Document:

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                                  EXHIBIT 10.1

                       NONQUALIFIED STOCK OPTION AGREEMENT
                                   N2H2, INC.

I.      OPTION GRANT. N2H2, INC., a Washington corporation (the "Company")
        hereby grants a nonqualified stock option to purchase up to 1,400,000
        shares of Common Stock of the Company, no par value, (the "Common
        Stock") as of August 2, 2002 ("Grant Date") to HOWARD PHILIP WELT (the
        "Optionee"), subject in all respects to the terms and provisions of this
        Nonqualified Stock Option Agreement (the "Option"). This Option shall be
        governed by, and construed in accordance with, the laws of the state of
        Washington without regard for principles of conflict of laws.

II.     DEFINITIONS.

        "Board" shall mean the Board of Directors of the Company.

        "Cause" is defined as (i) Optionee's failure or refusal to perform his
        duties, responsibilities or obligations hereunder after at least
        twenty-one (21) days' prior written notice regarding any such failure or
        refusal; (ii) Optionee's breach of any non-competition 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 Optionee's
        obligations under the Employment Agreement, continuing after 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 Optionee of any willful or intentional act in disregard of
        the interests of the Company which could be reasonably 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".

        "Committee" shall mean the Compensation Committee of the Board.

        "Disability" means that Optionee is unable to perform the principal
        functions of his duties due to a mental or physical impairment, but only
        if such inability has lasted or is reasonably expected to last for at
        least six (6) months. The determination of whether Optionee has a
        Disability shall be determined by the Committee based on evidence
        provided by one or more medical experts selected by the Committee.

        "Employment Agreement" shall mean the Employment Agreement between
        Optionee and the Company dated of even date herewith.

        "Exercise Price" shall mean the exercise price per share of the Option,
        as set forth in Section IV.

        "Fair Market Value" shall mean the average of the high and low sales
        prices of the Common Stock on the Over-the-Counter Bulletin Board.

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        "Good Reason" means (i) a material reduction (without Optionee's
        consent) in his title, authority, status, or responsibilities, or (ii) a
        material breach by the Company of its obligations under the Employment
        Agreement.

III.    VESTING SCHEDULE. The Vesting Initiation Date shall be May 18, 2002. The
        Option shall vest and become exercisable vest as to 116,666 shares per
        month on the 18th calendar day of each month, commencing on June 18,
        2002, with 100% of the option being vested and exercisable on May 18,
        2003. Notwithstanding the foregoing, (i) if Optionee's employment with
        the Company is terminated without Cause, (ii) if Optionee resigns for
        Good Reason before the first anniversary of the Grant Date or (iii) in
        the event of Optionee's death or Disability, this Option shall
        automatically vest and become immediately exercisable for a total of
        100% of the total number of shares of Common Stock originally subject to
        the Option. Optionee agrees to be seen by or consult with medical
        experts of the Committee's choosing, if so requested by the Committee,
        for purposes of making a determination of whether the Optionee suffers
        from a Disability under this Section II.

IV.     PRICE. The Option Exercise price shall be $0.145, the Fair Market Value
        on the date that the Option is granted by the Board. The Exercise Price
        shall be paid by delivery of cash or, subject to the discretion of the
        Board, by delivery of an approved equivalent to cash. In addition,
        Optionee may pay the Exercise Price by surrender of shares of Common
        Stock which have already been owned by Optionee for such duration as
        shall be specified by the Committee. For purposes of this Section IV,
        shares of Common Stock already owned by Optionee shall be valued at
        their Fair Market Value on the date of exercise of the Option. Shares
        surrendered in payment of the Exercise Price and applicable withholding
        taxes shall be deemed to be paid upon delivery of an irrevocable
        directive to a securities broker approved by the Company to sell all or
        part of such shares and to deliver the sales proceeds to the Company.

V.      PURCHASE FOR INVESTMENT. This Option may not be exercised if the
        issuance of shares of Common Stock pursuant to an exercise would
        constitute a violation of any applicable federal or state securities or
        other law or valid regulation. Any other provision of this Option
        notwithstanding, the obligation of the Company to issue shares pursuant
        to an exercise of the Option shall be subject to all applicable laws,
        rules and regulations and such approval by any regulatory body as may be
        required. The Company reserves the right to restrict, in whole or in
        part, the delivery of shares prior to the satisfaction of all legal
        requirements relating to the issuance of such shares, to their
        registration, qualification or listing or to an exemption from
        registration, qualification or listing.

