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                                                                    EXHIBIT 10.1

                         SEVERANCE AGREEMENT AND RELEASE

        The employment of Peter Nickerson ("Executive") with N2H2, Inc.
("Employer"), is being terminated. Executive and Employer desire to settle and
resolve all possible disputes between them growing out of Executive's employment
or termination of employment, and it is therefore agreed as follows:

        1. CONFIDENTIALITY OF AGREEMENT; AGREEMENT NOT ADMISSION. Executive and
Employer agree to keep this Severance Agreement and Release ("Agreement")
confidential, except insofar as disclosure may be required for legal or business
reasons. This Agreement is not an admission by Employer that it (or any of its
employees) has violated any law or failed to fulfill any duty to Executive. This
Agreement is not an admission by Executive that he has violated any law or
failed to fulfill any duty to Employer.

        2. TERMINATION OF EMPLOYMENT. Employer and Executive agree that
Executive's employment is terminated, without cause, and further agree to
discontinue the employment relationship, effective May 18, 2001. ("Effective
Date").

        3. RESIGNATIONS. On the Effective Date, Executive will be deemed to have
resigned as the Chief Executive Officer and President of Employer.

        4. SEVERANCE. In full consideration and in return for Executive's
release herein, Employer agrees to pay Executive severance equal to twelve (12)
months' base salary, subject to lawful deductions, payable in equal installments
on the fifteenth (15th) and last day of each month (the Company's regular
scheduled pay periods) commencing on the Effective Date.

        5. EXPENSES. As part of the severance package and in return for
Executive's release herein, Employer agrees to reimburse Executive in accordance
with the policies and procedures of Employer, for travel, entertainment and
other expenses reasonably incurred by him in connection with his employment,
upon presentation of appropriate vouchers or receipts through the Effective
Date.

        6. COMPANY PROPERTY. As part of the severance package and in return for
Executive's release herein, Employer agrees to convey to Executive the title to
the Employer-owned vehicle that was assigned to Executive. Executive shall also
be entitled to retain any of the office furniture that was located in his office
while employed by Employer. Notwithstanding the foregoing, in the event that
Employer does not merge with or otherwise acquire or be acquired by another
entity on or before November 18, 2001, Executive will reimburse Employer
$15,000, solely by Employer withholding such amount from severance payments made
pursuant to Section 4, for such furniture and vehicle.

        7. BONUS. Employer agrees to pay any bonus Executive may be entitled to
pursuant to Executive's Addendum to Executive Employment Agreement effective
October 1, 2000 and dated by Executive March 22, 2001 ("Employment Agreement").

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        8. EXECUTIVE'S WAGES. Executive acknowledges that he has received his
regularly scheduled base salary through the Effective Date, subject to lawful
deductions. Executive acknowledges that no additional wages are due from
Employer.

        9. RETURN OF RECORDS, CONFIDENTIAL INFORMATION AND PROPERTY. Except as
otherwise provided in Section 6 above, Executive agrees that within one month of
the Effective Date, Executive will return to Employer all property and equipment
furnished to or prepared by Executive in the course of or incident to
Executive's employment by Employer. Executive also agrees to return all Records
and Confidential Information pursuant to Section 8 of the Employment Agreement.

        10. MUTUAL RELEASE. Executive accepts Employer's undertakings in this
Agreement as full settlement of any and all claims, known or unknown, arising
out of or related to Executive's employment with Employer, or its termination.
Employer accepts Executive's undertakings in this Agreement as full settlement
of any and all claims, known or unknown, arising out of or related to his
employment with Employer. The release by Executive includes, but is not limited
to, any claims for damages or attorneys' fees, lost salary, lost benefits or
stock options, and specifically includes, but is not limited to, claims under
the Age Discrimination in Employment Act ("ADEA"). These claims are examples,
not a complete list, of the released claims, as it is the parties' intent that
Executive release any and all claims, of whatever kind or nature, in exchange
for the severance arrangements set forth in Sections 4 through 8 above.
Executive realizes this constitutes a full and final settlement of any and all
such claims, and except for obligations arising under this Agreement, this
Agreement releases Employer and any related companies (and their owners,
officers, employees, successors, assigns, and anyone else against whom Executive
could assert a claim based on Executive's experiences as an employee of Employer
or Executive's termination as an employee) from any further liability to
Executive (or to anyone else Executive has power to bind in this settlement) in
connection with such claims.

        11. NON-DISPARAGEMENT. Executive agrees that neither he, nor anyone
acting on his behalf, will make any negative, derogatory, or disparaging
statements, whether oral or written, regarding Employer. Employer agrees that
neither it, nor anyone acting on its behalf, will make any negative, derogatory,
or disparaging statements, whether oral or written, regarding Executive.

        12. SURVIVAL. Notwithstanding any other provision of this Agreement,
Executive acknowledges and agrees that termination of his employment with
Employer will not terminate or otherwise affect his obligations under: (i)
Section 8 of the Employment Agreement; and (ii) the restrictive covenants set
forth in Section 10 of the Employment Agreement.

        13. GENERAL. This Agreement (i) contains the entire understanding of the
parties with respect to the subject matter covered, except for Executive's
obligations under Sections 8 and 10 of his Employment Agreement; (ii) supersedes
all prior or contemporaneous understandings, except for Executive's obligations
under Sections 8 and 10 of his Employment Agreement; (iii) may only be amended
in a written instrument signed by both parties; and (iv) shall be governed by
the laws of the State of Washington. Each party warrants that they are the true
parties in interest, and fully authorized to execute this Agreement.

