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                                                                    EXHIBIT 10.4

                         EXECUTIVE EMPLOYMENT AGREEMENT

        THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement"), dated
as of August 23, 1999, is entered into by and between N2H2, INC., a Washington
corporation (the "Company") and DAVID W. ARNOLD, a resident of the State of
Washington (the "Executive").

        WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and

        WHEREAS, Executive is willing to serve in the employ of the Company as
Vice President - Chief Operating Officer of the Company for said period; and

        WHEREAS, the parties desire by this writing to set forth the terms and
conditions of the employment relationship between the Company and Executive.

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

        1. Employment. The Company hereby employs Executive, and Executive
agrees to accept such employment, upon the terms and conditions herein set
forth.

        2. Employment Period. The initial term of employment hereunder shall
commence on the date hereof and continue for a period of two (2) years ending on
August 22, 2001 (the "Initial Term"), subject to earlier termination as
provided herein. If Executive's employment is not earlier terminated, following
the Initial Term, this Agreement and Executive's employment hereunder shall
renew indefinitely until terminated by either party in accordance with Section 5
below (the "Employment Period").

        3. Position and Duties. Executive hereby agrees to serve as an employee
of the Company as Vice President - Chief Operating Officer. Executive shall
report to the President or such other officer(s) as designated by the Board of
Directors of the Company (the "Board"). Executive shall devote his best efforts
and his full business time and attention to the performance of services to the
Company in accordance with the terms hereof and as may reasonably be requested
by the Board, the President or other Board-designated officer of the Company.

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        4. Compensation and Other Terms of Employment.

                (a) Compensation. In consideration of the performance of his
duties hereunder, during the Employment Period, the Company agrees to pay
Executive during the Term of his employment at a base salary of Two Hundred
Thousand and No/100 Dollars ($200,000.00) per annum (the "Base Compensation").
All amounts payable to Executive under this Section 4(a) shall be paid in
accordance with the Company's regular payroll practices (e.g., timing of
payments and standard employee deductions, such as income tax, Social Security
and Medicare withholdings). Base Compensation shall increase by ten percent
(10%) during each twelve (12) month period beginning October 1, 2000 if the
Company's gross revenues reflected in its audited financial statements for the
fiscal year ending September 30, have increased by at least one hundred percent
(100%) over the gross revenues for the immediately preceding fiscal year.

                (b) Bonus. In addition to the Base Compensation described in
Section 4(a) above and any additional bonuses approved by the Board, Executive
shall receive a quarterly bonus in the amount equal to 1.8% of the increase, if
any, of the Company's gross revenues during such quarter over the gross revenues
for the same quarter during the immediately preceding year. For purposes of this
Section 4(b), gross revenues shall be computed in accordance with generally
accepted accounting principles consistently applied. Notwithstanding the
foregoing, the amount of bonus compensation pursuant to this Section 4(b) during
any Company fiscal year shall not exceed seventy percent (70%) of Executive's
Base Compensation during such fiscal year. Bonus compensation for any quarter
shall be payable on the 15th day of the month following the end of the quarter
and shall be subject to standard employee deductions.

                (c) Business Expenses. During the Employment Period, upon
presentation of vouchers and similar receipts, Executive shall be entitled to
receive reimbursement in accordance with the policies and procedures of the
Company maintained from time to time for all reasonable business expenses
actually incurred in the performance of his duties hereunder.

                (d) Vacation. During the Employment Period, Executive shall be
entitled to four (4) weeks paid annual vacation. Executive's vacation will be
scheduled at those times most convenient to the Company's business.

                (e) Benefits. During the Employment Period, the Company shall
provide to Executive such other employment benefits as may from time to time, be
made generally available to executives of the Company, including, without
limitation, the opportunity to participate in a group health insurance plan
(including coverage of Executive's family) and other benefit plans, if any are
in existence, in accordance with the terms of such plans, which benefits are
intended to be substantially similar to those provided by the Company as of the
date hereof (assuming availability at costs consistent with and comparable to
those currently paid by the Company); provided, however, that the Company shall
not be required to establish, continue or maintain any benefit plans.


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                (f) Additional Benefits. The Company shall reimburse Executive
on a monthly basis for reasonable commuting costs, parking, health club dues and
high speed Internet access at home.