VI.     NON-ASSIGNABILITY. The Option may not be transferred or hypothecated in
        any manner and shall only be exercisable by the Optionee or his legal
        representative. The terms of this Option shall be binding upon the
        executors, administrators, heirs, successors, and assigns of the
        Optionee.

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VII.    EXERCISE.

        A.     This Option shall be exercisable, to the extent of the number of
               shares purchasable by Optionee at the date of termination, only
               (1) within one year after such termination if the Optionee's
               termination is coincident with the Optionee's death or
               Disability, (2) within three years after the termination of
               Optionee's employment by the Company without Cause or by the
               Optionee for Good Reason or (3) within three months after the
               termination of Optionee's employment by the Company with Cause or
               by the Optionee without Good Reason, provided, however, that in
               no event shall the option be exercisable on any date after the
               expiration of the Term set forth in Section VII.B. below. Any
               portion of this Option exercisable at the time of the Optionee's
               death may be exercised by the personal representative of the
               Optionee's estate or the person(s) to whom the Optionee's rights
               under the Option have passed by will or the applicable laws of
               descent and distribution. This Option may be exercised only for
               whole shares of Common Stock.

        B.     This Option may not be exercised more than ten (10) years from
               the date hereof (the "Term"), and may be exercised during the
               Term only in accordance with the terms and provisions set forth
               herein. If the Optionee's employment with the Company is
               suspended pending an investigation of whether the Optionee shall
               be terminated for Cause, all the Optionee's rights under the
               Option likewise shall be suspended during the period of
               investigation.

        C.     This Option may be exercised for all or part of the shares
               eligible for exercise by presenting a written notice to the
               Company that this Option is exercised, or by such other method as
               complies with standard Company procedure. In either event, the
               Company shall determine whether the exercise complies with the
               terms and provisions of this Option. If the Option is exercised
               by written notice, such notice shall identify this Option, state
               the number of shares as to which the Option is exercised and be
               signed by the Optionee. Delivery of the exercise price for the
               shares to be purchased pursuant to the exercise of this Option
               shall accompany the notice or shall be otherwise accomplished in
               accordance with standard Company procedure. If the Optionee is
               deceased, exercise shall be by written notice, which notice shall
               be signed by the Optionee's legal representatives or
               beneficiaries. If the Optionee has a Disability, this Option may
               be exercised by written notice signed by Optionee's legal
               representatives. In all instances such notice shall be
               accompanied by evidence satisfactory to the Company and its
               transfer agent of the right of such person or persons to exercise
               this Option.

        D.     The Optionee shall make arrangements satisfactory to the Company
               for the satisfaction of any withholding tax obligations that
               arise in connection with his Option. The Company shall not be
               required to issue any shares of Common Stock until such
               obligations are satisfied.

VIII.   MARKET STANDOFF. In connection with any underwritten public offering by
        the Company of its equity securities pursuant to an effective
        registration statement filed

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        under the Securities Act after the date hereof, Optionee shall not sell,
        make any short sale of, loan, hypothecate, pledge, grant any option for
        the purchase of, or otherwise dispose or transfer for value or otherwise
        agree to engage in any of the foregoing transactions with respect to,
        any shares issued pursuant to this Option without the prior written
        consent of the Company or its underwriters. Such limitations shall be in
        effect for such period of time as may be requested by the Company or
        such underwriters and agreed to by the Company's officers and directors
        with respect to their shares; provided, however, that in no event shall
        such period exceed 180 days. Holders of shares issued pursuant to this
        Option shall be subject to the market standoff provisions of this
        paragraph only if the officers and directors of the Company are also
        subject to similar arrangements. In the event of any stock split, stock
        dividend, recapitalization, combination of shares, exchange of shares or
        other change affecting the outstanding Common Stock effected as a class
        without the Company's receipt of consideration, then any new,
        substituted or additional securities distributed with respect to the
        purchased shares shall be immediately subject to the provisions of this
        Section VIII., to the same extent the purchased shares are at such time
        covered by such provisions. In order to enforce the limitations of this
        Section VII., the Company may impose stop-transfer instructions with
        respect to the purchased shares until the end of the applicable standoff
        period.

