
     including without limitation, ACY *, or independent contractors to perform
     work pursuant to the Collaboration unless such person is contractually
     obligated to assign his or her interest in any inventions or other
     discoveries to ACY or Hyseq, or both, as applicable.

6.8 ACTUAL OR THREATENED INFRINGEMENT.

     6.8.1 In the event either Party becomes aware of any possible
           infringement or unauthorized possession, knowledge or use of any
           patents, copyrights, or technology of others, Patents, Confidential
           Information, Hyseq Technology, ACY Technology, a Party's copyrights,
           the ACY Database, the ACY Materials, or other technology of ACY
           (collectively, an "Infringement"), that Party shall promptly notify
           the other Party and provide it with full details.  ACY shall be
           responsible for the prosecution, prevention or termination of any
           such Infringement, at ACY's expense, in those instances where ACY is
           the owner of the underlying information or intellectual property
           (solely or jointly with Hyseq) that is the subject of such
           Infringement or has been exclusively or co-exclusively licensed same
           hereunder.  Hyseq shall be responsible for the prosecution,
           prevention or termination of any such Infringement, at Hyseq's
           expense, in all other instances.  If Hyseq does not commence an
           action to prosecute, or otherwise take steps to prevent or terminate
           an Infringement within one hundred and twenty (120) days from such
           notice, then ACY shall have the right and option to take such
           reasonable action as considered appropriate to prosecute, prevent or
           terminate such Infringement.  If ACY does not commence an action to
           prosecute, or otherwise take steps to prevent or terminate an
           Infringement where Hyseq is the joint owner of underlying
           information or intellectual property and same is not licensed
           exclusively to ACY, within one hundred and twenty (120) days from
           such notice, then Hyseq shall have the right and option to take such
           reasonable action as considered appropriate to prosecute, prevent or
           terminate such Infringement.  If either Party lacks standing to
           bring suit,

* denotes request for confidential treatment

                                       24

<PAGE>   25

           or otherwise determines that it is necessary or desirable for the
           other to join any such suit, action or proceeding, the second Party
           shall execute all papers and perform such other acts as may be
           reasonably required in the circumstances.

     6.8.2 Each Party shall, unless otherwise mutually agreed, bear the
           cost of any proceeding or suit brought by it.  In each case, the
           Party bringing suit shall have the right first to reimburse itself
           out of any sums recovered in such suit or in its settlement for all
           reasonable costs and expenses, including reasonable attorney's fees,
           related to such suit or settlement.  The remainder is next to be
           used to reimburse the other Party for its reasonable costs and
           expenses so incurred.  Any remaining amounts shall go to the Party
           bringing suit.  Each Party shall always have the right to be
           represented by counsel of its own selection and at its own expense
           in any suit instituted under this Paragraph by the other Party for
           Infringement.  In any action under this Paragraph, the Parties shall
           fully cooperate with and assist each other.

     6.8.3 LITIGATION STATUS.  The Parties shall keep one another
           informed of the status of and of their respective activities
           regarding any litigation or settlement thereof concerning the
           Collaboration, provided that no settlement or consent judgment or
           other voluntary final disposition of any suit defended or action
           brought by one Party pursuant to this Section may be entered into
           without the consent of the other Party if such settlement would
           require the non-settling Party to be subject to an injunction or to
           make a monetary payment or would adversely affect the non-settling
           Party's patent rights or the non-settling Party's other rights under
           this Agreement.

     6.8.4 In the event that an Infringement claim is brought against
           Hyseq or ACY or both, which ACY, in its good faith business
           judgment, believes will result in an injunction against Hyseq and/or
           ACY, preventing the use of Hyseq Technology necessary or preferable
           for use in the Collaboration as contemplated herein, Hyseq shall
           have a period of 60 days from written notice of ACY's good faith
           determination to (i) procure the right to continue using same at no
           additional costs to ACY, or (ii) replace or modify same so that it
           becomes non-infringing, at no additional cost to ACY, provided that
           such replaced or modified techniques or technology operates in a
           reasonably equivalent manner.  If Hyseq is unable to procure rights
           to continue using such Hyseq Technology as contemplated by (i) or to
           otherwise provide a non-infringing alternative as contemplated by
           (ii), ACY may terminate the Collaboration, effective 30 days after
           notice thereof.