        5. Termination of Employment. Executive's employment shall be terminated
on any of the following occurrences:

                (a) Executive's Permanent Disability. For purposes of this
Agreement, "Permanent Disability" means an illness, injury or other physical or
mental condition continuing for at least ninety (90) consecutive days, arising
at any time during the Employment Period, unless with reasonable accommodation
Executive could perform the essential functions of his position and making such
accommodation would not result in an undue hardship to the Company. If
Executive's employment is terminated because of Executive's Permanent
Disability, the Company shall continue to pay all Base Compensation and pro rata
bonus amounts accrued pursuant to Sections 4(a) and (b) for the longer of (i)
the remaining Initial Term of this Agreement or (ii) twelve (12) months.

                (b) Executive's Death. If Executive's employment is terminated
because of Executive's death, the Company shall pay to Executive's personal
representative (on behalf of Executive's estate), within 60 days after the
Company receives written notice of such representative's appointment, all Base
Compensation and pro rata bonus amounts, if any, accrued pursuant to Sections
4(a) and 4(b) above through the date of termination, and shall continue to pay
all Base Compensation and pro rata bonus amounts, if any, accrued pursuant to
Sections 4(a) and (b) for the longer of (i) the remaining Initial Term of the
Agreement or (ii) twelve (12) months.

                (c) For Cause. If Executive's employment is terminated with
Cause (as defined in Section 6(a) below), the Company shall pay to Executive all
Base Compensation accrued through the date of termination pursuant to Sections
4(a) and 4(b) above, whereupon the Company shall have no further obligations to
Executive under this Agreement. Executive and his dependents, if any, shall also
be entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.

                (d) Termination By The Company Without Cause or Voluntary
Termination By Executive With Good Reason. If Executive's employment with the
Company is terminated by the Company without Cause, or is Voluntarily Terminated
(as defined in Section 6(b) below) by Executive with Good Reason (as defined in
Section 6(c) below), the Company shall pay to Executive all Base Compensation
and pro rata bonus amounts, if any, accrued pursuant to Sections 4(a) and 4(b)
above through the date of such termination and shall continue to pay Executive's
Base Compensation and bonus for a period eighteen months (18) months thereafter
(the "Severance Period"). Those unvested stock options which are scheduled to
vest between the date of termination and the end of the Severance Period shall
be deemed to vest immediately.


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Executive and his dependents, if any, shall also be entitled to any continuation
health insurance coverage rights available under applicable law.

                (e) Voluntary Termination By Executive Without Good Reason. If
Executive's employment with the Company is Voluntarily Terminated by Executive
without Good Reason, the Company shall pay to Executive all Base Compensation
and bonus accrued through the date of termination pursuant to Sections 4(a) and
4(b) above, whereupon the Company shall have no further obligations to Executive
under this Agreement. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.

                (f) Voluntary Termination By Executive Following Change in
Control. If Executive's employment with the Company is Voluntarily Terminated by
Executive within 30 days of a Change in Control (as defined in Section 6(d)
below), the Company shall pay to Executive all Base Compensation and bonus
amounts accrued pursuant to Sections 4(a) and 4(b) through a period equal to the
Severance Period. All unvested stock options shall be deemed to vest
immediately. Executive and his dependents, if any, shall also be entitled to any
continuation of health insurance coverage rights available under the applicable
law.

                (g) Termination Obligations.

                        (i) Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by Executive in the
course of or incident to his employment by the Company, belongs to the Company
and shall be promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information belonging, or relating to the business of, the Company
or any affiliate. Following termination, Executive will not retain any written
or other tangible materials containing any proprietary information of the
Company or any affiliate.

                        (ii) Upon termination of the Employment Period,
Executive shall be deemed to have resigned from all offices, directorships and
similar positions then held with the Company or any affiliate.

                        (iii) The representations and warranties contained
herein and Executive's obligations under Sections 9 and 10 shall survive
termination of the Employment Period and the expiration or termination of this
Agreement. Any provision hereof required to give meaning and effect to such
surviving provisions shall also survive the termination of the Employment Period
and the expiration or termination of this Agreement.


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        6. Definitions. For the purposes of this Agreement the following terms
and phrases shall have the following meanings:

                (a) "Cause" shall mean a termination of Executive's employment
by the Company due to (i) Executive's failure or refusal to perform his duties,
responsibilities or obligations hereunder after at least fourteen (14) days'
prior written notice regarding any such failure or refusal, (ii) Executive's
breach of any noncompetition or confidentiality agreement with the Company;
(iii) the willful misappropriation of funds or property of the Company; (iv) use
of alcohol or drugs which interferes with performance of Executive's obligations
under this Agreement, continuing after at least thirty (30) days' prior written
notice; (v) conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation; or (vi) the commission by Executive of any willful
or intentional act in disregard of the interests of the Company which could
reasonably be expected to materially injure the reputation, business or business
relationships of the Company, provided, however, that a good faith mistake in
the normal course of business shall not be considered "Cause" under this Section
6(a).

