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                                                                   Exhibit 10.16
 
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                EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT
 
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     AGREEMENT made and entered into this 11th day of January 2001, by and
between Hyseq, Inc. of 670 Almanor Avenue, Sunnyvale, California 94085 (the
"COMPANY") and Ted W. Love ("EMPLOYEE").
 
     1.   The Company hereby employs Employee in such capacity or capacities as
set forth in the attached Addendum ("ADDENDUM"), beginning as soon as possible,
and continuing until terminated by Employee or by the Company, as provided in
the Addendum which provides for at-will employment, subject in all cases to the
terms and conditions of the Addendum.
 
     2.   The term "CLIENT" in all paragraphs of this Agreement shall mean any
person, firm, entity, company, partnership, or corporation with whom the Company
has contracted, negotiated, or otherwise dealt or has attempted to contract,
negotiate, or otherwise deal.
 
     3.   For all of the services rendered by Employee, the Company shall pay to
Employee as compensation, the initial sum of $485,000.00 per year, payable
semi-monthly, so long as Employee continues to render services to the Company,
or such other sum in the manner and the amount as may be determined from time to
time by the Company. Employee shall also participate in Company's management
bonus pool, with bonus payments to be determined and paid in accordance with the
terms of such plan. Employee shall also participate in employee benefit plans
maintained by the Company and in other benefits provided to senior executives,
including retirement and 401(k) plans, deferred compensation, medical and
dental, annual vacation, paid holidays, sick leave, and similar benefits, which
are subject to change from time-to-time at the reasonable discretion of the
Company.
 
     4.   Employee shall not during the period of employment engage in any other
business or sideline that interferes with Employee's ability to work for the
Company, constitutes a conflict of interest, involves a disclosure of Company
Confidential Information, except as may be required by the Employee's duties. In
compliance with California Labor Code section 2863 and other applicable law,
Employee will give preference to the Company's business over business transacted
on his own account. During the period of employment, Employee shall perform all
of the duties assigned in a manner satisfactory to the Company shall comply with
Company's directions, shall use all skills possessed, shall use care and
diligence in performing duties, and shall adhere to the policies, practices and
operating guidelines as from time to time may be established by the Company.
 
     5.   Confidential Information of the Company
 
          (a)  Employee shall use during his or her employment and at any time
thereafter his or her best efforts and exercise utmost diligence to protect and
guard Confidential Information (as hereinafter defined). Except as specifically
required in the performance of Employee's services for the Company, Employee
will not directly or indirectly use, permit others to use, disseminate, or
disclose any Confidential Information.
 
          (b)  Employee may lecture upon, disseminate, and publish under
Employee's own name scientific papers arising from the work done in the course
of performance of services for the Company as reasonably determined by Employee.
 
          (c)  All rights, title and interest in all documents, records,
notebooks, correspondence, trademarks, servicemarks, copyrights, deposits of
microorganisms, cells or parts thereof, cell lines, parts and progeny thereof,
and all products made thereby that directly or indirectly relate to and arise
out of Employee's work under this Agreement shall belong to the Company, and
upon expiration or termination of this Agreement, Employee shall turn over to
the Company all such documents and material, including copies thereof, then in
Employee's possession or subject to his or her control, whether prepared by
him/her or others.
 
          (d)  For the purposes of this Agreement, "CONFIDENTIAL INFORMATION"
shall mean information disclosed to Employee or known to Employee as a
consequence of or through performance of services for the Company, whether or
not related to his or her duties at the Company, and includes trade secrets or
any other like information of value relating to the business and/or field of
interest of the Company,
 
 
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including, but not limited to, information relating to products, inventions,
disclosures, processes, systems, methods, formulas, patents, patent
applications, machinery, materials, research activities and plans, cost of
production, contract forms, prices, volume of sales, promotional methods, lists
of names or classes of customers, customer contacts and buyer lists. Information
shall be considered, for purposes of this Agreement, to be confidential if not
known by the trade generally, even though such information has been disclosed to
one or more third parties pursuant to distribution agreements, joint research
agreements, or other agreements entered into by the Company or any of its
affiliates. For purposes of this Agreement, information shall not be considered
confidential to the extent that such information is or becomes, through no fault
of Employee, part of the public domain, such information is independently known
to Employee, or such information is lawfully furnished to Employee by a third
party without restriction on disclosure.
 
          (e)  In addition to the foregoing, the Company shall also have such
rights as are provided by common law or any other applicable law for the
protection of confidential information.
 
          (f)  Employee recognizes that a client of the Company may have
specific requirements for the protection of information and agrees to execute
such documents as may be required by the client, if in the exercise of
reasonable discretion, he believes the documents should be executed.
 
