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                                                                    EXHIBIT 10.3

                           INDEMNIFICATION AGREEMENT

        This Indemnification Agreement ("Agreement"), dated as of January 1,
2000, is between WEST COAST BANCORP ("Corporation") and Robert D. Sznewajs
("Indemnitee").

                                    RECITALS

A.      Indemnitee, as member of the board of directors or an officer of the
        Corporation and/or, one or more of its affiliate corporations, performs
        valuable services for the Corporation.

B.      The Corporation's Articles of Incorporation ("Articles") and Bylaws
        ("Bylaws") provide for the indemnification of the officers, directors,
        agents and employees of the Corporation to the maximum extent authorized
        by the Oregon Business Corporation Act ("Act").

C.      The Articles, Bylaws and the Act, by their non-exclusive nature, permit
        contracts between the Corporation and its directors and officers to
        indemnify those directors and officers.

D.      The Corporation has purchased and maintains a policy or policies of
        Directors and Officers Liability Insurance ("D & O Insurance"), covering
        certain liabilities, which may be incurred by its directors and officers
        in the performance of their duties.

E.      Due to changes in the terms, scope and availability of D & 0 Insurance,
        uncertainty exists as to the extent of protection afforded directors and
        officers under such D & O Insurance or under the indemnification
        provisions of the Act, Articles, or Bylaws.

F.      To induce Indemnitee to continue service as a director or officer of the
        Corporation and/or one or more of its affiliate corporations, the
        Corporation desires to enter this contract with Indemnitee.

        Therefore, in consideration of Indemnitee's continued service as a
director or officer, the parties agree as follows:

                                    AGREEMENT

1.      INDEMNITY. The Corporation agrees to hold harmless and indemnify
        Indemnitee:

        (a)     to the fullest extent permitted under each of the Articles, the
                Bylaws, and the Act, as each may be amended from time to time;
                and

        (b)     against any and all expenses (including attorneys' fees),
                witness fees, judgments, fines, ERISA excise taxes, and amounts
                paid in settlement actually and reasonably incurred by
                Indemnitee in connection with any threatened, pending or
                completed action, suit or proceeding, whether civil, criminal,
                administrative or investigative (including an action by or in
                the right of the Corporation) to which Indemnitee is, was or at
                any time becomes a party, or is threatened to be made a party,
                by reason of the fact that Indemnitee is, was or at any time
                becomes a director, officer, employee or agent of the
                Corporation, or is or was serving or at any time serves at the
                request of the Corporation as a

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                director, officer, employee or agent of another (i) corporation,
                including without limitation a corporate affiliate of the
                Corporation, (ii) partnership, (iii) joint venture, (iv) trust,
                (v) employee benefit plan or (vii) other enterprise.

2.      LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity under Section 1 will
        be paid by the Corporation:

        (a)     for expenses or liabilities paid to the Indemnitee under any D &
                O Insurance purchased and maintained by the Corporation;

        (b)     on account of any action, suit or proceeding brought by or on
                behalf of the Corporation in which judgment is rendered holding
                the Indemnitee liable to the Corporation;

        (c)     on account of Indemnitee's conduct which is finally adjudged to
                be willful misconduct or knowing violation of law;

        (d)     on account of Indemnitee's conduct which is the subject of an
                action, suit or proceeding described in Section 6 (c)(ii);

        (e)     on account of any action, claim or proceeding (other than a
                proceeding referred to in Section 7(b)) initiated by the
                Indemnitee unless such action, claim or proceeding is
                specifically authorized by action of the Corporation's board of
                directors;

        (f)     on account of any action, claim or proceeding referred to in
                Section 7(b) which action is finally adjudged to be frivolous or
                made not in good faith;

        (g)     if a final decision by a Court having jurisdiction in the matter
                determines that such indemnification is not lawful.

3.      MUTUAL ACKNOWLEDGMENT. Both Corporation and Indemnitee acknowledge that,
        in certain instances, federal law or public policy may override
        applicable state law and prohibit the Corporation from indemnifying its
        directors and officers. For example, the Corporation and Indemnitee
        acknowledge that the Securities and Exchange Commission (the "SEC")
        takes the position that indemnification is not permitted for liabilities
        arising under certain federal securities laws, and federal legislation
        prohibits indemnification for certain ERISA violations.