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        14. KNOWING AND VOLUNTARY WAIVER. Executive acknowledges that he has
been advised to consult with an attorney, and has had the opportunity to do so,
before signing this Agreement, which Executive has been given twenty-one (21)
days to consider, and which Executive may revoke within seven (7) days after
signing.

June 27, 2001                                 /s/ Peter Nickerson
----------------------                        ----------------------------------
Date                                          Peter Nickerson

                                              N2H2, Inc.

June 27, 2001                                 By /s/ Howard Philip Welt
----------------------                        ----------------------------------
Date                                          Philip Welt, President and CEO

                                       3<PAGE>   1
                                                                    Exhibit 10.2

                             STOCK OPTION AGREEMENT
                               DATED MAY 18, 2001

        A STOCK OPTION for a total of 600,000 shares of common stock
(hereinafter the "Option"), of N2H2, Inc., a Washington corporation (the
"Company"), is hereby granted to Philip Welt (the "Optionee"), at the price and
subject to the terms and provisions set forth below. For purposes of this
Agreement the term "shares" shall be deemed to apply to shares of common stock
of the Company as of the date hereof.

        1. OPTION PRICE. The option price is $0.355 for each share, being the
average of the high and low price of the Company's Common Stock on May 18, 2001,
the date of grant of this Option.

        2. VESTING AND EXERCISE OF OPTION. The Option shall vest and be
exercisable in accordance with the following provisions:

           a. Schedule of Vesting and Rights to Exercise. The Option shall be
vested and exercisable as follows:

<TABLE>
<CAPTION>
                              Percent of                    Number of
     Vesting Date            Option Vested             Shares Exercisable

<S>                          <C>                       <C>
     June 18, 2001                8.3%                        50,000
     July 18, 2001               16.6%                       100,000
   August 18, 2001               25.0%                       150,000
September 18, 2001               33.3%                       200,000
  October 18, 2001               41.6%                       250,000
 November 18, 2001               50.0%                       300,000
 December 18, 2001               58.3%                       350,000
  January 18, 2002               66.6%                       400,000
 February 18, 2002               75.0%                       450,000
    March 18, 2002               83.3%                       500,000
    April 18, 2002               91.6%                       550,000
      May 18, 2002              100.0%                       600,000
</TABLE>

           b. Method of Exercise. The Option shall be exercisable by a written
notice which shall:

              i. state the election to exercise the Option, the number of shares
in respect of which it is being exercised;

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              ii. contain such representations and agreements as to the holder's
investment intent with respect to such shares of common stock, acquired by
exercise of the Option, as may be satisfactory to the Company;

              iii. be signed by the person entitled to the Option; and

              iv. be in writing and delivered in person or by certified mail to
the Secretary of the Company.

              Payment of the purchase price of any shares with respect to which
an Option is being exercised shall be by check. The certificate or certificates
for shares of common stock as to which the Option shall be exercised shall be
registered in the name of the person exercising the Option. Options hereunder
may not at any time be exercised for a fractional number of shares.

           c. Restrictions on Exercise. No Option may be exercised if the
issuance of the shares upon exercise would constitute a violation of any
applicable federal or state securities or other law or valid regulation. As a
condition to the exercise of this Option the Company may require the person
exercising the Option to make any representation and warranty to the Company as
the Company's counsel believes may be required by any applicable law or
regulations.

        The following legend will appear on all certificates for option shares:

        THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE ACQUIRED BY THE
        REGISTERED HOLDER PURSUANT TO REPRESENTATION THAT THE HOLDER IS
        ACQUIRING THESE SHARES FOR THE HOLDER'S OWN ACCOUNT, FOR INVESTMENT.
        THESE SHARES MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
        OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
        AS TO THE SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN
        EXEMPTION FROM SUCH REGISTRATION STATEMENT.

        3. Non-Transferability of Option. Except as otherwise provided herein,
no Option may be sold, pledged, assigned or transferred in any manner, other
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee or by the guardian or
legal representative of the Optionee. The terms of the Option shall be binding
upon the executors, administrators, heirs, successors, and assigns of the
Optionee.

        4. Termination of Service to Company. The Option may only be exercised,
to the extent vested on the employee's last day of service to the Company as an
employee, for a period of one hundred (100) days after such last day of service.

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        5. Term of Option. The Option may be exercised within ten (10) years
from the date of original grant, and may be exercised during such term only in
accordance with the terms of this agreement.

        6. Adjustments Upon Changes in Capitalization. The number and kind of
shares of common stock subject to this Option shall be appropriately adjusted
along with a corresponding adjustment in the Option price to reflect any stock
dividend, stock split, split-up or any combination, exchange or change of
shares, however accomplished.

        7. Accelerated Vesting. Notwithstanding the above vesting schedule, if
Mr. Welt's employment is terminated as a result of a merger or other transaction
pursuant to which more than 50% of the voting control of the Company's
securities is transferred, an additional 100,000 shares will immediately vest
upon such termination.

DATED:  June 27, 2001                         N2H2, Inc.

                                              By /s/ J. Paul Quinn
                                                 ------------------------------
                                                 J. Paul Quinn
                                                 Chief Financial Officer

        Optionee acknowledges and represents that he is familiar with the terms
and provisions of this Nonqualified Stock Option Agreement as set forth above
and hereby accepts this Option subject to all the terms and provisions hereof.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
of the Compensation Committee of the Company's Board of Directors with respect
to the interpretation of any provision under this Nonqualified Stock Option
Agreement.

DATED:  June 26, 2001

                                                 /s/ Howard Philip Welt
                                                 ------------------------------
                                                 Philip Welt, Optionee

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