          (g)  Employee understands and acknowledges that, in connection with
employment by the Company, Employee shall be expected to participate in programs
of training or skill development, which may be formal, informal, and/or on the
job, including those involving the Company's methodology and "business
processes"; and Employee further acknowledges and agrees that all records,
files, documents, or other materials concerning in any manner the Company, its
methods of operation, its clients, or any other facet of the business of the
Company or its clients, disclosed to Employee in the course of said programs or
in the course of employment, shall be deemed to be Confidential Information
within the meaning of this Agreement and shall not, during the period of
employment or at any time thereafter, be disclosed to others or used for
Employee's own benefit, except to the extent necessary in the ordinary course of
completing said program or in performing other duties assigned to Employee as an
employee of the Company.
 
     6.   Confidential Information of Others
 
          (a)  If Employee learned about confidential or proprietary information
which belongs to a former employer, Employee has not brought and will not bring
to the Company or make use of any such confidential and proprietary information,
trade secrets, materials, documents or ideas during employment by the Company
unless such information or ideas (i) become publicly available for reasons other
that actions by Employee, (ii) are independently developed by others at or on
behalf of the Company who do not receive access to such information from
Employee, or (iii) are received by the Company from a third party who had
possession of such information or ideas.
 
          (b)  Employee represents that Employee's performance of (i) all the
terms of this Agreement and (ii) all duties as an Employee of the Company, does
not and will not breach any agreement to keep in confidence confidential or
proprietary information acquired by Employee in confidence or in trust prior to
employment by the Company. Employee has not entered into, and Employee agrees
that Employee will not enter into, any agreement, either written or oral, in
conflict with the provisions of this Section 6.
 
          (c)  Employee will not bring on to the premises of the Company any
unpublished document or any property belonging to his or her former or
concurrent employers or companies, if any, unless consented to in writing by
such former or concurrent employers or companies.
 
          (d)  Employee recognizes that the Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on the Company's part to maintain the
confidentially of such information and to use it only for certain limited
purposes. Employee agrees that Employee owes the Company and such third parties,
during the term of employment and thereafter, a duty to hold all such
confidential or proprietary information in the strictest confidence and not to
disclose it to any person, firm, or corporation (except as necessary in carrying
out his or her work for the Company consistent with the Company's agreement with
such third party) or to use it for the benefit of anyone other than for the
Company or such third party.
 
 
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     7.   Inventions and Other Intellectual Property
 
          (a)  Employee agrees that all Inventions and Other Intellectual
Property (as hereinafter defined) made, developed, conceived, or completed by
Employee, individually or in conjunction with others during the term of this
Agreement (or, which having possibly been conceived prior hereto, may be
developed or completed during the term of this Agreement or thereafter ) shall
be the sole and exclusive property of the Company; provided such Inventions and
Other Intellectual Property: (i) are made, conceived, or completed with the
equipment, supplies, facilities or Confidential Information of the Company, its
subsidiaries, or affiliates, or (ii) are made, conceived, or completed by
Employee during the term of his or her employment with the Company unless
Employee develops the invention entirely on Employee's own time without using
the Company's equipment, supplies, facilities or Confidential Information, or
(iii) result from any work performed by Employee for the Company; provided,
however, that this Agreement does not apply to any Inventions and Other
Intellectual Property that qualify fully under Section 2870 of the California
Labor Code, a copy of which is attached as Exhibit B hereto.
 
          (b)  For the purposes of this Agreement, "INVENTIONS AND OTHER
INTELLECTUAL PROPERTY" shall mean any and all inventions, discoveries, concepts,
trademarks, servicemarks, copyrights and ideas, whether patentable or not,
including, but not limited to, processes, methods, formulas, compositions,
techniques, articles, and machines, as well as improvements thereof or know-how
related thereto, relating to the business and/or field of interest, including,
actual or anticipated research and development, of the Company.
 
          (c)  Employee shall, without royalty or any further consideration to
Employee therefor, but at the expense of the Company:
 
               (i)  Keep and maintain adequate and current written records of
all inventions and original works of authorship made by Employee (solely or
jointly with others) during the term of employment with the Company. The records
will be in the form of notes, sketches, drawings, and any other format that may
be specified by the Company. The records will be available and remain the sole
property of the Company at all times.
 
               (ii) As promptly as known or possessed by Employee, disclose to
the Company all information with respect to any Inventions and Other
Intellectual Property made solely or jointly with others during the term of
employment.
 
               (iii) Whenever so requested to do by the Company, promptly
execute and assign any and all applications, assignments, and other instruments
that the Company shall deem necessary to apply for and obtain letters patent of
the United States and of foreign countries for said Inventions and Other
Intellectual Property, and to assign and convey to the Company or to the
Company's nominee the sole and exclusive right, title, and interest in and to
the Inventions and Other Intellectual Property or any applications or patents
thereon.
 
               (iv) Whenever so requested to do by the Company, deliver to the
Company any Company-owned information in his/her possession for interference
purposes or other legal proceedings and testify in any interference or other
legal proceedings.
 
               (v)  Do such other acts as may be necessary in the opinion of the
Company to obtain and maintain United States and foreign letters patent for the
Inventions and Other Intellectual Property.
 