4.      CONTINUATION OF OBLIGATIONS. Under this Agreement the Corporation is
        obligated to Indemnitee for any period Indemnitee is or was a director,
        officer, employee or agent of the Corporation (or is or was serving at
        the request of the Corporation as a director, officer, employee or agent
        of another (i) corporation, including without limitation, a corporate
        affiliate of Corporation, (ii) partnership, (iii) joint venture, (iv)
        trust, (v) employee benefit plan or (vi) other enterprise). Furthermore,
        this obligation will continue after Indemnitee's service as a director
        or officer terminates and so long as Indemnitee may be subject to any
        possible claim or threatened, pending or completed action, suit or
        proceeding, whether civil, criminal or investigative, by reason of the
        fact that Indemnitee was a director or an officer of the Corporation or
        was serving at the Corporation's request as a director, officer,
        employee or agent of another (i) corporation, including

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        without limitation, a corporate affiliate of Corporation, (ii)
        partnership, (iii) joint venture, (iv) trust, (v) employee benefit plan
        or (vi) other enterprise.

5.      NOTIFICATION AND DEFENSE OF CLAIM. Within 30 after Indemnitee receives
        any notice of the commencement of any action, suit, or proceeding,
        Indemnitee will notify the Corporation of it, if a claim with respect to
        the action may be made against the Corporation under this Agreement. The
        failure to so notify the Corporation will not relieve the Corporation
        from any liability it may have to Indemnitee under authority other than
        this Agreement. With respect to any action, suit or proceeding of which
        Indemnitee timely notifies the Corporation:

        (a)     the Corporation is entitled to participate at its own expense;

        (b)     except as otherwise provided below, the Corporation (jointly
                with any other indemnifying party similarly notified) is
                entitled to assume the defense of the action with counsel
                reasonably satisfactory to Indemnitee; and

        (c)     the Corporation is not liable to indemnify Indemnitee under this
                Agreement for any amounts paid in settlement of any action or
                claim that is effected without its written consent.

        After notice from the Corporation to Indemnitee of its election to
        assume the defense of the action, the Corporation will not be liable to
        Indemnitee under this Agreement for any legal or other expenses
        subsequently incurred by Indemnitee in connection with the defense of
        the action, other than reasonable costs of investigation or as otherwise
        provided below. Indemnitee may employ its counsel in such action but the
        fees and expenses of such counsel incurred after notice from the
        Corporation of its assumption of the defense will be at the expense of
        Indemnitee unless (i) Indemnitee's employment of counsel is authorized
        by the Corporation, (ii) Indemnitee reasonably concludes that there may
        be a conflict of interest between the Corporation and Indemnitee in the
        conduct of the defense of such action or (iii) the Corporation has not
        employed counsel to assume the defense of such action, in each of which
        cases the fees and expenses of Indemnitee's separate counsel will be at
        the expense of the Corporation. The Corporation is not entitled to
        assume the defense of any action, suit, or proceeding brought by or on
        behalf of the Corporation or as to which Indemnitee has made the
        conclusion provided for in (ii) above.

        The Corporation is permitted to settle any action except that it may not
        settle any action or claim in any manner which would impose any penalty
        or limitation on Indemnitee without Indemnitee's written consent.
        Neither the Corporation nor Indemnitee will unreasonably withhold its
        consent to any proposed settlement.

6.      ADVANCEMENT AND REPAYMENT OF EXPENSES.

        (a)     If Indemnitee employs his/her own counsel, the cost of which is
                to be indemnified by the Corporation under Section 5, the
                Corporation will advance to Indemnitee any and all reasonable
                expenses (including legal fees and expenses) incurred in
                investigating or defending any such action, suit or proceeding.
                These expenses must be advanced before any final disposition of
                any threatened or pending

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                action, suit or proceeding, whether civil, criminal,
                administrative or investigative and within 10 days after
                receiving copies of invoices presented to Indemnitee for such
                expenses.

        (b)     Indemnitee agrees that Indemnitee will reimburse the Corporation
                for all reasonable expenses paid by the Corporation in defending
                any civil or criminal action, suit or proceeding against
                Indemnitee if, and only to the extent that, it is ultimately
                determined by a final judicial decision (from which there is no
                right of appeal) that Indemnitee is not entitled to be
                indemnified by the Corporation for such expenses.

        (c)     The Corporation is not required to advance expenses to
                Indemnitee if Indemnitee (i) commences any action, suit or
                proceeding as a plaintiff, unless such advance is specifically
                approved by a majority of the Corporation's board of directors
                or (ii) is a party to an action, suit or proceeding brought by
                the Corporation and approved by a majority of the Corporation's
                board which alleges willful misappropriation of corporate assets
                by Indemnitee, disclosure of confidential information in
                violation of Indemnitee's fiduciary or contractual obligations
                to the Corporation, or any other willful and deliberate breach
                in faith of Indemnitee's duty to the Corporation, its
                affiliates, or its shareholders.

7.      ENFORCEMENT.

        (a)     The Corporation confirms that it has entered into this Agreement
                to induce Indemnitee to continue as a director or an officer of
                the Corporation or one or more of its affiliates, and
                acknowledges that Indemnitee is relying upon this Agreement in
                continuing in such capacity.