                                    ARTICLE 7
                                 CONFIDENTIALITY

7.1  CONFIDENTIAL INFORMATION.  Pursuant to the transactions contemplated by
     this Agreement, the Parties may provide to one another confidential
     information, including but not limited to each Party's proprietary
     materials and/or technologies, inventions, economic information, business
     or research strategies, trade secrets and material

                                       25

<PAGE>   26

     embodiments thereof.  As used herein, "CONFIDENTIAL INFORMATION" of a
     Party means any such confidential information disclosed by such Party to
     the other Party hereunder in written or oral form.

7.2  CONFIDENTIALITY.  The recipient shall maintain the providing Party's
     Confidential Information in confidence, except if and to the extent that
     such disclosure is required by Applicable Law and provided that the
     providing Party has received written notice reasonably far in advance of
     the proposed disclosure.  The recipient shall use the providing Party's
     Confidential Information solely to exercise its rights and perform its
     obligations under this Agreement, unless otherwise mutually agreed in
     writing.  Upon request by the providing Party, the recipient shall return
     all tangible materials comprising Confidential Information of the
     providing Party and return or destroy any notes, copies, summaries or
     extracts of the providing Party's Confidential Information.

7.3  EXCLUSIONS.  Confidential Information shall not include information that:
     (i) is shown by contemporaneous documentation of the recipient to have
     been in its possession prior to receipt from the providing Party; (ii) is
     or becomes, through no fault of the recipient, publicly known; (iii) is
     furnished to the recipient by a Third Party without breach of a duty to
     the disclosing Party; or (iv) is independently developed by the recipient
     without use of the providing Party's Confidential Information.  The
     receiving Party will have the burden of proving the availability of any of
     the above exemptions.

7.4  TERMINATION.  All obligations of confidentiality and non-use imposed
     under this Article 7 shall expire five (5) years following termination of
     this Agreement.

                                    ARTICLE 8
                                 INDEMNIFICATION

8.1  INDEMNIFICATION BY HYSEQ.  Hyseq shall indemnify and hold ACY and its
     Affiliates, and their respective directors, officers, employees and
     agents, harmless against all claims, damages, liabilities, losses, costs
     and expenses (collectively, "CLAIMS") if and to the extent arising from
     (a) the breach by Hyseq of any of its representations, warranties and
     covenants hereunder; and (b) any negligent or willful acts or omissions of
     Hyseq or its employees or agents in connection with the performance of any
     tasks to be performed by Hyseq under this Agreement, except in each case
     to the extent any such Claim is subject to indemnification by ACY pursuant
     to Section 8.2 below.  Indirect or consequential losses or damages are
     expressly excluded.

8.2  INDEMNIFICATION BY ACY.  ACY shall indemnify and hold Hyseq and its
     Affiliates, and their respective directors, officers, employees and
     agents, harmless against all Claims if and to the extent arising from (a)
     the breach by ACY of any of its representations, warranties and covenants
     hereunder; and (b) any negligent or willful acts or omissions of ACY or
     its employees or agents in connection with the performance of any tasks to
     be performed by ACY under this Agreement, except in each case to the
     extent any such Claim is subject to indemnification by Hyseq pursuant to
     Section 8.1 above.  Indirect or consequential losses or damages are
     expressly excluded.