          (d)  Employee represents that (i) he/she is not obligated under any
consulting, employment or other agreement which would affect the Company's
rights or his/her duties under this Agreement, (ii) there is no action,
investigation, or proceeding pending or threatened, or any basis therefor known
to him/her involving his/her prior employment or any consultancy or the use of
any information or techniques alleged to be proprietary to any former employer,
and (c) the performance of his/her duties as an employee of the Company will not
breach, or constitute a default under any agreement to which he/she is bound,
including, without limitation, any agreement limiting the use or disclosure of
proprietary information acquired in confidence prior to engagement by the
Company. Employee agrees that he/she will not, in connection with his/her
employment by the Company, use or disclose to the Company any confidential,
trade secret or other proprietary information of any previous employer or other
person to which he/she is not lawfully entitled. Attached as Exhibit C of this
Agreement is a brief description of all Inventions made or conceived by Employee
prior to his/her employment with the Company which Employee desires to be
excluded from this Agreement.
 
 
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          (e)  Employee further agrees that the obligations and undertakings
stated in this Paragraph 7 shall continue beyond the termination of Employee's
employment with the Company, at the Company's expense.
 
     8.   Employee acknowledges that Employee has been informed of the current
policies, practices, and operating guidelines of the Company and agrees to
comply with all such policies, practices, and such other policies, practices and
operating guidelines as from time to time may be adopted by the Company and
disclosed to him/her or of which Employee is otherwise aware.
 
     9.   Non-Competition
 
          (a)  During the term of Employee's employment with the Company,
Employee will not: (i) own or have any interest, directly or indirectly, in, or
act as an officer, director, agent, employee, or consultant of, or assist in any
way or in any capacity, any person, firm, association, partnership, corporation,
or other entity which is in competition with the Company, (ii) divert or attempt
to divert any business or client from the Company, or (iii) directly or
indirectly entice, induce or in any manner influence any person who is, or shall
be, in the service of the Company to leave such services for the purpose of
engaging in a business, or being employed by or associated with any person,
firm, association, partnership, corporation or other entity, which is in
competition with the Company to the extent applicable law authorizes such
provisions. The language of this Agreement is intended to comply with California
Business and Professions Code ss. 16600 and other laws allowing fair competition
and is intended only to prevent unfair or unlawful competition or other conduct
or practices that the Company can lawfully restrict.
 
          (b)  Employee agrees that Employee will not at any time during or
after his or her employment with the Company reveal, divulge or make known to
any person, firm, corporation or other entity any knowledge or information or
any facts concerning any suppliers, customers, methods, processes, developments,
schedules, lists or plans of or relating to the business of the Company, except
as reasonably necessary, in Employee's judgment, to carry out Employee's duties
and/or responsibilities, and will retain all knowledge and information which
Employee has acquired or which Employee will acquire during his or her
employment therewith relating to such supplier, customers, methods, processes,
developments, schedules, lists and plans and the business of the Company for the
sole benefit of the Company, its successors or assigns, except as reasonably
necessary, in Employee's judgment, to carry out Employee's duties and/or
responsibilities.
 
          (c)  In the event any court shall finally hold that any provision of
this Paragraph 9 constitutes an unreasonable restriction against Employee,
Employee agrees that the provision hereof shall not be rendered void but shall
apply as to such extent as such court may judicially determine or indicate
constitutes a reasonable restriction under the circumstances involved.
 
          (d)  The provisions for this Paragraph 9 shall survive the termination
of the terms of this Agreement and shall run to and inure to the benefit of the
Company, its successors and assigns.
 
     10.  Non-Solicitation
 
          (a)  Employee further covenants and agrees that Employee shall not,
during the period of his or her employment, be employed by or provide services
to any present or former client of the Company with whom Employee has dealt or
attempted to deal in the capacity of business development, analyst, consultant,
or in any other capacity, except as reasonably necessary, in Employee's
judgment, to carry out Employee's duties and/or responsibilities.
 
          (b)  Employee shall make available to the Company any and all
information of which Employee has gained knowledge during the course of his or
her employment with respect to any client with which Employee has had contact.
 
          (c)  Upon termination of Employee's employment with the Company,
regardless of whether Employee or the Company initiates the termination of
employment, Employee shall promptly surrender to the Company all property
provided him/her by the Company for use in relation to his or her employment,
and, in addition, Employee shall surrender to the Company any and all sales
materials, lists of clients, customers and prospective customers, price lists,
files, patent applications, records, models, or other materials and information
of or pertaining to the Company or its clients, customers or prospective
customers or the products, business, and operations of the Company.
 
     11.  It is mutually agreed between the parties that the breach of Section
5(a) of this Agreement by Employee
 
 
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<PAGE>   5
 
will cause irreparable injury to the Company, not fully compensable by damages
in an action at law, and the rights and remedies of the Company hereunder may
therefore be enforced both at law and in equity, by injunction or otherwise; and
the rights and remedies of the Company hereunder shall be cumulative and not
alternative.
 