        (b)     If Indemnitee successfully brings any action to enforce rights
                or to collect moneys due under this Agreement, the Corporation
                will reimburse Indemnitee for all Indemnitee's reasonable fees
                and expenses in bringing and pursuing such action.

8.      SUBROGATION. If the Corporation pays Indemnitee under this Agreement,
        the Corporation will be subrogated to the extent of such payment to all
        of the rights of recovery of Indemnitee, who agrees to execute all
        documents required and to do all acts necessary to secure such rights
        and to enable the Corporation effectively to bring suit to enforce such
        rights.

9.      NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this
        Agreement are not exclusive of any other right which Indemnitee may have
        or hereafter acquire under any statute, provision of the Articles,
        Bylaws, agreement, vote of shareholders or directors, or otherwise, both
        as to action in his/her official capacity and as to action in another
        capacity while holding office.

10.     SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this Agreement
        continue after Indemnitee ceases to be a director, officer, employee, or
        other agent of the Corporation and will inure to the benefit of
        Indemnitee's heirs, executors, and administrators.
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11.     SEPARABILITY. Each provision of this Agreement is a separate and
        distinct agreement independent of others. If any provision is held to be
        invalid or unenforceable for any reason, such invalidity or
        unenforceability will not affect the validity or enforceability of the
        other provisions or the obligation of the Corporation to indemnify the
        Indemnitee to the full extent provided by the Articles, Bylaws or the
        Act.

12.     GOVERNING LAW. This Agreement is interpreted and enforced in accordance
        with the laws of the State of Oregon.

13.     BINDING EFFECT. This Agreement is binding upon Indemnitee and upon the
        Corporation, its successors and assigns, and inures to the benefit of
        Indemnitee, his/her heirs, personal representatives, and assigns and to
        the benefit of the Corporation, its successors and assigns.

14.     AMENDMENT AND TERMINATION. No amendment, modification, termination, or
        cancellation of this Agreement is effective unless in writing signed by
        both parties.

Signed as of January 1, 2000:

                                            WEST COAST BANCORP

                                            By:    Gary D. Putnam
                                                   Chairman

                                            INDEMNITEE

                                            -----------------------------------
                                            Robert D. Sznewajs<PAGE>   1

* INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

                                                                    EXHIBIT 10.1

                             DISTRIBUTION AGREEMENT

        This Agreement, by and between MICROSOFT CORPORATION ("Microsoft"), a
Washington corporation, with its principal offices at One Microsoft Way,
Redmond, WA 98052, and N2H2, INC. a Washington corporation, with its principal
offices at 900 Fourth Ave, Suite 3400, Seattle, WA 98164 ("Company") is made and
entered into as of the later of the two signature dates below (the "Effective
Date").

                                    RECITALS

WHEREAS Company provides internet network solutions including, but not limited
to, the Bess Filtering System (the "Bess Filtering System") to schools and/or
libraries and owns and operates a web site currently located at
http://www.searchopolis.com (the "Searchopolis Site") which provides users with
tools enabling them to do internet searches;

WHEREAS Microsoft owns and operates a web site currently titled Encarta Online
Deluxe ("EOD") that is currently located at http://encarta.msn.com/encarta ("EOD
Site") as it may exist and/or evolve from time to time throughout the Term of
the Agreement, which provide end-users with, among other things, educational and
reference information and tools; and

WHEREAS Microsoft and Company desire to work together to allow Company to
promote and offer subscriptions to Microsoft's fee-based, secure product/service
known as Encarta Online Deluxe, to Company's prospective school and library
users in conjunction with Company's Bess Filtering System.

NOW THEREFORE, the parties agree as follows:

1. SUBSCRIPTIONS. Company will promote and offer subscriptions to Encarta Online
Deluxe ("EOD Subscriptions") in conjunction with Company's Bess Filtering System
and the Searchopolis Site to its prospective school and library users. In
addition, users who receive EOD Subscriptions in conjunction with Company's Bess
Filtering System will also be able to access EOD via the Searchopolis Site.

        1.1 RESTRICTIONS. Company shall promote and offer EOD Subscriptions to
its North American school and library users [ *** ], * in conjunction with the
Bess Filtering System and the Searchopolis Site. Company will not promote or
make available EOD Subscriptions to its [ *** ]. * Company will also not promote
or make available EOD with any other educational service other then in
conjunction with its Bess Filtering System, unless first approved by Microsoft.
[ *** ] * and be able to access the EOD Site via the Encarta link on the [ ***
].* [ *** ], * will link to the Encarta Online "free site", currently located at
http://encarta.msn.com, instead of Encarta Online Deluxe, via the Encarta link
on the Searchopolis Site.