                                       26

<PAGE>   27

8.3  PROCEDURE.  The indemnified Party shall give prompt written notice to the
     indemnifying Party of any suits, claims or demands which may give rise to
     any loss for which indemnification may be required under this Article 8;
     provided, however, that failure to give such notice shall not impair the
     obligation of the indemnifying Party to provide indemnification hereunder
     except if and to the extent that such failure materially impairs the
     ability of the indemnifying Party to defend the applicable suit, claim or
     demand.  The indemnifying Party shall be entitled to assume the defense
     and control of any suit, claim or demand of any Third Party at its own
     cost and expense; provided, however, that the other Party shall have the
     right to be represented by its own counsel at its own cost in such
     matters.  In the event that the indemnifying Party shall decline to assume
     control of any such suit, claim or demand, the Party entitled to
     indemnification shall be entitled to assume such control, conduct the
     defense of, and settle such suit, claim or action, all at the sole cost
     and expense of the indemnifying Party.  The indemnifying Party shall not
     settle or dispose of any such matter in any manner which would adversely
     impact the rights or interests of the indemnified Party without the prior
     written consent of the indemnified Party, which shall not be unreasonably
     delayed or withheld.

                                       27

<PAGE>   28

                                    ARTICLE 9
                              TERM AND TERMINATION

9.1  TERM OF THE AGREEMENT AND EARLY TERMINATION OF THE AGREEMENT BY THE
     PARTIES.  Subject to Section 9.3 hereof, the term of this Agreement shall
     extend through the Collaboration Term and thereafter until expiration of
     the last Patent covering the composition, use, or manufacture of a Product
     developed hereunder.  This Agreement may be earlier terminated as follows:

     9.1.1 by mutual written agreement of the Parties, effective as of
           the time specified in such written agreement; or

     9.1.2 by either Party,

            (i)  in the event of a Bankruptcy Event of the other
                 Party, effective immediately upon the occurrence of such
                 Bankruptcy Event; or

            (ii) upon any material breach of this Agreement by the
                 other Party; provided, however, that the Party alleging such
                 breach must first give the other Party written notice thereof,
                 which notice must state that nature of the breach in
                 reasonable detail and that the Party giving such notice views
                 such alleged breach as a basis for terminating this Agreement
                 under this Paragraph 9.1.2 and the Party receiving such notice
                 must have failed to cure such alleged breach within ninety
                 (90) days after receipt of such notice.

9.2  EARLY TERMINATION OF COLLABORATION BY ACY.

     9.2.1 RIGHT TO TERMINATE.  ACY may terminate the Collaboration at
           any time in its sole discretion:

            (i)  in the event of the "Acquisition" of Hyseq by a
                 Third Party,

            (ii) if Hyseq is no longer generally engaged in gene
                 discovery and sequencing as a primary business activity or is
                 generally unable to perform the types of obligations set forth
                 herein; and

           beginning on April 1, 2000:

            (iii) if Hyseq does not * at the * , subject however
                 to delivery by ACY of the requisite ACY Materials in
                 accordance with the timetable set forth in the Work Plan; or

            (iv) if Hyseq fails to deliver * in accordance with
                 the milestones and timetable set forth in the Work Plan, and
                 provided ACY has first delivered the requisite ACY Materials
                 in accordance with such timetable; or

* denotes request for confidential treatment

                                       28

<PAGE>   29

            (v)  if Hyseq fails to provide standard reports in
                 accordance with the milestones set forth in Exhibit 9.2.1(v);
                 or

            (vi) if ACY terminates in accordance with the
                 provisions of Paragraph 6.8.4 hereof;

           said termination to become effective 90 days after written notice
           of termination is provided to Hyseq of ACY's intent to so
           terminate, except for termination pursuant to this Paragraph
           9.2.1(vi), which shall become effective upon 30 days notice.  For
           purposes hereof, an "ACQUISITION" shall be deemed to have occurred
           if Hyseq shall consolidate or merge with another entity, or convey,
           sell or lease to another entity all or substantially all of the
           stock, assets or business of Hyseq and its subsidiaries, taken as a
           whole, or suffer a Change in Control in which another entity shall
           come to control Hyseq.  "CHANGE OF CONTROL" as used herein shall
           mean any transaction or event as a result of which any other entity
           acquires or for the first time controls and is able to vote without
           restriction (directly or through nominees or beneficial ownership)
           fifty percent (50%) or more of the capital stock of Hyseq
           outstanding at the time having the power ordinarily to vote for
           directors of Hyseq.