IX.     EFFECT OF CHANGE IN COMMON STOCK SUBJECT TO OPTION. In the event of a
        subdivision of the outstanding shares of Common Stock, a declaration of
        a dividend payable in shares of Common Stock in an amount that has a
        material effect on the price of the Common Stock, a combination or
        consolidation of the outstanding shares of Common Stock (by
        reclassification or otherwise) into a lesser number of shares of Common
        Stock, a recapitalization, spin-off or a similar occurrence, the Board
        shall make such adjustments as it, in its sole discretion, deems
        appropriate in one or more of the number of shares subject to the Option
        or the Exercise Price. Except as provided in this Section IX., Optionee
        shall have no rights by reason of any issue by the Company of stock of
        any class or securities convertible into stock of any class, any
        subdivision or consolidation of shares of stock of any class, the
        payment of any stock dividend or any other increase or decrease in the
        number of shares of stock of any class.

X.      AMENDMENT OR ALTERATION. The Board may amend or alter this Option,
        except that no amendment or alteration shall be made which would impair
        the rights of the Optionee hereunder, without his consent.

XI.     OPTION NOT A SERVICE CONTRACT. This Option is not an employment contract
        and nothing in this Option shall be construed as giving Optionee any
        right to be retained in the employ of the Company or limit the Company's
        right to terminate the employment or services of Optionee.

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XII.    NO RIGHTS AS A SHAREHOLDER. The Optionee, or a transferee of the
        Optionee, shall have no rights as a shareholder with respect to any
        Common Stock covered by the Option until such person becomes entitled to
        receive such Common Stock by delivering a written notice of exercise
        price (or completing exercise by such other method as complies with the
        Company's standard exercise procedure) and paying the Exercise Price
        pursuant to the terms of this Option.

                                             N2H2, Inc.

                                             By: /s/ J. PAUL QUINN
                                                --------------------------------
                                             Name: J. Paul Quinn
                                                  ------------------------------
                                             Title: Chief Financial Officer
                                                   -----------------------------

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If the following acknowledgment and acceptance is not executed within ten (10)
days of the effective date of this Option, it shall lapse and be treated for all
purposes as if it were never granted.

The Optionee acknowledges and represents that he is familiar with and
understands the terms and provisions of this Option. The Optionee hereby accepts
this Option subject to all the terms and provisions contained herein. The
Optionee hereby agrees to accept as binding, conclusive, and final all decisions
and interpretations of the Board upon any questions arising under the Option.

Dated: 8/13/02

WITNESS:                                     OPTIONEE:

/s/ J. PAUL QUINN                            /s/ HOWARD P. WELT
-----------------------------------          -----------------------------------

                                       6<PAGE>
                                  EXHIBIT 10.2

                                   N2H2, INC.

                              2002 STOCK AWARD PLAN

                         EFFECTIVE AS OF AUGUST 2, 2002

SECTION 1. INTRODUCTION.

        The Board of Directors of N2H2, Inc., a Washington corporation (the
        "Company") adopted the N2H2, Inc. 2002 Stock Award Plan on August 2,
        2002.

        The purpose of the Plan is to promote the long-term success of the
        Company and the creation of shareholder value by offering Eligible
        Employees an opportunity to acquire a proprietary interest in the
        success of the Company, or to increase such interest, and to encourage
        such selected persons to continue to provide services to the Company and
        to attract new individuals with outstanding qualifications.

        The Plan seeks to achieve this purpose by providing for Awards of Common
        Stock in the form of bonuses to be made from time to time.

        Capitalized terms shall have the meaning provided in Section 2 unless
        otherwise provided in this Plan or a Stock Award Notice.

SECTION 2. DEFINITIONS.

        (a) "AFFILIATE" means any entity other than a Subsidiary, if the Company
        and/or one or more Subsidiaries own not less than 50% of such entity.
        For purposes of determining an individual's "Service," this definition
        shall include any entity other than a Subsidiary, if the Company, a
        Parent and/or one or more Subsidiaries own not less than 50% of such
        entity.

        (b) "AWARD" means any award of Common Stock under the Plan.

        (c) "BOARD" means the Board of Directors of the Company, as constituted
        from time to time.

        (d) "COMMITTEE" means a committee consisting of one or more members of
        the Board that is appointed by the Board (as described in Section 3) to
        administer the Plan.

        (e) "COMMON STOCK" means the Company's common stock.

        (f) "CONSULTANT" means an individual who provides bona fide Services to
        the Company, a Parent, a Subsidiary or an Affiliate other than as an
        Employee or director.