        1.2 FUTURE DISCUSSIONS. Microsoft and Company agree to continue
discussions about the possibility of extending Company's promotion and offer of
EOD Subscriptions to Company's Workplace and Home users, but no EOD
Subscriptions shall be marketed or sold except as provided in this Agreement
without the express written approval of Microsoft. Likewise, Microsoft and
Company agree to discuss, in the near future, the possibility of Company
promoting and offering other Microsoft products via Company's Site to its users.
Additionally, Microsoft and Company will meet quarterly, as needed, during the
Term of the Agreement to discuss the implementation of this Agreement.

        1.3 EXCLUSIVITY. [ *** ].*

Microsoft Confidential

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        1.4 AUTHENTICATION AND LINKS:

               (a) The parties agree that EOD Subscribers will gain access to
EOD via the authentication processes, which Company shall be responsible for, as
described in Section 1 of Exhibit A, and each party will take such actions as
necessary to enable such authentication and access to occur.

               (b) Company will provide Bess Filtering System users access to
the EOD Site (and the Encarta Online "free Site" in the case of Searchopolis
users who are not also Bess Filtering System users) through integrated links on
the Bess Filtering System Tool Bar and Company's Searchopolis Site, as shown in
Exhibits D and E. Microsoft will provide the necessary urls for these links, and
Company will adhere to the Microsoft Guidelines for Displaying the Encarta
Online Logo and Microsoft Logo attached in Exhibits B and C. The search results
will be similar in nature to those in Exhibit F.

        1.5 SUBSCRIPTION AGREEMENT AND/OR SIMILAR NOTICE. Company will include
substantially the following, in a notice to its school and library users who
receive EOD Subscriptions in conjunction with the Bess Filtering System: "All
uses of the Microsoft Encarta Online Deluxe encyclopedia are subject to and must
be at all times in accordance with the Terms of Use contained within Encarta
Online Deluxe Encyclopedia, presently located at
http://www.msn.com/help/legal/terms.htm, as such Terms of Use may be updated
from time to time." Company also agrees that it will incorporate the above
language into its new Bess Filtering System subscription agreements and renewal
agreements as soon as practicable, but no later than August 1, 2000. .

        1.6 MICROSOFT PROMOTIONAL ACTIVITIES. Microsoft will provide Company
with promotion/marketing support, such as electronic files for marketing
collateral, promotional/marketing literature and sales support material as
needed to assist Company in the promotion of their EOD Subscription offer.

        1.7 COMPANY PROMOTIONAL ACTIVITIES. All Company materials which promote
EOD Subscriptions must be submitted to Microsoft for its approval prior to
distribution. Company acknowledges that such trademarks are the exclusive
property of Microsoft and that Company is not entitled either by implication or
otherwise to any title in the trademarks. This Agreement is neither a trademark
license nor an authorized user trademark agreement. Company will give Microsoft
at least 30 days notice of any promotion which might substantially increase
usage of EOD and will provide Microsoft with page view forecasts for the
upcoming months.

2. OWNERSHIP.

        2.1 Microsoft retains all right, title and interest in and to Encarta
Online and its trademarks, service marks and logos. Neither Company nor any of
its employees, agents or resellers shall have any right to make any
representation, warranty, or promise regarding Encarta Online (including,
without limitation, the EOD Site), or give any instruction for the use of the
EOD Site which is not authorized in writing by Microsoft.

        2.2 Company retains all right, title and interest in and/or a valid
license or licenses to use its Bess Filtering System, the Searchopolis Site, and
its trademarks, service marks and logos. Neither Microsoft nor any of its
employees, agents or resellers shall have any right to make any representation,
warranty, or promise regarding the Bess Filtering System or give any instruction
for the use of the Bess Filtering System which is not authorized in writing by
Company.

3. USER INFORMATION. Company will provide to Microsoft on a quarterly basis,
available subscriber user information for EOD Subscribers that will consist
simply of which schools and/or libraries are receiving EOD Subscriptions and
available user counts. ("User Information"). Microsoft and Company shall jointly
own the User Information. In addition to user counts, and as part of the
quarterly review mentioned in 1.1, Company agrees to provide certain aggregate
usage information (10 most popular searches on EOD, length of searches, length
of time on top 10 sites) to help in strategic planning. Company and Microsoft
may not sell or disclose to any third party any

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User Information except solely to satisfy any applicable law, regulation, legal
process or governmental request. Company and Microsoft agree to adhere to
applicable law and industry standards with regard to information gathering,
dissemination, privacy protection and other practices related to the privacy of
subscriber information including the standards set forth by TRUSTe and
BBBOnline. Except as expressly provided in Exhibit A, Microsoft will notify
Company before depositing cookies on user sites accessing Encarta Online.