     9.2.2 EFFECTS OF EARLY TERMINATION OF THE COLLABORATION.  Any
           termination of the Collaboration shall be without prejudice to the
           rights of either Party against the other, then accruing or otherwise
           accrued under this Agreement.  The licenses granted to ACY pursuant
           to Article 4 shall survive early termination of the Collaboration by
           ACY under this Section and the licenses granted to Hyseq shall
           survive early termination of the Collaboration by ACY under
           Paragraph 9.2.1(i), (ii), and (vi).  Further, as of the date of
           notice of such early termination by ACY of the Collaboration, ACY
           shall be released from its future obligations of research funding
           pursuant to Article 5 hereof, except for any obligations which have
           accrued but have not been satisfied as of the date of notice of such
           termination, and any applicable royalty payments or other applicable
           fees.  Notwithstanding the foregoing, if ACY terminates the
           Collaboration in accordance with the provisions of Paragraph
           9.2.1(iii), 9.2.1(iv) or 9.2.1(v) before September 30, 2000, ACY
           shall be entitled to a refund of the Initial Funding paid in
           accordance with Paragraph 5.1.2 hereof, less the actual cost of the
           computers purchased, such cost to be determined in accordance with
           Hyseq's customary accounting and business procedures, consistently
           applied.

9.3  TERMINATION AND SURVIVAL OF PROVISIONS UPON TERMINATION OF THE
     COLLABORATION OR THIS AGREEMENT.

    9.3.1. Upon any termination of this Agreement, the Collaboration shall
           also terminate.

    9.3.2. Upon any termination of the Collaboration, if this Agreement is
           not also terminated, the following provisions shall terminate and no
           longer be in effect: Sections 2.1 through 2.7 inclusive; Section
           2.8, except as otherwise provided in

                                       29

<PAGE>   30

           the last sentence thereof; Article 3; Paragraph 4.1.2, except as
           otherwise provided in the last sentence thereof; Paragraph 4.2.1;
           Sections 5.1 and 5.2, except for amounts accrued as of the date of
           termination; Section 6.7; and Paragraph 9.2.1.  All other
           provisions shall remain in effect as provided by this Agreement.

    9.3.3. Upon any termination this Agreement pursuant to Paragraphs 9.1.1
           or 9.1.2, the following provisions of this Agreement shall survive:
           Section 2.8, as provided in the last sentence thereof; Section 2.9;
           Paragraph 4.1.2, as provided in the last sentence thereof;
           Paragraphs 4.1.3 (except as provided below), 4.1.4, 4.2.2 (except as
           provided below), 4.2.3, 4.2.4; Section 4.3; Sections 5.1 and 5.2 for
           amounts accrued as of the effective date of notice of termination;
           Sections 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9, and 5.10 (all of which
           except as provided below); Sections 9.3, 9.4 and 9.5; and Articles
           6, 7, 8, 10 and 11.  Notwithstanding the foregoing, the license
           granted (pursuant to Paragraph 4.1.3 or 4.2.2 as the case may be) to
           the Party terminated for material breach in accordance with the
           provisions of Paragraph 9.1.2(ii) hereof and the provisions of
           Article 5 pertaining to same shall not survive.

    9.3.4. Upon any termination of this Agreement other than pursuant to
           Paragraphs 9.1.1 or 9.1.2, the following provisions shall survive:
           Section 2.9, Article 5 (with respect to amounts accrued as of the
           date of termination), 7, and 8; Sections 9.3, 9.4, and 9.5; and
           Articles 10 and 11.

    9.3.5. Additionally, Article 1 shall survive any termination of the
           Collaboration or this Agreement to the extent defined terms therein
           are used in provisions of this Agreement that also survive such
           termination.

9.4  CONTINUING LIABILITY.  Termination of this Agreement for any reason shall
     not release any Party from any liability, obligation or agreement, which
     has already accrued, nor affect the survival of any provision hereof,
     which is expressly stated to survive such termination.  Termination of
     this Agreement for any reason shall not constitute a waiver or release of,
     or otherwise be deemed to prejudice or adversely affect, any rights,
     remedies or claims, whether for damages or otherwise, which a Party may
     have hereunder or which may arise out of or in connection with such
     termination.