     12.  It is mutually understood and agreed that all agreements and covenants
contained herein are severable and that, in the event any of them shall be held
to be invalid or unenforceable to any extent or in any application by any court,
then the remainder of this Agreement and such agreement or covenant except to
such extent or in such application, shall not be affected hereby, and each and
every agreement and covenant of this Agreement and Addendum shall be valid and
enforced to the fullest extent and in the broadest application permitted by law.
 
     13.  This Agreement and the Addendum shall be governed, interpreted and
enforceable pursuant to the laws of the State of California. The Company and
Employee agree that either the United States District Court for the Northern
District of California (Ninth Circuit) or the Superior Court of the State of
California in and for the County of Santa Clara shall be the exclusive forum for
the resolution of any controversies or disputes hereunder.
 
     14.  Employee represents and agrees that Employee has had the opportunity
to discuss all aspects of this Agreement with his or her advisors, including an
attorney, if any, and that Employee has carefully read and fully understood all
of the provisions herein. Employee has had an opportunity to ask questions and
suggest alternative language. Employee agrees that the presumptions against the
drafter of a document shall not apply to any dispute regarding interpretation of
this Agreement. Employee acknowledges that, in executing this Agreement, except
as set forth in this Agreement and/or the Addendum, Employee does not rely and
has not relied on any representations or statements made by the Company or by
any of the Company's agents or representatives with regard to the subject
matter, basis or effect of this Agreement or otherwise. This Agreement and the
Addendum hereto incorporates the entire understanding between Employee and the
Company, recites the sole considerations for the promises exchanged, and fully
supersedes any and all prior agreements or understandings (written, oral, or
implied) between Employee and the Company pertaining to the subject matter of
this Agreement. In reaching this Agreement, Employee has not relied on any
statement or representation except those expressly stated in this Agreement or
the attached Addendum.
 
     15.  If any term or any condition in this Agreement in any way, whether
directly or indirectly, whether superficially or substantively, conflicts with
any term or condition contained in the attached Addendum, the term(s) and/or
condition(s) of the Addendum shall control in their entirety, and the
conflicting term(s) and/or condition(s) of this Agreement shall be completely
null and void, and of no further effect.
 
     16.  This Agreement shall become binding upon Employee immediately upon his
or her signing. This Agreement shall become binding on the Company when signed
by a person authorized by the Board of Directors of the Company.
 
     17.  No termination or amendment of this Agreement or the attached Addendum
or any provision hereof or thereof, or waiver of any right or remedy herein or
therein provided, shall be effective for any purpose unless specifically set
forth in writing, that is signed by the party or parties to be bound thereby and
that expressly states that it is modifying this "Employment and Confidential
Information Agreement" or the attached "Addendum." The waiver of any right or
remedy in respect of any occurrence or event on one occasion shall not be deemed
a waiver of such right or remedy in respect of the same or any similar
occurrence or event on any other occasion.
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
 
HYSEQ, INC.
 
By: /s/ GEORGE B. RATHMANN
   --------------------------------------------
   Name:  George B. Rathmann
   Title: President and Chief Executive Officer
 
EMPLOYEE
 
   /s/ TED W. LOVE
   --------------------------------------------
   Name: Ted W. Love
 
 
 
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<PAGE>   6
 
                        ADDENDUM TO EMPLOYMENT AGREEMENT
 
     This Addendum ("Addendum") to the Employment Agreement ("Agreement")
between Hyseq, Inc., a Nevada corporation ("Company" or "Hyseq"), with its
principal place of business at 670 Almanor Avenue, Sunnyvale, California, 94085,
and Dr. Ted W. Love ("Executive") is effective as of the date of the Agreement
("Effective Date").
 
                                   EMPLOYMENT
 
     1.1  Position and Duties: The Company employs Executive and Executive
accepts employment according to the terms and conditions set forth in the
Agreement and this Addendum.
 
          (a)  Executive shall serve as President and Chief Operating Officer
               ("COO") of Hyseq from the Effective Date until the date Hyseq
               promotes Executive to Chief Executive Officer ("CEO") and
               President of the Company. Executive shall have all the rights,
               responsibilities, authority, and titles commensurate with the
               position of President and COO. As long as Executive serves as
               President and COO, Executive shall report only to the CEO, Dr.
               George B. Rathmann, and the Company's Board of Directors
               ("Board").
 
          (b)  In his position as President and COO, Executive shall be
               responsible for all aspects of the Company's operations and all
               functional areas of the Company.
 
          (c)  Hyseq shall (x) promote Executive to President and CEO of the
               Company on or before July 1, 2002 (the "Promotion Date"), or (y)
               pay Executive four million dollars ($4,000,000), less the Stock
               Appreciation (as defined below), in one lump sum, on the
               Promotion Date or on any other applicable date as set forth in
               Section 3.2(b) or the date on which Executive's employment
               terminates before the Promotion Date other than for Cause (as
               defined below) or Good Reason (as defined below) exists (the
               applicable payment date is referred to in this Addendum as the
               "NonPromotion Date"); providing that if Company had Cause (as
               defined below) not to promote Executive to CEO, then Company
               shall not pay Executive the payment called for in this Section.
 