4. SUBSCRIPTION PRICING. Pricing for EOD Subscriptions sold by Company shall be
determined solely by Company.

5. REPORTING AND AUDIT RIGHTS. Company will track and report to Microsoft on a
quarterly basis, the number of EOD Subscriptions it provides to its school and
library users for the preceding quarter's EOD Subscription activity and results.
Company will use [ *** ] * enrollment data overlaid with its customer database.
[ *** ].* In addition, Company shall promptly notify Microsoft of any EOD
Subscription(s) which has the potential to significantly increase traffic to the
EOD Site (e.g., a state-wide or consortium contract). During the Term of this
Agreement and for one (1) year thereafter, Company agrees to keep all usual and
proper records and books of account and all usual and proper entries relating to
the total amount of the revenue described above. During the Term and for a
period of one (1) year following the expiration or termination of this
Agreement, Microsoft shall have the right to cause an audit and/or inspection to
be made of the applicable records of Company in order to verify statements
issued by Company and Company's compliance with the terms of this Agreement. Any
such audit shall be conducted by an independent certified public accountant
selected by Microsoft (other than on a contingent fee basis). Any audit and/or
inspection shall be conducted during regular business hours at Company's
facilities with no less than thirty (30) days advance written notice.

6. BILLING AND CUSTOMER SUPPORT; PAYMENTS TO MICROSOFT.

        6.1 Company will be solely responsible for all subscriber authentication
for EOD Subscriptions offered in conjunction with Company's Bess Filtering
System or via Company's Searchopolis Site. Company shall provide
subscription-related customer service to EOD Subscribers on the same basis as
Company provides support to end-users of other services included within
Company's Site. Company will consult with Microsoft on EOD Site end user
customer support. Company will be responsible for customer support on matters of
account management, billing, and authentication. Similarly, Microsoft will
provide support to Company for the trusted URL as detailed in Exhibit A and
access to Microsoft's web based support form for all other product support for
EOD, on the same basis as Microsoft provides support to other end users of the
EOD product.

        6.2 Company shall pay Microsoft [ *** ] * during the Term of the
Agreement. Payment shall be made monthly in the amount of $[ *** ] * for the
term of the agreement. In addition, for all individual EOD users over [ *** ] *
that Company delivers through subscriptions under this Agreement, Company shall
pay an additional fee to Microsoft equal to [ *** ] * per EOD user per year on a
prorated basis. Any additional payment are due 30 days after the end of each
quarterly reporting period, as discussed in Section 5 above

Payments shall be made to the following address:

               Microsoft Corporation
               PO Box 7247-7123
               Philadelphia, PA  19170-7123

        6.3 In consideration of Microsoft's obligations set forth in this
Agreement, Microsoft shall receive, during the Term of the Agreement, an
advertising sponsorship package on Company's Site valued at $[ *** ].* This will
be computed quarterly [ *** ] * over the 10 quarters covered by the Agreement,
with the volume determined based on Company's comparable ad rates for that
period. As an advertising sponsor, Microsoft will receive logo placement on the
Bess Tool Bar as shown in Exhibits D and E. Company's use of the Microsoft Logo
shall be in compliance with the Guidelines set forth in Exhibit C.

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7. TAXES AND EXPENSES. Company shall be liable for all sales, use, value added,
duties, tariffs or other similar taxes of any nature whatsoever associated with
providing EOD Subscriptions to school and/or library users as permitted
hereunder, and shall indemnify and hold Microsoft harmless from and against any
and all such taxes and expenses.

8. TERM/DEFAULT/TERMINATION.

        8.1 TERM. The term of this Agreement (the "Term") shall begin on the
Effective Date and shall continue until June 30, 2002. The Term may be extended
for successive one (1) year periods upon the written agreement of both parties.
Each party shall have the right to terminate this Agreement at any time without
cause upon sixty (60) days prior written notice to the other.

        8.2 TERMINATION FOR CAUSE. In addition to any other rights and/or
remedies that either party may have under the circumstances, all of which are
expressly reserved, this Agreement may be terminated immediately upon written
notice at any time as follows:

               (a) by either party if the other party is in material breach of
        any material warranty, representation, term, condition or covenant of
        this Agreement, other than those contained in Section 11.2, and fails to
        cure that breach within thirty (30) days after written notice thereof;
        or

               (b) by either party if the other party is in material breach of
        Section 11.2; or

               (c) by either party if the other party becomes insolvent or makes
        any assignment for the benefit of creditors or similar transfer
        evidencing insolvency; or suffers or permits the commencement of any
        form of insolvency or receivership proceeding; or has any petition under
        any bankruptcy law filed against it, which petition is not dismissed
        within sixty (60) days of such filing; or has a trustee or receiver
        appointed for its business or assets or any part thereof.

        8.3 EFFECT OF TERMINATION.

               (a) Upon termination or expiration of this Agreement, Company
shall immediately cease promoting and offering EOD Subscriptions. Each party
shall additionally provide reasonable assistance to the other for such
reasonable time and upon such terms and conditions as shall be mutually agreed
upon in order to assure an orderly wind down in such a manner as shall minimize
disruption to current subscribers.