9.5  RETURN OF CONFIDENTIAL INFORMATION.  Upon termination of this Agreement,
     each Party shall return to the other all Confidential Information of such
     other Party that remains in its possession, except that each Party shall
     be entitled to retain one (1) copy of any such information for archival
     purposes.

                                       30

<PAGE>   31

                                   ARTICLE 10
                         REPRESENTATIONS AND WARRANTIES

10.1 MUTUAL REPRESENTATIONS.  Each Party hereby represents and warrants to the
     other as follows:

    10.1.1 DUE ORGANIZATION.  It is a corporation duly organized, validly
           existing and in good standing under the laws of its jurisdiction of
           incorporation.

    10.1.2 DUE AUTHORITY.  It has power and authority to execute and deliver
           this Agreement, and to perform its obligations hereunder.

    10.1.3 NO CONFLICT.  The execution, delivery and performance by it of
           this Agreement and its compliance with the terms and provisions
           hereof does not and will not conflict with or result in a breach of
           any of the terms and provisions of, or constitute a default under or
           a violation of (i) any agreement where such conflict, breach or
           default would impair in any material respect the ability of such
           Party to perform its obligations hereunder; (ii) the provisions of
           its charter document or bylaws; or (iii) any Applicable Law, but,
           with respect to this clause (iii), only where such violation could
           reasonably be expected to have a material adverse effect on the
           ability of such Party to perform its obligations hereunder.

    10.1.4 BINDING OBLIGATION.  This Agreement has been duly authorized,
           executed and delivered by it and constitutes its legal, valid and
           binding obligation enforceable against it in accordance with its
           terms subject, as to enforcement, to bankruptcy, insolvency,
           reorganization and other laws of general applicability relating to
           or affecting creditors' rights and to the availability of particular
           remedies under general equitable principles.

    10.1.6 COMPLIANCE WITH APPLICABLE LAWS.  It shall perform all of its
           obligations hereunder in compliance with all Applicable Laws the
           violation of which could reasonably be expected to have a material
           adverse effect on such Party's ability to perform its obligations
           hereunder.

    10.1.7 NO ACTIONS.  There are no actions, suits or proceedings pending
           or, to its knowledge, threatened against it or its Affiliates, which
           affect its ability to carry out its obligations under this
           Agreement.

    10.1.8 ADDITIONAL HYSEQ REPRESENTATION.  In addition to the foregoing,
           Hyseq represents and warrants to ACY that, to Hyseq's knowledge as
           of the Effective Date, the practice of the Hyseq Technology or Hyseq
           Software as contemplated by this Agreement will not constitute
           infringement or an unauthorized use of any patent, copyright, trade
           secret, proprietary information, license or right therein belonging
           to any Third Party.

                                       31

<PAGE>   32

    10.1.9 ADDITIONAL ACY REPRESENTATION.  In addition to the foregoing, ACY
           represents and warrants to Hyseq that, to ACY's knowledge as of the
           Effective Date, use by Hyseq of the ACY Materials in performing the
           Collaboration as contemplated by this Agreement will not constitute
           infringement or an unauthorized use of any patent, copyright, trade
           secret, proprietary information, license or right therein belonging
           to any Third Party.

   10.1.10 GOVERNMENTAL CONSENTS.  No consent, approval, order or
           authorization of, or registration, qualification, designation,
           declaration or filing with, any federal, state or local governmental
           authority is required on the part of either Party in connection with
           the valid execution, delivery and performance of this Agreement,
           except for any filings under the United States Hart-Scott-Rodino
           Antitrust Improvements Act of 1976 or counterpart filings under the
           competition laws of other applicable countries or regions in the
           world.  Any filings under the Hart-Scott-Rodino Antitrust
           Improvements Act or other Applicable Laws and regulations in other
           countries or regions in the world, if any, will be effected by the
           Parties hereto as soon as practicable after the full execution of
           this Agreement.  If any such filing is effected by the Parties, the
           costs attendant thereto shall be borne equally by the Parties.  If
           this Agreement is enjoined under Hart-Scott-Rodino, this Agreement
           shall be null and void.