          (d)  Hyseq understands and acknowledges that Company's representation
               that it will pay Executive four million dollars, less the Stock
               Appreciation, if Company chooses not to promote Executive (unless
               Cause exists not to promote Executive) is a material
               representation inducing Executive to enter into the
 
 
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                   Hyseq, Inc. - Ted Love Employment Agreement
 
<PAGE>   7
 
               Agreement and this Addendum, and that Executive will not accept
               employment with the Company without this representation.
               Executive represents that, in reliance on the Company's
               representation, he has given up multiple opportunities to become
               Chief Executive Officer of other biotechnology companies.
 
          (e)  In addition, if the Company is required to pay Executive $4
               million less the Stock Appreciation pursuant to Sections 1.1(c)
               or 3.2(b), then during the period of time beginning on the
               NonPromotion Date and ending sixty (60) days after the
               NonPromotion Date, Executive, at his sole discretion, may sell
               all or any portion of his vested Option Shares (whether exercised
               or unexercised) ("Forced Sale Shares") to Hyseq and Hyseq shall
               be immediately required to purchase all Forced Sale Shares at the
               fair market value as of date Executive elects such sale (but in
               the case of vested but unexercised Shares, the fair market value
               less the exercise price).
 
          (f)  The Executive shall be appointed to the vacancy currently
               existing on the Company's Board of Directors ("Board") and
               thereafter, at all times while Executive is employed by the
               Company, the Company shall nominate to the Board and recommend to
               the shareholders that the shareholders elect Executive to the
               Company's Board.
 
          (g)  For purposes of this Addendum, "Stock Appreciation" means an
               amount equal to (x) the number of Executive's vested option
               Shares in excess of 150,000 Shares (regardless of whether such
               Shares have been exercised or forfeited) on the NonPromotion Date
               multiplied by (y) the amount resulting from taking (i) the
               closing price of Hyseq's common stock on the NASDAQ Stock Market
               on the NonPromotion Date and subtracting (ii) the exercise price
               of the vested option Shares.
 
     1.2  Best Efforts. Executive agrees to devote his full time and attention
to the Company, to use his best efforts to advance the business and welfare of
the Company, to render his services under the Agreement and this Addendum fully,
faithfully, diligently, competently and to the best of his ability.
Notwithstanding any other term in the Agreement and this Addendum, the Executive
may undertake any of the following activities, provided that such activities do
not materially interfere with the proper performance of his duties and
responsibilities under the Agreement and this Addendum:
 
          (a)  Executive may engage in charitable activities and community
               affairs.
 
          (b)  Executive may manage his personal investments and affairs.
 
 
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                   Hyseq, Inc. - Ted Love Employment Agreement
 
<PAGE>   8
 
          (c)  Executive may invest in, or own up to 5% of a publicly held
               company engaged in the same or similar business as the Company.
 
          (d)  Executive may serve as a director of, or advisor to any
               corporation which does not compete in any material way with the
               Company's business.
 
          (e)  Executive may participate in conferences, prepare or publish
               papers or books or teach; and,
 
          (f)  Executive may take on other positions of responsibility, with the
               approval of the Board, which approval shall not be unreasonably
               withheld.
 
     1.3  Location of Employment. Executive's principal place of employment
shall be at a location that is within thirty (30) miles of the Company's current
headquarters, unless the relocation of Executive's principal place of employment
by more than thirty (30) miles results in moving Executive's principal place of
employment closer to the Executive's current residence in Hillsborough,
California.
 
     1.4  Authorization to Work in the United States. The Immigration Reform and
Control Act of 1986 requires that Executive provide verification of identity and
legal right to work in the United States. Consequently, within three days of
beginning his employment with the Company, Executive must provide the Company
with proper documentation as required by the Employment Eligibility Verification
Form I-9.
 
                            COMPENSATION AND BENEFITS
 
     2.1  Base Salary. For services rendered by Executive under the Agreement
and this Addendum, the Company shall pay Executive a base salary of $485,000 per
year, less deductions required by law, payable in equal bi-monthly installments.
The Board shall review annually Executive's compensation, and the Board shall
adjust Executive's base salary if the performance of the Company or the services
of the Executive reasonably merit an adjustment; provided, however, that at all
times Executive's base salary shall be no lower than the highest base salary
paid by the Company to any other Company employee.
 
     2.2  Bonus Plan. The Executive shall participate in Company's management
bonus pool, with bonus payments to be determined and paid based upon written
performance objectives to be determined by the Compensation Committee of the
Company's Board.
 