                (b) "Voluntary Termination" shall mean the termination by
Executive of his employment by the Company by voluntary resignation or any other
means other than (i) death or Permanent Disability, (ii) simultaneous with
termination for Cause or (iii) simultaneous with or following an event which,
whether or not known to the Company at the time of such Voluntary Termination by
Executive, would constitute Cause.

                (c) "Good Reason" shall mean, with respect to a Voluntary
Termination, (i) if (A) such Voluntary Termination occurs within the thirty (30)
day period immediately following a permanent material reduction of Executive's
duties and responsibilities or a permanent change in Executive's duties and
responsibilities such that Executive's duties and responsibilities are
inconsistent with the type of duties and responsibilities of Executive in effect
immediately prior to such reduction or change, (B) such Voluntary Termination
promptly follows a reduction in Executive's benefits, or (C) the President or
the Board otherwise determines that a Voluntary Termination by Executive is for
"Good Reason" under the circumstances then prevailing, and (ii) if Executive
provides written notice of such Good Reason to the Company and the Company does
not correct the circumstances giving rise to such Good Reason during the
following 30-day period. The Company's termination or material breach of this
Agreement without Cause shall constitute Good Reason.

                (d) "Change In Control" means the occurrence of any one of the
following events:

                        (i) any recapitalization, consolidation or merger of the
Company in which the Company is not the continuing or surviving entity or which
contemplates that all or substantially all of the business and/or assets of the
Company shall be controlled by another person or entity other than the person or
entity which controlled the Company immediately prior to such recapitalization,
consolidation or merger;


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                        (ii) any sale, lease, exchange or transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company; or

                        (iii) approval by the members of the Company of any plan
or proposal for the liquidation or dissolution of the Company, unless such plan
or proposal is abandoned within 60 days following such approval.

        7. Stock Options. Subject to the discretion of the Company's Board of
Directors Executive shall be entitled to participate in any Company stock option
or stock purchase plan.

        8. Records and Confidential Information.

                (a) Executive acknowledges that, in connection with the
performance of his duties during the Term of this Agreement, the Company will
make available to Executive, or Executive will have access to, certain
Confidential Information (as defined below) and Trade Secrets (as defined by the
Uniform Trade Secrets Act) of the Company and its affiliates. Executive
acknowledges and agrees that any and all Confidential Information or Trade
Secrets of the Company learned or obtained by Executive during the course of his
employment by the Company or otherwise (including, without limitation,
information that Executive obtained through or in connection with his ownership
of and employment by the Company prior to the date hereof) whether developed by
Executive alone or in conjunction with others or otherwise, shall be and is the
property of the Company and its affiliates.

                (b) Confidential Information and Trade Secrets of the Company
will be kept confidential by Executive, will not be used in any manner which is
detrimental to the Company, will not be used other than in connection with
Executive's discharge of his duties hereunder, and will be safeguarded by
Executive from unauthorized disclosure.

                (c) Following Executive's termination hereunder, as soon as
possible after the Company's written request, Executive will return to the
Company all written Confidential Information and Trade Secrets of the Company
will have been provided to Executive, and Executive will destroy all copies of
any analyses, compilations, studies or other documents prepared by Executive or
for Executive's use containing or reflecting any Confidential Information or
Trade Secrets of the Company. Within 5 business days of the receipt of such
request by Executive, Executive shall, upon written request of the Company,
deliver to the Company a notarized document certifying that such written
Confidential Information and Trade Secrets of the Company have been returned or
destroyed in accordance with this Section.

                (d) For the purposes of this Agreement, "Confidential
Information" shall mean all confidential and proprietary information to the
Company, and its affiliates, including, without limitation, the Company's
marketing strategies, pricing policies or characteristics, customers and
customer information, product or product specifications, designs, manufacturing
processes, manufacturing costs, cost of materials, customer lists, business or
business prospects, plans, proposals, codes, marketing studies, research,
reports, investigations, or other information of similar character. For purposes
of this Agreement, Confidential Information shall not include and


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Executive's obligations under this Section shall not extend to (i) information
which is generally available to the public or within the industry, (ii)
information obtained by Executive from third persons not under agreement to
maintain the confidentiality of the same and (iii) information which is required
to be disclosed by law or legal process.