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        (g) "ELIGIBLE EMPLOYEE" means any individual who is a common law
        employee of the Company, a Parent, a Subsidiary or an Affiliate of the
        Company or a Consultant, provided, however, that no employee who is (i)
        a director of the Company or (ii) considered an officer of the Company
        within the meaning of Section 16(b) of the Exchange Act and shall be
        considered an "Eligible Employee."

        (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
        amended.

        (i) "FAIR MARKET VALUE" means the market price of Shares, determined by
        the Committee as follows:

               (i) If, as of the date of determination, the Shares are traded
        over-the-counter but are not classified as a national market issue, then
        the Fair Market Value shall be equal to the average of the high and low
        trading prices quoted by the NASDAQ system for such date;

               (ii) If, as of the date of determination, the Shares are traded
        over-the-counter and are classified as a national market issue, then the
        Fair Market Value shall be equal to the average of the high and low
        trading prices quoted by the NASDAQ system for such date;

               (iii) If, as of the date of determination, the Shares are traded
        on a stock exchange, then the Fair Market Value shall be equal to the
        average of the high and low trading prices reported by the applicable
        composite transactions report for such date; and

               (iv) If none of the foregoing provisions is applicable, then the
        Fair Market Value shall be determined by the Committee in good faith on
        such basis as it deems appropriate.

        (j) "PARENT" means any corporation (other than the Company) in an
        unbroken chain of corporations ending with the Company, if each of the
        corporations other than the Company owns stock possessing fifty percent
        (50%) or more of the total combined voting power of all classes of stock
        in one of the other corporations in such chain. A corporation that
        attains the status of a Parent on a date after the adoption of the Plan
        shall be considered a Parent commencing as of such date.

        (k) "PLAN" means this N2H2, Inc. 2002 Stock Award Plan as it may be
        amended from time to time.

        (l) "SERVICE" means service as an Eligible Employee.

        (m) "SHARE" means one share of Common Stock.

        (n) "STOCK AWARD NOTICE" means the notice described in Section 6
        evidencing each Award.

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        (o) "SUBSIDIARY" means any corporation (other than the Company) in an
        unbroken chain of corporations beginning with the Company, if each of
        the corporations other than the last corporation in the unbroken chain
        owns stock possessing fifty percent (50%) or more of the total combined
        voting power of all classes of stock in one of the other corporations in
        such chain. A corporation that attains the status of a Subsidiary on a
        date after the adoption of the Plan shall be considered a Subsidiary
        commencing as of such date.

SECTION 3. ADMINISTRATION.

        (a) COMMITTEE COMPOSITION. The Compensation Committee ("the Committee")
        shall administer the Plan. The Board may also at any time terminate the
        functions of the Committee and reassume all powers and authority
        previously delegated to the Committee.

        (b) AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan,
        the Committee shall have full authority and discretion to take any
        actions it deems necessary or advisable for the administration of the
        Plan. Such actions shall include:

               (i)    selecting Eligible Employees who are to receive Awards
                      under the Plan;

               (ii)   determining the number and other features and conditions
                      of such Awards;

               (iii)  interpreting the Plan; and

               (iv)   making all other decisions relating to the operation of
                      the Plan.

        The Committee may adopt such rules or guidelines, as it deems
        appropriate to implement the Plan. So long as the Committee has such
        authority, the Committee's determinations under the Plan shall be final
        and binding on all persons.

        Notwithstanding the foregoing, the authority provided above is
        concurrent with, and does not supercede, the authority of the Company's
        Board of Directors and may be revoked or modified at any time by the
        Board.

        (c) INDEMNIFICATION. Each member of the Committee, or of the Board,
        shall be indemnified and held harmless by the Company against and from
        (i) any loss, cost, liability, or expense that may be imposed upon or
        reasonably incurred by him or her in connection with or resulting from
        any claim, action, suit, or proceeding to which he or she may be a party
        or in which he or she may be involved by reason of any action taken or
        failure to act under the Plan or any Stock Award Notice, and (ii) from
        any and all amounts paid by him or her in settlement thereof, with the
        Company's approval, or paid by him or her in satisfaction of any
        judgment in any such claim, action, suit, or proceeding against him or
        her, provided he or she shall give the Company an opportunity, at its
        own expense, to handle and defend the same before he or she undertakes
        to handle and defend it on his or her own behalf. The foregoing right of
        indemnification shall not be exclusive of any other rights of
        indemnification to which such persons may be entitled under the
        Company's Articles of Incorporation or Bylaws, by contract, as a matter
        of law, or otherwise, or under any power that the Company may have to
        indemnify them or hold them harmless.