     2.3  Stock Option. As a material inducement to Executive to enter into the
Agreement and this Addendum and as part of Executive's compensation, the Company
 
 
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                   Hyseq, Inc. - Ted Love Employment Agreement
 
<PAGE>   9
 
shall grant Executive a stock option ("Option") to purchase 500,000 shares
("Shares") of Hyseq's common stock at a per share exercise price equal to the
closing price of the Company's common stock on the NASDAQ Stock Market on the
date of grant. The Company represents that it will use every effort to make the
date of grant the Effective Date, or the next business day after the Effective
Date. The Option shall be an incentive stock option to the fullest extent
permitted by law and the Company's Stock Option Plan. The vesting commencement
date for the Option shall be the Effective Date. 150,000 Shares shall vest on
the date of grant. 87,500 Shares shall vest on each one (1) year anniversary of
the Effective Date thereafter, until all Shares are fully vested or Executive's
employment terminates, whichever occurs first, subject in all cases to the
acceleration and other provisions set forth in this Addendum. The Option shall
terminate on the ten (10) year anniversary of the Effective Date and shall be
governed by an option agreement. The Executive shall receive the benefit, with
respect to all options issued to him now or in the future, of any changes in the
Company's stock option vesting schedule. All of Executive's options shall be
amended to provide for prorata monthly vesting after the first anniversary date
of the option in the event any optionee under any Company stock option plan
receives monthly vesting at any time.
 
     2.4  Put. Provided that Executive has not previously exercised the 150,000
Shares which immediately vest under the Option, at any time after Executive has
been a Company employee for 12 months, but before the third anniversary of
Executive's first day of employment (regardless of whether Executive is employed
by the Company), Executive shall have the right, but not the obligation, to
forfeit the option to purchase 150,000 Shares (and the post termination exercise
period for the 150,000 Shares shall be extended to the third anniversary date of
Executive's employment unless extended for a longer period by Section
3.2(a)(iii)). Immediately on receiving notice that Executive has forfeited his
option to purchase 150,000 Shares, the Company shall pay Executive the sum of
(x) two million dollars ($2,000,000), plus (y) the aggregate amount of all
interest accrued on the Loan (described in Section 2.5 below) up to the date
Company makes the payment required by this paragraph, and on the date the
Company makes the payment required under this Section 2.4 the Loan shall become
immediately due and payable in full. For purposes of this paragraph only, if
Executive's employment terminates before the one year anniversary of the first
date of his employment and the termination is other than for Cause (as defined
below) or Good Reason (as defined below) exists, then Executive will be deemed
to be a Company employee for 12 months, and shall have the right to forfeit the
150,000 Shares until the third anniversary of the first day of his employment
(and the post termination exercise period for the 150,000 Shares shall be
extended to the third anniversary date of Executive's employment).
 
     2.5  Promissory Note.
 
          (a)  The Company shall, at Executive's sole discretion, loan Executive
               two million dollars ($2,000,000) (the "Loan"), in increments, and
               at times, chosen by Executive. The interest rate on the Loan
               shall be the lowest applicable federal interest rate (or such
               other higher
 
 
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<PAGE>   10
 
               rate of interest, if required, to constitute a market rate of
               interest as contemplated by the Rules and Regulations of the
               Financial Accounting Standards Board and the U.S. Securities and
               Exchange Commission) on the day the Loan (or Loan increments) is
               issued. The Loan shall be due and payable five (5) years from the
               Effective Date (the "Loan Due Date"). Interest shall accrue, but
               shall be deferred and all interest and principal shall be due on
               the Loan Due Date. It is the intent of the parties that interest
               accruing and deferred under the Loan not be reportable as taxable
               income to Executive in a year or years prior to the interest
               payment being due pursuant to the Loan.
 
          (b)  In the event any state or federal taxing agency determines that
               interest is reportable as taxable income to Executive in a year
               or years prior to the Loan Due Date, then Company agrees to
               extend Executive one or more promissory note(s) at the interest
               rate described in 2.5(a) in order to cover the tax, and other
               amount, if any, paid by Executive on this additional taxable
               income.
 
     2.6  Contingencies. In the event that any statute or regulation or any
contract between Executive and/or Company and any Company underwriter, prevents
Executive and Company from consummating any of the securities transactions
described in Sections 1.1 or 2.4 or 3.2 of this Agreement, then (x) the
transaction shall not take place on the original transaction date, (y) the
transaction shall take place at the first date when legally and contractually
permissible, and (z) Company shall pay Executive the sum that Executive would
have received on the original transaction date (i.e., either the NonPromotion
Date pursuant to Sections 1.1(c) and 1.1(e) or the date of the Put pursuant to
Section 2.4, or the applicable date pursuant to Section 3.2(b)); provided that
in the case of a sale pursuant to Section 2.4 above, (i) Company shall also pay
the aggregate amount of all interest accrued on the Loan between the original
transaction date and the date the transaction takes place pursuant to this
Section 2.6 and (ii) if applicable, the term of the Loan shall be extended until
the first date when the transaction is legally and contractually permissible.
 
     2.7  Reimbursement of Expenses. The Company shall reimburse Executive for
actual and reasonable business expenses in accordance with Company policy. The
Company shall also reimburse Executive for all reasonable legal and accounting
expenses and all professional membership dues and continuing professional
education in accordance with Company policy. In addition, Company shall
reimburse Executive for all reasonable financial counseling and legal expenses
incurred in connection with the negotiation of the Agreement and this Addendum.
 