                (e) This Section is not intended to, and does not, limit in any
way Executive's duties and obligations to the Company under statutory and common
law not to disclose or make personal use of any Confidential Information or
Trade Secrets of the Company.

        9. Assignment of Inventions.

                (a) Definition of Inventions. "Inventions" means discoveries,
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes, except any of
the foregoing that (i) is not related to the business of the Company or its
affiliates, or the Company's (and its affiliates') actual or demonstrable
research or development (ii) does not involve the use of any equipment,
supplies, facility or Confidential Information of the Company, (iii) was
developed entirely on Executive's own time, and (iv) does not result from any
work performed by Executive for the Company.

                (b) Assignment. Executive agrees to and hereby does assign to
the Company, without further consideration, all of his right, title and interest
in any and all Inventions he may make during the Term hereof.

                (c) Duty to Disclose and Assist. Executive agrees to promptly
disclose in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subject to his reasonable availability if he is not. If the Company cannot,
after reasonable effort, secure Executive's signature on any document or
documents needed to apply for or prosecute any patent, copyright, or other right
or protection relating to an Invention, whether because of his physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
in his name and stead for the purpose of executing and filing any such
application or applications and taking all other lawfully permitted actions to
further the prosecution and issuance of patents, copyrights, or similar
protections thereon, with the same legal force and effect as if executed by him.

                (d) Ownership of Copyrights. Executive agrees that any work
prepared for the Company, which is eligible for copyright protection under the
laws of the United States or any other country, shall be a work made for hire
and ownership of all copyrights (including all renewals and extensions) therein
shall vest in the Company. If any such work is deemed not to be a work made for
hire for any reason, Executive hereby grants, transfers and assigns all right,
title and interest in such work and all copyrights in such work and all renewals
and extensions thereof to the Company,


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and agrees to provide all assistance reasonably requested by the Company in the
establishment, preservation and enforcement of the Company's copyright in such
work, such assistance to be provided at the Company's expense but without any
additional compensation to Executive. Executive hereby agrees to and does hereby
waive the enforcement of all moral rights with respect to the work developed or
produced hereunder, including without limitation any and all rights of
identification of authorship and any and all rights of approval, restriction or
limitation on use or subsequent modifications.

                (e) Litigation. Executive agrees to render assistance and
cooperation to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subject to his reasonable
availability if he is not.

        10. Covenants Not to Compete.

                (a) Non-Interference with Customer Accounts. Executive covenants
and agrees that, during the Employment Period, and for a period of eighteen (18)
months after the date of termination of Executive's employment with the Company,
Executive shall not, directly or indirectly, personally or on behalf of any
other person, business, corporation, or entity, contact or do business with any
customer of the Company with respect to any Internet filtering product or
service which is competitive with any product or service which was sold,
provided, or under development by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. This covenant applies to those customers and the related
entities of those customers to which the Company sold its Internet filtering
products or services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company, and those
prospective customers with which the Company actively pursued sales or the
provision of services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company.

                (b) Noncompetition. Executive covenants and agrees that, during
the Employment Period, and for a period of eighteen (18) months after the date
of termination of Executive's employment with the Company, Executive shall not,
directly or indirectly, own an interest in, operate, join, control, advise, work
for, serve as a director of, have a financial interest which provides any
control of, or participate in any corporation, partnership, proprietorship,
firm, association, person, or other entity (collectively, "Businesses")
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing any Internet filtering products, goods, equipment, or services
which are similar to any Internet filtering products, goods, equipment or
services produced, sold or provided by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. THE PARTIES ACKNOWLEDGE THAT THE COMPANY PROVIDES SERVICES ON
A WORLD WIDE BASIS AND, ACCORDINGLY THAT IT IS NOT FAIR OR APPROPRIATE TO
RESTRICT THE FOREGOING COVENANT GEOGRAPHICALLY.


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                (c) This covenant does not prohibit the mere ownership of less
than two percent (2%) of the outstanding stock of any publicly traded
corporation as long as Executive is not otherwise in violation of this covenant.