   10.1.11 NO FURTHER REPRESENTATIONS OR WARRANTIES.  Except as otherwise
           expressly provided in this Agreement or the Software License
           Agreement, neither Party makes any representation or warranty of any
           kind to the other Party, either express or implied.

                                   ARTICLE 11
                                  MISCELLANEOUS

11.1 RELATIONSHIP OF THE PARTIES.  The Parties agree that each is acting as an
     independent contractor with respect to the other and nothing contained in
     this Agreement is intended, or is to be construed, to constitute ACY and
     Hyseq as partners or joint ventures or ACY or Hyseq as an agent of the
     other.  Neither Party hereto shall have any express or implied right or
     authority to assume or create any obligations on behalf of or in the name
     of the other Party or to bind the other Party to any contract, agreement
     or undertaking.

11.2 LIMITATION OF LIABILITY.  Neither Party shall have any liability to the
     other Party pursuant to this Agreement for any special, indirect or
     consequential damages, including but not limited to loss of profits, loss
     of business opportunities or loss of business investment.

11.3 NOTICES. Any notice or other communication hereunder shall be in writing
     and shall be deemed given when so delivered in person, by overnight
     courier (with receipt confirmed) or by facsimile transmission (with
     receipt confirmed by telephone or by automatic transmission report) or, if
     given by mail, upon receipt, as follows (or to such other persons and/or
     addresses as may be specified in writing to the other Party hereto):

                                       32

<PAGE>   33

     If to Hyseq, to:  Hyseq, Inc.
                       670 Almanor Avenue
                       Sunnyvale, CA  94086
                       Attention:  Chief Executive Officer
                       Facsimile:  (408) 524-8145

     With a copy to:   Sachnoff & Weaver, Ltd.
                       30 South Wacker Drive, 29th Floor
                       Chicago, IL  60606-7484
                       Facsimile:  (312) 207-6400

     If to ACY, to:    American Cyanamid Company
                       Global Agricultural Products Research Division
                       P. O. Box 400
                       Princeton, NJ  08543-0400
                       Attention:  President
                       Facsimile:  (609) 275-5234

     With a copy to:   Assistant General Counsel
                       One Campus Drive
                       Parsippany, NJ  07054
                       Facsimile:  (973) 683-4117

11.4 SUCCESSORS AND ASSIGNS.  The terms and provisions of this Agreement shall
     inure to the benefit of, and be binding upon, ACY, Hyseq, and their
     respective successors and assigns; provided, however, that neither ACY nor
     Hyseq may transfer or assign any of its rights and obligations hereunder
     without the prior written consent of the other, except that either Party
     may transfer or assign any of its rights and obligations hereunder to an
     Affiliate or a person or other entity that acquires all or substantially
     all of the business or assets of such Party to which this Agreement
     relates, or pursuant to a merger or consolidation.  Each Party shall
     notify the other promptly following any such transfer, assignment, merger
     or consolidation.  Any purported assignment in contravention of this
     Section 11.4 shall, at the option of the nonassigning Party, be null and
     void and of no effect.

11.5 AMENDMENTS AND WAIVERS.  No amendment, modification, waiver, termination
     or discharge of any provision of this Agreement, nor consent to any
     departure by ACY or Hyseq therefrom, shall in any event be effective
     unless the same shall be in writing specifically identifying this
     Agreement and the provision intended to be amended, modified, waived,
     terminated or discharged and signed by the Party against whom enforcement
     of such amendment is sought, and each amendment, modification, waiver,
     termination or discharge shall be effective only in the specific instance
     and for the specific purpose for which given.  No provision of this
     Agreement shall be varied, contradicted or explained by any oral
     agreement, course of dealing or performance or any other matter not set
     forth in an agreement in writing and signed by the Party against whom
     enforcement of such variance, contradiction or explanation is sought.