               (b) In the event of termination or expiration of this Agreement
for any reason, each and every clause which by its nature is intended to survive
the termination of this Agreement including, without limitation, Sections 2, 5,
6 (solely to the extent necessary to make payments accrued during the Term), 7,
8.3. 9.1 and 9.2 indemnifications only, 9.3, 9.4, 10, 11.2, 13 and 15 through 18
shall survive termination. Upon termination or expiration both parties shall,
upon written request, return or certify destruction of Confidential Information
of the other party. Neither party shall be liable to the other for damages of
any sort resulting solely from terminating this Agreement in accordance with its
terms.

9. WARRANTIES/INDEMNITY/LIMITATION OF LIABILITY.

        9.1 COMPANY. Company warrants and represents that: (i) it has sufficient
authority to enter into this Agreement; (ii) to its knowledge all materials made
available by Company to Microsoft and/or to EOD Subscribers pursuant to this
Agreement (including logos) do not infringe the copyrights, trademarks, service
marks or any other proprietary right of any third party; (iii) the Bess
Filtering System and any other Company-owned or Company-licensed products or
services, subscriptions or access to which are offered and/or sold as part of
Company's services, shall be in compliance with all applicable laws and do not
infringe the copyrights, trademarks, service marks or other proprietary right of
any third party; except that Company's warranty with respect to patent rights
shall be to the best of its knowledge, and (iv) the promotion and offering of
EOD subscriptions in connection with the Bess Filtering System service by
Company shall be in compliance with all applicable laws. Company will indemnify
Microsoft

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<PAGE>   5

from and against any loss, claim, liability, damage, action or cause of action
(including, without limitation, reasonable attorneys' fees) brought against
Microsoft by a third party and arising from or related to materials (including
any intellectual property) made available by Company to Microsoft and/or to
Company's school or library users accessing the Searchopolis Site or any breach
by Company of the foregoing warranties, provided that Microsoft cooperates as
set forth in Section 9.3.

        9.2 MICROSOFT. Microsoft warrants and represents that: (i) it has
sufficient authority to enter into this Agreement and (ii) all materials made
available by Microsoft to Company pursuant to this Agreement (including logos)
do not infringe the copyrights, trademarks, service marks or any other
proprietary right of any third party. Microsoft will indemnify Company from and
against any loss, claim, liability, damage, action or cause of action
(including, without limitation, reasonable attorneys' fees) brought against
Company by a third party and arising from or related to materials (including any
intellectual property) made available by Microsoft to Company or for any breach
by Microsoft of the foregoing warranties, provided that Company cooperates as
set forth in Section 9.3.

        9.3 INDEMNIFICATION PROCESS. If any action shall be brought against
either party (the "Claimant") in respect to which indemnity may be sought from
the other party (the "Indemnifying Party") pursuant to the provisions of this
Section 9, the Claimant shall promptly notify the Indemnifying Party in writing,
specifying the nature of the action and the total monetary amount sought or
other such relief as is sought therein. The Claimant shall cooperate with the
Indemnifying Party at the Indemnifying Party's expense in all reasonable
respects in connection with the defense of any such action. The Indemnifying
Party may upon written notice to Claimant undertake to conduct all proceedings
or negotiations in connection therewith, assume the defense thereof, and if it
so undertakes, it shall also undertake all other required steps or proceedings
to settle or defend any such action, including the employment of counsel which
shall be satisfactory to Claimant, and payment of all expenses. Claimant shall
have the right to employ separate counsel and participate in the defense. The
Indemnifying Party shall reimburse Claimant upon demand for any payments made or
loss suffered by it at any time after the date of tender, based upon the
judgment of any court of competent jurisdiction or pursuant to a bona fide
compromise or settlement of claims, demands, or actions, in respect to any
damages to which the foregoing relates.

        9.4 LIMITATION OF LIABILITY. With the exception of liability under the
indemnity provisions of Paragraph 9 or for breach of Paragraph 11.2, IN NO EVENT
SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY, AND
WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

10. DISCLAIMER.

        10.1 ENCARTA ONLINE (OF WHICH THE EOD SITE IS A PART) IS PROVIDED "AS
IS," AND MICROSOFT MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES
REGARDING THE USABILITY, CONDITION OR OPERATION THEREOF EXCEPT AS MAY BE
SPECIFICALLY SET FORTH HEREIN. MICROSOFT MAKES NO WARRANTY THAT ACCESS TO OR USE
OF ENCARTA ONLINE WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT ANY SOFTWARE OR
SERVICES WILL MEET ANY PARTICULAR CRITERIA OF PERFORMANCE OR QUALITY EXCEPT AS
MAY BE SPECIFICALLY SET FORTH HEREIN. UNLESS OTHERWISE SET FORTH HEREIN,
MICROSOFT EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY, TITLE, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT, COMPATIBILITY, SECURITY OR ACCURACY.