                (d) Non-Diversion. During the Employment Period, and for a
period of eighteen (18) months after the date of termination of Executive's
employment with the Company, Executive shall not divert or attempt to divert or
take advantage of or attempt to take advantage of any actual or potential
business or opportunities of the Company or its subsidiaries or affiliates which
Executive became aware of as the result of his employment with the Company.

                (e) Non-Recruitment. Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, Executive agrees that during the Employment Period and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not (i) hire away any individuals who were
employed by the Company or its subsidiaries or affiliates during the
twelve-month period prior to the date of termination of Executive's employment
with the Company or (ii) directly or indirectly entice, solicit or seek to
induce or influence any such employees to leave their employment with the
Company or its subsidiaries or affiliates.

                (f) Non-Disparagement. Executive and the Company mutually
covenant and agree that, during the Employment Period and for a period of
eighteen (18) months after the date of termination of Executive's employment
with the Company, neither shall, directly or indirectly disparage the other.

                (g) Remedies. Both parties acknowledge that should they
materially breach this Agreement, it will be difficult to determine the
resulting damages to the non-breaching party, and, in addition to any other
remedies the non-breaching party may have, the non-breaching party shall be
entitled to temporary injunctive relief without being required to post a bond
and to permanent injunctive relief without the necessity of proving actual
damage. In the event of any action or proceeding to interpret or enforce this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs, whether or not litigation is actually commenced and
including litigation of any appeal. Failure of either party to seek any or all
remedies in one case does not restrict that party from seeking any remedies in
another situation, and no such action shall not constitute a waiver of any of
the party's rights.

                (h) Severability and Modification of Any Unenforceable Covenant.
It is the parties' intent that each of the covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
the parties' intent that if any term, provision or condition of the covenants is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the provisions thereof shall remain in full force and effect
and shall in no way be affected, impaired or invalidated. Finally, it is also
the parties' intent that if a court should determine any of the covenants are
unenforceable because of over breadth, then the court shall modify said covenant
so as to make it reasonable and enforceable under the prevailing circumstances.


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                (i) Tolling. In the event of the breach by Executive of any
covenant the running of the period of restriction shall be automatically tolled
and suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the covenants.

        11. No Assignment. This Agreement and the rights and duties hereunder
are personal to Executive and shall not be assigned, delegated, transferred,
pledged or sold by Executive without the prior written consent of the Company.
Executive hereby acknowledges and agrees that the Company may assign, delegate,
transfer, pledge or sell this Agreement and the rights and duties hereunder (a)
to an affiliate of the Company or (b) to any third party acquiring through
merger, consolidation or purchase all or substantially all of the business
and/or assets of the Company. This Agreement shall inure to the benefit of and
be enforceable by the parties hereto, and their respective heirs, personal
representatives, successors and assigns.

        12. Miscellaneous Provisions.

                (a) Payment of Taxes. To the extent that any taxes become
payable by Executive by virtue of any payments made or benefits conferred by the
Company, the Company shall not be liable to pay or obligated to reimburse
Executive for any such taxes or to make any adjustment under this Agreement. Any
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Compensation and any bonus, shall be reduced by any
required withholding for federal, state and/or local taxes and other appropriate
payroll deductions.

                (b) Insurance. The Company may, from time to time, apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance on Executive in any sum or sums that it may deem
necessary to protect its interests, and Executive shall aid and cooperate in all
reasonable respects with the Company in procuring any and all such insurance,
including, without limitation, submitting to the usual and customary medical
examinations, and by filling out, executing and delivering such applications and
other instruments in writing as may be reasonably required by an insurance
company or companies to which an application or applications for such insurance
may be made by or for the Company. In order to induce the Company to enter into
this Agreement, Executive represents and warrants to the Company that, to his
knowledge, Executive is insurable at standard (non-rated) premiums.

                (c) Deceased Executive. In the event that Executive shall die
while entitled to benefits hereunder, the payment which would otherwise be made
to Executive, shall be made to the estate, or other appropriate legal
representative, of Executive.