     2.8  Indemnification Agreement. The Company and Executive shall enter into
an indemnification agreement in the form of agreement attached as Exhibit A.
 
 
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<PAGE>   11
 
                       TERMINATION AND SEPARATION PACKAGE
 
     3.1  At Will Employment. Executive and the Company agree that Executive's
employment with the Company is "at-will." This means that either party may
terminate Executive's employment, with or without cause. However, any
termination of Executive's employment shall be subject to the terms and
conditions of the Agreement and this Addendum, including without limitation, the
Company's obligation to pay and/or provide the Separation Package as set forth
in Section 3.2(a) and, if applicable, the additional payments referred to in
Section 3.2(b) of this Addendum.
 
     3.2  Involuntary Termination, Good Reason to Resign, and Change of Control.
 
          (a)  Separation Package in the Event of Termination Without Cause
               and/or Good Reason to Resign Exists. In the event that
               Executive's employment terminates (x) other than for Cause
               (defined below) if terminated by the Company, and/or (y) Good
               Reason (defined below) exists for Executive to terminate, then
               the Company shall (i) immediately accelerate the vesting of 100%
               of Executive's then unvested Option Shares so that Executive's
               vested Option Shares and 100% of all unvested Option Shares are
               fully vested and immediately exercisable, (ii) immediately
               accelerate the vesting of 100% of all unvested shares of all
               options issued to and/or granted to Executive in the first four
               (4) years of Executive's employment ("New Option Shares") so that
               Executive's vested New Option Shares and 100% of all unvested New
               Option Shares are fully vested and immediately exercisable, (iii)
               extend by eighteen (18) months the time period Executive has to
               exercise any vested Option Shares and/or New Options Shares, (iv)
               immediately pay Executive, in one lump sum, a sum equal to twelve
               (12) months of Executive's then current base salary, and (v)
               continue the health, disability, and life insurance benefits for
               Executive (including his family) for the twelve (12) months
               following the termination date or Good Reason Termination Date at
               the same level of benefits as existed immediately before the
               termination date or Good Reason Termination Date. The benefits
               set forth in this Section 3.2(a) are referred to as the
               "Separation Package".
 
          (b)  In addition, in the event (x) Executive has not been Hyseq's
               Chief Executive Officer for at least six (6) months before the
               termination of his employment other than for Cause (defined
               below) and/or Good Reason (defined below) exists, or (y)
               Executive has been promoted to Chief Executive Officer and
               President in anticipation of a Change of Control and is not
               employed as the surviving
 
 
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<PAGE>   12
               entity's Chief Executive Officer and President for at least the
               one (1) year period beginning with the effective date of the
               Change of Control and ending on the one year anniversary of the
               effective date of the Change of Control (unless Executive is
               terminated for Cause), then (i) the Company shall immediately pay
               Executive four million dollars ($4,000,000), less the Stock
               Appreciation (but using the applicable event date instead of the
               NonPromotion Date for purposes of making the calculation) and
               (ii) Executive shall have the right to sell any or all of his
               vested Option Shares to Hyseq pursuant to Section 1.1(e) above
               (but using the applicable event date instead of the NonPromotion
               Date for purposes of determining the beginning of the 60 day
               period).
 
          (c)  Benefits. Following termination, Executive shall cease to be a
               Company employee and shall not be entitled to any benefits other
               than the Separation Package as set forth in Section 3.2(a) and,
               if applicable, the additional payments referred to in Section
               3.2(b).
 
          (d)  Termination For Cause and/or Resignation Without Good Reason. In
               the event the Company terminates Executive for "Cause" as "Cause"
               is defined below, and/or Executive terminates without "Good
               Reason" as "Good Reason" is defined below, Executive shall not
               receive the Separation Package. For purposes of the Agreement and
               this Addendum, a resignation tendered by Executive pursuant to a
               direct request of the Board where no Cause exists shall be deemed
               an involuntary termination without Cause, and Executive shall be
               entitled to the Separation Package.
 
     3.3  Cause. "Cause" shall mean (1) Executive's willful refusal or willful
failure to comply with a lawful instruction of the Board, or (2) Executive's
conviction of any felony involving an act of moral turpitude. The Company may
not terminate Executive for Cause under subsection (1) above unless the Company
gives Executive written notice of its intent to terminate Executive for Cause
with an explicit written explanation for all reasons for the for Cause
termination, and the Company, in good faith, permits Executive thirty (30) days
to cure the alleged wrongs. If the Executive cures the alleged wrongs, within
thirty (30) days of such notice, he cannot be terminated for Cause.
 