11. PRESS RELEASES/CONFIDENTIALITY.

        11.1 Subject to the prior written approval of the other party, either
party may use the name of such other party in a press release or public
announcement(s) relating to the rights and obligations set forth in this
Agreement

                                     Page 5
<PAGE>   6

and/or the relationship established by this Agreement; provided that neither
party shall issue any press release or make any public announcement(s) without
the express prior written consent of the other party which consent shall not be
unreasonably withheld or delayed.

        11.2 The parties acknowledge and agree that the Microsoft Non-Disclosure
Agreement dated as of March 1, 2000_ ("NDA") entered into by and between the
parties applies to this Agreement as if fully set forth herein and that all of
the terms of this Agreement (including but not limited to its existence) and all
discussions and negotiations related thereto are considered Confidential
Information under the NDA.

12. NOTICES. All notices and requests in connection with this Agreement shall be
deemed given as of the day they are received either by messenger, delivery
service, or confirmed fax, and three days after placed in the United States of
America mails, postage prepaid, certified or registered, return receipt
requested, and addressed as follows,

NOTICES TO COMPANY:                    NOTICES TO MICROSOFT:

N2H2.                                  Microsoft Corporation
900 Fourth Ave, Suite 3400             One Microsoft Way
Seattle, WA  98164                     Redmond, WA  98052
                                       Attn.:
Attn:

                                       Telephone:
Telephone:                             Fax:
Fax:                                   Email address:
Email address:
                                       Copy to:
Copy to:                               Microsoft Law & Corporate Affairs
Jim Johnston                           One Microsoft Way
Lane Powell Spears Lubersky LLP        Redmond, WA  98052
1420 Fifth Ave, Suite 4100             Fax: (425) 936-7409
Seattle, WA 98101
(Fax) (206) 223-7107

or to such other address as the party to receive the notice or request so
designates by at least ten (10) days prior written notice to the other.

13. INDEPENDENT CONTRACTOR. Company and Microsoft are independent contractors,
and nothing in this Agreement shall be construed as creating an
employer-employee relationship, partnership, or joint venture between the
parties.

14. ATTORNEY'S FEES. In any suit or action to enforce any right or remedy under
this Agreement or to interpret any provision of this Agreement, the prevailing
party will be entitled to recover its costs, including reasonable attorneys'
fees.

15. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of
each party's respective successors and lawful assigns; provided, however,
neither party may assign this Agreement, or any rights or obligations hereunder
without the consent of the other party, which consent shall not be unreasonably
withheld, delayed, or conditioned, except that the Agreement may be assigned by
either party without consent to a third party that acquires it by merger or
consolidation or acquires substantially all of its assets.

16. HEADINGS. The section headings used in this Agreement are intended for
convenience only and shall not be deemed to affect in any manner the meaning or
intent of this Agreement or any provision hereof.

17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or communications. This Agreement

                                     Page 6
<PAGE>   7

shall not be modified except by a written agreement dated subsequent to the date
of this Agreement and signed on behalf of Company and Microsoft by their
respective duly authorized representatives. No waiver of any breach of any
provision of this Agreement shall constitute a waiver of any prior, concurrent
or subsequent breach of the same or any other provisions hereof, and no waiver
shall be effective unless made in writing and signed by an authorized
representative of the waiving party.

18. SEVERABILITY. In the event that any provision of this Agreement conflicts
with governing law or if any provision is held to be null, void or otherwise
ineffective or invalid by a court of competent jurisdiction, (i) such provision
shall be deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect.

19. This Agreement does not constitute an offer by Microsoft and it shall not be
effective until signed by both parties.

MICROSOFT CORPORATION               N2H2, INC.

By                                  By
  ---------------------------         ----------------------------

Name (Print)                        Name (Print)
            -----------------                   ------------------

Title                               Title
     ------------------------            -------------------------

Date                                Date
    -------------------------           --------------------------

                                     Page 7
<PAGE>   8

                                    EXHIBIT A
                   TECHNICAL SPECIFICATION FOR AUTHENTICATION

1. COMPANY'S AUTHENTICATION PROCESS [ *** ] *

        [ *** ] *
        -  [ *** ]. *
        -  [ *** ]. *

2. SUPPORT

        Support for Company customers will be of two types.

        a.      Site reliability and functionality of trusted URL authentication
                mechanism
                These kinds of issues affect all Company customers and
                should be escalated directly to Microsoft.

        b.      User questions and support issues with EOD
                These kinds of inquiries should be referred to Microsoft's
                online support form at
                http://encarta.msn.com/help/support/form.asp. Support issues
                will be handled by Microsoft Product Support Services the same
                as all site support inquiries.