                (d) Notices. All notices, offers or other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be considered as properly given or made if (i) delivered personally,
(ii) mailed from within the United States by certified mail, return receipt
requested, postage prepaid, (iii) sent by prepaid telegram or facsimile
transmission (with written confirmation of receipt) or (iv) sent by overnight
delivery service. All notices given or made pursuant hereto shall be so given or
made to the parties at the following addresses, or to


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any other address the addressee may have notified the sender beforehand
referring to this Agreement, and shall be deemed effective when so given or made
at such address whether or not the recipient still resides at that address or
actually receives the notice:

               If to Executive:

               David W. Arnold
               8410 NE 27th Place
               Bellevue, Washington 98004

               If to the Company:

               N2H2, Inc.
               900 4th Avenue
               Suite 3400
               Seattle, Washington 98164
               Attn:  President

               With a copy to:

               Lane Powell Spears Lubersky LLP
               1420 Fifth Avenue, Suite 4100
               Seattle, Washington 98101-2338
               Attn:  Jim D. Johnston
               Facsimile: (206) 223-7107

                (e) Severability. If any provision of this Agreement is held by
a court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.

                (f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts executed in and to be performed entirely within that state, except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters, the law of the jurisdiction under which the respective entity
derives its powers shall govern.

                (g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.

                (h) Entire Understanding. This Agreement, including all Recitals
hereto which are incorporated herein by this reference, together with the other
agreements and documents being executed and delivered concurrently herewith by
Executive, the Company and certain of its


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affiliates, constitute the entire understanding among all of the parties hereto
and supersedes any prior understandings and agreements, written or oral, among
them respecting the subject matter within.

                (i) Pronouns and Headings. As used herein, all pronouns shall
include the masculine, feminine, neuter, singular and plural thereof wherever
the context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to be
ignored in any construction of the provisions hereof.

                (j) Amendments. Except as specifically set forth herein, this
Agreement shall not be changed or amended unless in writing and signed by both
Executive and the President (or other officer of the Company designated by the
Board).

                (k) Executive's Acknowledgment. Executive acknowledges (i) that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that he has read and understands this Agreement, is
fully aware of its legal effect, and has entered into it freely based on his own
judgment.

                (l) Arbitration. It is understood and agreed between the parties
hereto that any claim of any nature whatsoever arising out of or connected with
Executive's employment with the Company, including but not limited to wrongful
termination, breach of contract, defamation, and claims of discrimination
(including age, disability, sex, religion, race, national origin, color, etc.)
or harassment, whether under federal, state or local laws, common law or in
equity, shall be decided by submission to final and binding arbitration. The
arbitrator shall be a retired or former superior court or appellate court judge.
This arbitration provision shall be governed by the Federal Arbitration Act the
arbitration shall be and pursuant to rules and procedures hereafter adopted by
the Company, and failing such adoption, the Federal Rules of Civil Procedure.
Any arbitration hereunder shall be conducted in Seattle, Washington. Judgment
shall be final upon the award rendered by the arbitrator and may be entered in
any court having jurisdiction thereof. It is further understood and agreed
between the parties hereto that actions seeking temporary injunctions are hereby
excluded from arbitration and, therefore, may be sought in a court of
appropriate jurisdiction without resort to arbitration, even though resolution
of the underlying claim must be submitted to arbitration. Provided: This Section
shall not govern any matter arising out of Executive's violation of, or
threatened violation of, the terms of the Employee Intellectual Property
Agreement attached hereto as Appendix A and incorporated herein by reference
("IP Agreement"), or Executive's violation of the covenants contained in
Sections 10 of this Agreement, in which event the Company shall be entitled to
seek injunctive or other equitable relief in any state or federal court located
in King County, Washington, and the parties agree to submit to the jurisdiction
of such court.

                (m) Delivery by Facsimile. The parties agree that counterparts
of this Agreement may be executed and delivered by facsimile, followed by
regular mailing of original signed counterparts.


                                       12
<PAGE>   13

        IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.

                                  THE COMPANY:

                                  N2H2, INC.


                                  By /s/ PETER NICKERSON
                                    --------------------------------------------
                                    Its  President


                                  THE EXECUTIVE:

                                   /s/ DAVID W. ARNOLD
                                  ----------------------------------------------
                                  David W. Arnold


                                       13
<PAGE>   14

                                   APPENDIX A

                    EMPLOYEE INTELLECTUAL PROPERTY AGREEMENT


BY and BETWEEN:             N2H2, INC. (the "COMPANY"), a Washington corporation

                     and    DAVID W. ARNOLD ("EMPLOYEE").



In the course of employment with the Company, Employee has had and/or will have
access to information, products, processes, tools, know-how and other
intellectual properties that are confidential, proprietary or licensed to the
Company. There is currently an understanding and agreement between the Company
and Employee regarding these confidentiality and intellectual property matters,
which was documented in part by a certain N2H2 Employee Confidentiality and
Nondisclosure Agreement. As a condition of Employee's continuing employment, the
parties now wish to have this Agreement supersede and replace all previous
agreements of the parties on matters of confidentiality and intellectual
property rights.