                                       33

<PAGE>   34

11.6  GOVERNING LAW.  In the event a dispute, controversy or claim arises under
      this Agreement, this Agreement shall, unless otherwise agreed upon by the
      Parties or otherwise governed by applicable patent or other federal laws,
      be governed by and construed in accordance with the laws of the State of
      California or the State of New Jersey, without regard to either state's
      choice of law principles, at the election of the respondent to such
      dispute, controversy or claim.

11.7  EXPORT LAWS.  The Parties acknowledge that each is subject to Applicable
      Laws of the United States governing exportation of technical information,
      computer software, laboratory prototypes and other commodities and
      technology and that the transfer of same outside of the United States may
      require a license or other authorization from the appropriate agency of
      the United States government, and neither Party shall export same from the
      United States, nor re-export same from a country outside of the United
      States, without obtaining such license or other authorization.

11.8  ATTORNEYS' FEES.  Each Party shall bear its own legal fees incurred in
      connection with the transactions contemplated hereby.

11.9  SEVERABILITY.  If any provision hereof should be held invalid, illegal or
      unenforceable in any respect in any jurisdiction, then, to the fullest
      extent permitted by law, all other provisions hereof shall remain in full
      force and effect in such jurisdiction and shall be liberally construed in
      order to carry out the intentions of the Parties hereto as nearly as may
      be possible; provided, however, that nothing herein shall be construed so
      as to defeat the overall intention of the Parties.

11.10 USE OF NAMES.  Neither Party shall use the name, trade name or trademark
      of the other Party in connection with this Agreement without the express
      prior written consent of the other Party.

11.11 EXECUTION IN COUNTERPARTS.  This Agreement may be executed in any number
      of counterparts, each of which counterparts, when so executed and
      delivered, shall be deemed to be an original, and all of which
      counterparts, taken together, shall constitute one and the same
      instrument.

11.12 ENTIRE AGREEMENT.  This Agreement and the Software License Agreement and
      all exhibits and schedules attached hereto and thereto, contain the entire
      agreement and understanding of the Parties hereto, and supersedes any
      prior agreements or understandings between the Parties with respect to the
      subject matter hereof.

11.13 PUBLICITY.

   11.13.1 TERMS OF AGREEMENT.  Neither Party shall disclose the existence
           of this Agreement or any of the terms thereof, or its association
           with the other Party, to any Third Party, whether in writing or
           orally, without the prior written consent of the other Party, which
           consent shall not be unreasonably withheld.

                                       34

<PAGE>   35

           Notwithstanding the foregoing, either Party may make any such
           disclosure if but only to the extent such disclosure is, on advice
           of counsel, required by Applicable Law.  The disclosing Party
           shall use all commercially reasonable efforts to preserve the
           confidentiality of this Agreement and the terms thereof
           notwithstanding any such required disclosure, and will give the
           other Party written notice of such required disclosure, which
           notice shall, to the extent reasonably practicable, be given a
           reasonable period of time in advance of such required disclosure.
           In the event either Party is required to file this Agreement with
           the Securities and Exchange Commission, such Party shall apply for
           confidential treatment of this Agreement to the fullest extent
           permitted by Applicable Law, shall provide the other Party a copy
           of the confidential treatment request far enough in advance of its
           filing to give the other Party a meaningful opportunity to comment
           thereon, and shall incorporate in such confidential treatment
           request any reasonable comments of the other Party.

   11.13.2 PRESS RELEASES.  The Parties will issue a joint press release
           following the execution of this Agreement, the form and substance of
           which shall be approved by both Parties.  Any subsequent press
           releases regarding the transactions contemplated hereby shall be
           approved in advance by both Parties, such approval not to be
           unreasonably withheld or delayed, with the intent that such approval
           or a disapproval shall be forthcoming within five (5) business days
           from the date of receipt of the text of the intended disclosure.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first written above.

AMERICAN CYANAMID COMPANY

By: ________________________________________
Name: ______________________________________
Title: _____________________________________

HYSEQ, INC.