                                     Page 8
<PAGE>   9

                                    EXHIBIT B
             GUIDELINES FOR DISPLAYING THE ENCARTA ONLINE LINK LOGO

[ENCARTA LOGO]

1.  Except as Microsoft may authorize elsewhere, you may display only the link
    logo shown above ("Logo"). By downloading the Logo and signing the
    Agreement, you agree to be bound by these Policies.

2.  Company may display the Logo as specified in this Agreement and in the
    Exhibits thereto, but not in any other manner. The Logo must always be an
    active link to the Encarta Online Deluxe home page at
    http://encarta.msn.com/encarta, except in the case of Searchopolis users who
    are not also Bess Filtering System users, in which case the logo will link
    to the Encarta Online "free site" home page at http://encarta.msn.com.

3.  The Logo GIF "Encarta" should link to the urls referenced above. You may not
    remove or alter it or any other element of the Logo.

4.  Except as agreed by Microsoft elsewhere in the Agreement or its Exhibits,
    you may not display the Logo in any manner that implies sponsorship,
    endorsement, or license by Microsoft or any affiliated company.

5.  The Logo must appear by itself, with a minimum spacing between each side of
    the Logo and other graphic or textual elements on your page. Examples are
    found in Exhibit D and E. The Logo may not be used as a feature or design
    element of any other logo.

6.  Except for size subject to the terms herein, you may not alter the Logo in
    any manner, including proportions, colors, elements, etc., or animate, morph
    or otherwise distort its perspective or two-dimensional appearance.

7.  These Policies do not grant a license or any other right in Microsoft's
    logos or trademarks. Subject to the Agreement, Microsoft reserves the right
    in its sole discretion to terminate or modify permission to display the Logo
    at any time. Microsoft reserves the right to take action against any use
    that does not conform to these Policies, infringes any Microsoft
    intellectual property or other right, or violates other applicable law.

8.  MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW
    REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.

                                     Page 9
<PAGE>   10

                                    EXHIBIT C

                          MICROSOFT LOGO USE GUIDELINES

[MICROSOFT LOGO]

-   Company may use the above Microsoft Logo (the "Microsoft Logos") only as
    provided by Microsoft electronically. Company may not alter the Microsoft
    Logos in any manner, including proportions, colors, elements, etc., or
    animate, morph or otherwise distort its perspective or two-dimensional
    appearance.

-   Company may use the Microsoft Logos on Company's Web site solely as follows
    [or, solely in connection with the activities set forth in the attached
    agreement/letter]. Any other uses of the Microsoft Logos must be approved in
    advance by Microsoft.

-   Company's Web page title and any other trademarks and logos must always
    appear at least as prominent as the Microsoft Logos. The Microsoft Logos may
    not be used in any manner that expresses or might imply Microsoft's
    affiliation, sponsorship, endorsement, certification, or approval, other
    than as contemplated herein.

-   Company shall not use the Microsoft Logos in association with any third
    party trademarks in any manner that might suggest co-branding or otherwise
    create potential confusion as to source or sponsorship of Company's Web site
    or ownership of the Microsoft Logos.

-   Company may not display the Microsoft Logos on any site that disparages
    Microsoft or its products or services, infringes Microsoft's intellectual
    property or other rights, or violates any state, federal or international
    law.

-   The Microsoft Logos may not be included in any third party trade or business
    name, domain name, product or service name, logo, trade dress, design,
    slogan, or other trademarks.

-   The Microsoft Logos may not be combined with any other symbols, including
    words, logos, icons, graphics, photos, slogans, numbers, or other design
    elements. A minimum amount of empty space (minimum 30 pixels) must be left
    between each of the Microsoft Logos and any other object such as type,
    photography, borders, edges, etc.

-   The Microsoft Logos (including but not limited to Microsoft's logos,
    logotypes, trade dress, and other elements of product packaging and Web
    sites) may not be imitated in any manner in Company's Web site, or other
    materials.

                                    Page 10
<PAGE>   11

                                    EXHIBIT D

                    BESS FILTERING SYSTEM TOOL BAR SCREENSHOT

              [BESS FILTERING SYSTEM TOOL BAR SCREENSHOT GRAPHICS]

                                    Page 11
<PAGE>   12

                                    EXHIBIT E

                             SEARCHOPOLIS SCREENSHOT

                       [SEARCHOPOLIS SCREENSHOT GRAPHICS]

                                    Page 12
<PAGE>   13

                                    EXHIBIT F

                            SEARCHOPOLIS RESULTS PAGE

                      [SEARCHOPOLIS RESULTS PAGE GRAPHICS]

                                    Page 13

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