NOW THEREFORE, in consideration of the employment relationship between the
parties, the parties agree, promise and covenant to each other as follows:

1. SCOPE OF AGREEMENT.

        (a) The parties acknowledge and agree that this Agreement addresses only
certain issues relating to patent, copyright, trade secret and other
intellectual property rights. This Agreement is not a contract of employment and
does not address or modify any of the terms and conditions of employment,
including but not limited to duration of employment, compensation, non-compete
covenants, and other employment-related issues.

        (b) This Agreement and Executive Employment Agreement constitute the
entire agreement of the parties with respect to the subject matter thereof, and
may not be modified, amended or waived except in a writing signed by both
parties. In the event of any inconsistency between this Agreement and Executive
Employment Agreement, the provisions of this Agreement will control. This
Agreement shall be effective as of the beginning of the employment relationship
between the parties.

2. DEFINITIONS.

        For purposes of this Agreement, the capitalized terms set forth below
shall have the meanings assigned to them as follows:

(a) "Development" shall mean any information, product, process, invention,
discovery, technique, idea, design, work of authorship, improvement or
modification, in whatever form and


                                       14
<PAGE>   15

whether or not patentable, copyrightable or otherwise protectable under law,
that is created, made, conceived, developed, expressed in tangible form or
reduced to practice by Employee (either alone or with others).

(b) "Protected Development" shall mean any Development that:

        (i) results from the use of equipment, supplies, facility, Protected
Information and any property or proprietary rights (whether tangible or
intangible) that are owned, leased or contracted for by the Company;

        (ii) relates directly to the business of the Company, or to the
Company's actual or demonstrably anticipated research or development; or

        (iii) results from any work or services performed by Employee for the
Company.

        In particular, Protected Development shall include, without limitation,
any computer design, programming and documentation; source code and object code
for software; database, model, documentation, and information to whose creation
Employee contributes during the course of Employee's employment by the Company.

(c) "Protected Information" shall mean all information, in whatever form or
format, that is identified by the Company or is reasonably understood as private
or confidential, or that qualifies for protection under law as a trade secret or
proprietary information of the Company, its affiliated companies, its suppliers
or its customers. Protected Information shall include, but is not limited to:
(i) inventions, discoveries, ideas, techniques, drawings, specifications,
models, database, software, documentation; (ii) customer-related information;
(iii) sales and marketing plans, projections and analysis; (iv) any and all
information related to the business operations of the Company, its affiliated
companies, its suppliers or its customers; and (v) any and all information
provided to the Company by third parties which the Company is obligated to keep
confidential.

Notwithstanding the foregoing, Protected Information does not include any
information that is or becomes part of the public domain through no act or
failure to act on the part of Employee.

3. ASSIGNMENT OF INTELLECTUAL RIGHTS TO THE COMPANY.

(a) Subject to the limitation of Subsection 3(b), Employee hereby grants,
transfers and assigns to the Company all of the Employee's right, title, and
interest in or to: (i) the Protected Developments; and (ii) any proprietary
rights therefrom. Employee agrees that any copyrightable Protected Development,
to the extent created by Employee within the scope of Employee's employment with
the Company, shall be deemed to be a "work made for hire," pursuant to the
United States Copyright Act (17 U.S.C. Section 101).

(b) In compliance with Washington state law (RCW 49.44.140), Employee hereby
acknowledges that Employee has been advised and notified by the Company via this
Agreement that the Agreement does not apply to an invention for which no
equipment, supplies, facility, or


                                       15
<PAGE>   16

trade secret information of the Company was used and which was developed
entirely on Employee's own time, unless: (i) the invention relates (A) directly
to the business of the Company, or (B) to the Company's actual or demonstrably
anticipated research or development; or (ii) the invention results from any work
performed by Employee for the Company.

(c) Employee shall promptly disclose all Developments to the Company and keep
records relating to the conception, tangible expression and reduction to
practice of all such Developments. Employee acknowledges and agrees that this
disclosure obligation applies to all Developments, whether or not they qualify
as Protected Developments, for the purpose of determining rights of Employee and
the Company in such inventions. Any and all disclosure records, to the extent
related to a Protected Development, shall remain the sole and exclusive property
of the Company, and the Employee shall surrender possession of such records to
the Company upon request or upon any suspension or termination of the Employee's
employment with the Company.