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SECTION 4. ELIGIBILITY.

        Only Eligible Employees shall be eligible to receive Awards under the
Plan.

SECTION 5. SHARES SUBJECT TO PLAN.

        The stock issuable under the Plan shall be authorized but unissued
        Shares. The aggregate number of Shares reserved for Awards under the
        Plan shall not exceed 10,000 Shares on a fully diluted basis, subject to
        adjustment pursuant to Section 7.

SECTION 6. TERMS AND CONDITIONS FOR STOCK AWARDS.

        (a) TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
        granted in the form of Common Stock at such times and in such amounts as
        determined by the Committee.

        (b) STOCK AWARD NOTICE. Each Award issued under the Plan shall be made
        by delivery of a Stock Award Notice to the recipient. Such Award shall
        be subject to all applicable terms and conditions of the Plan and may be
        subject to any other terms and conditions that are not inconsistent with
        the Plan and that the Committee deems appropriate for inclusion in the
        Stock Award Notice. The provisions of the various Stock Award Notices
        issued in connection with Awards made under the Plan need not be
        identical.

SECTION 7. ADJUSTMENTS IN NUMBER OF SHARES AVAILABLE FOR AWARD.

        In the event that the Company shall (A) declare a dividend on the Common
        Stock payable in Common Stock or payable in a form other than Common
        Stock in an amount that has a material effect on the price of Shares,
        (B) subdivide the outstanding Shares of Common Stock, (C) combine the
        outstanding Shares of Common Stock (by reverse stock split or otherwise)
        into a smaller number of Shares of Common Stock, or (D) issue any shares
        of its capital stock in a reclassification of the Common Stock
        (including any such reclassification in connection with a consolidation
        or merger in which the Company is the continuing or surviving
        corporation) the Committee shall make such adjustments as it, in its
        sole discretion, deems appropriate in the number of Shares available for
        future Awards under Section 5.

SECTION 8. LIMITATIONS ON RIGHTS.

        (a) RETENTION RIGHTS. Neither the Plan nor any Award granted under the
        Plan shall be deemed to give any individual a right to remain an
        employee or Consultant of the Company, a Parent, a Subsidiary or an
        Affiliate. The Company and its Parents and Subsidiaries and Affiliates
        reserve the right to terminate the Service of any person at any

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        time, and for any reason, subject to applicable laws, the Company's
        Articles of Incorporation and Bylaws and a written employment agreement
        (if any).

        (b) REGULATORY REQUIREMENTS. Any other provision of the Plan
        notwithstanding, the obligation of the Company to issue Shares under the
        Plan shall be subject to all applicable laws, rules and regulations and
        such approval by any regulatory body as may be required. The Company
        reserves the right to restrict, in whole or in part, the delivery of
        Shares pursuant to any Award prior to the satisfaction of all legal
        requirements relating to the issuance of such Shares, to their
        registration, qualification or listing or to an exemption from
        registration, qualification or listing.

SECTION 9. WITHHOLDING TAXES.

        The Company shall utilize its standard payroll withholding procedures to
        satisfy any withholding tax obligations that arise in connection with
        Awards made pursuant to the Plan. The Company shall not be required to
        issue any Shares or make any cash payment under the Plan until such
        obligations are satisfied.

SECTION 10. GOVERNING LAW.

        The Plan shall be governed by, and construed in accordance with, the
        laws of the State of Washington (except its choice-of-law provisions).

SECTION 11. DURATION AND AMENDMENTS.

        (a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
        effective on the date of its adoption by the Board. To the extent
        required by applicable law, the Plan shall terminate on the date that is
        ten (10) years after its adoption by the Board and may be terminated on
        any earlier date pursuant to Section 11(b).

        (b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board may amend or
        terminate the Plan at any time and for any reason. No Awards shall be
        granted under the Plan after the Plan's termination.

SECTION 12. EXECUTION.

        To record the adoption of the Plan by the Board, the Company has caused
        its duly authorized officer to execute this Plan on behalf of the
        Company.

                                             N2H2, INC.

                                             By /s/ J. PAUL QUINN
                                                --------------------------------

                                             Title Chief Financial Officer
                                                   -----------------------------

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