 
     3.4  Good Reason. "Good Reason" shall mean (1) the material reduction or
material modification of Executive's authority, duties, title or
responsibilities without his prior written consent, provided that a change in
the number of persons reporting to the Executive shall not, by itself,
constitute Good Reason, or (2) the material reduction or material modification
of Executive's base salary, Executive's stock option rights as set forth in this
Agreement or employee benefits without his prior written consent; or (3) any
requirement that Executive move his principal place of employment more than
thirty (30) miles from the Company's current headquarters, unless the relocation
of Executive's
 
 
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<PAGE>   13
 
principal place of employment by more than thirty (30) miles results in moving
his principal place of employment closer to the Executive's current residence in
Hillsborough, California; or (4) Hyseq's failure to promote Executive to Chief
Executive Officer and President on or before the Promotion Date (unless the
Company had Cause not to promote Executive to CEO); or (5) in the event of a
Change of Control, if Executive is not employed as the surviving entity's Chief
Executive Officer and President for at least the one (1) year period beginning
with the effective date of the Change of Control and ending on the one year
anniversary of the effective date of the Change of Control (unless Executive is
terminated for Cause). Executive shall give the Company written notice of his
intent to resign for Good Reason ("Notice of Good Reason") thirty (30) days
before the date he will terminate his employment ("Good Reason Termination
Date"). In the event the Company disputes that Executive has Good Reason, the
Company shall inform Executive in writing before the Good Reason Termination
Date of every reason that the Company disputes Executive's Good Reason claim. In
the event that the Company disputes the existence of Good Reason, Executive, at
his sole discretion, shall have the right to withdraw his notice of intent to
resign for Good Reason and to continue his employment under the same terms and
conditions as if no Notice of Good Reason had been given.
 
     3.5  Change of Control. "Change of Control" shall mean (1) any event in
which the Company sells, transfers, or disposes of by other means all or
substantially all of the Company's assets (or consummation of any transaction
having similar effect), or (2) the dissolution or liquidation of the Company, or
(3) any merger, consolidation or transfer of securities of the Company with, to
or into another corporation, entity or person, other than a merger,
consolidation or transfer of securities in which the holders of more than 50% of
the shares of capital stock of the Company outstanding immediately prior to such
transaction continue to hold (either by the voting securities remaining
outstanding or by their being converted into voting securities of the surviving
entity) more than 50% of the total voting power represented by the voting
securities of the Company, or such surviving entity, outstanding immediately
after such transaction.
 
     3.6  Death. In the event of Executive's death while Executive is an
employee of the Company, the Company shall pay the Separation Package set forth
in Sections 3.2(a)(i), (ii), (iii), (iv) and (v) of this Addendum to Executive's
heirs.
 
     3.7  Disability. In the event of Executive's Disability for any period of
at least six consecutive months while Executive is an employee of the Company,
the Company shall have the right, which may be exercised in its sole discretion,
to terminate Executive. In the event the Company elects to terminate Executive,
the Company shall pay Executive the Separation Package set forth in Sections
3.2(a)(i), (ii), (iii), (iv) and (v) of this Addendum. For purposes of this
Addendum, "Disability" shall mean the inability of Executive to perform the
employment services called for in this Agreement by reason of physical or mental
illness or incapacity as determined by a physician chosen by Executive and
reasonably satisfactory to Company or its legal representative.
 
 
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<PAGE>   14
 
                              ADDITIONAL PROVISIONS
 
     4.1  Successors, Binding Agreement. The Agreement and this Addendum shall
not automatically be terminated by the voluntary or involuntary dissolution of
the Company or by any merger or consolidation, whether or not the Company is the
surviving or resulting corporation, or upon any transfer of all or substantially
all of the assets of the Company. In the event of any such merger, consolidation
or transfer of assets, the provisions of the Agreement and this Addendum shall
bind and inure to the benefit of the surviving or resulting corporation, or the
corporation to which such assets shall have been transferred, as the case may
be; provided, however, that the Company will require any successor to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform the Agreement and the Addendum in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
 
     4.2  No Mitigation. Executive shall have no duty to mitigate any breach of
the Agreement and/or this Addendum.
 
     4.3  Headings. Section headings in the Agreement and this Addendum are for
convenience only and shall be given no effect in the construction or
interpretation of the Agreement and this Addendum.
 
     4.4  Notice. All notices made pursuant to the Agreement and this Addendum,
shall be given in writing, delivered by a generally recognized overnight express
delivery service, and shall be made to the Company's principal place of
business, attention Legal Department, and to the Executive's residence.
 
     4.5  Facsimile Signatures. This Addendum may be entered into by facsimile
signatures, and in counterparts, all of which taken together shall constitute
one original Agreement.
 
 
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<PAGE>   15
 
     IN WITNESS WHEREOF, the parties execute and deliver this Agreement as of
the day and year first above written.
 
HYSEQ, INC.
 
Date: January 8, 2001                   By: /s/ GEORGE B. RATHMANN
                                           -------------------------------------
 
                                           George B. Rathmann
                                           -------------------------------------
                                           Print Name
 
                                           President and Chief Executive Officer
                                           -------------------------------------
                                           Print Title
 
 
TED W. LOVE
 
Date: January 11, 2001                  By: /s/ TED W. LOVE
                                           -------------------------------------
 
 
 
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</TEXT>
</DOCUMENT>