(d) Employee shall render and provide the Company with all information,
documentation and assistance, and shall sign and deliver all such assignments,
affidavits, declarations and other documents that the Company may request to
perfect, enforce, or defend any proprietary rights in or based on the Protected
Developments. The Company shall pay reasonable compensation for such
information, documentation and assistance if they are provided by Employee after
any suspension or termination of Employee's employment.

(e) The Company, in its sole discretion, shall determine the extent of the
proprietary rights, if any, to be protected in any Protected Development.

4. NONDISCLOSURE OF PROTECTED INFORMATION.

(a) Unless otherwise specified in writing, Employee shall assume that any and
all information disclosed by the Company to Employee, in whatever form, is
Protected Information, whether or not designated as private or confidential.

(b) During the period of employment and thereafter, Employee shall hold in trust
and the strictest confidence any and all Protected Information. Employee shall
not disclose any Protected Information to others without the prior written
permission of the Company, or use any Protected Information for any purpose
other than for the performance of services for the Company. In addition,
Employee shall take all necessary precautions to prevent any person or entity
with whom Employee comes into contact from acquiring, disclosing or using such
Protected Information.

(c) Employee hereby acknowledges and agrees that the obligations with respect to
any particular Protected Information shall be in force and binding as long as
such information qualifies as Protected Information under this Agreement,
regardless of any suspension or termination of employment relationship between
the parties, and regardless of any termination of this Agreement for any reason.


                                       16
<PAGE>   17

(d) All Protected Information is the Company's sole and exclusive property. Upon
request or upon any suspension or termination of Employee's employment, Employee
shall promptly return and surrender to the Company all items and materials in
Employee's possession or control, in whatever form and medium and including any
and all copies, which contain or embody any Protected Information.

(e) Nothing contained in this Agreement shall be construed as granting to or
conferring on Employee any proprietary right or interest in any Protected
Information.

(f) Unless otherwise agreed in writing, the Company shall be free to use and to
disclose in any way it deems appropriate any information provided to the Company
by Employee. Employee agrees not to disclose to the Company any information
which is confidential or private to Employee or to any third party that Employee
does not want so used or disclosed.

5. MISCELLANEOUS PROVISIONS.

(a) Remedies. Employee acknowledges and agrees that any violation of this
Agreement will cause irreparable harm for which the Company may not be fully or
adequately compensated by recovery of monetary damages. Accordingly, in the
event of any such violation or threatened violation, the Company shall be
entitled to injunctive relief from a court of competent jurisdiction in addition
to any other remedy available at law or in equity.

(b) Attorney Fees. If any action at law or in equity is brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover, at trial and on appeal, in addition to any other relief that may be
granted, reasonable amounts of legal, accounting and other professional fees,
together with other allowable costs and expenses.

(c) Applicable Law and Jurisdiction. The parties agree that this Agreement will
be governed by the laws of the State of Washington, without regard to Washington
choice of law principles. Law suits relating to this Agreement shall be brought
in the appropriate court in the State of Washington, and the parties agree to
submit to the jurisdiction of such court.

(d) Amendment and Assignment. All modifications to this Agreement must be in
writing, signed by the parties hereto. Except by operation of law, neither party
shall assign or delegate its rights or duties under this Agreement without the
prior written consent of the other party.

(e) Independence of Provisions. Each provision herein shall be treated as a
separate and independent clause, and the invalidity or unenforceability of any
one clause shall in no way impair the validity or enforceability of any other
clauses herein.

(f) Successors and Assigns. This Agreement shall be binding on Employee's heirs,
executors, estate administrators and legal representatives and shall be for the
benefit of the Company, its successors or assigns.


                                       17
<PAGE>   18

IN WITNESS THEREOF, the parties hereby execute this Agreement.

The undersigned has read and understood the foregoing and agrees to be bound
thereby.

                                  EMPLOYEE:


                                  Signed: /s/ DAVID W. ARNOLD
                                         ---------------------------------------
                                  Print Name:  David W. Arnold

                                  Date: August 23, 1999


The foregoing was executed by the Employee and accepted on behalf of the
Company.

                                   N2H2, INC.:

                                   Signed: /s/ PETER NICKERSON
                                         ---------------------------------------
                                         By: Peter Nickerson
                                         Title: President

                                         Date: August 23, 1999

                                       18