By: ________________________________________
Name:  Lewis S. Gruber
Title: President and Chief Executive Officer

                                       35

<PAGE>   36

                                  EXHIBIT 1.19

                                        *

                                       36

<PAGE>   37

                                  EXHIBIT 2.1.5

                                        *

                                       37

<PAGE>   38

                                  EXHIBIT 3.1

                                       *

                                       38

<PAGE>   39

                                EXHIBIT 9.2.1(V)

                                       *

                                       39<PAGE>   1
                                                                    EXHIBIT 10.4

                     AMENDMENT NO. 3 TO THE SECOND AMENDED
                 AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
                                      OF
                           WINN LIMITED PARTNERSHIP

       This Amendment No. 3 (the "Amendment") to the Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership dated
July 11, 1997 (the "Partnership Agreement") is entered into as of September
14, 1998, by and among Winston Hotels, Inc. (the "General Partner") and the
Limited Partners of WINN Limited Partnership (the "Partnership"). All
capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Partnership Agreement.

       WHEREAS, the Partnership Units held by John B. Harris, Jr. Were
redeemed on March 30, 1998 in exchange for REIT Shares in accordance with the
terms of the Partnership Agreement;

       WHEREAS, additional Partnership Units were issued to the General
Partner upon the contribution by the General Partner of the proceeds of the
issuance of REIT Shares to employees and directors of the General partner;

       WHEREAS, it is desirable to amend Exhibit A to the Partnership
Agreement to reflect such redemption and such issuance;

       NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree to
amend the Partnership Agreement as follows:

       Exhibit A to the Partnership Agreement is hereby amended by
substituting for the current version of such exhibit, a version in the form
attached to this Amendment reflecting the redemption of the Partnership Units
held by John B. Harris, Jr. and the issuance of additional Partnership Units
to the General Partner upon the General partner's contribution of the proceeds
of the issuance of additional REIT Shares to employees and directors of the
General Partner.

       IN WITNESS WHEREOF, the foregoing Amendment No. 3 to the Second
Amendment and Restated Agreement of Limited Partnership Agreement of WINN
Limited Partnership has been signed and delivered as of this 14th day of
September, 1998, by the undersigned as General Partner of the Partnership.

                                             WINSTON HOTELS, INC.,
                                             as General Partner

                                             By: /s/ Brent V. West
                                                -------------------------------
                                                Brent V. West

                                             Title: Vice President, Controller

<PAGE>   2

                                   EXHIBIT A
                              September 14, 1998

(reflecting redemption of Partnership Units held by John B. Harris, Jr. and
the issuance of additional units to the General Partner in connection with the
General Partner's issuance of stock to employees and directors)

<TABLE>
<CAPTION>
               PARTNER AND                        PARTNERSHIP                PERCENTAGE
                 ADDRESS                             UNITS                    INTEREST
                 -------                             -----                    --------

          <S>                                     <C>                        <C>
          GENERAL PARTNER:

          Winston Hotels, Inc.                     16,313,980                    90.37%
          2209 Century Drive
          Raleigh, NC  27612

          LIMITED PARTNERS:

          Hotel I, Inc.                               297,500                     1.65%
          2209 Century Drive
          Raleigh, NC  27612

          Charles M. Winston                          105,643                      .58%
          Winston Hotels, Inc.
          2209 Century Drive
          Raleigh, NC  27612

          Cary Suites, Inc.                           606,413                     3.36%
          2209 Century Drive
          Raleigh, NC  27612

          RWW, Inc.                                    69,960                      .39%
          2209 Century Drive
          Raleigh, NC  27612

          WJS Associates-                             109,516                      .61%
          Perimeter II, Inc.
          2209 Century Drive
          Raleigh, NC  27612

          Hotel II, Inc.                               45,651                      .25%
          2209 Century Drive
          Raleigh, NC  27612

          Quantum Realty                              440,100                     2.44%
          Partners II, L.P.
          100 Crescent Court
          Suite 1000
          Dallas, Texas  75241

          Hubbard Realty of                            63,797                      .35%
            Winston-Salem, Inc.
          85 South Stratford Rd.
          Winston-Salem, NC  27103
                                                   ----------                  -------
                                                   18,052,560                   100.00%
</TABLE>

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